Lynas Rare Earths Limited

Thank you all for standing by and welcome to the Linus Rare Earth Quarter Results Briefing. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question at that time, you'll need to press star 1 on your telephone. Please be advised that this call is being recorded today. And I'd now like to hand the conference over to Linus Rare Earth. Thank you. Please go ahead.

Good morning and welcome to the Linus Veris briefing for the December 2021 quarter. The briefing will be presented by Amanda Lacaze, CEO and Managing Director. And joining Amanda on the call today are Gauden Sturzenegger, CFO, Paul Leroux, VP Downstream, Daniel Havis, VP Strategy and Investor Relations, and Sarah Leonard, General Counsel. I'll now hand over to Amanda. Please go ahead, Amanda.

Thanks, Jen. Well, good morning, everybody, and happy new year. I am so pleased. I know how many phone lines there are that people have called in, so I know that the interest in our company continues to be high, and so I'd really like to thank you for joining in the call today. Let's hope that this is a year when we are able all to return somewhat to normal or at least where we have a more normalised approach to COVID and some of its effects on our businesses and our lives. We're looking forward to a very busy year at Linus. Unlike all those others when we had such a gentle time, No, every year is a busy year for us, but I guess that the year ahead for us is particularly exciting because we are now firmly focused on growth, growth activities and ensuring that our business is able to grow with the market at what appears to be an accelerating pace. But today is primarily about our quarter two results. I'm assuming most people on the call will have read those and certainly it's a delight to be presenting them. You will have also heard that on the call today we have Paul Leroux joining us as well as Danielle and Sarah. Paul has actually... been shouldering the load of leading the firm for the last month or so whilst I've had a little bit of time off. And so I'm pleased he's here and we'll be able to answer any questions that you might have about the market or indeed about some of our operating performance through the quarter. So in the quarter, externally, the market continued to be very kind and demand is strong across all segments in the market. Our Japanese customers' demand is growing at rates that we had not forecast to kick in quite so aggressively and quite so early. But as well as that, certainly... For us, inbound inquiry for our material from other consumers, you know, magnet buyers in particular outside of China is very strong. And that, of course, is translating to really very strong prices. As we've indicated in the report in November, the price for NDPR crossed the $100 a kilo, which is a bit of a benchmark. It's not been there since 2011. And it's certainly a great price for us to be selling our material. Internally, as always, I'm always much... more proud of the way that our people have been able to meet some of the challenges of the market. And despite continuing challenges from the pandemic, and that's both with respect to workforce and also to logistics effect, our production increased again to around the mid-1300 tonnes of NDPR. And I have to say the plant in Malaysia is running better than it ever has. And so we continue to improve our ability to deal with some of the challenges. In Malaysia, many of you will recall in the first quarter, we were looking at really high case rates in Malaysia, which translated to us really having a lot of people who were either isolating or unable to attend the workplace. Now, the case numbers in Malaysia have significantly reduced, but we've retained a number of our protective mechanisms as we manage this as an endemic rather than a pandemic in that environment. And of course, in Western Australia, as we look towards the opening of the borders in early February, we right now are progressively implementing many of the strategies that have served us very well in our Malaysian workforce. So we continue to have some effects on our workforce in Malaysia because there's still quite significant rates of infection in the community. In December, we had, I think, some of the most severe floods that we've seen in Malaysia since, certainly, I think the first year that I was there in 2014, we had a very big monsoon and widespread flooding. And that was quite significant this year. And I was just sort of going through some of the stats from that this morning. And we had about 30 of our families who were actually flooded and probably twice that number that required us to provide specific assistance through... you know, sort of through that period. And, you know, we do every year, we put buses on to help to bring people, to transport people from areas where they may have been, you know, sort of flooded or otherwise so that they can continue to work. So quite a lot of, you know, sort of challenges domestically as well as, of course, international logistics. I mean, I don't have to write a book on this. You know, there's an awful lot being written about the challenges of international logistics. But we're getting better at managing that as well. And so we're now complementing the rather less predictable sort of commercial shipping with charter shipments of concentrate from Fremantle up to Malaysia. And that certainly has provided us with better stability and the ability to continue to operate the plant at the rates that we choose. So all of these things have seen us with really a great revenue outcome and accompanying excellent margins. And our customers have confirmed to us not just qualitatively but quantitatively with confirmed purchase orders, their expectation that the demand will continue to grow strongly as we move into the 2022 calendar year. So as I said at the beginning, our focus really is about delivering on our growth project. We've given you a bit of an update. I note that people still think that there's risk for delivery of the Kalgoorlie project. Hopefully the sort of information that we're providing you, you can see that it's progressing well. It's quite exciting. I got to go to Kalgoorlie in November and it was terrific to see the site as it was then. And it's accelerated since then. We've included some photos in the quarterly report showing the kiln actually coming up to Kalgoorlie, which is quite spectacular. And I'm hoping that I will have the opportunity to be there to see it being lifted into place. So... You can see the progress which is there. Of course, we've also disclosed that the EPA has recommended the project for approval and now we're just awaiting the ministerial determination on that. In Malaysia, likewise, we've received the EIA approval for the PDF and we are working with our partner there to ensure that not only do we commence construction on time and in alignment with our licence conditions, but actually that we work as quickly as we can together to complete the project and to ensure that this particular issue is properly managed and safely managed as always for our people, our communities and the environment. And of course, All of this increase in production ultimately has to come from Mount Weld. Included some photos also of some of what we're doing in Mount Weld at present. We are continuing to invest in Mount Weld but we expect to accelerate that investment as we move forward to ensure that it can continue to feed our growing business. So all in all, it's an excellent result. You know, the team has really done an amazing job within, you know, in terms of dealing with some of the challenges that we have, but we feel that we're now in the best place that we could be as we look to growth continuing through this year which is sort of what our customers are indicating to us and we're all sort of set to ensure that we can deliver on not just today's business but also deliver the actions and the activities and the projects that are going to make us even more successful in the future. So with those as a few opening marks, I'm happy to take any questions. Also happy if when you ask them, if you want to direct them to Paul, then please feel comfortable to do so.

Thank you, Amanda. We will now begin the question and answer session. If you'd like to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you need to cancel your request, please press the pound or hash key. Our first question comes from Hayden Bestow at Macquarie. Please go ahead.

Good morning, Amanda. Well done on the quarterly. Just a couple of questions for me. Firstly, just on the CapEx, just keen to understand when that starts to really kick up to finish off the Kalgoorlie plan. It's still a relatively low number given the ultimate budget you're going to spend there so just keen to sort of understand is that you know the next six months that really starts to move higher or is it pretty even at this rate for an extended period of time and then just on the market I mean I've seen a few headlines around you know some vehicles trying to look at you know removing or reducing rare earths in in in some models. I mean, where are you seeing things from that perspective, just given, obviously, we've had huge EV sales and demand is strong across the board, but just keen to understand if you guys are seeing anything on the similar frame that, you know, some models are going to try and reduce rare-earth exposure, just given the cost of the rare-earth magnets.

Thanks. OK. Thanks. Gosh. You know, one of the things, Hayden, that I was thinking was, well, they won't wonder why we're not spending any money this quarter because I thought we'd spent quite a lot of money this quarter. So I can confirm that we have now placed purchase orders for all of our long lead time equipment, which is required on site. And so that means that we've got commitments for... a sizeable proportion of our overall budget and the next I guess big step is going to be with some of the civil works which will accelerate significantly once we receive the ministerial determination and associated approvals so yes we've got a bigger forecast this quarter than last quarter but It's a pretty substantive payment for CAPEX and that did include some costs associated with the mining campaign at nearly $40 million for the quarter. But it will be higher than that in the quarter ahead of us. Now, with respect to the market and thinking about motors, this is something I'll ask Paul to comment on as well. But I would say as sort of an opening comment, you know, there have been people talking about finding alternates to rare earth permanent magnet motors for electric vehicles for, you know, sort of many years. And there are alternatives. There have always been alternatives. Which don't work as well. But... I'll pass over to Paul to say a few more words on that.

Paul? Good morning, everyone, or good evening. No, actually, this talk about moving away from REERS is not present in the business at the moment. As you know well, the permanent magnet motors allow you to save a lot on your battery costs, and the battery cost is more serious than ever. So I would say market-wise, there were very big changes, and the main change that purchasing people work on securing supply for their companies, not on saving 50 cents per car. And that reflects on our work. For myself, my left side works on sales, the right on production. So half of me is on vacation and the other is working 300%, so I'm still a bit of a busy, but there is absolutely no question on the demand. It's really strong.

Okay, great. Thank you.

Our next question comes from Jack Gabb at Bank of America. Please go ahead.

Thank you, and morning, Amanda and Paul. A couple from me. I guess the first one is you said demand is accelerating, and it certainly looks like that. I'm just curious, are you able to meet this demand growth this year, or are you holding your plant to 75% capacity?

So, Jack... We're doing everything we can to be able to continue to grow production rates. And that's really why I spent a fair bit of time talking about our ability to manage some of the challenges around COVID. That was the only reason why we were holding it. I should say that was sort of the originating reason why we sort of shaped this view and have been really aiming to get to that 75% because we knew during some of the more severe stages of the pandemic that we just could not safely go beyond that. Today, we have some, as I said, doing things like chartering ships to be able to manage our way through some of the logistics. There is a cost associated with that, but it's way outweighed by our ability to increase production. And so we are aiming to produce in excess of 75% of Linus' next rates. But if there's one thing that we've learned over the last two years, it's not to... overstate our ability to, you know, sort of dial things up because there seems to be, and I think everybody in the world is seeing this, you know, the pandemic seems to find a different way to come at you from a different direction. But certainly our objective is to increase production well beyond the 75%.

Perfect. Thanks. And next one's just on Kalgoorlie. You know, if we go back to the original early works approval and the disturbance area that they actually got a picture of in that approval, it looks like based on your pictures, you've gone well beyond the disturbance area within that picture in terms of the tanks and whatnot. I'm just curious, has that early works approval changed slightly? And I guess more broadly, sort of what percentage of the project is complete thus far?

We would never breach an approval of that sort. The risk reward is certainly not sufficient to make it worthwhile. The early versus approval conditions are quite clear. It allows for a certain amount of land to be cleared and it allows us to do a certain amount of work which if the final approval doesn't come through, can be remediated. And so even when we look at those tanks that are sitting there on site, that's not where those tanks will end up, right? So we've brought them on site because they've been fabricated and they're useful for us. We've got things like water in them at present, which we can use as part of the current processes. but they're not sort of in their final location. So the work that we have done is absolutely in compliance with the early works approval. And there's a couple of things that, gee, we would have liked it if we'd been able to get a little bit of a relaxation around that approval, but we've really focused more on getting the major approvals through um rather than you know sort of seeking variation for what was a very clear indication from the epa in terms of those early works so there has been no change and we have not changed or or in any way the conditions associated with that approval okay that's helpful thank you and then

Just to clarify then, so are you sort of more than 20% of the project done at this point or is it a lot less?

Look, it's a bit hard to answer that. We're not talking about this sort of a direct line here. There are some things that we've been able to do in a different order from the way that we might do them, you know, sort of otherwise. So I can't really give you a number on that but I can tell you that as we look at our timeline to completion that we retain our belief that we will bring the project in on time and on budget despite the fact that everyone likes to write analysis that says that we won't.

Not me, but I take your point. Okay, thank you. And then the last one is I just noted your comments around, you know, you being off for a little bit and bringing Paul in, which is great. Should we read anything in this about potentially you stepping down or is this just a one-off?

No, I just wanted to have a holiday, but goodness sake, it's Christmas. I gave you one chapter at first. My daughter lives in Sweden. I hadn't seen her for two years. She got married. I had to watch it on a bloody video. And the minute that we had quarantine free travel, I thought, you beauty, I'm on a plane. And no, you shouldn't read anything into it.

Okay, perfect. Thanks, Amanda. That's all from me.

Thanks, Jack. Our next question comes from David Dickelbaum at Cohen. Please go ahead.

Good morning, Amanda. Thanks for the time.

Good morning, David.

And congratulations on the good news there. Glad you got some time off. Well deserved.

Thank you.

I have two questions. One is, The commentary around demands and customers emphasizing shortage of supply, do you see this material shifting the way that you sell product in the coming years and the complexion changing rapidly so that you would be contracting with actual magnet buyers versus magnet makers?

Yeah, David, we actually think about our customer base as, as at least those two segments, at least in the magnet segment, we do have magnet makers and magnet buyers and we do have contracts with both magnet makers and magnet buyers today. And we certainly have quite a lot of inbound inquiry from magnet buyers who are seeing demand increasing and as Paul mentioned before, very focused on security of supply and a lot less on, for example, price because for them they're really looking to make sure that they can continue to grow with their market as well. But we have maybe, I would think it's somewhere around about 15% of our business is contracted with Magnet Buyers.

Certainly, I think it's illustrative that as that segment expands, it would intuit that your margins would expand as well. The second question for me is just with the Linus 2025 vision, you talked about the exploration campaign investments at Mount Weld. If we were to think about theoretically running the LAMP facility at 100% of nameplate capacity, Is Mount Weld capable of generating enough feedstock to go there right now, or would that have to be a multi-year investment process?

Mount Weld can feed at 100% of Linus Next Rates in Malaysia. Our objective is to be able to grow, as we talked about Linus 2025 originally, by at least 50% by 2025. We originally set that target in 2019 based upon some forecast growth rates, which the market is currently outstripping those. So our core focus, and we will bring back sort of information to the market at the right time, Our core focus at present is to find ways to continue to accelerate that. So when we think about Mount Weld, what we do know is that we have sufficient material in the ground, but we will need to continue to invest in our Mount Weld operations. It's worth noting that the original construction of the Mount Weld facility now is a decade ago. And so continuing to invest in that and also continuing to invest in, you know, sort of our exploration program there is going to be an important part of feeding our growth aspirations.

I appreciate the answer, Amanda. Best of luck.

Thanks, David.

Our next question comes from Daniel Morgan at Barron Joey. Please go ahead.

Hi, Amanda and Tim. First question is, there's been a little bit of an inventory build in that sales are around 10% lower than production, and that's been the last two quarters. Is this the case across all products and specifically NDPR? Is it Lanthanum or Cerium? I'm just trying to work out, has there been an inventory build in NDPR in your business?

Oh, no. I can answer that with one word. No, there is no build of NDPR inventory. There's a bit of, you know, sort of across different quarters. I think that we finished last quarter with a bit more... Sorry, the first quarter with a bit more inventory than the second quarter. It wasn't much sitting in the warehouse at the end of the second quarter. What we're seeing is that inventory is in the non-NDPR materials. And even there, we're not seeing it as sort of even a medium-term issue. We did have a number of LA and CE shipments which were delayed at the end of last quarter for all the reasons that we've talked about previously with respect to global logistics and shipping availabilities.

Okay, thank you. And one of the new news in this release is that you're chartering vessels to shore up your logistics chain, which makes sense. I'm just trying to get an understanding of, you know, did this happen towards the end of the quarter or was it early? Just trying to work out, are you getting the benefits of this change yet or does it come, you know, in this quarter and beyond?

We will continue to use charter vessels to complement commercial shipping. Our first charter shipment wasn't until December. And, you know, it has its own challenges. We actually have to find ships, you know, available to charter. But, you know, at one stage when we were looking at a really, you know, sort of challenging number of containers sitting either in ships or in, you know, sort of transhipment ports. You know, it presented itself as the only logical solution and we think that it continues to be a logical solution moving forward. It certainly... underpinned better performance in December than we've seen in November or October.

Okay, thank you. And on the Kalgoorlie project, what is the critical path to getting this done on time and budget? Is it ministerial approval or is it delivery of long lead items? What do you need to see happen to meet the timing and budget?

So, as with any project, your critical path will move around at different times. It's like, you know, running a factory. Your bottleneck moves around. You fix one and then it moves to somewhere else. At present, we don't have anything on, you know, sort of a... ..you know... anything which is taking us into, you know, sort of critical risk territory on delivery of the project. But certainly finalising the approvals is very high on our list and we will be, you know, we will be able to execute very quickly once we've finalised our approvals because we've used the time that it's taken to get some of those things through wisely and, you know, ensure that we actually have equipment either on-site or in our Kalgoorlie facility. And, you know, we've got our engineering, you know, sort of well-prepared. So I think we've still got those, pretty much all the things prepared properly aligned, and we continue to have some buffer in the performance. So finalising the approvals right now is a very high priority for us. As said, we've done the tenders, we've placed the orders for 100% of the long lead time items. Our engineering is really well progressed It's really about getting those so that we can take the next step in terms of some of our civil and earthworks.

And with regards to the approvals process, the EPA issued its assessment report on the 20th of October. It's now almost three months later. We don't have ministerial approval. Is there any expectation or why is that taking so long for something that should be a priority, I would think, for the state.

I don't like... No. Look, where we're at, as the EPA approval came through, there's always room for appeals. It's part of a statutory process. There were two... protests lodged which have been dealt with. The appeals convener has provided a report and now we're waiting on sort of finalisation of the ministerial determination.

Okay, thank you very much Amanda and Tim.

Okay, thanks Danielle. I guess what I'm saying is that it's all in line with sort of statutory timelines. extraordinary in the timing and the timeline associated with getting the approval through.

Thank you very much.

Our next question comes from Trent Allen at CLSA. Please go ahead.

Thanks, Amanda. Well done on a good result. Someone, people have been asking about the potential to increase production and someone referenced throughput at the lamp. No, it's running at 75 odd percent at the moment. Can it run at 100 percent if we're looking through COVID into the future? I think your best quarter was back in, was it 2018? You did 526 percent. tonnes of NDPR compared to 600 which is at nameplate. Also the impediment around nameplate of course has been your licence conditions. I've always felt that part of that was the lack of a storage facility for your WLP but now that you've got an environmental approval for the PDF, does that open the door to change the conditions so that you can run at 100%? Also what's the timing on construction of the PDF? Thanks.

Yeah, okay. Nice to talk to you, Trent. Yes, we can run the plant. In terms of the plant itself operating, we can run at our line of next race. We're quite confident about that. The second point, which is about the constraints on... on processing and the, you know, we've not tested those in the last two years, of course, because we've had all sorts of other constraints. But we continue to work with the DOE on those and, yeah, like you're saying, we would be hopeful that we will find a path through to releasing those constraints. And your associated point on getting the PDF in place and really having that dealt with, I think that you're right. I think demonstrating that the PDF can be constructed and managed safely certainly takes away a lot of the other sort of issues which may be raised at one stage or another. So, as you would recall, our license condition requires that construction is commenced prior to the 2nd of March. With the EIA approval and various other associated approvals which need to be received, we feel that we are on a pathway to being able to meet that requirement.

Cool. Can you just remind me what the... So where do you guys bump your head at the moment? Is it around 85% of the lamp, of nameplate, or is it 82? Just if you could run it as quickly as you wanted to and still stay within your licence, because in the past, of course, you had to slow down in the second half so as not to breach the condition. How should we think about that? What's the rough number?

Yeah, I don't know that I can be as precise as 85 or 82. It's around about that number, yeah. Okay. Yeah.

0.5.

Sorry, 85.5?

0.5 or 0.6, I don't know exactly.

Okay. I'm just coding that in now. Thank you.

Yeah. We could work that out, but I think for order of magnitude, that's where the number gives you the right number.

Okay. Thanks, Amanda.

Thanks. Our next question comes from Reg Spencer at Canaccord. Please go ahead.

Thank you. Morning, Amanda and team. I'm sorry if someone else has asked this question, but I have had some phone issues this morning. But if I could start with the chartered transport ships, is that likely to be a permanent measure for the foreseeable future given global logistics issues? Or in your mind, it really is only temporary until such time as these logistics issues abate?

So, Reg, We thought that the logistics issues might abate, I don't know, 12 months ago, and then we thought they might abate six months ago, and guess what? You know, they just have continued to challenge us. And I think you will have read in the report that, you know, shipping days from Fremantle to Kwantung had, increased in the year just past from sort of March through to the end of the year. So we are not seeing this as a temporary stopgap. We're seeing it forming part of our logistics solution because we don't think that global logistics challenges are going to sort of just resolve themselves anytime soon.

Understood, understood. So I guess modelling costs, you know, we should think about some higher transport costs for the foreseeable future in such time as these issues abate. That makes sense. Amanda, you guys will be well aware that the border to Western Australia is opening in February. There is an expectation that there is going to be some disruption as COVID hits Western Australia. Have you got... any fat built into your timeline on any potential impact from that? Just curious on what that might mean for timelines and so on and so forth because we are hearing other companies and other projects quite concerned about the potential disruption from that.

Yeah, so I think that we're in a really good position compared to some of the other companies because we've already dealt with sort of managing the effects of a pandemic for an extended period of time in Malaysia. So it's not like, you know, I understand with some of the other companies, particularly in WA, they just really haven't had the experience of how to do this, but we have. And so we have a proven model which has worked for us in Malaysia. where we, yes, we have had some of our people with COVID, but it's not been acquired in the workplace. We've had a very careful management approach to ensuring that we don't have workplace transmission and that we do properly track and trace within our own workforce and we don't expose people people to the risk of getting sick at work. And so we're going to take that model and we're going to drop it into place in WA and we have every expectation that it will work well for us in WA as well. But our Western Australian team is all over this right now and But for us, the really good thing is our Western Australian team is all over it with our Malaysian team holding their hands and able to give them the benefit of our prior experience.

Understood. Maybe one for Paul, if I can. Paul, obviously aware of the consolidation of some of the Chinese SOEs in the rare earth industry. Do you expect this to have any impact on exports to the rest of the world or market pricing? I'm just kind of curious because one might think that the impact of consolidating those Chinese companies could go either way. So I'm just curious as to your thoughts as to what that might mean for supply material into the market.

I think you just look at the history back 15 years ago, you had a lot of very fragmented supply chain in China. So major buyers from the West buying rears from a multitude of suppliers in China and the price were very low. So then it consolidated and you see the impact on price. So further consolidation is probably something good for the market.

Understood. And just lastly, Myanmar, I see that the border with southern China is expected to reopen in the not too distant future. Given that that material is more ionic clays and more heavies, do you see that having a marked impact on your DYTB pricing or, you know, given the demand in the market, you know, that that should be more than soaked up?

Well, as you know, in terms of demand, the dy-terbium demand grows faster than the NDPR1, simply because the power of motors increase or temperature increase even more. And when you look at the overall supply of heavies, so ionic clay from South China plus Myanmar, actually it's not growing so fast, including full-speed Myanmar. So the supply-demand situation in dy-terbium is expected to remain at least as tight as today. So it remains a very valuable product for us. And we are very fortunate that our ore actually, compared to usual lightwears, contains quite high dy-terbium content. So that's a very important product for us.

And there's not an insignificant amount of NDPR that comes out of that Myanmar production. So similar question, I suppose. You're not expected to see any increase in supply to have a material impact on price. Okay, that's good. All right, thanks, guys. Thanks, Amanda.

Thanks. Thanks, Greg.

We have no further questions at this time, but just a final call before we wrap up. If you wish to ask a question, please press star 1. Amanda, there appears to be no further questions, so I'll hand back to you for closing comments.

Excellent. Thank you. Well, once again, thank you, everybody, for joining us. And actually, I look forward to probably catching up with some of you face-to-face when we... do our half yearly results at the end of February.

Thank you. This does conclude the call today. Thank you all for joining. You may now disconnect.