Lynas Rare Earths Limited

Thank you for standing by and welcome to the Linus Rare Earths quarterly investor briefing. All participants are in a listen only mode. There'll 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'd now like to hand the conference over to Linus Rare Earths. Please go ahead.

Good morning and welcome to the Linus Reras Quarterly Results Briefing for the December quarter of 2020. Presenting the briefing today is Amanda Lacaze, CEO and Managing Director, and Amanda is joined by Gaden Sturzenegger, CFO, Andrew Arnold, General Counsel and Company Secretary, Daniel Havis, Vice President of Strategy and Investor Relations, and Cam Leong, VP of Upstream. Please go ahead, Amanda.

Thanks, Jan. Well, good morning, everybody. And as always, thank you for your continued interest in the company. I was a bit concerned at a minute to 11. I'm in Queensland, so 10. We only had two people online, and I thought, is everybody thinking, oh, it's all so good that we don't have to ask any questions, and that's okay as well. But no, we now have... a much more substantive audience. So I guess for me, this is maybe one of the easiest quarterly readouts that I've done. I mean, really, wow, what a quarter. It was a very busy quarter. It was a very busy quarter and a very productive quarter. So it was productive in terms of our normal operations within the business, It was also a very productive quarter in terms of our progress on the significant growth projects that we have within our company. And it was a very busy quarter as we sought to continue to effectively manage some of the challenges that continue to be presented to our business by the COVID-19 pandemic. So it's with a great deal of pleasure that I highlight the fact that it was the highest revenue recorded in this quarter that we have ever recorded in the history of the company. Of course, benchmark pricing was fairly kind to us, but I think that more importantly, it reflects the strength of the key energy segments into which we sell, particularly new automotive. And by that, we're talking about hybrids, plug hybrids and electric vehicles. And I know that many investors are looking at Linus as an excellent way to gain exposure to this electric vehicle and new energy thematic. Of course, continued growth in renewables, particularly in wind power and electronics. Last quarter, a number of analysts said, oh, gee, you've done well to keep the costs where they are. Do you think you can manage to sustain that? And you will recall that I said that when we targeted to be operating at 75% of Linus Next capacity... we said we would expect to be able to capture cost efficiencies at that level. And we're pleased to be able to report this quarter that with a continuing strong focus on our costs that we have indeed been able to sustain the cost-efficient production. Of course, we'll note that we have also kept our production running at 75% of Linus Next rates, as we previously indicated. And I know that some of you want to know, well, why don't we do more? And to that, I would say exactly the same as we did last quarter, that there are still a great deal of uncertainties in the market today. We learn new and different things about the effects of the pandemic each day. And the challenges are much more than just health, but health matters. And our large processing facility is in Malaysia, which is grappling with a third wave of COVID infections at present. there is a rigorous movement control order in place. And as always, we ensure that we comply at a minimum with that regulation, but always, as with everything in the business, we adopt the highest standards. And so where quarantine rules may be more stringent in Australia, say, compared to some other jurisdictions, we will always adopt the more stringent requirements. So in Malaysia, part of the movement control order is a request for all businesses to control and minimize the number of staff on site. We've gone back to many of our administrative staff working from home, but at the 75% rate, we certainly are able to very effectively manage the requirements to safeguard the health of our employees and to meet the government requirements. And the other thing I think that is particularly relevant in the quarter just passed is the progress that we have made on our growth project. I said at the AGM that We are ambitious for our company and we are operating in growth segments and we are ambitious that our company will continue to grow as the market grows, that we will retain our share in the high value segments and indeed grow, that we will meet and exceed the expectations of our key strategic customers. Meeting the growth means that we need to be increasing capacity at each production stage within our operations. Part of that is the Kalgoorlie facility where progress is very satisfactory. One analyst that I read today wondered why we hadn't actually spent more money yet on Kalgoorlie. Of course, as always, we are carefully managing our procurement processes and profile to ensure best value. But we are moving forward with a number of the packages associated with construction that have now either been selected suppliers or we are well advanced in the tender process. And I think that some of you would have seen some of the pictures that we've got in the report of the kiln fabrication, which is continuing notwithstanding some of the COVID-19 challenges. Of course, the other news, which has been really significant in the last week, was the grant from the US government, the further grant of funding for the development of a commercial light rare earths facility in the US. This is very exciting. If we move to the next stage for the heavy development, we will end up with a facility in the US with light heavies and specialties. And this is very much in line with our overarching strategy to ensure that our upstream processing is close to our resource in Western Australia and our downstream processing close to our customers. And of course the upstream processing means that we need to continue to explore and understand our war body and once again we released during the quarter information related to that. So we will be releasing our half yearly results next month and one of the limitations always of the quarterly report is that it provides a view of cash as opposed to a P&L view of profitability. Once we've released that, you'll be able to see how these two things interplay. But we've got a history of really excellent cash conversion within the quarter, generally in excess of 80%, sometimes in excess of 90%. Simply the profile of sailings during this quarter meant that we had a lot of our deliveries late in the quarter and I would reassure everyone who is listening in that those sales which were invoiced late in the quarter have now been collected, the cash has been collected in the early part of January. So really very pleased with the quarter and in fact very pleased with the first two quarters of this financial year. So with those as introductory comments, I am as always happy to take any questions.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. The first question today comes from Daniel Morgan of UBS. Please go ahead.

Hi, Amanda. First question, just on the revenue side, it appeared that you made, again, more revenue or had a better price than I had thought. Obviously, there's a lot of moving parts behind that. Can you just help me unpack that? Did you sell more NDPR than you produced, or is it better pricing on the the scg heavy product um or did you did you sell more product towards the back end of the period and therefore you benefited from the price spike that occurred you know late in the quarter just trying to work out what's going on with your prices and why i'm under yes to all of the above daniel um so yes uh

The later delivery certainly meant that we didn't collect all of the cash within the quarter. As you're aware, we've been working with the rising price and whilst we would always prioritise customer needs over speculating on what might happen to the price in any given week or day, Certainly, one of the effects of those later deliveries has been that we've captured some higher prices. Yes, to the improved pricing from SEG, as you will have seen, the terbium price was almost, well, it was $8.95, we've quoted in this report, and I know that you've watched the the publications carefully and it touched $1,000 a kilo in January. So that certainly has that and the increases in dysprosium pricing as well. But in fact, a number of the other elements in that SEG have also appreciated a little in price, which is very pleasing for us. And yes, if you have a look at the report you'll see that in the period we produced 1,367 tonnes of NDPR and we did sell a little amount of inventory which had been carried over from the previous quarter in addition to that production.

Okay, thank you. I know you sought to address this a lot in your opening remarks. Why have you not changed the 75% capacity utilization? If I read your comments correctly, it's mostly about the safety of your staff and being a good citizen in Malaysia rather than a statement on demand. If you look at the demand side, You do state in your report that demand seems to be more resilient than perhaps everyone expected for rare earths. And, you know, it's quite clear that the pricing is very strong. So I'm just trying to clarify that it is more just, you know, a local Malaysia thing rather than a call on demand being weaker than what we might have thought it would be.

Yeah, maybe I could... expand on it a little um most certainly there is a risk management portion to our decision and uh and that that entails more than you know the number one piece there is about health right and ensuring that we comply with all regulations and always take the most conservative approach to managing the health of our people. But a second thing, which I did highlight in the report, is the effect of changes in commercial shipping. So part of that is about customer delivery, but another part is about getting concentrate from Mountwell to Malaysia, which generally speaking for Malaysia, many years now, has been a relatively non-contradictory part of what we do. But at one stage during the quarter, we had every single shipment that had departed Mount Weld for Malaysia was delayed, every single one. And so if we had been, in that instance, if we had been running at higher rates, we would have been compelled to actually stop production because of those delays in shipping. So we're juggling quite a lot of balls here and so the more cautious approach to production planning I think has served us quite well. I also indicated last time around that we had some major maintenance being conducted on at least one of our kilns. And certainly that has, whilst we can often sort of run hard coming up to a maintenance shut and then fill our buffers, Some of these other complexities have made that a little bit more difficult. And in terms of meeting market demand, certainly if we were looking at this and saying at 75% we couldn't sustain supply to our strategic customers, then we would be revisiting that and we see that that has not been an effect so far. We've had to manage quite carefully as we've allocated stock but certainly we would be hoping that within the next couple of quarters we'll be turning that production up again but But as I said, there are a number of moving parts and really our production planning at 75% is to do with sort of careful risk management.

Thank you. And maybe just the last question on the markets. I mean, the price for your commodities have clearly lifted substantially over the past quarter. Just wondering if we could get your high-level takes on what is going on in the market? You know, is this fundamentally backed? Is there more demand for these products? Or is it maybe the supply anxiety piece that's coming through and the concern about supply from China specifically? Thank you.

You know, I think it's a little bit of both. You know, we highlighted the fact that in the segments that we operate. And so when we think about automotive, you know, the sale of new energy vehicles has continued to pace. And, you know, I'm alert to the fact that even here in Australia, which I was driving last evening and I was listening to an article which was talking about the strong demand for automotive. And I guess that, you know, all of us who are no longer able to travel anywhere and much has been written about people sort of giving themselves a treat and it appears that new cars is one of the areas where people are wanting to give themselves a bit of a treat. So certainly we're seeing that demand is sufficient to be creating a bit of a balance in the market, sort of giving a bit of foundation to the pricing. I think that we will never give a forecast on pricing because the only thing that we know for a fact is that we will be wrong. But the dynamics of the market appear to be relatively balanced at present. But we're waiting to see what happens after Chinese New Year because, as you know, there's Lunar New Year because it's Chinese industry typically shuts down during that period so we'll see what happens after then. I think that the fact that the market is not flooded with product is probably consistent with keeping this sort of nice balance which is underpinning these improved prices.

Thank you very much.

Thanks, Danielle. Thank you. Once again, your next question comes from Jack Gabb at Bank of America. Please go ahead.

Thank you, and good morning, Amanda and team. Just two quick ones for me. Firstly, just to go back to the capacity question, have you applied, I guess, for a permit uplift from the Malaysian government or the DOE in the agency with respect to concentrate imports just to get above the or get to the sort of closer to nameplate capacity and then just secondly on the relocation of cracking and leaching can you just let us know what's outstanding in terms of permitting thanks okay so in terms of the operations in in Malaysia we

We have disclosed previously that we actually have approval for a higher level of imports. What we don't have is the approval on the higher level of processing and of course in the FY20 calendar year we didn't test that limit. we continue to engage with the DOE on a variety of matters, including this issue of processing volumes. But I don't have any new news on that. And in terms of the cracking and leaching permitting in WA, we don't propose to have a running commentary on that. I think that we've disclosed already that it does not trigger an action under the EPBC so therefore it will be regulated under the Western Australian state law, that we are working closely with the EPA on that and that at present none of those approvals are on a critical path at this time. you know, all is working according to, you know, our team is working very closely with the WA government because we have lead agency status with JITSI and also working very closely with the EPA to move through those approvals appropriately. We also disclosed not long ago that on the first set we've come back with a number of questions and we're just answering those in good order.

Great. That's all from me, Amanda. Thank you.

Thanks, Jack. Thank you. Your next question comes from Reg Spencer of Canaccord. Please go ahead.

Thank you. Good morning, Amanda and team. Congratulations on a very good quarter. A lot of my questions have been answered already so thank you for those. I was just hoping you could help me understand a little bit better the longer term capacity plans noting now that you're looking to establish a light separation facility in the US. I know we sort of had a brief discussion on this in the past but maybe what I was hoping was to get a bit of a better idea about capacity plans with the US included and what I mean by that is that only to be incremental to what you're doing in Malaysia. Noting that you've always stated in the past that you would ramp up production in line with the market but I was just curious about how that might differ from actual installed capacity. So any comments you've got there Amanda would be much appreciated.

I still think 2025 is a fair way away and so we've always been loath to then also be talking to the young men. So particularly in a market which is a high growth market such as the markets into which we sell. we aim to grow with the market and if we think back even three years ago, you know, we did sort of some analysis when we looked at, you know, sort of the consensus amongst industry observers and it basically said, you know, you'd need a new line every four or five years in terms of capacity. So, we seek to certainly fill that and, you know, we're seeing the Malaysian plant will continue to grow because our key customers in the East Asian markets, particularly Japan and in China as well, are growing and growing substantially. So we will be aiming with the way that we configure our new industrial footprint Yes, we will be aiming to ensure that it is additive, not replacement. I mean, that's how we create value. But the exact path to doing that requires us to be able to reliably increase throughput at each of the production stages. And so as we continue with our growth projects, That's exactly what we're aiming to do. So, you know, I'm not ready to say to you this is the number or that is the number. What I am prepared to say to you is that if your question was, is this as good as it gets, 10,500 tonnes a year of NDPR, my answer would be no, that's not as good as it gets.

That's a good answer. One more question, Amanda. Given where pricing is for the more valuable rare earth products at the moment, we are approaching incentive price levels for greenfield developments. We all know that these projects take a long time to come online, but your points earlier about your own capacity expansions, in order to deliver that supply when the demand is there or when the demand appears, those investments need to be made sooner rather than later. Does that mean that there is the risk of new market entrance coming now that we have in that incentive pricing in the market? And does that mean that you would look to potentially accelerate, where possible, any capacity expansions?

We really only have one speed, and that's as fast as we can go. So, you know, we are very focused on doing these things quickly. so that we are prepared. And I think I've talked to you before about, you know, a lot of the problems in mining and chemical industry is that they bring on capacity in big chunks and it's always at the wrong time. It's either before the demand or after the demand. Our modular approach means that hopefully we will have a situation where we can cost-effectively incrementally increase as the market does, you know, because the market doesn't then want to go in leaps and bounds. In terms of other supply coming online, I tend to spend less of my time thinking about that than others do and remain very firmly of the view that the textbooks are right and that competitive markets are good for everyone. The more activity, the more innovation, the more demand is likely to increase. And for us as the market leader outside of China, our job is to make sure that we stay ahead of the game. So it's good for us as well. It keeps us on our mettle. And we have no intentions of giving up those things that drive competitive advantage for our business.

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

Thanks, Reg. Thank you. Your next question comes from Dylan Kelly of Ord Minette. Please go ahead.

Good morning, Amanda. A couple of questions for me just on the U.S. business. I just want to go into some detail if we can. Firstly, when are you going to be in a position to announce, say, the details behind the various parts of that U.S. business now? Or could you give us an understanding of what's preventing you from telling us about some of the moving parts there? I'm referring to things like what's the joint venture structure in terms of percentage share? What are the rough economics in terms of total capex? What's the impact on operating costs likely to be? Elements such as that. I'll pause there and we can discuss the second one after.

Okay. When we provided the brief on the heavies, we identified that we had... agreed certain milestones in the phase one contract with the US government and upon satisfaction of those we may be granted phase two contract although there is no guarantee. But clearly that as a decision feeds critically into the overall configuration of that facility. With respect to the of what you're talking about. I don't think I've ever told you precisely what CapEx and operating costs are line by line, so I'm not expecting that we'll probably be doing that. But, you know, we've indicated that by the end of this financial year, we have an expectation that we will know the path forward on the heavies. And so I think you could safely say assume that we would be targeting that by the end of this financial year we will have a very fleshed out plan for that facility and exactly how all of those things that you've identified look. So achieving the agreement with the US government on the lines certainly adds to our vision to that facility. And we do have quite a lot more work that needs to be done there because that's come as a result of an initial PENDA response, but now we need to really put our shoulders to the wheel on quite a lot of the additional engineering and design. But give us a little bit of time now that we've got that one under our belt and hopefully soon we'll have more clarity relating to any second phase funding on the heavies and then we'll be able to give you that more comprehensive picture, Dylan.

Okay, great. Thanks, Amanda. Now in terms of just some of the finer detail on the tender announcement, The 1,250 tonnes out of 5,000 TREO, that's about, what, 25% split in terms of production. That's a bit lower than, or quite a bit lower than the 35% that you've been running at in recent history. is that representative of what the DOD has required and that's completely different to, say, what the business as a whole is going to be running out? Or is that more of a reflection of, say, what the introduction of more Dunkin' Ore is going to do to that overall product split?

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

Okay, fair enough. And just one final thing on the curious mention of the word guidance. I don't think I've seen you use that term before. You're using it in the context of saying plant utilization at 75%. Does this mean you're moving more towards some tangible, harder targets in the future that we should be thinking about? Maybe CapEx? I'd like just putting my hand up there. You know, rest of the year utilization rates.

No, no, no. You're applying far too much thought to, you know, sort of the semantics here. I think we did guide to the market on the fact that we were going to run the plant at 75% of Lina's mixed capacity, and that's all that that word really indicates.

Okay. Just thought I'd try.

Thanks, Amanda.

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 Anthony Kavanagh of Chester Asset Management. Please go ahead.

Hi, guys. Well done again on a great quarter. I guess a couple of guys have already bet me to the punch on the capacity question, but I was curious, Amanda, on the widening spread between neodymium and praseodymium. I'm just curious as to how much of that spread you can actually capture. I know in the past you've spoken about separating the two elements, but can we think about close to 100% of the separation capturing the high neodymium price?

Oh, no. So the drive for our decisions on how much we separate are based almost purely on customer demand. And within our particular customer set, how much of the material they're looking for is PRND versus PRND. So I think the interesting thing on it, and it's one of the things that I often say, we are Linus Rare Earths Limited, not Linus NDPR Limited. And as I look sometimes at the way that people think about the rare earth market and about, you know, maybe some of the other sort of business propositions, it's very, very NDPR focused. And clearly that's the key value driver today. But all of these elements have applications and uses and, you know, the price is, change around over time. You know, 15 years ago, Cerium was king and ND was a byproduct. Three years ago, when we were first looking at the separation of ND and PR, ND was sitting at the same price as PR and D and PR was being sold at a premium. So these things, you know, sort of move around according to demand and our production will move according to demand. to ensure that we meet the needs of our customers and their specific applications. So some of them use more rather than less. Some of our customers don't use any separated ND at all in their magnets and others use it in a number of applications. So that really is what's driving us is our customer requirements. always of course with a watchful eye on what's going on with price but as you would recognise Anthony more ND means more separated PR as well and so we need to have a good strong marketing program for that separated PR as well because we don't want to be producing lots of ND and and building lots of inventory and PR.

But just to clarify, if you had the demand for it, do you have the ability to separate and sell, you know, ND and PR 100% separately? Is there capacity for it?

Oh, no. Well, A, we don't believe that there would ever be the demand for that. And B, no, we don't. We configured... We have four... SX5 trains which separate the PR and D from the LACE and we modified one of those trains to do the PR and D separation. At this stage, we're not intending to change any more of that production capacity.

Okay, cool. Thanks, Amanda.

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 Matthew Chen of Foster Stock Broking. Please go ahead.

Hi Amanda and team, how are you?

Oh good, it's a long time since I've heard you Matty.

Yes, still kicking. I just wanted to ask on the US Light Rare Earth Separation Facility, just a follow-up question on that. So is there a kind of thinking in terms of the DoD, perhaps the analogy is jar rate as to lamp output as is DoD to that proposed light rare earth and heavy rare earth output? Is that a fair assumption to make?

Yeah, Matt, I probably would look at it slightly differently in terms of what's similar between these approaches. And I think the primary task of Jogme and Jare is to ensure supply of raw materials into Japanese industry in a way that means that Japanese industry can grow and flourish. And So JOGMEC is the Japanese government's arm for doing that. In the US, the US has quite a long history of using its defence industry and defence industrial base to create capable and commercial supply chains. into which industry can then step. You know, I mean, you think about the history and the famous examples like, you know, parachutes becoming stockings and all of those sorts of things. So you will note in the wording that the Light Rare Earth Plant funding is for a commercial facility. So it's not for a captive facility simply for supplying, you know, Department of Defence needs. This is about being a first step in the re-establishment, the reinvigoration of rarer supply chains in the US. We've got a first agreement. Clearly, there's a lot more that we need to do in terms of development and interaction, We see the primary intent here being sort of reinvigorating this important industry.

Great. Much has been written about the requirements for the US industry, in particular for the heavy side. Does that kind of downplay the demand for the lights? Or is that kind of, you know, go arm in arm because, you know, the solvent extraction process spits them all out depending on your old body?

So I think that really the initial focus on heavies has to do more with the fact that there is no non-Chinese source of separated heavies today, right? whereas Linus today can satisfy outside China demand for NDPR. So there is a guaranteed supply source. It might not be where the US government would like it to be, because clearly they would like it to be supporting US industry, but there is a supply source. So I think that the initial focus on heavies is simply... a recognition of the fact that there is a gap in the supply chain there.

Great. All right. Just to clarify, that 5,000 tonne total rare earths, is that included of the heavies and the specialties as well, or is that purely- No, they're just lights. Lights and, okay. So can you remind me what the potential capacity for the heavies production site is?

So we haven't actually disclosed that, but lots of heavy rare earth facilities in China typically operate at about 3,000 tonnes a year.

Okay. So I guess my follow-up question was going to be, is it proportionate to the distribution running at that sort of 5,000 total REO for the lights? Is that a way to think about it? Or will it be separate? Sorry.

We need to do some more work on that. We're relatively fresh out of the blocks with this sort of definitive step on the lights. And so we need to do some more work with that. But we will clearly disclose that once we've done the work and have the numbers appropriate.

And it sounds like there's an update at the end of this fiscal year.

Yes, that would be our objective, yes.

Okay. Great.

Thanks and well done. Thank you. 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. There are no further questions at this time. I'll now hand back to Ms. Lacaze for closing remarks.

Okay, thank you. Thank you, everybody. As I said, much appreciated and I My fervent desire is that all quarterly reports will be as positive as today's is. Okay, talk to you all again soon. Bye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.