Lynas Rare Earths Limited

Thank you for standing by. Welcome to Linus Red Earth Quarterly Resorts Briefing. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Linus. Thank you. Please go ahead.

Good morning and welcome to the Linus Veras Investor Briefing for the September quarter of FY23. Today's briefing will be presented by Amanda LaCaze, CEO and Managing Director, and joining Amanda on the call are Gauden Sturzenegger, CFO, Paul LaRue, Chief Operating Officer, Sarah Leonard, General Counsel and Company Secretary, and Daniel Haver, VP Strategy and Investor Relations. I'll now hand over to Amanda. Please go ahead, Amanda. Thanks, Jan. Good morning, everybody.

Actually, we're attending in force today in terms of the Linus team, and it's an interesting reflection of life in 2022 that we are literally scattered all over the world. So we're calling in from a variety of different destinations. But we are all very focused on ensuring that we find a better second quarter performance than the first quarter. It was a difficult quarter. I think that everyone on the call is well across the fact that we had the serious issues with water. I think I've said to many of you, it's a matter of ongoing frustration to me that we operate on the wettest continent on earth and on the driest continent on earth, and water is a challenge in each location. During this quarter, I remember and previous quarters we've often had ongoing challenges with our continuity of water supply in Malaysia but generally we've been able to implement initiatives which have mitigated the effects of reduced supply. During this quarter we weren't able to do that when a major pipe burst and we had zero water delivered to the plant. for nearly over two weeks. So I think that the important thing here is that it's a sign of strength, it's really a sign of how strong the market is that we still booked 164 million in revenue and we ended the quarter with over a billion dollars in the bank which is particularly pleasing given that We've got a very heavy call on capital at this time as we're really accelerating our activities in Kalgoorlie in particular and as we start to invest more in our Mount Weld capability. So notwithstanding some of the challenges of the quarter itself, as we've indicated in the report and as I've said on other occasions, we are really focused on growth. And just to pick out the highlights on that, we had two big pieces of news associated with Mount Weld through the quarter. The first is that we've commenced the two-year exploration program into the carbonitite. This is into the primary mineralisation below the enriched weathered zone, which we have been mining to date. We're delighted that via JARE, JOGNEG, Japan Oil Gas Metals Exploration Corporation, is providing us with additional technical support on that program. This is really exciting stuff geologically. Our GEOs are very excited to find out what lies beneath, as indeed are our colleagues at ZOGNEG. In addition to that, JARE provided additional financial support for the exploration program in the form of a US $9 million equity placement to fund those program activities. And of course the other really big news at Mount World is the expansion which we announced in early August. I sometimes sort of say a little wryly that it appears that most things come in $500 million chunks and rare earths. Indeed, this is another $500 million program at Mount World. It's very exciting. It will take us... a first step to 12,000 tonnes a year of NDPR. We have two further enhancements that the team is working on which we will announce in due course which will see us be able to increase that output by a further 2,500 tonnes each. It is really important to just take a moment to reflect on this. It can sometimes be easy in a market where there's a lot of focus on some of the processing activities that we remember that feedstock is essential. Any downstream investments are only going to deliver a return if they have feedstock. And the quality of the Mountveld ore body continues to be the thing that underpins value and value creation. within Linus. Of course, I know everybody always waits breathlessly to see what's going on at Kalgoorlie and it is so exciting. A couple of weeks ago, I was out there on the Monday with the board and then on the Wednesday with the US ambassador, which is pretty cool. And even within those two days, I could see changes on the site. The team is very excited every day to see this plant really coming together and you can see it in some of the photos that we've included in the report. We have provided a little bit of a further update on this as well. Those of you who listen to these calls often would know that we received a grant from the Australian government under the Modern Manufacturing Initiative for a new industry-first carbonation circuit. I was hopeful that we would be able to accommodate that within our original budget, but with some of the various pressures, particularly around construction costs and logistics, that's not been possible. As well as that, we made a decision to put in some circuits which will allow us to further upgrade capacity at Kalgoorlie over time. And then, as I said, there's been a few of the you know, sort of increases in construction contracts and logistics. And so today we're just announcing that we expect that we'll come in about 15% over our initial budget, but that, as I said, includes both the scope increases and any cost increases. In the quarter I've spent quite a bit of time on aeroplanes. delighted to be back in a single location now hopefully for a few days. Being to the US a terrific opportunity to view the site and the proposed site for the plant there. We will update the market on that once we've completed our negotiations, but I think that it will be an excellent location for our facility. Also had extensive engagement with US government with respect to that contract. and things are progressing well there with the delivery of our phase two deliverables as part of that program. And then last week, you know, I was in the US again, met with many investors and that was terrific, you know, this great interest in the rare earths industry. But as well as that, there was, you know, sort of probably the premier rare earth conference of the year. And so I had a great opportunity to really engage with other players in the market as we all seek to, ensure that we are actually stepping up to deliver the sort of supply requirements for this market as it continues to grow through to 2030. But notwithstanding all of that, it still remains that while there's a lot of action in the market, Lyman is the only producer at scale of separated rare earths outside of China. And we see that that will probably be the case for some time yet. And so ensuring that we maintain a focus on getting back online, having a much stronger second quarter in terms of production is really sort of the focus of everybody on the team at present. So a bit of a mixed quarter notwithstanding some of the challenges we still delivered sort of a nice uplift in cash whilst funding the growth programs and hopefully we're looking into a better second quarter as we head through to the end of this calendar year. So with those opening comments I'm very happy to take any questions or if you want to specifically direct your questions to any of the others on the team, please let me know.

Thank you. As a reminder, to ask a question, you need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Your first question comes from the line of Paul Young of Goldman Sachs. Please proceed.

Yeah, morning Amanda. Thanks for doing the call again. First question is on the water challenges in Malaysia. Great news that water supply has now normalised. Can you step through what changes you've made and what gives you the confidence that the water supply challenges are now fixed? And also note you make the comments around you can actually ramp up production volumes pretty quickly. Just trying to get a sense of How much catch-up can you achieve on NDPR production over the next couple of quarters?

Thanks, Paul. I'm not sure that we've ever said that we're comfortable with the water supply situation. As I said, we've got a long history of challenges. The situation in September was extraordinary. There was a, I think it was about a one and a half metre pipe, which was 10 metres underground, burst. And that meant that everybody in Kwantung, including residential users as well, had no water whilst that pipe was being repaired. So that pipe has been repaired. As well as that, prior to that there were some challenges around the pumping station and there are new pumps which have been put into place. So we think that we have a better situation than we've had previously in terms of the supplier, but we are continuing to investigate. and not on our own with some of the other industrial users within the Gbeng industrial state, we're looking to investigate other options for building redundancy into the water supply situation, including do we need to put a pipeline to an alternate supply source, etc.? ? Locally, we had used a lot of the water which was sitting in this disused bauxite pit, which is essentially next door to our plant. But we're coming into the monsoon season, so we think there's going to be a fair bit more water there. But the other thing is that as we've indicated, At the last quarterly, we were implementing a new circuit to improve our water recycle rates. Now, that's a little bit behind time now because it's hard to recycle water if you don't have any. But we think that that will improve our performance. And then the other thing that the technical team is looking at is other solutions that will allow us to increase water recycles. That's our preferred pathway here is to continuously improve the recycle rate rather than just finding a different source of water because that means that we've got more control over it ourselves. So in terms of being able to catch up, as I think we've indicated in the report, we certainly see that we should be able the sort of production volumes, which I think most of you analysts have got included in your models, which are at or about the same sort of levels as we had in the previous year, we would think that we would be able to certainly be able to catch up and deliver those sorts of results over the following nine months.

Okay. All right. Thanks, Amanda. Maybe moving on then to the CapEx increase on Kalgoorlie. I mean, you've been asked this question around that capital estimate probably over the last 18 months from time to time and the increase we've seen today that you've announced, probably not too dissimilar to what other companies are experiencing in the industry with respect to inflation. You're pointing out logistical, increase in logistical costs and et cetera, a bit of a scope change there. I note as well. So more of the question I have is around the total CAPEX budget you have including Mount Weld and LAMP etc of $1.2 billion over the next two years. I'll correct by saying that's now $1.275 billion but what's the risk around the same issues that have impacted the Kalgoorlie cracking and leaching estimate impacting the two-year budget and maybe more the question is what contingency Have you actually built into that number? What risk should we see on that increasing beyond the 1.275 now?

So Paul, it'll stay at 1.2 when we've got enough headroom in there to accommodate this increase within that 1.2 which has been disclosed. So you don't need to put the 75 on top of that. Yeah, we've been asked about this for some time. I would point out that we got all the equipment on budget and on time. Of the increase, more than half of it relates to the scope increase. And as I said, we were originally, which means that, frankly, that the cost increase is well within 10%. we were hopeful that we would be able to cover the scope within that initial budget. And if it wasn't for some of these sort of more extraordinary cost increases which have occurred over the last 12 months, we probably could have. So we think that it's prudent on the scope that we do the work now. You only get one shot at being a low-cost producer, and that's when you size your equipment. And so that's the reason why we've made that call to do it now. Each of the projects has its own contingency in it. Yeah, the contingency that we put into the Mount Royal budget is larger than the one that we had in the Kalgoorlie project budget initially.

Okay. All right. So absorbed by contingency. That's helpful. I'll just ask one last one, Amanda. Just on the market, sort of a bit of volatility in NDPR prices in the period, a bit of feedback from trade journals, et cetera, was a fair bit of restocking and destocking and seasonality and in the price volatility. I know you've made a comment in your report here around the stated 25% increase in the Chinese production quota and how that led to some concerns in the market. Can you maybe just give any information you have around what Chinese production volumes are actually doing at the moment, what you've actually seen or heard of what they're doing?

Actually, I might pass that across to Paul. I mean, there's sort of limited information coming out of China at present, as you would no doubt appreciate with the sort of continuing various lockdowns. I'm sure we'll explain a little of the arithmetic around the 25% and why we were never, in fact, we were quite welcoming in that number, where others, I think, saw it as being maybe a little bit more risky. So, Paul, maybe if you'd like to talk about what you are seeing out of China in terms of production.

Yeah. It's been a long time since I last visited China and I spent more time dealing with water in Kuantan than with NDPR price in the market. But basically China increased their production quota by 20% in the first six months of the year, 25 in the second half. When you combine that with the production of liners, you end up with an increase of production in the calendar year by 21% worldwide. And when we compare that with the production increase of magnets, and as you guess, we know pretty well how much each magnet maker inside and outside China is producing. converting this into NDPR consumption, we match with the same number of 21% increase. So I think we do this calculation very carefully within Linus. I guess there are people doing that very carefully in the meeting China. And what is interesting to me is that they decided to shot exactly at the balance point so that things remain the way they are. And that's basically how you saw the price stabilizing after a bit of a shooting earlier on. Some concern because a lot of people say, well, 25% increase is not too much. But finally, after a while, people realized that things were still in balance and that's where the price stabilized nowadays. Now for the future, I was expecting some kind of stimulus package from Xi Jinping, but he stopped short of this, just signing up for another five years. I don't know what he will do for these five years, but we'll see how the Chinese economy moves from now on.

Okay, thank you, Paul. Very helpful. Thanks, Amanda. That's it for me.

Thanks, Paul.

Questions? Once again, if you'd like to ask a question, please press star 1-1. Our next question comes from the line of Daniel Morgan from Barren Joy. Please go ahead.

Hi, Amanda and Tim. So just wondering how hard you can run the Malaysian plant for the remainder of the year. What gives you confidence that you can meet last year's production numbers despite the slow start to the year? Is there any maintenance that we should be thinking about coming up or did you use the downtime to take care of some maintenance issues?

The simple answer to that is yes. We had already scheduled the only major kill maintenance that we needed to do during the year. We'd already scheduled that in the first quarter. We took the opportunity to do another piece of maintenance in that time as well. We certainly see that we should be able to run all four kilns with normal preventative maintenance downtime but we should be able to run all four kilns through to the end of the financial year.

Thank you. The increase to the Kalgoorlie budget, you intimated quite a bit or half of it was scope. Can you elaborate on You know, what is the increase to scope? You know, is this preparing for potentially the expansion of system capacity towards 16.8 thousand tonnes per annum of NDPR? Is that what you're referring to?

Yeah, you've followed us for quite a long time, haven't you? Absolutely. So there's two things, Daniel. The carbonation circuit, as you will recall, is about $30 million in total and half of it will be picked up by the Australian government and the other half will be picked up by Linus. And as I said at the time, I'd hoped that we would cover that within our contingency, but that's not going to be the case. And then, of course, the second piece is as we look at how do we put together all the pieces of the jigsaw puzzle and capacity, we do need to make sure that we've got the opportunity to be able to increase capacity at Kalgoorlie and particularly as we continue to increase our output from Mount Weld. So those are the two things that are... you know, sort of driving that scope increase.

Thank you. I note that your cash costs or cash outflows for production and royalties, et cetera, was 104 mil in the quarter. I know it's quite a messy quarter where you didn't produce as much as you would have liked to and you had to make a bunch of decisions on the fly to fix water issues and whatnot. But I'm just wondering, you know, given... Is this a level of cash outflow we should expect for the rest of the year each quarter or will it go up with volume going up?

Thank you. So a lot of that and that issue on the cost has been quite challenging, particularly around things like probably the most significant has been sulfuric acid cost increases. um you know so which is sort of unavoidable, A, and B, we can't choose to dose different amounts. So it's not something that we can just sort of say by using less. Having said that, in Paul's team, they're very focused on further opportunities to reduce either usage and or finding to sort of new suppliers, but really that increase in costs has got more to do with increasing input costs than anything else, and it really comes down to what happens with the market prices on some of those things. But let GATNs maybe say a little more. I mean, I said that the one which is highest in my mind is South Europe, which has gone up by about two and a half times.

Yeah, I think I would like to add that here, if you refer to the data, Daniel, it's cash. Obviously, cash follows a couple of weeks or even one to a month after consuming it. And particularly on the royalty, basically what we are talking about here is really the royalty we paid at the high point of the of the prices so definitely on that you will see coming back on it and also what you have seen is probably also WIP balance which is probably different than what you would have in normal operation so there will be some adjustments to it I would not expected to see it higher than it was in this quarter. But again, I think we need to see how the price develops and indicate on the chemical inputs as they are probably coming through with about 45, 60 days time gap.

Okay, thank you. Last question, if I may, just back to Kalgoorlie's plant. The budget has increased. I appreciate some of that scope, but is there anything you might add just on the timing? It doesn't look like you've changed the timing from July 2023, which has always looked like a tight timeframe. I'm just wondering if there's any update here.

It is a challenging timeframe and no, there's no update. At this stage, we continue to manage all elements of that plant to be able to bring it online in the event that we are unable to continue to produce in Malaysia.

Thank you very much.

Thanks, Danielle.

the questions one moment before we take the next questions our next question comes from the line of levi spry from ubs please proceed okay thanks thanks for the call uh maybe can i just push a little bit more on the last question so what is the critical path uh what

What will we see and I guess what were the expectations around commissioning in certain parts of the circuit?

So of course you would be aware that the critical path moves around. Once something goes red it gets fixed and then something else will become the critical path. It's like dealing with sort of bottlenecks in an industrial operation. We will advise the market when we have first feed on. In terms of commissioning, we have already recruited the operational management team that will run the Kalgoorlie facility, including a commissioning manager, and we are well placed to be able to commence that process as soon as equipment is ready to go through the commissioning process.

Okay, thanks Amanda. And maybe just one for Paul. So can you share with us a little bit about your calendar year 23 expectations for magnet demand or production? So it sounds like you're not adding much volume, if any, to the supply side. So what are your expectations around demand? Has it rolled over? Is there any signs of it rolling over a little bit?

Yeah. I think it's fair to say that the 21% increase in magnet production worldwide in 22 and 16 in 21 included some restocking or refilling on the supply chain that had been, I mean, everyone decreased their inventories during the COVID, not knowing how far it would go, how long. From our direct or Linus customers, and you know, most of them are Japanese, so everything is pretty well scheduled. We see a substantial increase, I mean at least 10% increase for next calendar year. Now there are obviously uncertainties in regard especially on the Europe situation, the semiconductors availability. What I would foresee is that at least a wind turbine in 2023 which should be much stronger than in 2022, and that doesn't relate to much on semiconductors. And as of today, we still see a very strong growth on the electric cars. This is just accelerating all the time. For the rest, like home appliances, robotics, this is more related to the global economic situation. So if the economy goes down, you will have less new buildings, less air conditioners, etc. So that's where most of the uncertainty lies. But for the specifics that we enjoy, which is wind turbines and electric cars, I think 23 is a very good year ahead again for us.

Yeah, nice one. Thanks, mate. Thank you.

You're welcome, mate.

Thank you for the questions. Once again, if you would like to ask questions, please press star 11 on your telephone. Our next question comes from the line of Austin Yun of Macquarie. Please proceed.

Hi, morning. Amanda, thank you for taking my questions. Just two from me. The first one is on the capital management. I see that the restrictions have been removed. Just wondering if you have any any plans to provide further clarity on the capital management or potentially update you given the policy, understanding that the near-term focus is on the growth and executing multiple projects in your pipeline. Thank you. I'll come back with the second one.

Thanks, Austin. Great question. And we're very pleased to agree these variations in the Senior Loan Agreement with JARE who have always been supportive and I'd actually forgotten the history, well it was just before my time, when these came in it was to avoid the potential risk of the company breaching other more sort of normal debt covenants. But I think that we're now, we've now grown up as a business and it is appropriate to do this. We, the board of Linus, We're very pleased that this will allow us to have a more normalised approach to capital management, including the opportunities to provide both a capital and a yield return to our investors. That will just be considered as a normal part of the board cycle. So, you know, all boards consider the payment of dividends as part of their half year and annual results. And with this now as new agreement with JARE, we will be able to do that. So we're very pleased with it and we see it as being a strong indicator of the maturity of the business.

Thank you, Amanda. The second question is on the serum production. I can see that you delivered a few large orders in a quarter. Just trying to understand from a production perspective, do you have a minimum cerium delivery kind of commitment every year? Thank you.

I'm not sure I completely understand the question. We have the ability to produce cerium At times where we have had challenges around some of the inputs, like particularly the water, we will preference the NDPR circuits, of course, and that's really what we've seen over the past couple of years. We have significant customers for what's now more than half a dozen different grades of cerium. Even within our cerium portfolio then we're really developing some higher margin products within that portfolio including for applications like water treatment in addition to the more traditional applications like the serum which is used in AutoCAD systems. So we do have a series of customer contracts associated with this. ability and you know sort of normal operating conditions to be able to meet those contracts plus more cerium is in basically in plentiful supply throughout all suppliers so yeah does that answer is that really what you're sort of seeking to understand Paul can probably add yeah as well thank you Amanda thank you yeah so basically

The product mix will normalize for the rest of the year, right? And which is going to help the average real-life prices, given that the NDPR will be a larger proportion for the next three quarters?

Yeah. Yeah.

That's right. Thank you. That's all.

Thank you.

Once again, if you would like to ask questions, you may slowly press star 11 on your telephone and wait for a name to be announced.

Okay. Record call, sounds like.

Are there any more questions, Desmond?

At this time, there are no further questions on the queue. Back to you. Okay.

All right, look, terrific. I'm sure if any of you think of some further questions, you can drop a note to Daniel and or Gaudens, and we will certainly, and Lauren will certainly get back to you. But once again, thank you all for your time and attention this morning. And I'll look forward, hopefully, to seeing many of you between now and Christmas, maybe even some of you will come to the ATM. So thank you all.

Thank you. For participating, you may now disconnect.