Lynas Rare Earths Limited

Thank you for standing by and welcome to the Linus Rare Earth quarter results call. At this time, all participants are just in the listen-only mode. Following the presentation, there will be some time for a question and answer session today. To ask a question via the telephone, you'll just need to press star 1 on your telephone. And just please be advised that today's conference is being recorded. But without further ado, I'll now hand the call over to Linus Rare Earth. Thank you and please go ahead.

Good morning and welcome to the Linus Reris Investor Briefing for the June quarter of FY 2021. Presenting the briefing today is Amanda Lacaze, CEO, and joining Amanda on the line, Gavim Sturzenegger, CFO, and Sarah Leonard, Company Secretary and General Counsel. Please go ahead, Amanda.

Thanks, Jan. Good morning, everybody, and thank you for joining us this morning. For what is really one of the most pleasing quarterly reports that I've had the opportunity to present, and really not a lot to add, but I would make a few comments. The first is that it is always our number one objective to ensure that we keep our people safe. And never has that been more challenging than in the environment present in Malaysia where pandemic conditions are real and very, very difficult for everybody. I'm not really big on using superlatives in a business sense. I've had too many ski instructors tell me that my turns are awesome. when in fact I know that they're anything but. But in this instance, I can tell you that I do sit in awe of the determination, the discipline and the resilience of particularly our Linus Malaysia leadership team and every single member of our Malaysian team. Within an environment where infections are incredibly high and restrictions on operations are very tight. Our people have kept our people safe, kept our operations safe. The leadership team has adjusted to new SOPs issued by the government quickly and efficiently. Some other challenges presented as a result of the pandemic. We've talked previously about some of the logistical challenges. particularly related to shipping. In Malaysia, we've had some issues also with water as pumps have failed and of course some of the challenges around movement have made it difficult for the authorities to be able to address those. Despite all of these challenges, our team has managed to keep production at just above the 75% that we've maintained through the year. and continued to implement a series of initiatives that will see us continue to improve our business and continued engagement as appropriate with regulatory authorities and also with our communities. One of our most recent initiatives with our communities is one that particularly appeals to me where we made up a series of care packs and people in the company contributed to these as well as the company itself. They had a chicken, a bag of rice, some noodles, and oh, now I've forgotten what the fourth ingredient was. But this has meant that we've been able to put a lot of these into our community to ensure that people in the community who truly are doing it tough in Malaysia are able to continue to feed themselves and their families. Our financial results really speak for themselves. Our operating cash result was really exceptional based upon record sales revenue and of course an extraordinarily positive average selling price for our materials. As noted in the report, there was a little softening of the price during the quarter but this has recovered again during July. I'm particularly proud of our continuing strong cost control and some very good progress from our research and development teams on implementing, identifying, testing and implementing new and improved flow sheets which will in time give us further reductions in production cost. During the quarter we've made really significant progress on our Key Linus 2025 projects. You've seen some of the photos. The overall Linus 2025 plan includes upgrades and changes at each of our sites. And so you can see we've put some pictures in here of some of the things that we're doing at Mount Weld. It's quite exciting actually seeing the development as we move forward at Mount Weld. In addition, we've made really significant progress on our Cars Early project. and it's starting to really get to the exciting part of this project. As you can see from the photo, we've got all five sections of the kiln shell completed or close to completion and we have commenced preliminary site works on our site in Kalgoorlie as approved by the EPA and we're looking forward to further development of that site. In line with the Department of Defence milestones related to the Heavy Rare Earth Project in the US, we've submitted all of the detailed engineering and design work and at present are awaiting the Department of Defence's finalisation of their merit evaluation as per submission. We continue to be very actively engaged with various governments around the world who remain focused on really developing better and more diverse supply chains in this sector. And we're delighted only a couple of weeks ago to welcome members of the EU delegation in Australia and representatives of 10 of the member countries to our site at Mount Weld. And that visit was co-hosted by the Governor of Western Australia, the Honourable Kim Beazley, which was really just a fabulous opportunity for us to show off the value, the quality of the ore body at Mount Weld and the skills and capabilities of our team there. So a really excellent quarter, just really delighted to be able to report this to our shareholders, many of whom have held our hands tightly through the years when, you know, we had a different set of challenges and, you know, we look forward to continuing to deliver excellent results from our business. So with that, I'm happy to take questions.

Thank you. So, ladies and gentlemen, we'll now be in that Q&A session. Again, if you'd like to ask a question, it's just by pressing star 1 on your telephone and then just waiting for your name to be announced. And if any time you need to cancel the request, it's just by pressing the pound or the hash key. Our first question today comes from the line of Jack Gabb. So please ask your question, Jack.

Thank you and good morning Amanda. Just a couple from me. Firstly on pricing, you reported a nice pickup in average selling prices and I realize some of that's down to NDPR but just curious, was there much impact from a change in sales mix or notably higher realizations for SAG or Serum or Lanthanum?

Thanks. So yes, most of it was driven by NDPR as you would expect. For SEG, yes, we have had some very good outcomes on that, and it's certainly one of the reasons why we've included now for some time in the quarterly report a view of dysprosium and terbium prices as well. So that's seen strength in the SEG price, which has certainly been a great sort of underpinning to the improved prices on NDPR. and gives us more confidence. We've always been very confident, but even more confidence in the strategic logic of separating our own heavy rare earths. We are also doing more work on our geology and mine planning at Mount Weld to understand how we can best manage that resource which as you know is unique because it is rich in heavies and in lights, well rich in lights and in heavies and really how do we modify our mind planning to ensure that we're able to optimize that as well as that the operating teams are doing a lot of work on understanding the ways that the different elements report through the process so that we are maximising recoveries on the most valuable of the elements that we produce. In terms of the lazanum and cerium materials, there's not been any significant shift in pricing but certainly demand has recovered and so that's been really a very good thing for us because As I've said previously, for every kilo of NDPR that we produce, we will produce a kilo of lanthanum and two kilos of cerium, and finding a home for that material is important.

Perfect. Thanks. And then secondly, just on the PDF, you obviously outlined you're looking at a new site, or potentially a new site. Just curious what's driven the change. Are there any additional capex requirements? I guess lastly, is it feasible to permit this new location quickly enough to meet your 3 September deadline?

Thanks. So Jack, it's a good question. I mean we've always sought to assess a number of candidate sites and in our discussions with government and regulatory authorities in Malaysia, we've always had more than one site for consideration. As you know, we always do things which are consistent with regulatory authority direction and so coming up with a second site is really just a prudent risk management process for us to ensure that we have more than one opportunity. where we have done sort of the detailed work on site characterisation and other studies. We are working very closely with both the government and also the regulatory authorities on this process. So I think I've also said many times that I see that there's very little value from blow-by-blow description on approvals and regulatory relationships. I would simply say that we're confident that we are working in a very productive way with the relevant authorities. With respect to cost, we have a turnkey solution that we agreed with the contractor which has been nominated by the Pahung State Government. as the operator of these facilities in the state of Pahang.

Okay, perfect. Thank you. So no need to extend the deadline, it's fair to say, at this point?

At this point, we're working with the authorities to understand exactly what needs to be done and also within the constraints of, you know, movement, very, you know... restrictive movement control orders in Malaysia, including sort of across state borders and even inter-district at times. But we will, of course, disclose if there's any change to the current situation.

Perfect. Thanks. And then the very last one from me. Very good to see your heavy submissions progressing. Just curious whether there's any evidence that we're closer to a magnet maker solution in the US and whether you're considering a role in that process?

Ah, well, I think that the level of sophistication of understanding of, you know, the importance of the whole of the rare earth supply chain, including the downstream ecosystem, is really picking up both in the US and also in Europe. And, you know, we've always been confident that particularly in the US that there will be those who are prepared to step in and take up that part of the value chain. You know, we have a large... We have very large and loyal customers and we would, you know, any... change for where we participate in the value chain would be done very carefully and with significant consultation with our customers.

Perfect. Thanks, Amanda. I'll pass it on.

Thanks, Jay.

We've got another question from Lovine of Daniel Morgan. So please ask your question, Daniel.

Hi, Amanda and Tim. Just wanted to know, given the strong financial results good cash flow and the very strong and strengthening balance sheet. Is there the potential for a maiden dividend to be considered?

I'm always thinking about maiden dividends, Daniel. It would be, you know, certainly we see that this is an important part of meeting our shareholder needs needs. You would recall that we have certain constraints that were agreed to historically with respect to payment of dividends associated with our senior secured lender. We will need to resolve those and we also the more important thing is that We need to make choices or need to make assessments on how best to serve our shareholders' interest. Is it with the dividend or is it with, you know, sort of continuing investment in various areas of the business? But we are considering it. what would be required for us to be able to do that. But at this stage, certainly I'm not announcing any change to our policy today.

Okay, thank you. And we've been hearing about a lot of cost inflation in the mining industry, particularly in WA, as it pertains to labour and the impact of borders. Just wondering how you're Managing this risk on the Kalgoorlie project, I know there isn't and hasn't been an update of the capital cost envelope of about $500 million.

Yes, there hasn't been an update and as you know, Daniel, we always disclose if there is anything material to disclose and so therefore you can assume that we're not seeing that that number has changed. We have a number of different strategies to address potential cost inflation and we're seeing those actually work currently and we're not seeing that we need to put additional risk mitigants in place just now. So we are working, we've actually and we're have identified this in the report. We've released a lot of our packages of work. Almost all of our major equipment has been ordered and certainly all of the long lead time equipment and more than half of our total equipment required In addition to that, some of our major contracts relating to things like Earthworks and Civil Works have also been completed. So we're seeing ourselves in a strong position working with, as we've identified right from the beginning, local and mid-sized players who tend to be working very effectively in the current environment.

Thank you. And for the heavy rarer separation, your SDG product, I was just wondering if you could talk about the potential value uplift from separating it yourself. You know, what proportion of the value you're getting now versus what you could get separating it yourself. Just wondering if you could talk about that revenue uplift.

Oh. It's It's a substantial uplift. We don't provide detailed P&Ls by product because we are a fully integrated sort of process and so we won't be providing sort of a detailed P&L for the heavy. Internally, however, the way that we have done this is that we have looked at the difference between you know, the margin, as you're implying, Daniel, the margin on SEG versus the margin that we'll get on the separated materials. And, you know, we expect it to be, as you said, a significant uplift, which is the reason why it makes sense for us to do it.

Okay. And just one question before I throw it to others. You're starting the next mining campaign again. Just wondering, is there anything in the... the ore body that you'll be mining that's different but might pose any challenges for recoveries or costs?

Thank you. It's a really good question. As we move through the ore body, of course, we see changes. One of the things that we're very alert to is increasing appetite ore. within the mix. But we have done the test work and part of the additional stack cell that we put in place is to ensure as we move into additional parts of the ore body, we've actually got the flow sheet adjusted in a way that means that we will be able to maintain the high recovery rates that we've got at present. But it certainly is something which we're not just assuming that as we move through the ore body, everything's going to keep on working the same way that it does now. Our mineralogy team is really very focused on doing all of this test work and we think we've got some good strategies for dealing with it.

Okay. Thank you very much. Thanks. Your next question comes from the line of Reg Spencer. So please ask your question, Reg.

Thank you. Morning, Amanda. Just on the outlook, is it safe to presume that we should be assuming a 70% to 75% utilisation rate until such time as those Malaysian COVID restrictions are loosened or lightened?

Yeah.

you know I don't get guidance because it's so very difficult we started this quarter you know sort of with our tails up really thinking we'd be able to you know sort of switch things up if not you know sort of all the way at least you know we'd be able to get a bit of extra production out of the plant this quarter and you know The result as it stands, I think, is just really excellent given the number of challenges that we've had. So we'll see. It's all I can say. You know, yesterday there were 17,000 COVID cases in Malaysia. But, you know, just for Australians in particular, we're... stopping and pausing and thinking about. So we will not do anything which puts the health, in fact the lives of our people at risk. But at present the Malaysian team is really doing extraordinary things. The 40% headcount constraint means that there are times when we have to prioritise maintenance over production, say for example. because we can't have our maintenance people and contractor teams on site at the same time as our production teams will stay under that limit. Pahang is in a much better position than some other parts of Malaysia, but we just remain alert and vigilant as far as this is concerned. But trust me, you know, the team is pushing as hard as we possibly can within the constraints that we have.

Understood. Yeah, I don't think anyone doubts the achievements of your team in Malaysia, given the circumstances. Just shifting tack a little bit to CapEx. How should we think about CapEx during FY22? Obviously construction at Kalgoorlie has yet to commence in earnest and I presume Well, I suppose the timeline is all dependent on getting final APA approvals and so on and so forth. But, you know, should any guidance on that front, even though you've just said that you don't provide guidance?

Well, look, we've just done our budget. I can tell you, this time next year, I doubt that I will be presenting a report with nearly $700 million in cash at the end. because we will have spent an awful lot of that. I notice you wonder why we're not spending faster. It's not because the work is going slowly. It's because we are quite good at managing the way that we spend, and I don't see any good reason to spend early and often. I mean, the team negotiates good arrangements you know, good commercial arrangements with our suppliers, which meet their needs so that they're, you know, sort of keen to supply to us but at the same time meet our needs. But we would expect that the substantial portion of the two biggest projects, which is the Linus Calculi and the PDF, activities in Malaysia, that a substantial portion of each of those projects will be funded in the 2022 year.

Understood. Thanks, Amanda. I'll pass it on.

Your next question comes from the line of Trent Allen. So please ask your question, Trent.

Oh, hi, guys. Congratulations on a great result. Now, my question is just about the PDF again. I don't know if you can comment, but there was an article that appeared in Malaysia on the weekend saying that the second location that you mentioned is on an empty lot right next to the lamp back in the industrial estate. So my first question is, is that article accurate? I don't know if you've seen it. It was on the Malaysia Keeney website. And secondly, it seems like a logical place to put the PDF. Why wasn't that the first choice? Anyway, just across the fence instead of some distance away. Thank you.

Excellent questions Trent and you would be no doubt not surprised to know that yes, we have seen what Malaysia Keeney has printed. Malaysia Keeney has a particular profile within Malaysia. In terms of why wasn't this on the list, I think that those who've covered us or followed us for some time will recall that even all the way back, and I think it was 2015, the International Atomic Energy Agency sort of recommended that we should be investigating on-site options. As I said earlier, we've always had more than one option that we've presented to government and regulators. But ultimately, you know, sort of what goes on the list for full investigation sits with the government in the first instance, the Pahang State Government, to identify that it sits with their plan for management of residences is sought and also that it is actually government land ultimately which is used for the facility. So without going into chapter and verse, to and fro and all of those sorts of things, as I said, we've identified sort of up to half a dozen different places that we think would be suitable. And we just work through those with government and regulators and ensure that we do the work that they require us to do to sort of prove that those sites would be appropriate for the use of this activity.

Yeah. Yeah, sure. So you've seen the article. It seems to have some quite detailed images and such in it. Can you comment on its accuracy or is that not something you can talk about?

Look, I think what we're saying here is that we've identified the site. We're working with government and also with the regulators on the various sites. studies that need to be complete and you know sort of how much that is. It's radiation management plans and it's an environmental impact assessment and it's sort of we have to do soil testing and a whole variety of different things. The excellent thing is that we have eight years of data for the material which is stored in the temporary facilities at the lab and so that facilitates you know, sort of really our ability to be very sure about what the effect of storing there is. With respect to whether Malaysia King gets things right or wrong, I'm not really going to comment on that.

Yeah, sure. Well, I hope that is the new site and it's approved. It would be a lot easier, you would think, just to push things across the fence rather than... truck them out to Katam.

Sure. As a greenie, the idea of not having trucks going down, you know, we were looking at things like would we be able to get electric trucks and those sorts of things, but still not having trucks trundle down the highway would definitely meet my aspirations.

Okay, thank you.

Your next question just comes from the line of Dylan Kelly. So please ask your question, Dylan.

Morning, Amanda. Pretty much all my questions have been answered. I've just got one final one. I wanted to clarify the impact to the workforce in Malaysia based on the current lockdown situation. You mentioned in the release that you're limiting the workforce to, what, 40% of what it's supposed to be. I noticed that that latest movement order started on the 1st of June. Could you clarify how that's changed relative to the past and what portion of the workforce you used to be able to have in?

Oh, it's much tighter. We operated for some time at 60% and there is a variation between daytime and a number are allowed during the day versus on night shift. Of course, we have significant of our administrative staff on site in Quentin. They're all working from home. And we just schedule very carefully, as I said, the other activity because, you know, I don't want everybody here thinking, oh, gosh, we can produce at this rate with 40% of our headcount. we must have been, you know, sort of swiping off when we had 100%. That's not the case. I mean, what we do is we're very selective and we do have to make choices some days between maintenance and production staff. Our people have been, you know, sort of flexible and responsive to that. In some cases, Instances, the movement control order has extended beyond sort of state, prohibits state border crossings, which means some of our people who are sort of call them weekend spouses in Malaysia. So some of our people are not able to get home to see their families. But there's also even been some inter-district. These are the EMCOs, the Enhanced Movement Control Orders, which prohibit inter-district travel. We've taken virtually the whole hotel in the local Baloch village and housed our people there as required. It means that we can ensure that we're providing a hygienic environment, that we're able to implement, you know, sort of hygiene practices there that keep our people safe, whilst at the same time complying with not having our people moving across districts. So, you know, that's sort of really... It's a real-time management task. You know, we have... sort of morning calls where we look at what's happened, what's happened in terms of any variation to standard operating procedures, and we ensure that we meet those absolutely. As indicated in the report, we are participating in the process, the public-private vaccination process, I can tell you that last week we had the first recent operation. We've had about 60% of our staff have had their first vaccine and we had a 99% turnout with the only ones who didn't turn up being those who'd already accessed the vaccine via other government means. So, you know, our people are limited. Our people are very alert. There have been times where people have, you know, one or other of our people have acquired COVID outside of the workplace. And because, you know, a lot of our people live near each other or friends or otherwise, you know, I think at the worst, we had 32 of our people that we actually had involuntary sort of isolation because we contact traced ourselves through our own process and so they stayed at home until they were clear. So it's just a very active and daily management but we do have to make choices.

Okay, fair enough. Just turning slightly to water supply. I mean that's been a problem in the past And you had several programs to mitigate that in the future. Any chance of disruption going on from here?

Last time it was such a big issue. We put in an additional storage pond. We've also set up a process where we can extract water from the nearby disused bull site pit. We've now also reactivated some of our water treatment processing plant so that it will allow us to treat some of that water for greater usage but certainly one of the things that we're looking at as we continue to assess ways to improve our flow sheet is how to reduce water requirements with increased recycling and a number of other initiatives that we will announce as we prove them at bench and plant scale. It's really disappointing that we've managed to get quite an extended period of time. Our supply was pretty much on the ball. But once again, there's been equipment failures in the public water processing system, which has resulted in this. And of course, it's harder for those equipment failures to be addressed with some of the movement control restrictions. But we're not sitting just waiting to be buffeted backwards and forwards on this. It is part of our weekly report is really our water initiatives. And these are good initiatives and applicable in every site that we have. I mean, in Australia, we also have water supply challenges because we're operating on a dry continent. So finding better flow sheets that see us recycling more water is good in an environmental sense and it's good in a business sense.

Thanks for clarifying that. Okay.

Now, I've received a call from David Deckelbaum. from the US on the webcast asking how does the design to refine carbonate at Kalgoorlie impact views on operating expenses or margins versus the initial flow sheet. Well, it improves it. As we noted in our release last week, Our objective with this new circuit is actually to improve the quality of the carbonate. Any time that we improve purity, it's always better, so always focusing upstream on producing the best possible feedstock for the next downstream process is really important. I think most people are alert to the fact that we are moving a significant part of our operations from a low-cost jurisdiction to a higher-cost jurisdiction and so we are very focused on ensuring that we find compensating savings to compensate for those areas where we will not be able to avoid higher costs. For example, Australians get paid a lot more than Malaysians. and notwithstanding our conversation we've just had on water, water is more expensive in Australia than it is in Malaysia. So we are looking for ways to really compensate some of those costs and certainly the carbonate, the new carbonate refining circuits does give us some benefits there in terms of reduction of chemicals, but it's primarily a quality task.

Okay, just from the telephones, I might give one final reminder. If you'd like to ask a question, it's just by pressing star 1. But we do have another telephone question, Amanda. I will next go to Michael Evans. So please ask your question, Michael.

Good day, Amanda, and congratulations on a good quarter in what's clearly challenging. conditions most of my questions have been answered i wasn't sure i was still on the queue but that's that's great i mean i was curious on how you're thinking about the full capacity of linus next and making assumptions around you know how long the pandemic lasts but i certainly don't want to um lay to that point but clearly it's not an issue of demand with prices where they are demand's very strong and you can sell a lot more NDPR if you can produce it safely, I expect. I suppose, leading on from that, you made a comment in the quarterly that some of the price rises in the first quarter were speculative, I think you used the word. Can you make any comment on the prices at the moment? I mean, I can't figure them out. They go up, they go down.

Now the game is what they're going up.

It looks like they're going up again. I mean, can you give us some insights from your customers on sort of the price dynamics?

Yeah, so I was going to say something about your comments on value, but it just escaped me, unfortunately, that We are very focused on doing whatever we can to increase volume throughput because the market is strong, demand is strong. The use of the word speculative is probably not that... other than the fact that, you know, and you've followed this for long enough to know that, you know, this is a market where there can be speculation because it's a relatively small market and that can at times, you know, sort of influence the prices. But on the other hand, I would say that what we're seeing is a really sustained increase in demand. This is generally a time when we see a bit of a dip. There's no good reason for seasonality, but there is a bit of seasonality. and we're not seeing any of that this year at all. In fact, demand is remaining, you know, really strong. It's not increasing. So, yeah, we see the market, you know, the market pricing at times when you get sort of a sharp spike, you think, oh, someone's, you know, sort of having a bit of a punt. But generally, this sort of sustained increase in prices does reflect a really sustained increase in demand. And so, you know, whilst I know that all of you and all of our shareholders would like us to produce more, our focus is really on making sure that we can meet our customer needs as well. And so, you know, our customers are growing and we need to be growing with them.

That's helpful. And I suppose while I've got you on the topic... The word commodity is not one you like, I know that.

I hate it.

I mean, on that note, we've talked about it before for many years, but can you comment on, here we are with these great prices, 60 plus US, I know you've been through a lot longer periods with much lower prices, you know, your customers, your OEMs, et cetera, are they getting serious about locking in some prices now that they're getting serious about EVs and getting more confident on the outlook in that market, can you lock in a meaningful proportion of your NBTR output and where are those discussions at or I wouldn't want to say that you've given up on them. I mean that's something you'd never give up but to get some fixed pricing totally changed the dynamics of your sales profile going forward, right?

Sure. And once again, you know, this is a bit of a balance. I mean, how much do we fix and at what price can we fix it? And we go back to the idea that we really like to have a bit of a portfolio of prices so we get, you know, exposure to the upside, which of course brings exposure to downside as well on some of what we do. Right now, we don't have a lot of spare NDPR to be... to be acquiring new contracts. The Japanese market is very robust and so we have executed a couple of fixed price contracts in the last six months but it's not going to substantially move the dial until we are able to increase our output, which will allow us to pick up a couple of additional customers in those types of contracts that you're talking about.

Okay. That's helpful. Thank you. I'll leave it at that. Thanks, Amanda.

Thanks, Michael.

And we do have a final question now from Jay Erlandson. So please ask your question, Jay.

Hi, Amanda. It's Jay from Colorado.

Hi, Jay. How are you?

Oh, I'm doing very well. I'm just heading back into civilization. And I had a question. I read an article before I left at the Pentagon. For you Aussies, that's the U.S. military authority. But the Pentagon said that Linus would be commanding about 25% of the world's output of REOs when the projects are completed. Can you comment if that's true? And it sounds like a pretty good number.

Well, our objective today is to, you know, at least add an extra 50% over and above the Linus Next Race by 2025, but as we're looking at the market demand accelerating even faster than when we set that target a couple of years ago, we are looking at every option that we can to increase production. The 25% is just a function of how fast the market grows. and, you know, whether we can grow as fast as the market is growing. But we certainly think that we need to be in that sort of range, you know, to be a meaningful player in the global market.

Cool. Well, that sounds great. Great job. Really good quarter.

Thanks, Jack.

And with that, there's no further telephone questions. So for now, I'll hand back to Linus Riaz.

Okay. Well, look, once again, thank you, everybody, for joining today. It really was a pleasure to be able to present such an excellent quarter. And I look forward to engaging with you all again when we release our annual results in about a month's time.

Ladies and gentlemen, that does conclude today's conference call. But once again, thank you all for participating today. But you may now all disconnect.