Lynas Rare Earths Limited

Ladies and gentlemen, thank you for standing by and welcome to the Linus Corporation quarterly results briefing. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will just need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I will now hand the conference over to the Linus Corporation. Thank you. Please go ahead.

Good morning and welcome to the Linus Corporation investor briefing for the December quarter 2019. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director. Amanda is joined by Gaden Sturzenegger, Chief Financial Officer, and Andrew Arnold, General Counsel and Company Secretary. I'll now hand over to Amanda to commence the briefing. Please go ahead, Amanda.

Thanks, Lauren. Good morning, everyone. Happy New Year and Gong Xi Fa Chai. I'm delighted, actually, with our very early Chinese New Year this year because it means that Monday is a public holiday not only for Australia Day, so happy Australia Day to all the Australians on the call, but it is also a public holiday in Malaysia. And the last time this happened, I ended up going to Japan. But this time, that is not the case. So a long weekend, I think, beckons for all of us. So for us, and I think from a couple of the little reports already put out, thank you, Dylan and Michael, for being so quick to act. In an operating sense, it was a relatively uneventful quarter. Certainly disappointing that we once again missed getting the approval from the Malaysian Department of Environment for the uplift in processing at our plant. But on the positive side, there were a number of initiatives that we had put into place primarily in the previous quarter or early this quarter particularly with respect to management. I think last quarterly call I talked a little bit about the issues with carbonate and Crandallite in the ore that have come out from Mining Campaign 3. And the new circuits and new treatment protocols that have been implemented in Mount Weld have been very successful and have certainly contributed to improved efficiencies in Kwantung. And in Kwantung, certain actions that we have taken, for example, the addition of iron sulfate to the process in cracking, have also improved outcomes. We've certainly managed to get significant uplifts in recoveries for quite extended periods of time. Then maybe not so good, cracking and leaching manager sometimes will look at me and they'll say, so when are you going to have a go at me? But generally speaking, recoveries are significantly enhanced from where we were looking at towards the end of last quarter and early into this quarter. So as I said, operationally fairly uneventful. Pity we didn't get the uplift because we certainly could have easily pushed more through the plant. And in December, we actually had a very, very good month because, of course, we ran everything as hard as we could knowing that we would be running out. The market continues to be very subdued. The market price continues to be very subdued, notwithstanding that there's excellent demand. Demand growth, particularly in the Japanese market, is strong. and indeed by far the greatest proportion of the material that we sold in the quarter has gone into markets outside China, particularly into Japan. SEG and LACE, as we've highlighted in the report, saw good price realisation. SEG, very much a demand-driven change in price with the reduction in material coming out of China and the increasing demand as part of the electrification story but I guess we're even more proud of the improved pricing on lanthanum and cerium because this is as a result of the work that we have been doing specifically on different grades, different qualities, which has seen us be able to deliver an improved average price, which is a very good sign for the future. I know everybody loves to be focused on NDPR, but every kilo of NDPR that we produce is going to bring a kilo of lanthanum and two kilos of cerium with it. and finding homes for this, A, material, finding a home for it is incredibly important. B, every dollar that we get effectively falls to the bottom line because we really look at our costs on a cost per kilo of NDPR basis. But I guess the most important things then really are the strategic matters that we have been dealing with rather than the operating matters, which after five years of operations, I'm delighted to say does not need a lot of intervention from anyone other than the hardworking operations team. So as we look at Linus 2025, we now have a substantial team working on Linus 2025 planning, engineering and projects. So this includes, in Western Australia, a team whose primary focus is certainly on managing the project, ensuring that we are crossing our T's and dotting our I's, but with a great deal of focus there on dealing with government, dealing with approvals, ensuring that we've got all of the location decisions made properly, And then we have our engineering. And as time goes on, it will develop into our construction team as well, who is doing the work on really what are we going to build, how is it going to work. And that team, for those of you who know many of our people, Grant McAuliffe, who was previously the site manager in Kuantan, is now leading that team full time, ably assisted by many of our Malaysian engineers. It is our Malaysian engineers who are doing the primary design and specification work, not only for the plant in Kalgoorlie, but also for our proposed plant in Texas. So during the time, during the last quarter, as we indicated, we would finalize site selection. You will recall we started with three to five sites that we were considering. We have announced the selection of a specific site in Kalgoorlie-Boulder. The Kalgoorlie-Boulder City Council could not be more welcoming and supportive in terms of assisting us through the various activities that we need to be certain that we can develop this site, but more so even in terms of ensuring provision of appropriate utilities, most particularly things like water. And I just would say this, Kalgoorlie has been excellent at, of course, when you're out in that neck of the woods, you need to be conserving your water. You need to be recirculating and reusing it. And so we have an agreement with the Kalgoorlie Boulder City Council to use reclaimed water in our process, which once again is a tick on sustainability principles. We expect soon to release the tender for some of our longest lead time items, including the kiln. I think that that's an important milestone in terms of demonstrating progress on this. And we are very well progressed, as I think all of you would know. Concentrate into a rare earths refining process is only about 20% of the input. So making the decision to shift this from Kwantung to Kalgoorlie actually means that we need to be doing a lot of work on things other than just can we engineer the plant and get the concentration back to the front end. So there are various chemical reagents, power, water, and of course we have to consider things like transport. So we're very well progressed on really working out the right supply models for each of those different elements. As we said, it was published quite extensively. The US government via the Department of Defense released a request for tender for the development of a heavy rare earth separation plant in the US. We lodged a compliant tender on the 21st of December, I think it was. And I know that there will be many who will want to know, well, so now what? But I think also there will be many that know that governments move at the speed that governments move, not necessarily at the speed that we would like them to move. So we will certainly update the market as we get feedback from the U.S. government on that matter. But at this stage, we have nothing more to add other than the fact that we have indeed released a compliant tender. We're very pleased with it. We've done, you know, the full engineering and design work on the heavy rare earth separation plant with our head of technical, Ding Zhou En, who has done this previously alongside, once again, our Malaysian engineers. And then I guess just the other thing around the Linus 2025 project, which is worth noting, is that we continue to engage very productively with a variety of governments. We've been sort of absolutely delighted with the level of support, as I said, already from the Kalgoorlie-Boulder City Council. But many of you would have noted that we released to the market just before Christmas, the fact that we have been given lead agency status by the West Australian government. Now, what that means is that within the Department of Jobs, Tourism, Science and Industry or Innovation, which sits within the Premier's Department, we have a project manager who assists us to ensure that we are working through all the appropriate approvals with contact with the appropriate people. Many of you would have also noted that the Premier of Western Australia and the Mines Minister both released direct statements after we announced the Kalgoorlie site and with the announcement of JITSI of the lead agency status Both of them issued announcements that were overtly supportive for the development of the Linus plant in Western Australia. Of course, as part of not only the heavy rare earth development of our tender, but more generally speaking, we continue to be engaged with the US government, the Australian federal government, for those who may have missed it, has actually set up an office for critical minerals and the office for critical minerals is once again designed to ensure that those who are able to assist in ensuring secure supply chains outside of China are given as appropriate assistance from the government and this really is around the fact that the rare earths market as many of you have been involved in it for a long time would know cannot be natural market forces cannot be relied upon it is a distorted market and so therefore government support in one form or another may be necessary and finally of course I must acknowledge the continued support from the Japanese government by way of JOGMEC and JARE, but also generally by way of understanding and supporting us in diplomatic engagements. So then that brings me of course to the least favourite of my daily activities, which is Malaysian regulatory matters. So I think everybody is very familiar with the fact that the license which was renewed only for six months is due for renewal on the 3rd of March, that there are two key conditions, one relating to the construction and management of a long-term storage facility for the WLP here in Pahang, and the other relating to the transition of cracking and leaching processes from Kwantung to another location is all that is specified in the license. Of course, that other location is Kalgoorlie. very progressed with all aspects related to this, with evidence of progress, with delivering the one or two very specific pieces of evidence that the AELB has sought. The AELB has already completed its pre-licence audit and once again rated Linus as very satisfactory which is indeed the highest level rating that can be achieved. I think the other thing in terms of the Malaysian regulatory environment and operating in Malaysia is that we have really redoubled I guess our efforts to ensure that we have really direct engagement with not only our local communities but also important NGOs here in Malaysia. And in the report we've included a list of some of those which I think that you will recognize as being very important in terms of advocating for Linus within Malaysia. So all in all, Uneventful operationally, that doesn't mean not busy because overwhelmingly busy really in terms of executing on our Linus 2025 growth plan as well as all of the work that is required to deliver to the Malaysian regulatory requirements. So with that, I'll take a moment and take any questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, again, just please press star 1 on your telephone and wait for your name to be announced. If at any time you need to cancel your request, just please press the pound or the hash key. Once again, that's star 1 on your telephone. Your first question today comes from the line of Dylan Kelly from Ordmanet. Please ask your question, Dylan.

Yes, good morning, Amanda and team. Just two questions for me that in general groups, sales and capex. So the first one is looking at the realized price. It looked pretty good. I just wanted to understand how much of that mix is attributable to, say, the price premiums that you're trying to target for, say, some of the lower value products like LANCE or the SEG uplift, or conversely, how much of the realized price lift was more to do with the fact that you're selling less lower value Lantanum and Cerium?

Oh, gosh, I cannot give you a number on that, Dylan. But, yes, some of it is a volume mix effect. So our total sales of Lanthanum and Cerium were a smaller proportion of the total. So that gives you a higher average realized price. But the price for NDPR was, not stellar as you know um certainly it's very stubbornly you know staying low right through this period um you know coming up to license renewal at a minimum but we think that there are probably some other things going on inside china as well um so uh ecg was very good price during the quarter. And the S&M and Serium prices, we're now probably on average getting well and truly towards the 10% above the market price. And I think that we've still got some headroom on that to bring that up further. But arithmetically, without actually having done this table myself, a lot of it really has to do with product mix.

Okay, fair enough. So just moving into the concept of CapEx and what you've mentioned there in terms of the team and the size of the group that you're going to be spending on in the coming months and quarters ahead with long lead time items, can you give us a sense as to what the outgoings are expected to be and your level of confidence around that? say $500 million headline number in terms of an update or a revised number any time in the future?

Yeah, I can't give you a detailed outlook on the CapEx quite yet, but would expect that we will be able to inform the market with a little bit more specificity within the next couple of quarters. We will start to see, and the reason why we flagged it is that, yes, we've already started to see some costs associated with operating the project team, and we will start to see some capital outflows commencing maybe even as early as this quarter because, although probably not, I mean, we're going to release tenders for some of these long lead time items, but if we select a successful tenderer, there generally will be deposit monies which are available. So it's really just flagging that. And given that we typically don't have a really, for a business this size, high level of sustaining capex, I just wanted to flag that, you know, there will be sort of a slight uplift as far as that's concerned. We expect a major capital spend to kick in in 2021. This year is going to be primarily about design approvals, and it is only because there are certain of those items, you know, like there's elements of the kiln, for example, which are going to take, I think, nearly two years to be fabricated because, of course, a lot of this has to be done specifically for us. But we expect the major capital outflow to be in the 2021-2022 calendar year. So we will, as we get more certainty on that, provide it through. Now, with respect to the capital, total capital spend. One of the things that we're working through and certainly have had sort of various discussions with governments and customers is We need to make a call on whether we just do cracking and leaching in Kalgoorlie or whether we add solvent extraction upstream in Kalgoorlie. Now, if we do that, clearly that changes the capital envelope. On the other hand, it also potentially changes the operating cost structure because it takes a step out of the process. So we would have to do certain things to the product that comes out of cracking and leaching to get it into a form to transport to Malaysia for feed into solvent extraction. So we're still working on that and that may change sort of the shape of the capital. But in terms of the cracking specifically, We're firming that up and for our design as it stands at present, we're pretty confident that we can sit within envelope.

Okay. So just digging into that point around, you know, do you or don't you go down another level in terms of the process stream to SX? I mean, what's the primary consideration behind that? Is that possibly a function of the Department of Defence of outlook and tender requirements in terms of having material in country? What's ultimately going to drive the decision there?

The first point is an operating point. So as you would know because you've been up here and crawled all over the plant, we transfer material from cracking and leaching to upstream Essex in a liquid form and relatively low concentration. So if we took the material that comes out of cracking and leaching, there's a number of processing steps that would be involved in converting it to a solid form for shipment because no one's going to be happy if they're shipping a lot of water. So it is primarily an operating decision on what is the most efficient point for us to have a transport step. So that may mean that we are better off with the solvent extraction upstream in Kalgoorlie and then the solid conversion before we send that to Malaysia for downstream Essex and product finishing. On the other hand, it also meets, you know, so that's an operating sort of cost decision. There's a strategic construct, you know, we talked right at the beginning in Linus 2025 about the importance of diversifying our industrial footprint. And if we were to do this, it would indeed diversify our industrial footprint. In terms of cost, certainly we will have to make some investments in solvent extraction, whether it's here or whether it's in Australia. And your final point is also right, Dylan, that we would be able to export SEG from the equivalent SX1 in Kalgoorlie directly to the US for further processing. So it's got quite a lot of positives associated with it, but it's not a simple decision. It is one where the engineers need to do quite a lot of work, and it brings with it a requirement for additional reagents in Kalgoorlie, which is probably sort of the most critical decision for us.

Okay, fair enough. That's a very comprehensive answer, very mental. Just to tidy up on the next steps ahead.

Just to prove we've actually done the work, Dylan.

Well, you know, we'll continue to dig if we can. So just around the next decision, so we're waiting on feedback from the existing tender process. Do you expect that there's other parts of the supply chain that the US may announce in the coming weeks and months ahead? in relation to some of the other initiatives that the funds are taking?

I have no idea, I'm sorry. I cannot even speculate on what might be in the minds of the US government. I think, you know, where we see this as we engage with various governments, you know, when we speak to the Japanese government, particularly by Judd-Meg, they know almost as much about the rare earth market as we do. You know, and all other governments probably have come up the learning curve really quickly over the last 12 months but, you know, they're still, we're still not quite sure at what stage all of the others are at in their real understanding and their understanding really one of the critical factors where, as you said, when we speak to the Japanese they know exactly where the pain points are.

Okay, fair enough. Thank you, Amanda.

Thanks, Ellen.

Just another reminder, ladies and gentlemen, it is star one to ask a question from your telephone today. And your next question comes from Daniel Morgan from UBS. Please ask your question, Daniel. Thank you, Amanda.

On the amount of concentrate that you're allowed to process In Malaysia, so in the past 12 months you were constrained on that metric due to licensing restrictions. Just wondering when there might be an update on that or a change on that. Granted, your March license is obviously front of mind, but if you could just comment about that processing license renewal or uplift.

So, Danielle, you are right. We have a later focus on the March renewal. And given that the processing uplift does not affect our operations right now, we have members of the team preparing the additional documentation requested by the Department of Environment. We're confident that we can prepare the relevant information, but it certainly will not be until after we have been through the licence renewal process.

Right, and that brings me to my next question about how you're going to run the plant. I mean, you had throttled it back through the last half to comply, obviously, with that constraint. Just wondering how it's ramped up in the development quarter to date, has it ramped up well and how will you be treating the run rates this year, i.e. will you try to go flat out in the first half in anticipation of a favourable outcome on this or will you be running at slightly lower rates during the year?

Okay, so the answer to the first question, the plants come up in really good shape in the first part of January. It won't It won't be a 600 tonne month because it wasn't at a 600 tonne run rate for the first 14 days, I'd say. But it ramped up very nicely during that time. But by the end of January, we expect that we will be pretty sustainably at that sort of level. In terms of the decision on whether we run full full speed for the whole year or whether we hold back. We actually haven't given that a lot of consideration right now because we think from our further discussions that given we get through the March licence gate that the chances that we will be able to resolve any of the remaining issues with the DOE are pretty good. On the one hand, I'm a pretty simple person. A tonne you don't make today is a tonne you might never make, and a tonne you don't sell today is a tonne you might never sell. So I tend to like to put things in the bank rather than have them out on the never-never. But having said that, if our view does change and we think that there is a greater risk achieving that approval and uplift, then we will reconsider.

Thank you. And the Linus Next project, you've outlined that you've started spending money towards that, which is logical and you flagged that. More of an analyst question really, is that going to be expensed through the P&L or will you be capitalizing that as a project cost?

Yeah, Daniel, I think a fair point. We will obviously attempt to capitalize it. But just I think to indicate so far over the last half year, so we are talking really about very limited amounts, I think probably half a million, not more. But I think that will become obviously more relevant going forward.

Thank you. And probably the last question for now is just costs. How are you seeing the cost pressures in the business? I mean, definitely in the report today, you realize price was higher than I expected and therefore revenue. But cost was just slightly higher than I thought. Just wondering how these cost drivers are going and what you expect for the next, well, for the calendar year 2020. Okay.

So the plant likes to run at full speed, without question. And when we run at full speed, we get a whole virtuous circle of recoveries and volume, and therefore improved costs. So during the quarter, we had two months where we were at really maybe no more than 60% of full speed and one month where we were much closer to full speed. So we've got a very clear view actually of what that does to cost and bear in mind that you're looking at a cash cost here which doesn't necessarily correlate to the actual costs which you will see when we release the half yearly. I actually have to say I was very pleased with our costs and particularly in the month where we were running at close to full speed. Significant improvements, which I think we can see a lot of those correlate directly back to Linus Next, the work that we did in 2018. But the other thing is that we've also got an excellent new plant manager in Quantan who is taking a fresh look at things and coming up with some good ideas and some good initiatives to continue to improve. So Galen wants to say something as well. I guess I would just caution that we're looking at a cash cost profile here, which is not necessarily reflective of the actual cost on a P&L basis.

Yeah, I think overall what's probably important to mention, we did show pretty good progress on the cost side, particularly compared to a year ago. It was a little bit neutralized. The improvement is on the effect side, I think, particularly The Malaysian Ringgit strengthened relative to the Australian dollar, and that has put in probably about $2 million additional cost in U.S. dollar, not in Malaysian Ringgit, so that might have a little bit of adverse impact. But underlying, the activity is going the right way, and we see the result.

Thank you. Just last question. Sorry if I may before I let others have a go. The SEG was where you made some extra money than we might have expected in the period and prices have increased for some of those products. Can you just talk to us simplistically about how you get paid for that product and remind us about that?

We send an invoice and they send us some cash.

I mean, so there's published prices that we see on the constituent products and...

So what we do is that we characterize the material. And this is why we reference the fact that we are, as we went into campaign three, we're blending more into the Duncan zone and the ore body, which is richer in the heavy rare earths. And so that is now being blended in and we will gradually increase the amount of heavy rare earths that we produce from our concentrate. So we saw the first slight uplift in that. That translates into price because we sell the product on what is actually in that product. So we analyze each batch and then we We use that with a number of potential purchases and we run a bidding process, an auction basically, and then we take the highest bidder, which typically is more than what you would see if you were looking at it just on a straight out, you know, if you were trying to calculate it from the published pricing.

Right, okay. Thank you very much.

Thank you.

Your next question comes from the line of Cathy Moises. Please ask your question, Cathy.

Good morning, Amanda. Just a really quick one. We're looking at potentially having increased refining in Australia. Just wondering, would there be likely to be a capacity expansion overall? Because as you're progressively potentially moving more and more of the processing facility areas, away from Malaysia that would free up more of your Malaysian acreage to be able to devote to the final upgrade or are you going to be looking at maybe producing an Australian only material and maybe having Malaysia as a toll trading hub? What sort of scenarios are we looking at or is it too early to say?

It's probably a bit early Cassie but we're not stepping back from Yeah, we've talked about this quite a lot. The amount of IP that we have built here in Malaysia for the processing of rare earths is really significant. There is no other facility like our Linus Malaysia operations in Kuantan anywhere in the world. And in terms of processing our raw material, it is really excellent. We are reluctant participants in the idea of shutting down any part of our Malaysian operations. And with sort of any development, our enthusiasm for investment in Malaysia remains pretty high because it's a great place other than some of the issues, sort of the political issues that we've had. The rest is it's a low cost environment with a skilled workforce and it's close to our customers and all of that works very well. Certainly our starting position on this was always that our aim was that we would continue to run our facility here and that our growth capital would be going on the ground in Australia. Now, if it turns out that that becomes growth and replacement capital, that just gives us a slightly different financial picture from where we started this process. But certainly, over the next 10 years, we need more production. We will need more investment. Where we put that, given that there's a great deal of enthusiasm from non-Malaysian governments for investment in rare earths and critical minerals, will simply be a function of what is going to make financial best sense.

Fantastic. Thanks, Amanda.

Thanks, Cathy.

Just a final reminder, ladies and gentlemen, it's Star 1 on your telephone to ask your question today. And your next question comes from Michael Evans from ACOVA. Please ask your question, Michael.

Good morning, Amanda. Thanks very much for the update. You made a couple of comments in the quarterly regarding just the market. The Chinese light RE market is oversupplied with concentrate from the US and Africa, etc. Can you expand on that in terms of maybe give us Do you have an idea of the quantum of coming from the U.S. and Africa, maybe in concentrate tonnage terms? And I assume that U.S. concentrates would almost be 100% mountain pass. But where is it coming from in Africa, and is that sustainable, and what's the quantum?

The big number is the product coming out of mountain pass, right? And I don't have the number to hand right now for how many times. It's a big number. And they're churning out a lot of concentrate, and it's flooding into China. And yes, that is going in different hands. It's sort of creating just a bit of instability in the market from what had sort of started to settle into a slightly more orderly market. The African material is relatively low volume by comparison. It's a matter for the Chinese market primarily. And as I've said before, we have very little of our material going into the Chinese market these days. But it affects the price.

And are those imports, are they displacing, as far as you're aware, concentrate from China or other concentrate imports into China?

There's not a lot of other product coming into China, really. So it is primarily about, you know, it's an oversupply at the market, which then pushes price pressure downstream into particularly the magnet producing area and then that feeds back into upstream pressure as well. So a lot of downstream users are laughing all the way to the bank on the back of Chinese rare earth producers lower margins. So we remain optimistic at some stage they'll work that out.

Okay, great. Thanks very much.

And one final reminder, it's star one on your telephone to ask a question or make a comment in today's call.

Okay, well, looks like that's it. So thank you all, much appreciated. 2020, I am approaching this year with a firm determination that it's going to be an excellent year. And there will be many occasions for drinking large quantities of expensive champagne along the way. It really is, you know, there have been times when we felt a little bit, you know, life has been a little bit tough, dealt us a little bit of a tough hand, but really as we get further along on our Linus 2025 activities, I've got to tell you, it's exciting and, you know, really very energising for everybody in the business. So, look forward to talking to you all again at the half year and thanks for joining us.

Ladies and gentlemen, that does conclude today's conference call. Thank you for all participating. You may now all disconnect.