Lynas Rare Earths Limited

Good day and thank you for standing by and welcome to the Linus Rare Earth Quarterly Results Conference call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Linus. Thank you. Please go ahead.

Good morning and welcome to the Linus Rare Earths Investor Briefing for the March 2021 quarter. Today's briefing will be presented by CEO and Managing Director Amanda LaCaze and joining Amanda for the briefing are CFO Dardenne Sturzenegger, General Counsel and Company Secretary Sarah Leonard and VP Strategy and Investor Relations Daniel Havard. I'll now hand over to Amanda. Please go ahead, Amanda.

Thanks, Jan. Good morning, everybody. Thank you to all those who have joined the call today. It seems just like yesterday that I was talking to you with the half-year results. These sort of quarterly reports do bring us all together on a regular and frequent basis every quarter. We're delighted, of course, to present another excellent quarter. Our production was in line with our planning. As I've identified in the quarterly report, we've opted to keep production at 75% of LinusNix rates. We continue to have challenges both with inbound and outbound logistics. Until we're able to build a significant store of concentrate ahead of the plant in Malaysia, it's not our intention to dial up production significantly. We keep putting concentrate on the water, but it keeps having sort of variable delivery dates. I'm pleased that our costs are in line with plan and remain very much under control. as we're operating at the 75% level. Of course, the market remains very buoyant and we're delighted with that. NDPR pricing is strong. Pricing for heavies is also very strong. And demand also is very strong. Many of our customers, not only back to pre-COVID levels, but some of them are in fact looking to further growth in the short term. Like many other firms, we were frustrated that our ship got stuck in the Suez Canal. And so as we look at our results here, we were well and truly on track for an absolute record quarter, but there was a couple of hundred tons, frankly, that didn't make it before the end of March as a result of delays in shipping. But that material has left our plant in early April. I guess where I'd like to, I mean, you know, some of the business as usual is pretty clear from the report. I'm just, you know, sort of a moment thinking about in this strong market, how do we make sure that we meet our objective of growing with the market. So as demand grows, how can we ensure that our capacity grows? And of course, that's associated with some of our key projects. And keen readers will note that certainly the expectation from Chinese producers is that the market will continue to strengthen with some quite significant announcements regarding capacity uplifts. So our key projects, which are going to allow us to grow with the market, include, of course, the Kalgoorlie project and the work on the development of our US rare earth processing facility. So Kalgoorlie first. Kalgoorlie's work is continuing apace. The project team is growing, as would be expected at this stage of the project. And we now have most of the key positions with respect to managing that project within Linus are now filled. And we are making really good progress on tendering and letting the contracts for a variety of different elements, equipment, engineering and other work. We've included some photos in here so you can see how far progressed the fabrication of the kiln is, which is of course very exciting. But as well as that, as part of the approval process, the EPA has given us you know, limited, approval for limited preliminary works on site. And it's important to note that these are, you know, works which will ensure that when we start receiving the equipment, providing we have the final approval, we will be able to move quickly. But they are not works which presuppose a ministerial decision. So the relevant Act provides provision for minor or preliminary works that are associated with an implementation of a proposal but are unlikely to have a significant environmental impact, and that's exactly what we're doing at present. But it is very exciting to actually have people on site doing those works. We've started to see... slight ramp up of capital associated with the Calzuli project with a further step up expected in this quarter ahead of, as we've indicated previously, the large capital spend, which we expect will be primarily in the FY22, in financial year 22. Of course, the other exciting news during the quarter, which we did cover when we did the annual results is the agreement from the DOD for a contract to partly fund the development of a light rare earth facility which we proposed to have operating alongside our already planned heavy rare earths and specialty facilities. This effectively means that our facility in the US is really a very substantial facility with light separation, heavy separation and specialties all on the one site. We think it's very exciting and really provides the fundamental, you know, sort of foundation the development, the further development of the rare earth ecosystem in the US. So we really think about it as a platform for development of further activities in line with government policy. And of course, we've all seen that governments continue to be very focused on the rare earth sector. And of course, as we think about this, It's for reasons which are strategic. Of course, geopolitics are an important part of that and ensuring that there are resilient supply chains in all key supply chain areas, but particularly for critical materials is at the forefront of government thinking. The second area is, of course, that these are materials which underpin new technologies and modern manufacturing capabilities. And so governments all around the world are keen to ensure that they are part of the significant development that we expect to see over the next couple of decades. as we adopt new technologies which are going to be, frankly, better for our planet, but also better for consumers. And, of course, the third reason why governments remain very focused on this sector is that it is a critical part of economic recovery. And as we see the continuing demand in key sectors for our materials, We see this as being a very positive thing for our industry and also for all of the industries which we feed. So as I said, I don't have a lot more to say other than the quarterly report speaks for itself again. A very good quarter. We continue to see very positive and buoyant market conditions. and are looking forward to finishing the year in very good shape. So with those as introductory comments, I'm very happy to take any questions that people might have.

Excellent. Ladies and gentlemen, we'll now begin the question and answer session. If you wish to ask a question, please press star 1 and wait for your name to be announced. If you wish to withdraw your question, please press the pounder hash key. Please stand by while we compile the Q&A roster. Once again, it is star 1. Thank you. We have multiple questions in queue. Our first telephone question comes from Jack Gadd from BOFA. Please ask your question, Jack.

Thanks, and morning, Amanda. I hope you're well. Just a couple from me. Firstly, just on the, I guess, the disparity between production and sales, you mentioned a couple hundred tons were caught up around the Suez, but obviously the difference between production and sales was a bit larger, so just curious whether you can make up the reduced shipping volumes this quarter, or are we going to see a further inventory build I'll start with that one, thanks.

Oh, hi, Jack. All of that product's left the plant now. I'm not going to tell you what our sales revenue in the first two months of April is, but suffice to say I have a very big smile on my face.

Okay, thank you. And then can you give us the latest on the permitting for the PDF? Have you completed the EIS?

So the EIA has been... We've been working very closely with all relevant authorities. The EIA is largely complete. Documentation was lodged quite some time ago and it's been out for public comment and engagement. So we've taken on comments which are relevant. I mean there are a few which have come online which are not particularly relevant like what effect it might have on the stray dogs. in the area but we've certainly taken on all of the informed technical information to improve the EIA and undertaken significant engagement with local communities so that they understand really the effect of the EIA, the safety conditions associated with the project and have been very pleased with the support that we've received from most local communities. Within the next few weeks, the EIA will be finalised with the DOE decision on it. And I say all of that in the context of the fact that, as you're aware, we already have agreements and approvals from a variety of other authorities, and in fact the head authority, which is the AELB, which has identified that this is an appropriate site.

Perfect, thank you. And then just one last one. You mentioned getting final approval for cracking and leaching. I'm just curious when you expect that?

Oh, I never, ever, ever suppose when any regulatory authority or government may make a decision. Once again, pleased to be able to advise that we have lodged the relevant documentation We have been really delighted with the speed with which assessments have been made, but the regulators have a task. They need to do it diligently, so it will take the time that it takes, and our focus is always on ensuring that they have the best possible information. Where we do that, then approvals can be turned around fairly quickly. Where we don't do that, of course, they take a little bit longer. But the documentation has been lodged with the regulators, and so we will certainly advise when we get relevant decisions.

Perfect. That's really helpful, Amanda. Thanks very much. I'll pass it on.

Our next telephone question is from Dylan Kelly from OID Minute. Please ask your question, Dylan.

Yes, good morning, Amanda. Two quick ones from me. Just firstly, I'm curious as to the WA permitting the mention of a second project area for residue storage. Obviously, that raises a couple of eyebrows in terms of what's going on now. Can you just walk us through the requirements for the second area for waste disposal? And does that throw us better in the works, or is this just steady as she goes?

Yeah, okay. You may have missed it earlier, but we have actually advised that we have two sites in Kalgoorlie. So Lot 500, which will be the primary site for the processing facility, and a lot at Yarrie Road. which will be used over the life of the processing facility for storage of by-products produced at the facility. This is simply reflecting the fact that over the life of the facility, the Lot 500 will not be sufficient for storage of all of that by-product material. It has been a core part. in our initial discussions with the West Australian Mines Authority, you know, in line with their policy position that any project should have not only its operating parameters but also its closure plans in place right from the beginning is the reason why Yarri Road has been included. But it's not a change.

Okay, understood. Just in regards to CapEx and project spend, $10 million for the quarter. I thought we were getting to the pointy end of construction pre-works and paying for a lot of the obvious progress that you've made with procurement of key pieces of kit. When should we start expecting a large licks of capital start being paid for all the various project works that we've got going on?

Well, I think 10 million is quite a lot more than we have as a normal CapEx profile. True. So we are starting to see it now, Dylan. And, you know, the vast majority of that 10 million is actually associated with the 2025 project. We expect that that will step up probably by about double this quarter and it will continue to increase as we move into FY22.

Okay, great. Thanks, Amanda.

We're not in a rush to spend the money and if we can agree payment terms, let's say work commencing and relevant payment terms, then there's no reason why we should be spending money all of our cash up front.

Good to hear.

Our next telephone question is from David Deckelbaum from Cohen. Please ask your question, David.

Good morning, Amanda. Thanks for the time this morning.

Morning, David.

I was curious. Thank you. I just wanted to do some clarification. You mentioned, obviously, in the release that You see some of your competitors, namely in China, ramping up capacity, presumably to meet demand. How do you reconcile that with how you feel about the market right now, pricing and what you're seeing on the demand side? Certainly you're seeing recoveries here, but do you see a situation where the overall market is still going to have a difficult time keeping pace with demand?

Yeah. So, look, demand is strong, particularly for the magnetic materials. Although, interestingly, immediately, you know, sort of post-COVID in the first quarter, you know, sort of about this time last year, actually, in sort of March through to June, we saw a complete, not quite collapse, but really substantive pulling back in the catalysts sector um particularly of course in in fuel catalytic cracking because you know planes weren't flying and cars weren't driving and all those sorts of things during those lockdowns we've seen that recovery come really back um this quarter was probably the first that we've really seen a real recovery in that area and uh similarly in some of the um autocat sector we've seen it not quite back to where it was, but certainly it's recovered somewhat from, you know, sort of the really substantive reduction last year. Magnetic materials through the sort of the COVID challenges have held, you know, sort of their own in terms of demand and, of course, as we're aware, prices strengthened during that period. And we think that the fundamental trends which see continuing growth in the key sectors remain very favourably poised. And so we're looking forward to a very good, you know, sort of few years ahead of us. But as I've said, you know, one of the reasons why we're investing in additional capacity is that we've always articulated our strategy that we will grow with the market and we will maintain our share in the highest value segments, which is where we write most of our business. And so we really are focused on giving ourselves that ability to be able to ramp up as market demand continues. I think that as we look at some of the largest players in China, Of course, their ability to leverage is quite strong and so I'm not surprised that they're looking at being able to increase their production in exactly the same way as we are to ensure that we can meet demand. But we see the market settings sitting very favorably at present and would expect that that will continue in the foreseeable future.

I appreciate that. If I could just ask one more just on the U.S. expansion. I think you mentioned that you'd have a proposal, a design proposal on the heavy separation facility by June. Can you refresh us in the timeline for how you're thinking of submitting proposals around the light separation facility, and would you look to begin construction concurrently on both projects, or would you sort of do the heavies and the lights in queue?

Yeah, it's a good question, David, and as I said, the fact that both of these projects contract or both of these initiatives are now being considered by the US government as areas worthy of support. It certainly upsizes the facility that we're considering in the US and we certainly are not looking at them as two separate I mean, ultimately, we're talking about creating a platform for rare earths in the US. And so we need to be thinking about both of these projects concurrently. We need to understand, therefore, infrastructure and other capabilities which are necessary to support a facility of the size that this is going to be. With respect to the heavies, we have, you know, basically completed our homework on design and engineering and we'll be submitting that for consideration with the DOD in the near term. With the lights, we still have additional engineering work to do on that and some of this other work with respect to really what does this now whole facility look like as opposed to just sort of the separate production units. We will keep people up to speed on it, but it is clearly a conversation which we need to have with the USG, and we're doing that on an ongoing basis.

Thanks for that, Amanda. Thanks. Our next telephone question is from Reg Spencer from Canaccord. Please ask your question, Reg.

Thank you. Good morning, Amanda and team. Just shifting back to Kalgoorlie, outside of the permitting, which you ran through a little bit earlier, are there any other impediments or risks that may impact your construction timeline? You mentioned that you are experiencing some challenges on the shipping in international logistics, and I fully appreciate that there are quite a large element of your construction and manufacturing of that facility that will be happening domestically, but Is there anything there that might present as a risk to achieving commissioning of Kalgoorlie in late 2022?

Oh, Reg, this is a big project. You know, it's a $500 million project. And we have a comprehensive risk register associated with this project. Otherwise, we wouldn't be running the project well. And we also have comprehensive... list of mitigants associated with those risks. But there are many risks associated with the project. At this time, our assessment of the risks and the mitigating strategies that we've been able to put in place tell us that we have no red lights. So I understand your point around the inbound logistics and we are very alert to that. Of course there are some slightly different challenges when we're talking about a single shipment of a large piece of equipment compared to what we're talking about with needing to find ships every week or every couple of days either in or out of Malaysia. So it's not one of the risks that we've got as sort of a high risk at present. Of course, there are many risks associated with Kalgoorlie, but our project team's task is to ensure we've identified them and put in place mitigating strategies, and we've done that.

Okay, understood. One last question attached to Kalgoorlie. as you progress through detailed design and commence construction works, are you seeing any material cost inflation, things like steel? You know, I think most people would be well aware of labour constraints in Western Australia. Not that that's going to present a risk to your liquidity, but are you seeing any cost inflation there over and above what your original estimates on the CapEx might have been?

No, not at this time. We've got... Actually, the team has done an excellent work around specification and tendering for major equipment. The project director keeps on telling me he won't give me back any of the contingency quite yet, but we haven't had to dip into the contingency for any elements, so we are largely placing our purchase orders in line with our original expectations.

Excellent. Excellent. Thanks, Amanda. I will pass it on.

Thanks, Rach.

Our next telephone question is from Michael Evans from ECOVA Capital. Please ask your question, Michael.

Good morning, Amanda. Thanks very much. David actually asked most of my questions, but just on China North Rare Earth increasing their production, is they doubling it over the next three years? I wasn't aware of that. Can you sort of elaborate on what you know about that and maybe also remind us how much they produce? I thought they produced like close to 50% of the world's NDPR oxide or something like that. Maybe you have a better figure than me. And have they given any sort of colour on whether that's going into whether they're increasing this sort of rare earth magnet production by that magnitude as well? What do you know about that announcement?

I don't know a lot more than I've already told you. I mean, these things, as we all know, can sometimes be a little opaque. But the first thing to say is northern rare earths is about 60% of China's production. So it is a very substantial step up, which is the reason why we've flagged it in the report. And Batu, which is in Mongolia, is a whole jurisdiction that takes a great deal of pride in it. being the centre of the rare earths universe. I would love it if we could get to that same sort of position with some of our locations. And over the years has really established substantive capability at all stages of the value chain, right through to the production of electric motors. So the increasing production output in this area is a significant indicator of their expectation that the market will continue to grow and will continue to flourish. So, yeah, it's a big step up and we see it as a very sort of positive sign in terms of confidence in the markets.

Fantastic. And maybe just one more on the market, conscious polls on the call. But with regards to your Japanese customers, can you give us any color insight on what their magnet production is, growth has been over the sort of last three to six months relative to sort of China's magnet production or global magnet production? Are they still sort of full steam ahead or? or anything you can give us there would be great.

So, look, I don't know the relative number there, Michael. You know, Japan versus China in terms of growth. What I do know is that our demand from our Chinese customers has more than recovered... Sorry, from our Japanese customers has more than recovered pre-COVID levels. And, you know, as we're looking to... future you know tautology future forecast as we're looking at our forecast that that growth is expected to further to continue further so our experience in the market is the Japanese market is very buoyant and you know that's a very positive thing for our business but whether that sort of recovery in growth acts the same or higher or lower sort of velocity than what's happening in China. I don't have that information to hand, but I'm sure that separately we can have a look at that.

Okay, that's great. Thanks, Amanda. That's all from me. Thanks.

Our next telephone question is from Matthew Chen from Foster Stockbrokers. Please ask your question Matthew.

Good morning Amanda. Thanks for the opportunity. I just wanted to drill a bit further down on that northern rare aspect of the announcement. I just wanted to check if that production capacity, do you understand that to be the mining rate or the separation and smelting capacity which Maybe I misunderstood but I always thought the separation smelting capacity wasn't an issue. It was essentially limited by the quotas which I understand have been growing quickly over the last couple of years. So do you understand it to be in step with a list in quotas? Has that been kind of flagged by central authorities?

Look, you know, the Chinese market is quite complex and, you know, as I think everybody knows, relatively opaque. We don't have a bunch of helpful resource statements and all of those sorts of things. What we do know is that Northern Rarers has a very long life supply of rare earths as a consequence of the material as a byproduct from their iron ore mining operations. We also know that there's over time been plenty of sort of separation capacity in China. But I go back to, you know, sort of Northern Rare Earths and the investment and capability that they have in terms of their whole of rare earths business. And so it's, you know, as we think about their increase in capacity, it's ensuring that, you know, these facilities are, Operating well and efficiently. We would say the only ones who are lower cost than us, but they are lower cost than us. And that's not just a volume effect. It is sort of the quality of their operations as well. And so we, as you know, are very focused on what can we do to make a further step down in terms of our costs. So I can't tell you exactly how it factors into any existing facilities that they might have. We're just sort of flagging what has been sort of announced. And as I said, we see it primarily as a positive thing and a large and professional and really sort of focused organisation like Northern Rare Earths which will take a very professional approach to this sort of growth I think is generally a good thing for the market.

Yes and like you said I think already that it shows quite strong faith in the demand side of the market because I note that production quotas have already increased 50% over the last three years and You know, if they run rate the second half quotas with the same as the first half, they'll be on 80-something thousand tonnes of rare earth production, or lights, for the year, won't they? So to double that again in three years, I just think that there's potentially... Sorry, my understanding is essentially that it was always limited by central authorities rather than... any limits to the resource or their capacity?

Certainly, there is that element to it and sometimes the increase in quotas is more about, in quotation marks, legalising production which is already occurring. our indications and bearing in mind, we've not had anybody been able to visit China for nearly two years now. So, you know, we're working on sort of advice coming down the line, but our indications are that the market demand is very buoyant in the Chinese magnet sector.

And just on that, are you, I mean, have you sort of filtered, sort of heard anything filtered through about, you know, the situation in Myanmar and shadow and legal production or particularly kind of mining from that market?

I have no direct knowledge of any impact from Myanmar. Logic says that there must be. but I had no direct knowledge.

Just a final one on the reference to the judicial review application. Just remind me, this is a review as to the process of the 2019 renewal but it's judicial review so essentially that that original decision, you know, that kind of ministerial decision can't change. Is that... That's the nuts and bolts of it. There's that judicial review application in May, but that's it. I recall having a conversation with Andrew about this.

Yes, it's a strange case. It relates to licence... Not our current operating licence, but the operating licence prior to that. Yes. So, you know, I mean, it's... I think that from the legal documentation that we've seen that the government's position is consistent with ours and essentially that, you know, it's not relevant because the subsequent renewal of the licence has been made.

Yep. OK. Thanks. I'll pass it on.

Thanks.

Once again, if you wish to ask a question, it is star one. And we have a question from Tom Sumatsu from Bluebird Assets. Please ask your question, Tom.

Hi. Good morning, Amanda. Thanks for taking the time. You may have covered this earlier on. I was just wondering... What's stopping Linus from ramping up to 100% capacity on Linus Next in Malaysia?

Really, it's primarily associated with some of the challenges that we have around logistics at present, and particularly related to getting concentrate shipments from that world across to Malaysia on a predictable basis. We normally like to carry between about 15 and 20 days stock in front of the plant and we've found it very difficult to sustain that at one stage. I think at its worst we had something like 32 shipments on the water which had been rescheduled up to six to eight times each. This is just a direct consequence of some of the issues associated with COVID, congestion in the Singapore port, etc. Primarily, the concentrate issue sort of guides us, but of course, it's also related to other inputs. We've sought to increase inventory onshore so that we can continue to operate at our target levels. But what we don't want to do is to ramp up production and then find ourselves needing to shut the plants down because we don't have inputs, because the plant is running well and very stayable operation and it doesn't like being, like any chemical plant, it doesn't like being turned on and off. So really we continue to really focus on doing this and we've put a lot of stock on the water to try to really sort of build that stock but we are finding just ongoing challenges with getting, you know, we're not like, you know, sort of the big iron ore miners with our own, you know, sort of charters. We need to find space on ships for containers and, yeah, it just continues to be a bit of a challenge.

Okay, so this is not relating to any permitting restrictions or limitations as to production throughput?

No, no.

No, no. It's quite a deliberate decision and it's also associated with some of our health and safety protocols that we have in place. As many people would know, Malaysia is still experiencing a third wave of COVID and so we are complying with all requirements to be careful with how many staff we have on site and how we're managing them and all of those sorts of things. So the 75% level allows us to manage our business with some headroom for dealing with unexpected disruptions that might occur in all of these different areas.

Okay. Okay. And final one, so, I mean, the pricing environment is relatively favorable and, you know, I mean, do you have any kind of, it's a difficult question, but do you have any kind of thoughts or guidance in terms of when we can get to 100% of next production capacity?

I can tell you that there are many of us in the business that would very much like that to be tomorrow, but it is a balance. and you know I'm sitting looking at our forecast on inventory and you know sort of some of these other areas and as said you know even with some of our inputs you know who would believe that a ship could block the Suez Canal and so some of the inputs that come from the Middle East and Europe for our plant you know of course have been delayed so We review this on a weekly basis, and I can assure you that given strength of price and demand that presents at the minute that we think that we can do this in a sensible way, we will be doing it.

Okay. Thank you. Thanks a lot for that.

Thanks, John.

If there are no further questions at this time, I'd like to hand the call back to Linus for closing remarks. Please go ahead.

Terrific. Thank you very much. And thanks all for joining today.

As I said, I think we've delivered an excellent quarter. We certainly are managing to deliver exactly what I think many of our shareholders who were with us, you know, have been with us for years. the past four or five years. I remember saying in about 2017 that we were leveraged, that we were positioned to take full advantage of any upside in price. I think that we're seeing the benefits of that today and look forward to speaking with you again in another three months when we look at our full year outcomes. Thanks all. Bye.

Ladies and gentlemen, that does conclude the call for today. You may all disconnect. Have a great day. Goodbye.