Neo Performance Materials Inc.

Thank you operator, and good day everyone. Today's call is being recorded.

A replay will be available starting tomorrow in the Investor Center on our website located at neomaterials.com.

Thanks Alex and good morning everyone. I'd like to spend my time this morning providing some context on our strategic initiatives as well as where we're going.

But first, I'm pleased to share with you some highlights of Neo's fourth quarter and full year results. Neo reported sales of $110 million during the fourth quarter and adjusted net income of $9.6 million, or $0.25 per share.

We reported adjusted EBITDA of $12.3 million. And our top line performance represented a substantial recovery relative to our performance at the start of the global pandemic.

Neo's focus in 2020 was to protect our core business in the face of that global pandemic as well as to set the stage for growth and we return to more normalized operations and we continue to advance into new applications and markets. In spite of 2020's many challenges both for us as well as our customers, I'm pleased to report that Neo finished the year in great shape.

Volumes and revenues accelerated their growth in the quarter, indicating a strong recovery in our key magnetic and catalytic applications. Our facilities around the world are operating at near full capacity and have exceeded health and safety targets.

Thanks, Constantine and good morning, everyone. Before I begin my commentary about the results of the fourth quarter, let me first acknowledge the point that Constantine made earlier.

The COVID-19 dynamic has been impactful to families and societies over the world for a rather extended period of time now and will continue in various parts of the world here in 2021. Today, I'm going to talk about the robust recovery that Neo has seen in many of its end markets.

But we don't need any of the commentary to be insensitive to those families and regions, where recovery is still a little more fragile or a little more distant. It is interesting and challenging to summarize our full year results.

From Neo's performance perspective, the full year feels very much like two very different worlds. Today, I will focus my commentary on our operating performance over the past quarter, as it doesn't seem particularly relevant to speak about the year in totality, given the dramatic impact of COVID-19, particularly in Q2 and Q3 of 2020.

I'll spread the comparisons out to the prior year, which was a pre-COVID environment and to this past third quarter to get a sense of the sequential changes in the momentum of growth. Of course, all information to review full year results and full year comparisons to the prior year are available in the company's MD&A and financial statement documents.

Our fourth quarter results reflected strong recoveries across most of our major markets. As we discussed on our last call, we began to observe signs of a turnaround in the third quarter.

And this positive momentum continued through year-end and into the start of 2021. The main driver of our performance in the fourth quarter was increased product volume.

This was a combination of higher volumes required to support increased activity as well as the supply chain rebuilding inventories ahead of anticipated continued growth. This has been true across our automotive, health care, general industrial and consumer electronics sectors.

And we have seen less growth or recovery in our aerospace industry affecting both volume and price. And this is one of the reasons why our rare metals business has significantly underperformed.

During the fourth quarter, we reported a consolidated $110.4 million in revenue compared to $94.6 million in the prior year period and $77 million in the third quarter. We reported net income of $2.4 million or $0.06 per share.

And our adjusted net income was $9.6 million or $0.25 per share in the fourth quarter of 2020. We reported adjusted EBITDA of $12.3 million, compared to $12.5 million in the prior year period and just $5.7 million in the third quarter of 2020.

We will jump to the business unit performance in a moment but it is worth noting here that Magnequench and C&O combined to show a 30% improvement in adjusted EBITDA in the fourth quarter of 2020 over the fourth quarter of 2019. However, this improvement was offset by charges in the Rare Metals segment that we will walk through in a few moments.

There have been many positives experienced during this recovery. On the automotive front, passenger sales have accelerated from the lows in the first half of 2020.

And while the industry will take time to return to previous vehicle sales levels, there are significant improvements as we enter 2021. There has been additional demand and higher prices for many of our rare earth element products, particularly the magnetic applications that drive higher energy efficiencies, new technologies and those that are significant enablers to the electrification of automobiles.

Jumping to a detailed review of each business. Let's start with Magnequench.

Volumes from Magnequench were 1626 metric tonnes in the fourth quarter of 2020 compared to 1387 metric tonnes in the fourth quarter of 2019, an increase of 17% over the prior year. This compares to 1095 metric tonnes in the third quarter of 2020, an increase of almost 50%.

Adjusted EBITDA in the fourth quarter of Magnequench was $11.4 million compared to $9.5 million in the fourth quarter of 2019, an increase of 19%. And compared to the third quarter of 2020, the increase in adjusted EBITDA is greater than 100% or more than double.

Shipments for Magnequench powders were very strong in the quarter, continuing the trend that started late in Q3 and which continued throughout Q4. The strength was near ubiquitous across all major geographies and end-use applications.

Automotive applications led the strong recovery and accounted for more than 60% of total sales volumes. The growth in automotive set the pace and nearly every other application followed suit.

New and emerging magnetic technologies continued to gain momentum at replacing larger heavier motors across the automotive platform, consumer goods, factory automation and health care all showing signs of resiliency. The exception here were some older legacy applications such as hard disk drives, which continued to become a smaller and smaller piece of the portfolio.

We believe that the increase in product volume is driven by both finished goods consumption and to a lesser extent through rebuilding inventory levels throughout the supply chain. Many of our customers seek to replenish their on-site inventory in order to provide flexibility to respond to recent dynamic orders including preparing for future increased demand.

Thus far into 2021, many of these volume trends have remained in place and we anticipate the trend for strong shipments in inventory building to continue in the first quarter of 2021. Another bright spot in Magnequench continues to be the improvement in our compression molded magnet business.

As Constantine mentioned, our magnet volume improved by nearly 30% in the fourth quarter over the prior year. We are seeing growth across all the traditional magnet applications including box fans, laptops, server racks and increasingly popular gaming applications.

Notably, we have also commissioned new capacity and are now qualified and in production with our first automotive magnets. We are pleased with the success and the continuation of expanding our portfolio of solutions to address growing market segments.

Let's turn to our Chemicals & Oxide business or C&O. Revenues for C&O were $48.4 million in the fourth quarter of 2020 compared to $33.7 million in the fourth quarter of 2019, an increase of 44% over the prior year.

This compares to $36 million in the third quarter of 2020 an increase of 34%. Adjusted EBITDA in the fourth quarter for C&O was $7.1 million compared to $4.4 million in the fourth quarter of 2019, an increase of 61%.

And compared to the third quarter of 2020 the increase in adjusted EBITDA in the fourth quarter is greater than 80%. Similar to Magnequench, Chemicals & Oxides benefited from the continued recovery across the automotive space.

Our auto-catalyst business started to see momentum during the third quarter and this momentum continued across all regions throughout the fourth quarter. Part of this strength is related to customers rebuilding stock.

But the above market C&O recovery trend was also supported by C&O winning increased market share in both its existing applications as well as in newly launched applications showing growth despite the pandemic. In fact, overall auto-catalyst volumes for the year were similar to prior year despite the general slowdown in automotive production over the year.

Within our rare earth separation business, Constantine mentioned the key demand trends that are affecting the most valuable rare earth elements, the magnetic elements. As mentioned earlier, increased demand for these magnetic elements and the unique powerful rare magnets they enable is being driven by key global trends in energy efficiency, in the electrification of automobiles and in the trend for smaller, lighter and more powerful motors among others.

These trends are not going away. And as we move toward a world surrounded by more technology, with a key emphasis on environmental considerations.

Despite constantly increasing demand requirement for these elements, pricing of these elements has traditionally showed levels of volatility. The spot price of some of these elements are up in the 50% -- 20% to 50% range as compared to the end of the Q3.

And with the continued dynamics in the first quarter of the year, which Constantine mentioned, we have seen market spot prices for these elements continued to increase an additional 20% to 50% since the start of this year. Accordingly, from a lead lag perspective, C&O is currently benefiting from the increased selling prices with having lower cost inventory on hand.

There was some benefit of this in the fourth quarter, but the majority of the benefit will be seen later as the rapid price increases occurred later in the quarter and in the first quarter of 2021. Conversely this also means that, Neo will have higher working capital requirements in this environment both in terms of accounts receivable and inventory, particularly as Neo is now buying higher cost raw materials at these higher costs.

Neo has adequate cash balances to manage this increase in working capital and we started to see at the end of Q4 and into Q1 2021. Lastly in Rare Metals.

The difficult demand trend that began in the second and third quarters of 2020 remained throughout the year. Our view of the aerospace market has not shifted in which we anticipate that 2021 will likely be a challenging year for this business.

While replacement aircraft will still be required growth is largely an open question for the industry at this point. Revenues for Rare Metals were $12.1 million in the fourth quarter of 2020 compared to $21.6 million in the fourth quarter of 2019, a decrease of 44% from prior year.

Adjusted EBITDA in the fourth quarter for Rare Metals was a loss of $3.3 million compared to positive adjusted EBITDA of $1.2 million in the fourth quarter of 2019. Volumes in aerospace are likely to be continually challenged in 2021 as they were in the latter half of 2020.

However, the lower volume levels were not the primary cause of the significant loss in Q4, '20. The Rare Metals division also took a $3.3 million charge related to the lower of cost or market adjustments on inventory in the quarter.

This relates to having purchased higher cost inventory earlier in the year and then being negatively impacted by lower demand and lower prices at the end of the year. Selling prices fell about 15% to 20% for some products within the Rare Metals group in the second half of 2020 which we believe is highly correlated with weaker demand from the industry.

New raw material purchase costs reflect this lower market price generally. So, there's a somewhat corresponding change in overall production economics.

However, we had to take a significant charge in Q4, 2020 relating to the historical inventory balances that were already on hand and purchased at higher cost levels. We anticipate the slower industry performance will continue to be a challenge for Rare Metals in early 2021.

However, this sizable $3.3 million LCM charge should not be a recurring item notwithstanding that pricing and cost can always change over time. Despite these near-term headwinds our commercial and technical teams continue to develop new applications, exploring new end markets and are evaluating significant operational improvements.

This includes evaluating new sources of feedstock such as recycling and scrap material feeds across the Rare Metals business. We have also been utilizing the slower production times for both required maintenance and evaluating growth and efficiency projects.

While the aerospace industry has not experienced the same type of recovery as the automotive industry and others our customers have communicated that there will be demand in 2021 and we think of entering the year with a cautious approach. With respect to the consolidated results one would notice that our SG&A expense came in higher for the year and higher in Q4 as compared to prior periods.

While it sounds a little counterintuitive, given the numerous cost savings plans that were put in place and executed during the year, we would note that SG&A expense was also impacted by higher valuation charges related to our legacy long-term incentive plans. These onetime valuation adjustments were triggered due to our largest shareholder no longer maintaining majority control which we achieved through the two secondary offerings in December 2020 and February 2021.

There were also unusual costs incurred to execute the secondary offerings, as well as costs associated with senior management changes made earlier in the year. In terms of normal recurring SG&A costs, legal defense fees were elevated during the 3-month and full year periods as we continued to incur costs to defend ourselves in these matters.

As for the financial position, we continued to have a very strong financial position with $72 million in cash balances. We generated operating cash flow of $10 million during the year.

And although tempered we continued to make $7.3 million in capital investments in our business including expanding magnet-making capabilities. We maintained our dividend in the year and we returned $11.3 million to Neo shareholders throughout the year.

We also repurchased $3.1 million of shares through our NCIB program. As mentioned earlier we anticipate that we will be investing in working capital in early 2021 with higher rare earth prices generally but with the $72 million in cash and very little debt and a history of cash flow generation we are comfortable and confident that we can make the necessary investments to continue to grow our business.

With that Amy operator please open the line for questions.

Hi. Good morning, guys.

Good morning, Yuri.

Good morning. Constantine, great, great quarter.

Just with the higher rare earth prices does -- when does it start to hurt Magnequench and its ability to displace heavy earth heavier materials that are usually less expensive? Are you at that point?

Is it something you need to worry about in terms of potentially impacting volumes as we go forward here?

Thanks, Yuri. I'm not sure I fully understand the question.

Are you referring to heavy rare earths being replaced by the MQ3-type magnets that powder is going through, or the typical replacement gain in the industries between Neo magnets and different types of magnets? So I'm...

Exactly, yes. Yes.

More -- like especially against ferrite?

Yes, yes. Clearly ferrite is an inexpensive material and makes lower cost magnets, but ferrite historically has not -- cannot achieve the type of performance that the Neo magnets can.

I mean I mentioned the high torque precision motors are going to industrial robots. And these are right across the board: automotive appliance as well as semiconductor foundries.

You can't get there with ferrites. Or if size and weight is at a premium as well as performance precision are at a premium then you really don't have the option to go to ferrite.

However, as I said, you were covering us back in 2011, and I did say that I think the industry is running the risk if -- with the pricing of our materials, we are providing a strong incentive to very smart people, very smart engineering in very big projects to design rare based technologies out of the end applications And in 2011, we clearly got into that stage. We're not there yet.

Again, I don't think there are any hard and fast rules. However, I still claim that there's a little bit of room for neodymium and praseodymium prices perhaps a little less so for dysprosium and terbium prices to continue to rise.

But I don't -- as I said in my comments, I don't see the panic that I saw in 2011 were driven by the concern of keeping plants operating because of the export restrictions, people were just paying crazy pricing. I just don't see that.

I think the industry has learned its lesson. I think the regulators in the largest market, in the largest production base in the industries in China have learned their lesson.

I don't expect to see the type of crazy prices like we saw in 2011. But again, I don't have a crystal ball though.

But I do see a greater degree of discipline in the market, which also is being affected by the fact that Lynas and MP Materials are large producers supplying both raw materials and separated products into this business. So the industry structure and dynamic is very different than 2011.

And I also don't see sort of arbitrary bureaucratic interference to control either supply or prices. So, I'm a bit more optimistic.

I still think that in a nutshell, and if you let me talk I'll keep going for hours here, which I promise not to do. But, I don't see the same dynamic as 2011.

Yes, there are concerns. Yes, there's a bit of pain.

But keep in mind that, Magnequench adjust its prices. Most of our business is on a quarterly price-adjustment formula.

Some of our businesses are monthly formula. Other is on six-month formula and the like.

However, we can pass our price increases through. And to the degree that Magnequench continues to be almost -- nothing is completely indispensable, but they're close to being there.

I think we will have the ability to pass the price increases on. We don't like it.

We don't want to do it. In fact, the more expensive the magnets and the motors with these magnets get the less competitive they are to alternative technologies and that's an envelope that I think the industry as a whole should be smart not to push too far.

But on balance, what I see over the next few months, at least within our ability to forecast our business, I'm not too concerned about the overall competitiveness of the industry.

Okay. Thank you, Constantine and congrats on a good quarter.

I'll get back in queue.

Thanks Yuri.

Hey good morning guys. Thanks for the time.

Constantine, I guess, I have some bigger picture type questions on the production agreements with Energy Fuels. I apologize I may not sequence them properly but I'll give it a shot.

So, I guess Neo and Energy Fuels you're -- and I guess there's other industry parties you mentioned Lynas and MP Materials effectively trying to create a vertically integrated supply chain that doesn't exist outside of China. I guess my first question I guess do you think the market is big enough and they're growing fast enough to potentially support multiple vertically integrated players?

And maybe the better question is, is there a significant first-mover advantage to whoever can do it?

Great question Mark. The -- first of all, Lynas has been part of the industry and its supply chains for almost a decade.

So, the Lynas production is really not new. Molycorp -- sorry MP Materials -- the old habits die hard I apologize.

MP Materials has been doing this for over a year now and of course, all the mineral concentrates, all the bastnaesite concentrates go to China currently. But when they start separating in California that will change of course.

At that point, which I expect over the next one to two years, we might see perhaps a slight oversupply by today's standards. But when I also see the demand growing both inside and outside of China primarily driven by EVs I'm -- Mark I'm not too concerned.

I think the world will need a lot more supply of rare earths in order to get to where the planners and the major industrial players want to get to. So that doesn't keep me up at night.

On the other hand, finally, Neo and Energy Fuels. Our deal is very small it's disciplined it's highly capital-efficient and it's very low cost.

This is -- when I keep harping to the point where it gets tired hearing at times I'm sure about the extremely low capital efficiency -- or high capital efficiency, low capital intensity of our project, it's -- we followed if you want to think about it that way a very Chinese model of putting this project together. Byproduct economics at the mining resource extraction step just like Baotou Steel has been doing for three decades in inner Mongolia taking the byproduct from iron ore where the mining costs are essentially paid for by a different operations if you end up with the rare earth concentrates in your tailings.

Similarly, Chemours in Georgia have been stockpiling the monazite for years because the primary mining operation recovers zircon and ilmenite for titanium production. So, you start with a very low -- I don't want to call it zero nothing at zero, but very low-cost mining operation at the front end.

Then the rare earths and the byproduct uranium are extracted by Energy Fuels using available capacity and there's lots more available capacity there. And finally, this product is going into our Silmet facility which over the last year or so has been operating at about 75% capacity simply because we couldn't get any more material by our current suppliers there.

So, this is the combination of very, very low mining costs. We're utilizing available capacity where you don't really need to spend any capital of any significance and then driving plants to operate at higher throughput really provides very powerful economics.

What happens when we take this to the next stage with Chemours Energy Fuels and Neo, clearly we will have to spend some more capital. But the fundamental operating costs that involve zero or close to zero mining costs using available capital equipment in Energy Fuels to provide probably the lowest cost material out there will continue.

In fact the bulk of the operating cost is transportation more than processing. So, in a nutshell, Mark again, I don't think there's -- I'm not concerned about creating an oversupply outside of China.

And what I would add as Rahim said and I said earlier what we see now in a pricing environment for rare earths primarily for magnetic rare earths that is very, very much demand-driven as opposed to what happened 10 years ago which was a supply restricted pricing behavior. So as long as the demand continues as long as the world needs more EVs, better more efficient EVs with longer ranges, I think, really neodymium praseodymium magnets provide the ideal solution to that.

So I tend to be a bit more bullish about EV growth and its effect on the industry than I have been with pretty well most other applications over the last 30 years.

Got it. And maybe if I can ask a follow-up question then Constantine.

And just -- I'll apologize because it's a bit of a long one, but I want to get it all in. But there's I guess -- I'm just curious, sort of, where you think -- or how you think, sort of, Neo best fits sort of in the supply chain outside of China?

Is it selling separated rare earths? Is it sort of downstream magnets and magnetic materials.

So maybe another Magnequench-type facility in Europe? And sort of I guess your views on how important it is to be vertically integrated or to own the feedstock?

And I guess the flip-side talk about the know-how and the risk involved and others moving downstream not, Neo but the others in terms of figuring out the separation mono -- or manipulation getting qualified with customers? How long that takes?

And just -- maybe just trying to understand the barriers to entry that are around your business. Again I apologize for the length, but, yes.

Yes. Well, it's a loaded question so I apologize ahead of time for probably giving you an answer that's too long too.

Listen we -- I've said this before, but Neo will do what our customers need us to do. So right now and as I said in the third quarter call back in November our customers are really trying to convince us to establish additional rare earth production capacity in Estonia as well as start doing more in the downstream part of that supply chain into rare earth metals, rare earth alloys and rare earth magnetic powders and magnets.

Now it's one thing to -- for our customers to be pulling us in that direction as well as the regulators and the policymakers in Europe, but it's a completely different proposition for us to want to do it and be willing to make the investment. I mean at the end of the day we will do whatever the customer -- our customers want us to do as long as we can make money doing it right?

But you need to go hand and hand. So this is, sort of, the phase of the evaluation we are at in order to be looking at all of these opportunities.

So in the fullness of time ideally Silmet will be a bigger facility, perhaps, 2 times bigger, 3 times maybe separating heavy rare earths as long as the right supply arrangements can be secured. So I do see doing more in Europe.

It remains to be seen how far down our already existing internal supply chain from rare earths all the way to magnets where we will go. But we're looking at all the opportunities.

We will be not only opportunistic, but also long-term greedy. I mean we need to provide a proper return on capital for our investments as well as a sustainable long-term ROCE, which is in the industry it's not all that easy, especially, when you are competing against large companies that dominate the space, especially, in China.

I think there's room for cooperation with exploration companies around the world. There's room for a lot more to do with our friends at Energy Fuels.

And there is, of course, room to afford the supply chains to cooperate even with some of our Chinese competitors or other folks who are going down that supply chain. At the end of the day, when you look at the macro picture related to supply chains this is a conclusion that you don't only reach for rare earths, but the world will need to produce a lot more rare earths if we're going to achieve decarbonization and 100 million of EVs produced per year by 2030-2035 whatever the target is.

So you need a massive increase in the supply of rare earths and the downstream products around the world. You will also need a lot more copper a lot more cobalt, a lot more lithium and all that other -- and all those other resource type materials that are critical for the production of EVs.

So I'm looking at this as a massive opportunity and we will take it as far down as we need to for -- to keep our customers happy, but also by making sure that we will be making money, while doing this. So, sorry, I hope I wasn't too evasive Mark.

But we will do what makes sense for our customers and for our shareholders.

That’s great Constantine. And in the interest of time, I'll leave it there, but appreciate the time.

Thanks.

Thanks Mark.

Good morning everyone.

Good morning Frederic.

Constantine, I appreciate that you're only a few weeks into your supply agreement with Energy Fuels, but could you give us a sense of how things are going? And as you look forward what are the potential pitfalls that you need to be mindful of?

Pitfalls? You really want to hit on the negative side right off the bat Frederic, right?

Well, that's a fair question. Right now honestly the -- one of the biggest problems we're facing not just us but all supply chains is logistics problems.

It's tough to get containers to move between production and jurisdictions and -- where the demand is delays in shipping congested ports. If you're shipping -- or if you're receiving anything through the port of Long Beach in California, you're probably adding two to three weeks if you're lucky to your times.

So, the more immediate challenge is as supply chains are sort of digesting going from severe limitations during COVID and then exploding into a growth pattern that we haven't seen in a while macro economists at least from what I've been reading tend to be very bullish for 2021 and GDP growth all of that will put a lot of stress on supply chains and especially logistics. In terms of the rest of the challenges that the Energy Fuels-Neo arrangement will face, I'm really not too concerned.

I mean we've been working with -- the two companies have been working together since last spring. And even though we managed to put this in an extraordinarily fast way as I said in my comments, Energy Fuels has extremely capable and smart chemists and chemical engineers just like we do.

So, we've been dealing with the technical problems all along. But Energy Fuels now has received a large quantity of monazite from Chemours and they're in the process of turning it into finished uranium and mixed rare earth carbonate to ship to Silmet.

So, we're going through that. So, I do expect the first full container shipments to start either by the end of the second quarter or shortly into the third.

And it's all going according to plan. I'm not seeing any extraordinary difficulties out there.

And simply because both companies both Neo and Energy Fuels, we've been doing this sort of thing for a long time. So, it's not like we're taking a walk on the wild side here Frederic.

It's the stuff that we do every day. We're just doing it in a new way that -- and again this is -- as I mentioned earlier this is not something that keeps me up at night.

So, I don't really see anything insurmountable in terms of what Energy Fuels is or what we're trying to do.

That's great to hear Constantine. I didn't mean to rain on your parade here.

The question -- the next question I have relates to -- I mean you mentioned that you potentially see the Silmet facility potentially doubling even tripling in size with respect to its capacity. At which point would you start making that decision to increase the capacity?

And the related question is that how expensive or how capital intensive is it to expand the manufacturing capabilities there?

Yes. Again another good question Frederic.

We will -- clearly from a demand point of view we see the opportunity to expand Silmet by a factor of two, three, four. The European policymakers have made it very clear to us that they consider rare earth production in Europe and rare earth magnetic materials and magnet production in Europe to be of critical importance.

And for the newly formed European Raw Materials Alliance an EU-sponsored body the two highest priorities are rare earth and rare earth magnet production in Europe. So, that is one of the fundamental reasons why I'm pretty bullish about Silmet.

And I did say that it's a very strategic asset since it's the only rare earth production site in Europe, which means that the skill set is there, the institutional memory is there, the capabilities are there. And whenever you try to install new capital equipment and install capacity, it's a lot less costly to do so on an incremental basis adding to the existing infrastructure as opposed to a greenfield expansion.

So I would see the opportunity to at least double Silmet. Now that will depend on Energy Fuels' ability to secure additional monazite streams to increase its capacity, to increase its output of rare -- mixed rare earth carbonate.

It will depend on Solikamsk Magnesium Works being able to squeeze out a few more tonnes on the raw material that have been supplied to us for the last 30 years plus depending on whether we decide to go into heavies -- heavy rare earths it will depend on our ability to identify enough producers or emerging producers in South America, in Australia elsewhere. And keep in mind that the Energy Fuels suite of rare earths in that stream that we're getting does have significantly elevated heavies, but right now Silmet does not separate those.

But -- so we'll have to take into account the availability of raw materials. The capital cost I would expect, for example to double Silmet from 2500, 2800 tonnes a year REO, which should be something in the -- again don't hold me to this, but notionally in the $50 million perhaps as much as $100 million.

But I would expect to be lower -- we are closer to the lower end. So these are not decisions that we take lightly.

We need to ensure that the return will be there the appropriate return will be there for the capital that we will invest.

Awesome. Thanks for the color.

Exciting time ahead. Thanks.

Indeed. Thanks, Frederic.

Hi, Constantine. With Neo historically being really close to the customer in terms of its product design as your materials are giving them so much of their capabilities in the product, how far are you along in those relationships when you're looking at Europe in European operations?

Are you already well-advanced in the development of actual products using your materials, or is that something that will take a year or something of that length?

Thanks, Mac. Good question, again.

Europe has been a big market for both Magnequench and C&O, of course, rare metals that's -- it's a primary market as well. So the relationships are very close.

A lot of the product design and development historically has been done with -- together with our European customers. And when you look at the folks that we supply they're all global names, Tier 1s and OEMs.

And in fact we supply them in Europe and the Umicores and the Johnson Mattheys and the BASFs of this world for C&O as well as the Bosch, Brose, Siemens, Grundfos, Schaeffler of this world for Magnequench are all headquartered in Europe, but they're all global players. So we supply Umicore in Europe, in Belgium, in Poland.

We supply them in Wellington, Ontario. We supply them in the States.

We supply them in India, in Korea, in Japan and in China. So when we work closely with our customers, it's not always with a European focus in mind because these applications are global.

And in turn they supply OEMs -- their customers on a very global basis. However, what is going on in Europe right now is unique because you have an extraordinary confluence of regulatory incentives as well as industrial priorities coming together in a way that I haven't seen in a while and that's another reason why I'm pretty bullish about Europe.

So the conversation we're having is mostly with customers of ours that have been customers for over a decade. With Bosch, for example, we make magnets for them, we make magnetic powders for some of their other magnet suppliers.

So the conversation we're having around EV-related expansion is all within the same context. So we're not reinventing the wheel radically.

Now Magnequench will have to, sort of, expand its capabilities in the magnetic space in order -- if we go in that direction of larger-centered EV magnets, but it's not like doing something that we've never done before. We are probably the world's premier magnetic and magnetic materials technology experts.

So the route to making the right magnets for -- in question around the EV supply chains is not a terribly big or risky leap. In terms of the timing, I think, it's going to take longer, I think to come up with the right economic/return formulas, in discussions with industrial and government partners in Europe, as opposed to figure out the technology.

So I'm pretty optimistic that, given the level of discussions that we've had so far. And the planned discussions for the next few months, I would expect that we should be making a decision by the end of the year, which way -- which direction is going to go.

So, yeah, it's not an overnight phenomenon, but I think it will take probably 2021 and 2022 to put the actual industrial infrastructure in place. So -- and be in production sort of 2023, type of timeframe.

But we're not there yet. We still have a lot of work to do.

And as I said, most of that work is at the front. And the challenges right now are not -- the serious challenges are not the technical challenges, the serious challenge is finding the right way to go into this and do so, with -- while achieving an appropriate return on our capital.

Okay. Okay.

So it sounds, as if, like, it's not a situation where it's cannibalistic like demand in Europe, if it's from the same customers with very similar products you've already been building with them. It's not a situation where, it will be cannibalistic to your operations in Asia.

And out of China, because they're saying, "Look, don't send us stuff from China. If we're going to grow, it better be domestic."

So there's…

Correct. Yes.

…So it's growing in addition. And they just don't want that necessarily to come from the sources that they're currently getting.

Is that fair?

Correct. Yeah.

Yeah. I'll talk on that.

It's…

Okay.

… the growth that we see in Europe is totally additive to everything else that we're doing. And it's incremental, even though, it could be big.

But it's still highly synergistic with what we're doing and totally additive to what we're doing.

Okay. I understand.

And then, my second question just maybe to Rahim. I'm just looking -- I'm wondering about, the write-downs.

I'm just -- I went back and read, like in the Rare Metals segment in Q4 2019, you wrote about, less inventory in the system. And then, in Q1, noted, the majority of the historical raw materials have been used in production, with only a small amount remaining.

So what's happened here? Is that, the balance of 2020, it got worse, or is there a mix issue, or I would have been -- I would have thought you would have had even cheaper purchase inventory.

No. I think you raised a really good point, Mac.

And you hate to tie something to COVID, but it really is. What had happened here is we were running down inventory in the back of 2019.

And in the first half of 2020, we were using kind of a lot of our older inventory and running it down too. When we needed to kind of restock inventory, I would say, through 2020, our suppliers were having COVID supply chain issues.

So we ended up, with, let's say, extraordinarily high purchase of inventory, kind of just at the end of Q3, type timeframe. And then, the -- so we were purchasing an extraordinary large amount of inventory, because we had no sense of regularity of shipment.

And then, unfortunately the price of -- the finished good price really fell off in Q4, October, November, December. So, rather -- I will not say unfortunate.

I mean, there's dynamics that are tied to COVID. True that our purchasing at the end of the year is probably higher than it should have been given the environment.

Those are a number of things that are associated with the root cause and some of the corrective actions that we're going to put in place. But, a lot of it was rather unique circumstance around COVID crisis.

Okay. And just to follow-up on that.

Do you think by the end of this year that, if you were in a stable volume environment, right? Let's just say, things don't get worse but in the rare metals they're kind of hovering where they are, you could -- you've taken the write-down, you might be pretty lean in your inventory could we actually see by I don't know, Q4 or something a pretty good improvement in margin at Rare Metals?

Is that possible on flat volumes?

Yeah. Look, I think, it depends on what we define as pretty good.

If we're defining it against 2020, then the answer is absolutely. If we're defining it against historical periods, I would say that, I don't quite see an EBITDA profile that looked like kind of some of the historical periods in the past.

Right.

So, I mean, both of those are, kind of lower EBITDAs than we would be targeting for that business. So, I guess, whichever metric …

Yeah. But…

…we give you is going to be lower than our expectation. But certainly, better than 2020, but perhaps not recovering yet in terms of absolute dollars to the numbers that we would have had in 2017 -- I don't know, 2017 or 2018.

…

Okay. Yeah.

That’s helpful.

Like, we're on the path.

Yeah. That’s helpful.

Thanks very much. Its great quarter.

Now I will pass.

Yeah. Thank you.

Thank you, Operator. Thanks everybody.

Thanks Amy. Thank you, Operator.

Take care.