Lynas Rare Earths Limited

Good Morning and welcome to the Lynas Rare Earths quarterly results briefing for the December quarter of 2020. Presenting the briefing today is Amanda Lacaze, CEO and Managing Director; and Amanda was joined by Gaudenz Sturzenegger, CFO; Andrew Arnold, General Counsel and Company Secretary, Daniel Havas, Vice President Strategy and Investor Relations, and Kam Leung, VP of Upstream.

Please go ahead Amanda.

Thanks, Jen. Well, good morning everybody.

And as always, thank you for your continued interest in the company. I was a bit concerned at a minute to – well 11, I'm in Queensland.

So 10, we only had two people online, and I thought is everybody thinking, “Oh, it's also good that we don't have to ask any questions and that's okay as well.” But now we now have much more substandard quality.

So I guess for me this is maybe one of the easiest quarterly read up that I've done. I mean, really wow, what a quarter.

It was a very busy quarter. It was a very busy quarter and a very productive quarter.

So it was productive in terms of our normal operations within the business. It was also a very productive quarter in terms of our progress on the significant growth projects that we have within our company.

And it was a very busy quarter as we sought to continue to effectively manage some of the challenges that continue to be presented to our business by the COVID-19 pandemic. So with a great deal of pleasure that I highlight the fact that it was the highest revenue recorded in this quarter that we have ever recorded in the history of the company.

Of course, benchmark pricing was fairly kind to us, but I think that more importantly, it reflects the strength of the key Nd segments into which we sell, particularly new automotive and by that, we're talking about the plug hybrid and electric vehicles. And I know that many investors are looking at Lynas as an excellent way to gain exposure to this electric vehicle and new energy Semantic of course continued growth in renewables, particularly in wind power and electronics.

Last quarter, a number of analysts said, “Oh, you've done well to keep the cost where they are. Do you think you can manage to sustain that, and you will recall that I said that when we targeted to be operating at 75% of Lynas next capacity, we said we would expect to be able to capture cost efficiencies at that level.

And we're pleased to be able to report this quarter. That was a continuing strong focus on our costs that we have indeed been able to sustain the cost efficient production.

Of course, we'll note that we have also kept our production running at a 75% of line its next rate, as we previously indicated. And I know that some of you want to know, well, why don't we do more, and to that, I would say exactly the same as we did last quarter, but there are still a great deal of uncertainties in the market.

We learn new and different things about the effects of the pandemic each day, and the challenges are much more than just health, but health matters. And our large processing facility is in Malaysia, which is grappling with a third wave of COVID infections at present.

There is a rigorous movement control order in place. And as always, we ensure that we comply at a minimum with that regulation, but always as with everything in the business we adopted the highest standards.

And so where quarantine rules may be more stringent in Australia, say compared to some other jurisdictions, we will always adopt the more stringent requirements. So in Malaysia, part of the movement control order is a request for all businesses to control and minimize the number of staff on site.

We've gone back to many of our administrative staff working from home, but at the 75%, right, we certainly are able to very effectively manage the requirements to safeguard the health of our employees, and to make the government requirements. And the other thing I think that is particularly relevant in the quarter just past is the progress that we have made on Agros project.

I said at the AGM that we are ambitious for our company and we are operating in growth segments, and we are ambitious that our company will continue to grow as the market grows. So we will retain our share in the high value segments and indeed growth that we will meet and exceed the expectations of our key strategic customers.

Meeting the growth means that we need to be increasing capacity at each stage within each production stage within our operations. Part of that is satisfactory.

One analyst that I read today wondered why we hadn't actually spent more money yet on Kalgoorlie. Of course, as always, we are carefully managing our procurement processes and profile to ensure best value, but we are moving forward with a number of the packages associated with construction that have now either been we've selected suppliers, or we are well advanced in the tender process.

And I think that some of you would have seen the some of the pictures that we've got in the report fabrication, which is continuing not withstanding some of the COVID-19 challenges.

So we will be releasing our half yearly results next month. And one of the limitations always of the quarterly report is that it provides a view of cash, as opposed to P&L view of profitability.

Once we've released that, you'll be able to see how these two things into play, but we've got a history of really excellent cash conversion within the quarter generally in excess of 80%, sometimes in excess of 90% simply the profile of sailings during the quarter meant that we had a lot of our deliveries later in the quarter. And I would reassure everyone, who is listening in that those sales which were invoiced later in the quarter have now been collected - the cash has been collected in the early part of January.

So really very pleased with the quarter, and in fact very pleased with the first two quarters of this financial year. So with those as introductory comments, I am as always happy to take any question.

Hi, Amanda. First question.

Just on the revenue side, it appeared that you made again more revenue or had a better price than I had thought. Obviously, there is a lot of moving parts behind that case, help me unpack that?

Did you sell more NdPr than you produce or is it better pricing on the SCG heavy product? Or did you sell more product towards the back end of the period?

And therefore you benefited from the price spike that occurred late in the quarter, just trying to work out what is going on with your prices and why I'm under?

Yes, to all of the above Daniel. So yes, whilst we the later delivery certainly meant that we didn't like deal with the cash within the quarter, as you're aware, to say working with the rising price, and that whilst we would always prioritize customer needs over sort of speculating on what might happen to the price in any given week or day.

Certainly one of the effects of those later deliveries has been that we've captured from higher prices. Yes, to the improved pricing from SCG.

As you will have seen the terbium price was almost well, it was 895 roof closes in this report, and I know that you've watched the publications carefully, and did it touched $1,000 a kilo in January. So that certainly has that and the increases in dysprosium pricing as well.

But in fact, number of the other elements in that SCG have also appreciated a little in price, which is very pleasing for us. So and yes if you have a look at the report, you'll see that in the period, we produced 13,167 tonnes of NdPr and we did sell a little lab of inventory which had been carried over from the previous quarter in addition to that production.

Okay, thank you. And I mean you sought to address this a lot in your opening remarks.

Why have you not changed the 75% capacity utilization? If I read your comments correctly, it's mostly about the safety of your staff and being a good citizen in Malaysia rather than a statement on demand.

I mean, if you look at the demand side, you do send your report that demand seems to be more resilient than perhaps everyone expected for Rare Earths. And it's quite clear that the pricing is very strong.

So I'm just trying to clarify that it is more just local Malaysia thing rather than a call on demand being weaker than what we might have thought it would be.

Yes, maybe I could expand on that a little. Most certainly, there is a risk management portion to our decision.

And that entitles more than the number one phase there is about health and ensuring that we comply with all regulations, and always take the most conservative approach to managing the health of our people. But the second thing, which I did highlight in the report is the effective changes in commercial shipping.

So part of that is that customer deliveries, but another part is about getting concentrate from that level to Malaysia, which generally speaking for many years now has been a relatively non-controversial part of what we do. But at one stage during the quarter, we had every single shipment that had departed mount weld for Malaysia was delayed, every single one.

And so if we had to bring in that instance, if we had been running at higher rates, we would have been compelled to actually stop production, because of those delays in shipping, so we're juggling quite a lot of balls here. And so the more cautious approach to production planning, I think, has served us quite well.

I also indicated last time around that, we had some major maintenance being conducted on at least one of our kilns, and certainly that has - was we can often sort of run hard coming up to a maintenance shot, and then fill out our buffers. Some of these other complexities have made that a little bit more difficult.

And in terms of meeting market demand, certainly, if we were looking at this and saying at 75%, we couldn't sustain supply to our strategic customers, then we would be revisiting that. And we see that is not been an effect so far.

We've had to manage quite carefully as we've allocated stock. But certainly, we would be hoping that within the next couple of quarters, we'll be turning that production app again.

But as I said, there are a number of moving parts, and really, our production planning at 75% is to do with sort of careful risk management.

I think it's a little bit of both, we've highlighted the fact that in the segments that we operate, and so when we think about automotive, the sale of new energy vehicles has continued to pay some, I'm alert to the fact that even here in Australia, actually, I was driving last evening, and I was listening to an article which was talking about the strong demand for automotive, and I guess that, all of us who are no longer able to travel overseas, and much has been written about people sort of giving themselves a treat, and it appears that new cars is one of the areas where people are wanting to give themselves a bit of a treat. So certainly, we're seeing that demand is sufficient to be creating a bit of a balance in the market, sort of giving a bit of foundation to the pricing.

I think that we will never give a forecast on pricing, because the only thing that we know for a fact is that we will be wrong. But the dynamics of the market appear to be relatively balanced at present, but we're waiting to see what happens after Chinese New Year because as you know, this type of learning New Year because it's Chinese industry typically shuts down during that period.

So we'll see what happens after then. I think that the fact that the market is not flooded with product is probably consistent with keeping this sort of nice balance, which is underpinning these improved prices.

Thank you very much.

Thanks, Danielle.

Thank you and good morning Amanda and team. Just two quick ones for me.

Firstly, just to go back to the capacity question, have you applied I guess for a permanent uplift from the Malaysian government, or the one DOE - agency with respect to concentrate imports just to get above or get some sort of closer to nameplate capacity? And then just secondly on the reallocation of Cracking & Leaching, can you just let us know what's outstanding in terms of permitting?

Thanks.

Okay. So, in terms of the operations in Malaysia, we have disclosed previously that we've had - we actually have approval to - for a higher level of inputs.

What we don't have is the approval on the higher level of processing. And of course, in the FY 2020 calendar year, we didn't test that limit.

And so, we continue to engage with the DOE on a variety of matters, including this issue of processing volumes and I don't have any new news on that. And in terms of the Cracking & Leaching permitting, in WA, we don't proposed to have a running commentary on that because I think that we've disclosed already that it does not trigger a nation under the EPBC.

So, therefore, it will be regulated under the Western Australian state law that we are working closely with the EPA on that. And then at present, none of those approvals are on a critical path at this time.

So, all is working according to - the ad team is working very closely with the WA government because we have lead agency status with duty, and also working very closely with the EPA to move through those approvals appropriately. We also disclosed not long ago that on the first day, we come back with a number of questions, and we're just answering those in good order.

Great. That's all for me, Amanda.

Thank you.

Thanks, jack.

Thank you. Good morning, Amanda, and so my congratulations on a very good quarter.

A lot of my questions have been answered already, so thank you for those. I was just hoping you could help me understand a little bit better.

The longer term capacity plans noting now that you're looking to establish a light separation facility in the U.S. I know we've sort of had a brief discussion on this in the past, but maybe what I was hoping was to get a bit of a better idea about the capacity plans with the U.S.

included and what I mean by that is that going to be incremental to what you're doing in Malaysia, noting that you've always stated in the past that you would ramp up production in line with the market, but I was curious about what the - how that might differ from actual install capacity. So any comments you've got there, Amanda, would be much appreciated.

Sure. So I still think 2025 is a fairway away.

And so they've always been loath to then also be talking. So, particularly in a market, which is a high growth market such as the markets into which we sell, we aimed to grow with the market.

And if we think back even three years ago, we did sort of some analysis when we looked at sort of the consensus amongst industry observers, and it basically said, you'd need a new line and say every four or five years in terms of capacity. So we seek to certainly feel that and we're seeing the Malaysian plants will continue to grow because our key customers in the East Asian markets, particularly Japan and in China as well are growing and growing substantially.

So we will be aiming - it's a way that we configure our new industrial footprint. Yes, we will be aiming to ensure that it is additive, not replacement.

I mean that's how we create value. But the exact path to doing that requires us to be able to reliably increase throughput at each of the production stages.

And so as we continue with our growth project, that's exactly what we're aiming to do. So, I'm not ready to say to you, this is the number or balance the number what I am prepared to say to you is that if your question was, is this as good as it gets 10,500 tonnes a year of NdPr?

My answer would be no, that's not as good as it gets.

That's a good answer. One more question, Amanda, even where pricing is for the more valuable rare earth products at the moment, we are sort of approaching incentive price levels for Greenfield developments.

We all know that these projects take a long time to come online, but your points earlier about your own capacity expansions. In order to deliver that supply, when the demand is there or when the demand appears, those investments need to be made sooner rather than later.

Does that mean that there is the risk of new market entrants coming now that we have in that incentive pricing in the market? And does that mean that you would look to potentially accelerate where possible, any capacity expansions?

We really only have one speed, and that's as fast as we can go. So we are very focused on doing these things, so that we are prepared.

And I think I've talked to you before about a lot of the problems in mining and chemical industry is that they bring down capacity and beat chance, and it's always at the wrong time is either before the demand or after the demand. Our modular approach means that, hopefully, we will have a situation where we can cost effectively, incrementally increase as the market does because the market - leaps and bounds.

In terms of other supply coming online, I tend to spend most of my time thinking about that than others do. And remain very firmly of the view that the textbooks are right.

And that competitive markets are good for everyone, the more activity, the more innovation, the more demand is likely to increase. And for us as the market leader outside of China, our job is to make sure that we stay ahead of the game.

That's good for us as well. It keeps us on our mettle.

And we have no intentions of giving up those things that drive competitive advantage for our business.

Understood. Thanks very much, Amanda, and congratulations to you and the team, another good quarter.

Thanks, Reg.

Good morning, Amanda. A couple of questions for me just on the U.S.

business just want to go into some detail if we can. Firstly, when are you going to be in a position to announce so the details behind the various parts of that U.S.

business now? Or could you give us an understanding of what's preventing you from telling us about some of the moving parts there?

I am referring to things like what's the joint venture structure in terms of percentage share? What are the rough economics in terms of total CapEx?

What's the impact on operating costs likely to be elements such as that? I'll pause there and we can discuss the second one after.

Okay. When we provided the brief on the heavies, we identified that we had a great certain milestones in the phase one contract with the U.S.

government and upon satisfaction of those we may be granted phase two contract although there is not a guarantee. But clearly that has the decision feeds critically into the overall configuration of that solidity.

With respect to the super detail of what you're talking about, I don't think I've ever told you precisely what CapEx and operating costs are line by line. So I'm not expecting that probably be doing that.

But we've indicated that by the end of this financial year, we have an expectation that we will bear the path forward on the heavies. And so I think you could safely assume that we will be targeting that by the end of this financial year.

We will have a very fleshed out plan for that facility, and exactly how all of those things that you've identified and look. So, achieving the agreement with the U.S.

government on the line, certainly add to our vision to that facility and we do have quite a lot more work that needs to be done there because that's come as a result of an initial tender response, but now we need to sort of really put our shoulders to the wheel on a lot of the additional engineering and design. But give us a little bit of time now that we've got that one under our belt and hopefully soon I'll have more clarity relating to any second phase funding on the heavies, and then we'll be able to give you that more comprehensive picture, Dylan.

Yes, that's a relatively theoretical number and we will certainly fine tune that and sort of – the production even in our facility at present bounces around and what percentage of daily production is NdPr as any other material. But certainly as we're moving forward, inclusion of additional heavies within our overall feed will necessarily affect the proportion to the other materials.

Okay, fair enough. And just one final thing on – I am curious mention of the word guidance.

I don't think I've seen that word or you used that term before, using it the context of saying plant utilization of 75%. Does this mean you're moving more towards some tangible harder targets in the future that we should be thinking about maybe CapEx, I'd like just putting my hand up there?

And the rest of the year utilization rates are – come on…

No, no, no. You’re applying far too much thought to sort of this event next year.

I think we did guide to the market on the fact that we were going to deliver – you can run the plant that 75% of our line is mix capacity and that's all that word really indicates.

Okay, I just thought I'd try. Thanks, Amanda.

Hi, guys and hold on again on a great quarter. I guess a couple of guys have already got on capacity question, but I was curious Amanda on the warning spread between neodymium and praseodymium.

I'm just curious as to how much of that spread you can actually capture like in the past you've spoken about separating the two elements, but I mean can we think about close to 100% of the separation capturing the high neodymium price?

No. So, there's the drive for – our decisions on how much we separate are based almost purely on customer demand.

And within our particular customer set, how much of the material they're looking for is NdPr versus PrNd. So I think the interesting thing on earth and it's one of the things that I often say, we are Lynas Rare Earths Limited got Lynas PrNd Limited.

And as I look sometimes at the way that people think about the rare earth market, and about maybe some of the other sort of business propositions is very, very NdPr focused. And clearly, that's the key value driver today.

But all of these elements have applications and uses and the prices change around over time, you know, 15 years ago, cerium was king and Nd was a byproduct. Three years ago, when we were first looking at the separation of Nd and Pr, Nd was sitting at the same price as Pr and NdPr was being sold at a premium.

So these things sort of move around according to demand and our production will move according to demand to ensure that we meet the needs of our customers, and their specific application, so some of them use more rather than less, some of our customers don't use any separated Nd at all in their magnets and others use in a number of applications. So that really is what's driving us is our customer requirements.

Always, of course, with a watchful eye on what's going on with price. But as you would recognize, and to me more Nd means more separated Pr as well.

And so, we need to have a good strong marketing program for that separated Pr as well, because we don't want to be producing lots of Nd and building lots of inventory in Pr.

But just to clarify, if you have a demand for it, do you have the ability to separate? And so, you know, Np and Pr 100% tripling, is their capacity of course?

No. Well, I we don't believe that there would ever be the demand for that.

And no, we don't. We configured – we have four - five trains which separate the PrNd from the LiCa.

And we modified one of those trains to do the Pr and the separation. And at this stage, we're not intending to change any more of that production capacity.

Okay, cool. That’s helpful.

Thanks, Amanda.

Hi, Amanda and Dan. How are you?

Good. It's a long time since I've heard you, Mattie.

Yes, still ticking. And I just wanted to ask on the U.S.

light rare earth suppression is really just a follow up question on that. So is there a kind of thinking in terms of the DOD perhaps the analogy is - to lamp output as is DOD to that proposed light rare earth and heavy rare earth output, The first option to make.

Yes, Matt, I probably would look at it slightly differently in terms of what's similar between these approaches. And I think the primary task is to ensure the supply of raw materials into Japanese industry in a way that means that Japanese industry can grow and the Japanese government plan for doing that.

In the U.S. The U.S.

has quite a long history of using its defense industry in defense industrial base to create capable and commercial supply chains into which industry can then step, I mean, you think about the history and the famous examples like parachutes becoming stockings and all of those sorts of things. You will note in the wording that the library's plant funding is for a commercial facility.

So it's not for a captive facility simply for supplying, Department of Defense needs. This is about being a first step in the establishment of all the reestablishment the reinvigoration of railroads supply chains in the U.S.

We've got sort of a finished agreement that clearly there is a lot more that we need to do in terms of development and interaction, but we see the primary intent here being yes, sort of reinvigorating this important industry.

Great. And, I mean, it's sort of much has been written about like the requirements for the U.S.

industry in particular for the heavy side. That's kind of downplay the demand for the lights or is that kind of go arm-in-arm, because the solvent extraction process, spits them all out depending on your body?

So I think that really the initial focus on headings has to do more with the fact that there is no Non-Chinese source of separated today, right? Whereas liners today can satisfy outside China demand for NdPr, right?

So there is a guaranteed supply source, it might not be where the U.S. government would like it to be, because clearly they would like it to be supporting.

So the U.S. industry, but there is a supply towards.

So I think that the initial focus on heavies is simply a recognition of the fact that there is a gap in the supply chain there.

Right. All right.

And just to clarify, what was that 5000 tonne? Is that included of the heavies and the specialties as well or is it purely?

And so can you remind me what the potential capacity for the heavies production side is?

So we haven't actually disclosed that. Sort of heavy rarest facilities in China typically operated about 3000 tonnes a year.

Okay. So I guess my follow up question was going to be is it proportionate to the distribution running at that sort of 5000 total area for the light?

Is that a way to think about it? Is it will it be separate?

Sorry.

We need to do some more work on that. We're relatively fresh out of blocks with the insert of definitive stamp on the line.

And so we need to do some more work. But we will clearly disclose that once we've done the work and have the numbers appropriate.

And sounds like there is an update at the end of this fiscal year?

Yes, that would be our objective. Yes.

Okay. Great.

Thanks and well done.

Thank you.

Okay, thank you everybody. It's very much appreciated and my fervent desire is that all quarterly reports will be as positive as today is.

Okay, Tokyo getting soon. Bye.