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Good day, and welcome to the Neo Performance Materials Inc. 3Q 2021 Earnings Announcement Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Ali Mahdavi. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Thanks for joining us this morning to review Neo Performance Materials' Q3 2021 financial results.On today's call, I am joined by CEO, Constantine Karayannopoulos, who will provide opening remarks; and Rahim Suleman, Neo's Chief Financial Officer, who will give a short overview of the Company's third quarter results, which were published on November 8.Please note that some of the information you will hear during today's presentation and discussion will consist of forward-looking statements, including, without limitation, those regarding revenue, EBITDA, adjusted EBITDA, product volumes, product pricing, other income and expense measures, cash returns and future business outlook, including potential expansion plans. Actual results or trends could differ materially from those discussed today. For more information, please refer to the risk factors discussed in Neo's most recent financial filings, which were filed on SEDAR earlier this month and are also available on our website. Neo assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.Financial amounts presented today will be in U.S. dollars. Non-IFRS financial measures will be used during the conference call. Further information regarding Neo's use of non-IFRS measures is available in Neo's Q3 2021 earnings press release, which is available on SEDAR and on our website at neomaterials.com.Let me now turn the call over to Constantine.
Thanks, Ali, and good morning, everyone. We're hosting today's call, slightly outside of the typical pattern due to the completion of Neo's recent $100 million bought deal, which we announced its closing 2 weeks ago.Our third quarter financial and operating results were filed and published in early November, as Ali noted. In summary, we reported $119.8 million of revenue and adjusted net income of $9.8 million. We reported adjusted EBITDA of $17.7 million. And over the past 12-month period, our cumulative sales revenue is just shy of $500 million. This is an encouraging milestone, particularly while some supply chain disruptions continue across the manufacturing sector.Rahim will provide a bit more color on our third quarter results. From my perspective, I would note that current operating trends are in line with our expectations in what remains a strong market environment, despite the headwind continuing to face both the automotive industry, the semiconductor sector and general supply chain issues globally.In short, we continue to experience strong demand for Neo's rare earth and magnetic-based materials, and we're doing everything we can to maintain the reliable shipment of products to our key customers around the world.As we come to the close of 2021, it's a natural time to reflect on the past year and envision Neo's future. The strength of our business is a direct result of years of investment in producing high quality, highly engineered specialty materials that meet the demanding needs of our very sophisticated customers. We have developed new technologies and products, and we strive to provide excellent customer service to deliver upon those.We have been around for a few decades now. And as we assemble the rare earth and advanced materials company for the next few decades, we're keeping those values at the forefront of all of our strategic initiatives. Over the past year, we have been diligently working to advance 4 core business goals: first, protect, strengthen and grow our core business; second, expand through innovation into next-generation technologies and products; third, expand and diversify our geographic footprint in order to capture growing demand for specialty rare earth products in Europe and globally; and fourth, improve our global sustainability leadership. These are the 4 core pillars of our growth strategy. Given the current macro environment that strongly favors the adoption and acceleration of sustainable technologies, Neo is certainly working from the position of strength as many of the products we make are essential to the functioning of a wide range of green tech.A key example of this growth strategy is the revitalization within our Rare Metals business unit. Following multiple years of mid- single-digit EBITDA margins, our team underwent an extensive and systematic approach to improving in that business unit's economic model. And through those efforts, we have been able to secure reliable sources of additional raw material feedstock, we launched several engineering projects to improve our operations efficiency, and we have identified several new paths to commercialize new products and access new markets as the recovery in the aerospace market, our main market for the business unit, continues.I've been pleased with the results so far. Rare Metals recently improved its EBITDA margins to double digit levels, and we're setting a path forward for capacity expansion and allocating more of our capacity to value added technologies. I want to express my gratitude for the hard work, dedication and commitment from our team members around the world in that business, as well as all the business units for driving these initiatives forward.Similarly, we've been executing along -- upon operational excellence initiatives within both our Magnequench and Chemicals & Oxides units. Within Magnequench, we have expanded our operating capacity for bonded magnetic powders, and we have been growing our capacity to manufacture compression molded magnet. Within Chemicals & Oxides, we're working to diversify our raw material feedstock for all of our plants, but with particular focus on our operations in Europe. For example, during the quarter, we started to process that new raw material supplied by Energy Fuels, which originates in the United States as a byproduct of other mining operations, as we target expanded capacity and operating rates. Later in the quarter, we started receiving shipments at one of our plants in China from a new heavy rare earth mining operation in Vietnam. We expect more shipments in the New Year.Across all of our business units, we're proud of the strong health and safety culture that has been established over the years at our various manufacturing sites around the globe.As we look to the future, I'm cognizant of some major trends that have been accelerated as a result of the COVID pandemic and supply chain trends. Our customers have been clamoring for localized supply chains and sustainably-produced materials to meet the world's leading environmental, social and governance standards. We're carefully listening and incorporating feedback from our shareholders in terms of ESG initiatives.We're also hearing directly from more and more customers who are hungry for verification and validation of a transparent upstream -- of their transparent upstream supply partners. As we think through innovation and long-term business planning, ESG will be at the center of everything Neo does. For example, earlier this year, we became a participant in the United Nations Global Compact, the world's largest corporate sustainability initiative, and we committed to implementing the Global Compact's Ten Principles on human rights, labor, environment and anti-corruption. We also recently joined the Responsible Minerals Initiative, which serves as an umbrella organization designed to support responsible mineral sourcing.We've always served a trust -- as a trusted, reliable partner for our customers around the world. We serve our customers through a geographically diverse production footprint. We not only want to meet our customers where they are in terms of their ESG practices, but also lead our supply chains to where we all need to be. This approach has led to several significant advantages by means of Neo's critical infrastructure. As the world's only rare earth company that operates parallel supply chains, both inside and outside of China, we are uniquely situated to understand the pressures and rapidly changing dynamics of upstream advanced material supply chains. The twin crisis of global supply chain bottlenecks and constrained semiconductor supply has spotlighted the risks of centralized logistics channel. This has accelerated the needs of many of our direct customers in the automotive and electronic spaces and their OEM counterparts to source locally to rely less on ocean freight and to prioritize responsibly sourced materials that incorporate circular end-of-life strategies. Neo has already integrated material recycling in several areas of our production operations, including our rare earth magnetic materials.Many of our top strategic plans for growth involve expanding our nameplate capacity in Europe to serve increasing demand in the region. By nearly all measures, global vehicle electrification is going to drive enormous increases in demand for permanent rare earth magnets. Not only would magnet customers need additional supply, but they will also require greater geographic diversity of supply in order to minimize supply chain risk. This is what we're hearing very directly, in fact, loud and clear, from our OEM and Tier 1 customers, especially across Europe. They've told us in no uncertain terms that they want to see Neo expand their operations in Europe into the production of rare earth metals, alloys and permanent magnet. Fortunately, we are extraordinarily well positioned to respond to this increasing demand.In Sillamae, Estonia, we run the only commercially operating rare earth separations facility of its kind within the European Union. The strategic importance of having existing infrastructure, including a large operations base located on the Baltic Sea, and a highly skilled labor force is crucial to accelerating a large-scale projects, such as expanding into alloy and magnetics manufacturing within Europe. Moreover, our rare earth separations facility in Estonia has in the past produced rare metals -- rare earth metals, and it is producing tantalum and niobium metals. That capability could be rapidly restarted. Additionally, we make rare earth metals through 2 joint ventures, one in China and one in Thailand. And we produced rare earth iron-boron alloys in China and Thailand.So while our Magnequench division is a global leader in the production of bonded and hot deformed rath magnets and magnetic materials, expanding our operations to produce sintered rare magnets is not a big leap for Neo. The alloy jet casting process that we have invented and perfected at Magnequench is actually a very similar, but much more severe and demanding process than the strip casting process used in the production of sintered magnet alloys. We have a large number of people in Neo who are highly skilled in making sintered magnets. And we're exploring partnerships with potential state-of-the-art partners who already produce sophisticated sintered rare magnets for the EV space globally. For us, the sintered magnet space is a relatively low-risk with a strong market demand that appears evident at this point and with the emerging government support. It also presents us with a global market that is in order of magnitude larger than the current addressable market for Magnequench with all the opportunities that this brings to the table.As we're working our way around managing the technical risk of such a project, we're staying very focused on also minimizing market and financial risks. We expect to turn the expression of strong interest by European customers and their customers into contracts once our sampling and qualification process gets underway in the New Year, which will help minimize the market risk. Similarly, our expectation, one that is shared by OEMs and Tier 1 suppliers at this point is that the European Union and the Estonian government will help Neo and the supply chain with shared funding to address the financial risk of such a project.Both elements are absolutely vital to any decision by Neo to allocate the capital required in this effort. They're also vital to the long-term commercial success of any such venture. That's why I'm especially thankful for the assessments and vision of key stakeholders, including the Estonian government and its Ministry of Economic Affairs, for their commitment to securing financial and other assistance to our project at all levels within their control. Gaining alignment through public stakeholders, such as the European Union, customers such as OEMs across the automotive, aerospace and wind energy sectors, and our local teams on the ground is a critical and rewarding effort. We're very encouraged by efforts from all sides to date, and look forward to continuing to move this process forward to a successful outcome.In addition to potentially expanding production of separated rare earth oxides in Europe and moving further downstream to produce rare earth metals, alloys and sintered magnets, we're also examining potential long-term expansion in other regions, including North America. While the auto industry in the United States and Canada is moving towards greater vehicle electrification, I think it is fair to say that the North American industry will likely lag its European brethren in terms of public charging infrastructure, local government commitments and general customer adoption over the next couple of years. That said, I fully expect North American manufacturers to catch-up that will provide Neo with additional opportunities for potential expansion.While final decisions on these and other expansion plans have not been yet made by Neo, I remain optimistic that market conditions, new and expanded options on rare earth feedstock sources around the world, rare earth separation in North America and necessary government support can come together to allow these investments to proceed in a manner that make these projects attractive to all stakeholders. Our recent primary capital raise of CAD50 million is largely intended to support this type of growth and expansion. As we look at servicing all of our customers globally, we will continue to invest in our businesses to ensure a strong return on shareholders' capital.Further, we will seek to protect and grow our core business and incorporate sustainable technologies where appropriate. For example, we're in the process of revitalizing one of our primary operating facilities in China. This project will modernize its infrastructure, improve our operating efficiencies and ensure a stable manufacturing site for next-generation environmental emission catalyst technologies within the Chemicals & Oxides business unit. The products manufactured at this site are essential bridging technologies for hybrid vehicles as electric vehicles continue to grow through both public infrastructure and consumer support. The complex catalyst systems required in these hybrid vehicles are expected to continue to evolve through the adoption of the very tight Euro 7 regulations and related global standards, and to be in place largely for the next several decades.In closing, the operating and market environments for rare earth and rare metal-based materials remains quite robust. Magnetic materials, in particular, have been reaching sustained heights this year amidst growing end-use demand and short-term supply chain disruptions, including consolidation within China and the global shipping crisis. That said, the macro trends towards the use of sustainable technologies requires a thoughtful view to responsibly source materials. We look forward at Neo to continuing our efforts to ensure high-quality materials for our customers and to deliver the key technical customer service and innovation required to develop next-generation technologies.And with that, let me turn the call over to Rahim.
Thank you, Constantine, and good morning, everyone. We are well into Q4 now, so we won't be going into too much detail on the Q3 results today as those results were released about a month ago, although we will be happy to take questions and elaborate as necessary on those results. But allow me to touch on the major highlights and to bridge some of the market trends that Constantine referred to within our short-term results.The trend this year of higher and volatile rare earth prices continued through Q3 and to date. And as we have stated in the past, although we do not rely on commodity price movements for our value-add proposition, volatility in the short-term does impact our results.Magnequench continued to see strong volumes in the quarter, but those volumes were tempered by the semiconductor chip shortage that everyone is well aware of. We clearly see changes in some customer purchasing behaviors, and many customers have directly attributed those short-term changes to the lingering semiconductor issues. The impact extends not only to our automotive platforms, but also to many of our non-automotive markets. Despite these relatively soft ordering patterns, gross margins at Magnequench remained healthy, as Magnequench is benefiting from some lead lag impacts on which we'll elaborate within C&O.In C&O, our environmental catalysts business also saw relatively slowing orders in automotive and, again, tied to the semiconductor chip shortage. The recent slowdown is broad-based across the industry without any adverse trends related to our specific customers, programs or regions. On the other hand, the rare earth separation business remains extremely strong. Of course, this business is most impacted by lead lag, but higher prices for rare earths allow for more dollar value margin in the separation business in addition to where we have low-cost inventory on hand in the short term. The price increases are primarily seen across the magnetic elements. And as we have discussed, magnetic elements -- magnetic rare earth elements are critical in a number of future facing technologies, including energy-efficient motors, sensors and traction motors for electric vehicles.Constantine mentioned the improvement and strength in our Rare Metals business. Past efforts to diversify end markets, add customers, engage in operational excellence activities are all starting to see benefits in Rare Metals. Of course, the growth plan won't be linear, and price movements and lead lag will also impact short-term results, but we are seeing recovery in market demand, expansion in the end markets where we participate, and improved and systematic improvements in our operating performance in this business unit.Our cash balances remain healthy, and our ability to generate cash remains consistently strong, even before the recent treasury offering that is supplementing our cash balances and targeted at future growth initiatives. Notably, our inventory balances and working capital balances are up considerably in the quarter and in the year, and this is primarily attributed to the higher rare earth prices.We are very pleased with the financial performance of the Company and the path of continued growth that we see ahead. In the 9 months ended September 30, 2021, we generated $62.3 million of adjusted EBITDA. Of course, comparison to the prior year of $16.6 million doesn't seem very relevant, but even as the comparison to 2019, where we earned $41.3 million in adjusted EBITDA, we have grown adjusted EBITDA about 50% across all 3 business units.And now we will open it up for questions.
[Operator Instructions] We'll take our first question from Yuri Lynk with Canaccord Genuity.
Constantine, on the -- as you contemplate the new manufacturing capacity in Europe, Estonia, what kind of time line are we looking at? And what should we be thinking of in terms of potential capital outlay?
Yes. Thanks, Yuri. The -- as we expressed in our joint press release with the Estonian government, and as I mentioned in my comments, we're trying to sort of minimize and manage market risk, financial risk. And the fact of life remains that this industry is dominated by very large Chinese producers of magnets into Europe and into North America as well. So in order for any new investment to make sense and provide an acceptable level of return to whatever private capital is invested, they will -- I mean, it's inevitable to conclude that there will need to be government assistance. Similar to -- as I mentioned in previous calls before, if you look at what the European Union did around batteries, for EVs, there's been a massive level of government assistance to every single battery producer that is building gigafactories in Europe and primarily in Germany.So the -- we feel that the -- based on the current programs that we have been discussing with the government of Estonia and the EU and the expectations of the Estonian government for the timing of the process to reach its natural conclusion, we would expect to be seeing some meaningful developments in the first half of next year. So again, at least that's my expectation. Now, if things change, we might have to push that forward back. But I would expect that by sometime in the first half of next year, we will have some specific and committed expression of support by Estonia and the EU, at which point, we will make an investment decision to commit to that project. So first half of the year is when I realistically expected, it might slip a quarter. We're not in control of government processes. But I think realistically, that's sort of the time frame.And then, I would -- as I mentioned in my comments also, I would expect North America to follow suit over the next year or so. So -- but I have no -- I mean, we're not really in any meaningful conversations with Canadian or U.S. governments at this stage. But I do expect that as the demand grows stronger in North America, we will probably be engaging in specific discussions about doing something similar in North America, perhaps another 2, 3 quarters later.I don't know if that answers your question, Yuri, but again, I would expect something in the first half of the year, optimistically or cautiously optimistically, but definitely, within 2022, we should be making a funding or an investment decision about Estonia.
Okay. The moves into -- the potential move into sintered, is that necessary to further penetrate the EV traction motor market beyond where your current bonded formulations can take you?
Yes, absolutely. That's the main driver of demand in the rare earth industry, it's EV traction motors, where you go from -- for a small electric motor, you're looking at something in the order to -- in the order of 1 kilogram to 1.5 kilogram of neodymium-iron-boron, running about a third or 30% rare earth -- the rare earth metal to something in the order of 2 kilograms to 3 kilograms, perhaps more kilograms of magnets for the larger models that have multiple motors in their drivetrain. Clearly, all the analysis that we have done internally and all the analysis that we've seen from credible analysts suggest that there will be an excess of demand oversupply for both rare earth elements, but also in the jurisdictions where these materials and devices are needed, there'll be a shortage in manufacturing capacity. So with the help of our customers, as I said, we expect that the market risk will be minimal.But clearly, our product offering currently addresses smaller motors in the automotive sector. The biggest one might be an electric power steering motor, which would have a magnet in the order of 40 grams, 50 grams. But these electric traction motors would have 4, 5, 6 magnets, totaling about 1 kilogram each, as I mentioned. So this is clearly a technologically advanced, but also the fastest-growing market for magnetic applications in the industry. So naturally, we're gravitating towards that. And given our experience in serving the needs of our automotive customers, where half of our revenue comes from automotive, and it's the same people that buy Magnequench magnets and magnetic materials that also are the big drivetrain producers, I think it's a very good fit for Magnequench.
[Operator Instructions] Moving on, we'll go to David Ocampo with Cormark Securities.
Constantine, you touched a lot on potential developments, and you guys do have quite a bit of cash on your balance sheet today, especially if you include the most recent offering. How should we be thinking about leverage going forward? And how much capital does that give you to deploy? And just kind of building on that, do you guys have sort of an IRR threshold on any new potential investments?
Well, we're always looking at a number of initiatives, David, and leverage is not a bad thing. But given the -- our footprint and nature of operations, it's perhaps a bit more challenging for a company like Neo. However, as we see the footprint transition into more EBITDA and cash flow generation from Europe and perhaps eventually North America, that will -- we expect that will shift.Rahim and his team are working very hard trying to get some working capital type loan facilities in place. When -- for Phase 1 of our European facility, I think we have all the cash that we need. However, there will be opportunities to explore low interest loans and such, in which case, we will take a look at that. But for now, I think we're okay to fund all of our capital needs.But, I'll ask Rahim to also talk a little bit about all of our other leverage efforts and raising debt around the world.
Sure. Thanks, Constantine. Hey, David. Look, I think that we are targeting a desirable amount of financial flexibility in each of the regions, and we will get debt instruments in various regions to support that level of financial flexibility. I think this offering and kind of the strategy with the cash that we have gives us flexibility to do a number of different things simultaneously, because I think there are a number of different things on the Board and available to us. But we also needed kind of the strength and the demonstration to the governments that we're working with that we have the financial wherewithal to make significant investment. So it all kind of ties together in an overall strategy. But I do think that, I guess, just to summarize, there is debt capacity that is available. We are comfortable getting a certain level of debt. We are not loading up by any means. But we are also managing the number of different opportunities that we see ahead of us.
David, it's Ali. Just one point on that. From a balance sheet strategy perspective and to complement what Rahim just said, as you look forward, the evolution of the balance sheet, what I would qualify in a perfect world as we execute the strategy in Europe and EBITDA growth happening in Europe and North America over time, then the leverage can be put in place based on that EBITDA growth in those geographies, which if you look at it, ultimately, it's going to be, call it, eliminating the lazy balance sheet scenario for obvious reasons, and as Rahim pointed out, we're -- as a team, as a company, we're conservative. So you're not going to see aggressive leverage, but there's going to be healthy leverage, which is going to adequately then satisfy whatever we need going into the future.
That's great color. And then, Constantine, you talked a little bit about how the sintered magnet base is dominated by large Chinese players. And presumably, you guys do some business with them through your Chemicals & Oxides business. Have you heard any pushback from those customers with you guys going further downstream?
No. The short answer is no. Besides, it's -- in all of our discussions, which, unfortunately, we can't have those face-to-face these days with Chinese partners, regulators and so on, my take on how China works, perhaps slightly different than the current narrative, but this is a big market. There's a vast demand. And I recently spoke in October, actually, at the annual rare earth conference in London. And the main theme, plagiarizing a presentation by a friend during the summer, I used his -- shamelessly used his expression from Jaws, the movie Jaws, that when Sheriff Brody saw the shark, his first reaction is -- was rather, we need a bigger boat. So the supply chains around EVs need a lot of really, really big boats.And when you look at all the material -- the critical materials are going to batteries and drivetrains, the world does not produce enough of those. So the demand profile for rare earths, lithium, cobalt, nickel, you name it, is such that even if a fraction of this materializes, they will need to be a massive expansion in both resource extraction, but also manufacturing capacity globally. And the big Chinese magnet producers all are trying to capture this opportunity, but they all realize that the pie is going to be so big that they will not be able to dominate it in the way that they have been dominating up to now. And especially since the main market for these magnets has been China, because China has led the world in electrification, and Europe has responded very quickly, and eventually, I think North America will catch up. So I really do not see any inherent conflicts with our customers, partners and regulators in China.
That's helpful color. And one last one form me here. It's probably for Rahim. We've been trying to draw a line in the sand on kind of the dollar contribution per tonne for the last 2 quarters, and rare earth pricing has gone up again. But if I think longer-term or medium term, is the third quarter run rate on that dollar contribution is [ probably ] a good ballpark that we should be using as kind of our normalized rate?
Yes, look, it's difficult for us to quantify exactly. First of all, we'd split that up into Magnequench, C&O, and the auto catalyst, and rare metals, because all of them would have different types of contributions, and there's different mixes of products that are in there. I think these margin levels are still pretty healthy on a volume basis. But I think our volume -- the offset to that, I think our volume is lower than where we would expect it to be just because of the other industry shipping and global supply chain issues. So I think the dollar values are on the higher end. Having said that, as I mentioned in my comments, higher rare earth prices will lead to higher dollar value margins. But it depends on the position you take there on what you think of the future rare earth prices.
And next, we'll go to Mark Neville with Scotiabank.
Maybe just first question on the -- what you're sort of considering in Estonia and Europe, would you -- are you willing to sort of put any dollar figures around sort of what the ask is or what you're sort of seeking in terms of funding?
It's not quite like that, Mark. In the conversations with the Estonian government, they have a number of programs under their own direct jurisdiction of EU funds. So they have expressed their willingness to support us within those programs. I think out of a total investment proposition for a Phase I metal alloy and magnet facility Phase I, meaning something in the ballpark of 1,000 tonnes a year of magnet production. That would be in the round numbers without being too specific in the $30 million to $50 million of Capex, and I would expect that those programs within the government of Estonian's purview could add up to perhaps half of that.That, given the feedback that we're getting from Tier 1 and OEM customers on potential pricing, premium available, I think, would lead us to conclude that we can extract and achieve an acceptable rate of return or whatever capital we invest. So that's sort of ballpark-ish the numbers that we're looking at. But again, this is Phase I. And eventually, this will be a drop in the bucket for -- in terms of Europe's needs, which we would expect to continue to expand. And we would -- hopefully, once we get this going, we will quickly start looking at a Phase II to add capacity in the order of another 4x to 5x to what Phase I would be.So again, we're taking a very methodical approach, careful, and we're not betting the farm on this, but it's definitely a very exciting opportunity, and we're trying to figure out the most rational and safe way to capitalize on this.
Sorry, that was -- just to clarify, is U.S. dollars capacity or euro or...
Yes. No, U.S. dollar.
The support that you're seeking, is it primarily for sort of upfront capital, or is there sort of additional support that you could get from the government? Again, this in terms of pricing, you mentioned [ if customer was ] right, you get from the government sort of VAT or something in addition that you're seeing here, or that would be required to sort of move forward with this?
Well, the early discussions have been on CapEx support. But there are some inherent sort of disadvantages that making magnets in Europe entails, and there are some structural subsidies and sort of support that will be necessary to counterbalance things like the VAT, for example, that you mentioned. But this is a next phase discussion. For now, we're focusing on the CapEx and having the conversations with our OEMs and Tier 1 customers for a premium that would cover the structural disadvantages of making magnets in Europe.
Sorry, you said the conversation is with customers, not governments?
Well, the government is an ongoing discussion. But again, this is -- yes, it's even more difficult trying to get ongoing support to cover structural disadvantages is much more difficult than upfront capital as we recently saw, again, with the European Battery Alliance, where massive amounts of money have been invested. On the other hand -- and again, the reason why we're having this conversation in Europe is because, in Europe, largely, the bus is driven by the automotive OEMs. It's -- we started getting a lot of feedback from our Tier 1 customers about what they want to do in achieving a certain level of diversification of their supply chains and localized circular manufacturing in Europe by 2025. And it all made sense once we sat across the table from some of the larger OEMs in Europe, and they said, yes, this is what -- this is -- we read the RIDE Act to all of our Tier 1s, and we expect that by 2025, 50% of their supply chains need to be localized with -- and diversified.So there isn't a lot of time. And the fact that this discussion in this bus is being driven by the OEMs is extremely helpful, because then you have a chance to sit in front of the OEMs and say, okay, this is what it means. If this is what you need, this is what it's going to take, both in terms of capital and operating, and you should be expecting to pay a premium of this level. And this is a discussion that frankly went a lot better than I expected, because if I had this discussion 3 years ago with any of the OEMs, they would have kicked me out of the room. But this is clearly a very different attitude, because this is such -- of such strategic importance to the European OEMS. And I do expect that over the next little while, this will be the realization in North America as well.
A tough one to answer, but do you -- does this sort of the global sort of supply chain bottlenecks perhaps makes the conversation easier today, but is that sort of maybe a risk whenever this -- whenever -- if you move forward and you build it out, the global supply chains are sort of a little more fluid, and maybe there's not sort of a stronger dependency on localized supply chains?
Well, one of the fundamental weaknesses in Europe is that there is no local source of raw material supply. There's a few projects going on. There's a tailing -- there's a couple of tailings projects in Scandinavia. There's Greenland, which looks less likely after the last political developments there. But the world has a lot of rare earth. I mean, we're working with folks in Australia, working with folks in South America. So absent any continuing logistical challenges, and I do hope that the world will learn its less and solve these logistic problems in the not-too-distant future, I think the rest becomes, do you have enough of an infrastructure -- a manufacturing infrastructure and a skill set in Europe to do what needs to be done in Europe and what the OEMs expect. So no, I don't think it's terribly risky. Again, my -- the primary risk I consider the market risk and the financial risk, and we're addressing both of those.
Right. I know I've asked too many questions, but one last one. If you did go ahead with a Phase I project, how long would something like that take to build?
I would expect to -- if, let's say, first half of the year, we pulled the trigger. We started engineering. I mean, we've done a lot of the preliminary design already. Engineering design, it could start next year. We would be ready to start sending preproduction samples in 2023 and be in position to start manufacturing by late 2024. You see, this is driven by that 2025 target that the OEMs and the Tier 1s are giving us. So I think we can get there. But 2024 is probably when we could start seeing some degree of meaningful output in contribution by this activity.
And next, we'll go to Frederic Bastien with Raymond James.
Question -- just one question for you. Our EV traction motors today exclusively made out of sintered magnets, or is the technology competing with others?
No. The simple answer, again, is no. There -- the 2 fundamental designs are induction motors, where the magnetic field gets created by power by electricity. And there's different versions. There's sort of switch reluctance, but these are fundamentally non-magnet designs. However, the big advantage of using permanent magnets -- rare earth permanent magnets is that these designs tend to be significantly more energy-efficient than the induction motors. As Tesla found out -- if you recall, Tesla started life using only induction motors, because they did not want to depend on rare earth magnets. They -- from what I read, they've gone pretty well to rare earth permanent magnet motors across the board, simply because they can achieve a ballpark of, say, 10%, 15%, in some cases, as much as 20% better energy efficiency out of these motors. What this means is that if you have, for a certain given range for your EV, you can use a permanent magnet traction motor and use a 10%, 15%, 20% smaller battery, or for a given battery, you can add another 10%, 15%, 20% to the range of the car, both very desirable outcomes, especially given the fact that the battery is still the most expensive component in the EV.So the -- in terms of what we do, I've talked in the past about the work that we're doing with Daido Electronics in Japan, a very large magnet producer and one of our biggest customers, and Honda -- Honda Motors, where Daido make -- we make a very unique magnetic material that can achieve performance levels designed and specified by Honda and by Daido without using heavy rare earth. Daido uses a unique process to make the magnet. Again, to belabor the point and cloud it even further, we make these MQA powders and Daido MQU magnets, and Honda makes the traction motors. This is the -- as far as I know, this is the only traction motor technology that does not use sintered magnets, but it uses magnets that perform like sintered but made in a different way by Daido. And that -- and the performance of that magnet, according to what Honda tells us is, they consider that the most energy-efficient traction motor out there.
Okay. That's great. But that advantage that you're seeing and the manufacturer of your bonded magnet as you kind of move and expand into sintered magnets, do you believe that you can bring that additional value where you could possibly manufacture magnet, sintered magnets, that have a lesser of a content, lesser rare materials, but still produce the same kind of results? Or is that harder to achieve?
Yes. I wouldn't -- I mean, this would not be our immediate objective. I think we will start with sintered magnets that the supply chains are used to, essentially the sustained designs. And then as the world unfolds, clearly, that would be one area of R&D to continue to optimize the level of rare earth used or the cost to performance ratio, as well as continue -- I mean, we've been pretty adept at developing magnetic materials that can perform at high levels without heavy rare earths, that's clearly a direction that we would like to pursue. But we want to make sure that we're focusing on the highest possible priorities and optimization will probably take a bit more time once we get going.
Moving on, we'll go to Ian Gillies with Stifel.
With respect to sintered magnets and Neo's value-add proposition, is there anything that we should be thinking about whether it be from a revenue per tonne perspective or operating margin perspective with respect to that product relative to your existing product?
Yes. The obvious answer there would be that sintered magnets, there are a lot more involved to produce. The yields are lower than bonded magnets. Bonded magnets that we make and our customers make our net shape magnet, so it is very high yields. But with sintered, depending on the size and shape of the sintered magnet, you get much lower yields, and that is reflected in the price.So where -- ballpark speaking strictly, a bonded magnet would cost something in the order of $50 a kilo. And keep in mind that bonded magnets contain less rare earth because of the bonding agents that dilute the magnetic material. The sintered magnet -- the state-of-the-art sintered magnets are closer to $100 a kilogram, much higher performance, but also much more costly to produce. So round numbers, 1,000 tonnes a year of EV type magnets would be generating something in the order of $50 million of top line.
Okay. That's very helpful detail. The other question I want to follow-up on was the revitalization of the facility in China. As you do that, do you expect there will be any increase in capacity or throughput from that geography as a result of the work you're doing there?
We're not planning on a massive expansion, but I do expect better efficiencies, and there will be incremental gains. And everything we read and we're told China is jumping on the Euro 7, very, very tough emission control environment, very aggressively. So yes, I do expect that -- we're seeing a very strong demand for these products over the next 10 years. So I mean, if we felt that the internal combustion engine was going to die in the next 2, 3 years, we wouldn't be doing this, but we do see a very good runway for growth and margin generation here.So again, just back to your specific question though, I don't really see a massive expansion in capacity. There will be some incremental gains here and there, but I think it will be more of a capacity along what we have now, perhaps with a marginal increase in 10%, 20% kind of thing, but not doubling it. And of course, the continuing demand that we see for these products mean that we'll have a pretty attractive payback on whatever investment we make here.
Understood. That's very, very helpful. I'll turn the call back over now. Thank you very much, gentlemen.
Thank you.
And there are no further questions. I'd like to turn it back to our presenters for any additional or closing comments.
Thank you again for joining us today. We look forward to reporting back to you on our year-end results. That concludes today's call. Have a great day.
Thanks, everybody.
Thank you. And once again, that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.