Lynas Rare Earths Limited

Thank you for standing by and welcome to the Linus Corporation quarterly results briefing conference call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Linus. Please go ahead.

Good morning and welcome to the Linus Investor Briefing for the March 2020 quarter. Today, the briefing will be presented by Amanda Lacaze, CEO and Managing Director. And Amanda is joined by Andrew Arnold, General Counsel and Company Secretary and Guardian Sturzenegger CFO. Please go ahead, Amanda. Morning, Jen.

Well, good morning, everybody. Isn't this a slightly different way of doing things? I'm trusting that everybody on the other end of the line has dressed appropriately for this teleconference, that there is a minimal amount of lycra amongst particularly our middle aged males and that everybody is truly dressed for success.

Well, what a quarter we've had.

We started with our Malaysian operations shutdown and we finished the quarter with our Malaysian operations shutdown, but for two different reasons. In between these two bookends, we delivered some excellent outcomes for our business. Certainly during the quarter, external factors continued to be very varied and challenging. But, you know, we're paid to manage our performance to these sort of external challenges to ensure that our business comes through it, hopefully stronger than we went into it. So today, you know, we're all subsumed with the issues of the COVID-19 challenges. But remember, during this quarter, our business has dealt with licensing challenges, very dynamic Malaysian politics, some influences on the market and demand from the early effects of COVID-19 in China, the change in government in Malaysia, and of course, ultimately, the movement control order in Malaysia, which has seen us shut our Malaysian operations. But as I said, we're paid to manage our response and our approach of forming small, focused and expert teams to deal with each of these challenges has paid off for our business. Taking first of all, because it was the thing before COVID-19 that tended to engage everyone most was really understanding where we were at and progress on the licensing, which of course, as you would recall, our license was due for renewal on the 3rd of March. Our Malaysian license team, ably led by Dharno Mishal and Professor Ismail, really delivered some outstanding outcomes, continued engagement with relevant regulatory bodies, and ensuring that we met the conditions that were associated with the renewal in August last year saw us with the renewal of our license for a three-year period. Alongside that, Michelle and Ismail and other members of their team ensured that we had a resolution to matters associated with the PDF requirements in Malaysia. We have a very clear plan and a pathway to success for that and issued a contract for the management of that project to GSSB. In terms of production, we started up very well and then of course we shut down. But we've been able to use our time to really ensure that when we start up, we start up even stronger than we did in January. And I was particularly pleased with our startup process at that time. So if we look at just some of our results and the highlights of those, and I know you'll have all read the report, but nonetheless, we are in... I think it's one of the most overused expressions at present, but very challenging times. For us, we've gone into this in the strongest position that our company has ever been financially. We've got a strong balance sheet. We've got excellent cash balance, which enables us to manage our way through this process. But during the quarter, Production, notwithstanding that we lost probably up to about 21 days of production, 1,369 tonnes for NDPR production was truly excellent and we were on track to really an outstanding quarter in terms of production, given that the first two weeks was much slower with the start-up from our shutdown at the end of December. Also, our total REO production was up on the previous quarter. So this is a reflection of improved management. We're in always a state of looking at continuous improvement, so improved management at both sites, and indeed improved management in terms of the way that we are integrating between both of our sites. So, for example, one of the things that we implemented, which seems small and maybe gets lost amongst many of the other things we're doing, is a new circuit in Mount Weld to deal with the carbonate in our raw material, which saw us being able to deliver a better outcome in Malaysia. In terms of sales, Certainly the market in general has been subdued and that has reflected some of the early challenges in China as a result of the early influences from COVID-19 in China. But demand outside China remained strong. even though prices were not as robust as we would like them to be. But the outcome is that we had good sales revenue as well as excellent cash conversion of those sales. One of the things we're particularly proud of, last quarter I think we talked about the fact that we were starting to see really... benefit from our long-term strategy of contracted sales and outside China sales on price. And we're really pleased to be able to report that we reached a new low on our sales inside China. Many of you will know that I've often said, Paul's KPIs go like this, sell everything we produce, then second one is sell everything we produce outside China, and the third is sell everything we produce at a premium to the published price. So only 10% of our sales in this quarter were made into the China market. Paul assures me that this will stop at about 1% because he doesn't want to lose his job. I think we can negotiate that. At the same time, we continued, the Linus 2025 team continued to focus on the development of all of our growth projects, including, of course, Kalgoorlie, where the project team is very capable to be working on a distributed basis as they plan and design our plant. We went for a virtual walkthrough of the design at our last steering committee meeting, and that starts to really bring the whole project to life. We've released our first tender for our long lead time products, in particular the kiln. Those tenders have been received and we're now proceeding to detailed tender evaluation. In addition to the heavy rare earths tender that we lodged in the previous quarter in the US, there was a further tender documentation released by the US government for a light rare earth operation in the US and we have submitted that during the March quarter. So we have remained very, very busy through all of these various external challenges and I think that the outcome that you see today whilst Certainly we've seen some benefits from foreign exchange, the fact that we were able to, notwithstanding a number of significant calls on our cash, as well as the limitations on production at the beginning and end of the quarter, we've been able to generate positive cash flow and we're very proud about that. Where to from here? As we've also announced today, the Malaysian Movement Control Order has been extended through to the end of April. However, the Malaysian government has also provided new guidelines on those industries which may be able to start up. So we believe that we fit within a number of those criteria and have lodged our application and are waiting for that at present. Of course, the importance is how do we start up? And I did a presentation last week to CEDA where I was widely quoted, quoting that old saying which is never waste a good crisis. And certainly we have been certain that we are not wasting this time. So whilst the Malaysian operations are shut down at present, we have spent the time ensuring, A, that we have operating procedures which ensure that we are protecting the health and safety of our people, their families and our local communities. We have temperature checking on site. We have enhanced operations in terms of cleaning and hygiene procedures. But we have also been using this time to ensure that our knowledge workers, particularly our process engineers, are doing work which will ensure that we are operating better and more safely again once we start up and we have also been using a variety of different mechanisms to ensure that our operators who can't normally do their work remotely are engaged in training activities and remaining very engaged with the business so that when we do start up they will be well prepared for that startup process. The other thing that this gives us an opportunity to do is, you know, because even with some of the shutdown with the regulatory constraints, we were never completely shut down. We still had activities on site. Our leadership team was still very much engaged with managing daily activities. They've had a lot of more time opened up to really rethink our operating parameters and think through and model how we're going to restart this business. We would expect that there's going to continue to be somewhat muted demand in the market for at least a six-month period. And so making decisions on what sort of throughput rates we will target and how we can do that in the most cost-effective way is something that our operations team in Kwantung have dedicated their time to over the past couple of weeks. We have an excellent startup plan and we're very confident that we can start up in a way which is both cost-effective whilst ensuring that we meet the fresh demand from our key customers. At Mount Weld, we have continued to operate because the West Australian government has nominated the resources industry as an essential industry. There too, we have implemented a number of new protocols to ensure the safety and health of our workforce and our local community. At present, Mount World's processing operations are shut down. We've built some quite good buffer stock in terms of concentrate. And our team is focusing on using this time productively to complete a number of improvement projects that we may otherwise have had to outsource. So once again, improving cost-effectiveness. So we are hopeful that we will be starting up in the near future. We have a plan for that startup. We're confident that we will be able to do it both cost-effectively and in an operating sense very efficiently. So once again, just reflecting on the fact that we had really an excellent production quarter It showed the benefits of a number of our investments that we've made to improve things like reliability, recoveries. We've had an excellent outcome in terms of our sales development, our portfolio of customers and the markets into which we sell. We've certainly seen the benefit of the efforts that we have put into outside the development of the rare earth industry outside China. Japanese demand remains steady and we think given the fact that we are so important to the hybrid and electric automotive segment that we will see that balance out to some extent some of the subdued demand in other sectors. So finishing the quarter in pretty good shape financially and feeling pretty confident about our ability to continue to weather the COVID-19 challenges. So with that, I would be happy to hand over and take questions.

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Dylan Kelly of Ordmanet. Please go ahead, Dylan.

Good morning, Amanda. Hope you're well. Three questions from me. So just talking, you mentioned before that you're trying to estimate what your production rate should be over the next six months and what market demand outlook is like. How's the team thinking about this at the moment? Are you more concerned around if you were to run it over 600 tonnes per month, the market may not actually be there for that. How are you trying to quantify this?

Okay, so there's a few inputs to our decisions on our production rate. The first, which is important to deal with, is the which is set by the Malaysian government, which is that we should have no more than 50% of our normal workforce on site. And that's of course a reflection of seeking to minimise movement within the community. that becomes sort of a first criteria for us to think about well really how can we run the plant with you know sort of 50% on site. The second piece then comes down to really what is the fresh demand in the market and particularly in our key markets as opposed to maybe areas where people are seeking to continue to either hold high levels of inventory or build high levels of inventory. We have no great desire to be depleting our resource at very low prices. So really understanding fresh demand levels and making sure that we meet those is really important. And the third piece is really having a very deep understanding of when and how demand, particularly in the automotive sector, is likely to be affected by the continued impacts of COVID-19. So on balance, we expect that we're going to run the plant at probably between 60% and 70% capacity. We think that we can do that safely and we can do that to give us really an optimum financial outcome rather than consuming financial resources to build inventory either in our own warehouses or in others' warehouses.

Okay, great. That's a great answer there, Amanda. Just turning to how this is impacting the business. So it seems pretty clear to me that Australia's got, sorry, Mount World has reasonable stockpiles and so long as that supply chain continues, there's a lot, that's not really the issue. This is about Malaysia and being able to operate there. When you said that Malaysia never really shuts, what did you mean by that? And can you break down what you are able to do on the site. Can you still put tons on the back of a flatbed and put them into the port? Can you perform any sort of long lead time, so bring forward some maintenance, or is this effectively there's only a skeleton staff and no one's there?

It's an absolutely skeleton staff at present. what we have been able to do is that we did have concentrate both in the port and on the water and so I guess we have been able to bring all of that on site and have that properly stored one of the things which is helpful for us is that as you know we're processing a natural resource and there is always some variability it gives us an opportunity to really assess all of that material we've got and and if necessary to blend for sort of optimum production outcomes we have of course all of our security staff on site we have a skeleton maintenance team who are able to do some some small activities but primarily are there to ensure that we're testing systems, making sure that we've got, you know, sort of our systems, all of our safety and alarm systems working well and we're able to do some tests which are harder to do when you're engaged in normal operations. And, of course, we have our, as I said, our knowledge workers, so that's our production leadership team as well as our engineering teams able to do a lot of work, if not a lot of physical work, but a lot of work on really developing plans for better and more efficient throughput. But it is a very small on-site number at present. It's across

sort of 24 hours we've got less than a hundred people so slightly more during the day and then a smaller number at night okay great and just in terms of um sorry in your latest update you mentioned this this notion that you could you can apply for an exemption to continue producing because of you know the your end-use supply going into things such as ventilators. What's the decision-making process that goes, or the application process like for that? And could you lead us into exactly what goes into a ventilator in terms of railroads, just at a high level?

So, actually, what I'd rather do is step back to the fact that the Malaysian government, in the extension of the Movement Control Order, also provided a new set of industries that would be considered to restart operations. This included those involved in the automotive supply chain, most importantly those who were involved in export, and of course most of our materials are exported. um those involved in the oil and gas supply chain and then of course there are some of the medical supply chains including medical devices so we think that we you know sort of clearly fit under automotive supply chain uh export um oil and gas you know whilst most of the um the catalysts which are used in big refineries are produced by the three big companies in North America. They then find their ways to refineries all over the world. In terms of medical supply chains, it's really not just ventilators which are relevant to COVID-19, but it's also other diagnostic processes and equipment, including MRIs. and a variety of other areas as well so materials which find their way there include magnets clearly but also some of the high purity cerium and lanthanum materials which go into diagnostic testing for you know things like kidney disease and those sorts of things so so you know as I think, you know, we often talk about this and the importance of rare earths and, you know, the famous phrase about being, you know, the vitamins of 21st century industry. We see that, again, you know, today, which is so much of this is actually, you know, our materials go into a variety of important supply chains. So we think that with the MIDI... industries list which has been published that we fit within that list there's a process for making application we have done that but we know that just like the Australian government dealing with its 800,000 applications for job seeker allowance the Malaysian government is dealing with a very large volume of applications to restart, and so I would not make a recommendation or a forecast on when we may or may not get that approval, but we think that we will satisfy the conditions as the Malaysian government works through the various backlog of approvals.

Okay, thanks a lot, Amanda. I'll pass it along.

Thanks, Dylan.

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Andrew White of Current & Co. Please go ahead, Andrew.

Hi there, Amanda and the team. It was just a question on, I know you've outlined the tender that's been put out on the long lead item. Can you give me an idea on the timeframe that you expect submissions to that to come back? And then when they do come back, just what it looks like in terms of will you prioritise the capital outlay in the near term on that?

So the submissions have come back.

We've received the tenders and we are proceeding to detailed tender evaluation with the tenderers. I actually can't tell you just straight off the top of my head how long we think that process is going to continue. And in terms of use of funds, um clearly we will be prioritizing those areas where we need to ensure that we have um you know these long lead time articles uh items you know sort of funded um now because it's too late if we don't do it you know sort of if if we put it off for another six or twelve months we're doing this um sort of process alongside um

you know relatively short timeline we're running parallel processes with also doing all of our regulatory and approvals work okay yep no problem so yeah that pretty much answers my next question just on the sense of urgency on getting Western Australia going so yeah do you I guess the question I can ask is just what sort of you're trying to push that ahead as fast as you can what are sort of the major tasks that we can look to expecting on the mountwell project or sorry on the cracking elation project okay so as I said there's really sort of two pathways here I mean there's one which is really about approvals and as

Yeah, I mean, it's pretty exciting for us, but with everything else that's gone on, I even forgot to say this in the introduction, you know, getting the major status, project status by the Australian government and the lead agency status by the Western Australian government is really important for us. The fact that the Australian government has set up a critical minerals office is beneficial for us as well. And we are very engaged with government and also with sort of relevant public service departments through this process. And I would say that we've been really very pleased with the quality of the engagement in those areas. On the other hand, the engineering, which includes plant design, plant layout, is progressing apace and, you know, it's pretty exciting. You don't very often get to fundamentally, you know, sort of, I guess what I would say is that our project team is pretty excited about it. We had our steering committee meeting I said to our project lead Grant, you know, was he having a good time? He said, well, yeah, actually, I'm having a really good time. Bear in mind that Grant ran our cracking and leaching before then becoming site manager and Quantani ran cracking and leaching from 2013 at a time that that plant was really suffering from some of the sub-optimal design features. And so he has an opportunity now to design a plant which addresses all of those issues and makes it better again. So we don't see any slippage in our timeline at this stage on the Kalgoorlie project. What we do see is the importance of understanding how an extended economic effect from the COVID-19 pandemic may affect our funding requirements, and so we're doing the work on that at present.

Okay, excellent. Thanks for that. Just on what's happening at the LAMP with it being in care and maintenance, I understand that chemical costs are a major component of the input costs. What's sort of the magnitude of reduction that you've got at the moment? Is chemicals inputs completely stopped on the process at the moment, or what sort of percentage reduction would you say there has been on those inputs right now?

Yes. We've avoided 100% of the chemical input costs. We're not producing, so we don't need to buy them. There's some, of course, as we look at cash, you know, in April we're paying the invoices for material that we consumed in March, but we have no chemicals of any substantive nature coming on. You know, our two... two big reagents, sulfuric acid and hydrochloric acid, and both of those gone. Essentially, the only costs that we are sustaining through this period are labour costs with a few other sort of small additions. But we're fortunate compared to many other businesses that labour is a percentage of our total inputs is a relatively small number.

Yep, I see. Excellent. Thanks for that. That's all for me.

Thank you, Andrew.

The next question comes from Chris Hughes, a private investor. Please go ahead, Chris.

Good morning, Amanda, and your team. Delighted to hear everybody's well, and I just feel your frustration. Yet another quarter caused reductions in production through absolutely no cause whatsoever of anybody on the ground. It's just so frustrating for everybody and I guess from my perspective, the big positive is what you've actually produced and sold and while some of it's come from inventory, the potential is obviously there and running at the levels it has obviously. The days that you're allowed to operate are very encouraging. Just a very simple question, Amanda. I know you have experience of insurance coverage and I'm just asking whether your loss of profits insurance cover with business interruption caused by this virus and the imposition put on you by the requirement to close down.

I might let Andrew answer that but as I understand it we're probably not going to get a lot of talk there but Andrew can you address that?

Certainly. Morning, Chris, and thank you for the question. Good morning. The general position under business interruption insurance is that it's part of your property policy and that usually you need an underlying property damage in order to trigger recovery. And so the general position for all companies with BI cover is that they would have limited capacity to recover in this situation, and we are the same.

Okay, unfortunately that was the answer I thought I'd get, but I should at least ask it anyway. All I can say is good luck and I hope you guys will get up and do it.

Thanks, Chris.

Thank you, Chris. Your next question comes from Matthew Chen of Foster Stockbroking. Please go ahead, Matthew.

Morning, Lance Chen. I just wanted to ask, I wanted to reconcile what you were saying about a fresh demand over the next six months against, I guess, the sales volume in the last quarter. That seems pretty strong to me. Obviously in comparison to Q2, Q2 is a bit of an anomaly because that was the tail end of the processing limit for calendar 19 year. But there didn't seem to be sort of any issues getting product out through your chain over the last quarter. Just wanted to sort of reconcile that with what you were saying about fresh demand and the inventory build.

Oh, well, we clearly have to think about, you know, what's likely to happen to demand coming out of the restart from the various COVID-19 shutdowns. And so that's really what we're going to be focusing on, making sure that we meet that demand.

Yeah, OK. And just to clarify, it was... Because my phone dropped out for a bit there. It was 60% to 70%. 67% of capacity, wasn't it? Yes. That's how you're thinking about it.

Yes. So we're still doing some further work on that. And as I said, what we want to make sure is that we're able to satisfy the demand for our strategic customers. But we also want to make sure that as we start up, we do it on sort of a with a focus on costs which see this being, giving us really an optimum financial outcome because, you know, the world is an uncertain place and preserving our strong, you know, our strong financial position and balance sheet to allow us to come out of this, you know, our objective is not to come out of this alive, it's to come out of this stronger is sort of one of the things that is really exercising the minds of everybody in our production team.

Fair enough. And just wanted to clarify, you said at the start of the call, was it 21 days lost production last quarter?

Oh, thereabouts. If you talk about it was effectively 10 days at the end of the quarter and And when we talk about the time to get everything filled up and running smoothly at the beginning of the quarter, that's not a precise number, but it's around about that sort of number that we're talking about.

And with the Malaysian government exemption process, Could you specify which government department is handling that? MITI. Oh, okay, MITI. So you've got a fair bit of... Well, you've got the relationship there and you've got a fair bit of experience dealing with them, haven't you?

Yeah, look, I think that if we look at the way that Malaysia has responded and many of my friends here in Australia will ask me about it and ask about it compared to, say... some of what's been printed about Indonesia, and I'm not as familiar with Indonesia, clearly. But Malaysia has demonstrated, I think, again, that it is, you know, whilst it's still classified as a developing economy, that it is a very mature community, its response has been actually very similar to the sort of response that we've seen here in Australia. Its infection rates have been pretty low, sort of comparable to what we see in Australia. The decisions are being made by the Ministry of Health But within those critical decisions, just like here in Australia as the chief medical officer, the Ministry of Health is setting the framework. But the implementation of that activity then sits with MITI. And so I would say that Malaysia has performed well. The new Malaysian government has performed really very creditably through this process.

It's quite a challenge for a new incoming government, isn't it? And I've just formed a cabinet and I've been dealt with this hand.

So I think the fact that the... In fact, the new government does have a lot of... experienced and older hands in it you know so a lot of the a lot of the government ministers have been ministers previously I think that that is certainly working in in in Malaysia's favor great thanks Amanda okay thanks Matt thank you Matthew there are no further questions at this time

I'll now hand back. Apologies. Your next question comes from Michael Evans of Avoca Capital. Please go ahead, Michael.

Good morning, Amanda. Thanks very much. I'm a bit confused, I think, on the Malaysian government regulations. You mentioned, I understand they've sort of extended the shutdown to about the 28th of April at this stage, but then you also mentioned that one of their the first criteria that you have to meet in getting it back to production is no more than 50% of normal workforce on site. Is that the criteria today or is that the criteria post the 28th of April, assuming they lift total restrictions? And are you working on and confident that you can produce 60, 70% of 7,200 tonnes of NDPR capacity with 50% of your workforce? Are those questions clear?

So I don't know what the Malaysian government is going to say on the 28th of April, right? What I do know is that the conditions for any industry operating at present are that it should have no more than 50% of normal staffing levels. At present? Sorry?

At present. Okay, right now.

At present. So if we get an approval to start up, which is what we're sort of hoping within the latest guidelines, if we get an approval to start up before the 28th of April, then we would expect that it is going to be under those very clear guidelines, which is 50% of staff on site. That, as you said, is about really seeking to minimise the amount of movement that there is and therefore the opportunity for cross-contamination and we are supportive and compliant with that. Can we run at 60% to 70% under those conditions? Yes, we can.

Okay, so the current condition is really simplistic. You can't produce anything at the moment. and you can't have any more than 50% of your normal workforce on site. But you're under, in your request to start production, you're assuming they'll, you want to say, okay, you can produce, but you still can't have, if you can produce with 50% of your normal workforce on site, we'll let you produce. That's sort of roughly what you're looking for.

Sure, yeah.

Yeah, okay. And you're confident you can produce 60 to 70%, 7,200 tonnes of NDPR with half your workforce. I've got your answers. Yes. Okay. Thanks, Amanda. That's it for me.

Just sort of following that up a little bit further, that's no different from the sort of conditions here in Australia where we're being asked to ensure that all those who can work at home work at home. So when we talk about Mount Weld, we have only one of our... metallurgical team on site the others are working from home our planes have only are only carrying a 50% load we've brought in additional buses so that we have no more than you only have little sort of mini buses we have no more than six passengers on each bus so it is consistent with the same sorts of guidelines and constraints that we're dealing with here in Australia.

Thank you. Your next question comes from Tim Ainsworth, a private investor. Please go ahead, Tim. Hi, Amanda.

I'm just wondering if you could update us on the Blue Line joint venture, Amanda. What progress there at the moment, or is it dependent on the US tender results?

Yeah, we're waiting on the US tender result, and we've not got that at this stage. As I think everybody knows, we've even got a passing consumption of news. We know that the US government's pretty consumed with other matters at this stage. On the other hand, some of our team were in the US at the time, that a number of the travel restrictions came into play and had been using that time very wisely with some product development and process development work. So I think that we're looking to develop a business there, which is a combination of a heavy rare earth plant separation plant, as well as other specialty materials. We're using our time now. I mean, with all of these things, how do we use this extra thinking and time that we've got to the best possible effect? But an update on that really is dependent upon the US government being open for business again.

Okay, thanks. Just one other Japanese media comment in the middle of last month. It was about the 14th of March. Amanda was talking about the increasing of reserves in the state reserves. I think they mentioned rare earth elements, which I presume would be NDPR. Any comment on that? Have you had any contact with that that you can talk to us about?

No comment.

Okay. Thank you.

Thank you, Tim. There are no further questions at this time. I'll now hand back to Amanda for closing remarks.

Okay. Well, once again, thank you all. I'm very pleased with our performance during this quarter.

I'm particularly pleased with the way that everybody in the business has manned up to the various challenges with which we've been presented. And I remain very confident that we're going to come out of this in good shape and actually with the work that's being done by our various teams. with a really refreshed and energised and improved operating rhythm. So thanks for your attendance today and look forward to keeping you updated as we move forward.