Neo Performance Materials

Ladies and gentlemen, thank you for standing by. And welcome to the Neal Performance Materials fourth quarter and full year 2020 conference call. 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 this time, you will need to press star then one on the telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker today, Mr. Alex Caldwell, Corporate Secretary. Please go ahead.

Thank you, Operator, and good day, everyone. Today's call is being recorded. A replay will be available starting tomorrow in the Investor Center on our website, located at neomaterials.com. On today's call, we have NEO's President and CEO, Konstantin Karyanopoulos. Also on the call is Rahim Suleiman, NEO's Chief Financial Officer, who will provide detail regarding the company's fourth quarter performance. Then we will open the call to questions from analysts. Please note that some of the information you will hear during today's presentation and discussion will consist of forward-looking statements, including, without limitation, those regarding revenue, EBITDA and adjusted EBITDA, product volumes, gross margin, other income and expense measures, gross fee, cash returns, and future business outlook. Actual results or trends could differ materially from those discussed today. For more information, please refer to the risk factors discussed in NEO's most recent financial filings, which were filed on CDAR earlier today and are also available on our website. NEO assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. Financial amounts presented today will be in U.S. dollars. Non-IFRS financial measures will be used during this conference call. Further information regarding NEO's use of non-IFRS financial measures is available in NEO's Q4 2020 earnings press release, which was released earlier today and is available on CDAR and on our website. Let me now turn the call over to Constantine for opening remarks.

Thanks, Alex, and good morning, everyone. I'd like to spend my time this morning providing some context on our strategic initiatives as well as where we're going. But first, I'm pleased to share with you some highlights of NEO's fourth quarter and full year results. NEO reported sales of $110 million during the fourth quarter, an adjusted net income of $9.6 million, or $0.25 per share. We reported adjusted EBITDA of $12.3 million, and our top-line performance represented a substantial recovery relative to our performance at the start of the global pandemic. NIO's focus in 2020 was to protect our core business in the face of that global pandemic, as well as to set the stage for growth it will return to more normalized operations, and we continue to advance into new applications and markets. In spite of 2020's many challenges, both for us as well as our customers, I'm pleased to report that we have finished the year in great shape. Volumes and revenues accelerated their growth in the quarter, indicating a strong recovery of key magnetic and catalytic applications. Our facilities around the world are operating at near full capacity and have exceeded health and safety targets. We entered 2021 with product demand continuing to show upward momentum, and we are beginning to advance strategic initiatives aimed at accelerating the company's long-term growth. As the global pandemic continues, we're all maintaining a heightened sense of caution Favorable news related to COVID vaccines give us hope that there is light at the end of the tunnel. Yet, we're still concerned with the possibility of renewed lockdowns in many parts of the world. For example, case counts continue to trend unfavorably in Brazil, Central Europe, and India. Just last week, Paris returned to lockdown mode. The operational challenges associated with the pandemic have also proven to be a moving target. Fortunately, our operations have managed through recent supply chain shortfalls, overtax, shipping ports, and surge in demand. This is to say nothing of our most important and continuing mission, keeping our employees and their families as safe as possible from the virus. Despite these challenges, NIA was able to deliver one of our best quarters in years, one that was driven primarily by volume growth. The key for us has been maintaining flexibility and open lines of communication with all of our clients and customers. With multiple manufacturing facilities located across two different continents, our global footprint is critical in enabling us to continue supplying customers with the right products where and when they needed them and with exceptionally high quality. for which we are known. On this point, I'd like to give a shout-out to our Chemicals and Oxides team, which recently received the Top Supplier Quality Award by the Environmental Catalyst subsidiary of a major global automobile manufacturer in Japan. That award for superior product quality came in the middle of the global pandemic, and that says a lot about our team's resourcefulness, dedication, and commitment to excellence. As we enter 2021, I'm very encouraged by organic growth trends I see across our core business. In fact, the very positive volume and pricing trends for the chemicals and oxides and the magnet branch business units that we saw in the fourth quarter continued into the first quarter of 2021, which closed us next week. When we announced our first quarter results in mid-May, We expect that they will exceed current analyst consensus estimates of $84.9 million in revenue and $9.9 million in distributed tax, and will also be significantly higher than our fourth quarter 2020 results we announced today. Now, given the continued uncertainty we faced this year with a pandemic and other factors such as merit pricing, geopolitical development, and this will not, I think it is prudent to introduce some caution to go along with our optimism that these trends will continue for the balance of this year. That said, I'm excited about a number of near and midterm growth opportunities where I see us positioned to deliver innovative, advanced materials that are needed by new and more sustainable technologies. Capitalizing on these growth opportunities will take critical focus, discipline, and resolve. To help us get there, our global team is tapping into new entrepreneurial roots and culture while relying on our decades experience in this business. In a relatively short period of time, we have made very good progress in methodically executing our strategic priorities for growth. This is perhaps illustrated by the launch and successful commercialization of several new products this year, this past year rather. These include high-performance precision neomagnets for use in electric vehicle cooling, water pump motors, seat and trunk motors, laptop and tablet plan motors, and a host of consumer products for vacuum cleaners to massage guns. Our MagneQuench magnetic powders, are now being used in the traction motor and generator of one major automaker's second global hybrid car platform, a larger volume global model. Our highly engineered powders are manufactured into hot deformed rare permanent magnets by Daido Electronics in Japan. And what is amazing is that these magnets can perform in a vehicle drivetrain system while containing zero heavy layer of elements. This is an advanced material innovation, which was considered next to impossible only a few short years ago. We achieved this target in time for the 2020 model year, and we continue to improve on the performance of this technology. One area of perhaps unexpected growth for our magnetic powders was in the production of high torque magnets used in precision motors. or industrial robots. Our magnetic powders are helping semiconductor manufacturers expand their production capacity. This is a handsomely growing business for us, by the way, which is perhaps not surprising given the intense effort being made around the world to increase the production of these chips. In our chemicals and oxide division, we developed a new line of high-curity nanostructured dystrosium oxide. for use in dielectric formulations that help further shrink the size of multi-layer ceramic capacitor chips produced in Japan and Korea. There can be anywhere from 500 to 1,000 of these chips in a single smartphone. More than 1 trillion are made each year for a wide variety of electronic systems. In addition, our very busy and effective research and development teams are continuing to make progress on the development of a new family of innovative rare-based materials that demonstrate a wide range of performance characteristics, including superior catalytic, fire retardant, and antiviral properties. The potential applications for these new materials are very exciting. But our new goal encompasses more than a deep R&D pipeline and close development partnerships with our customers. For example, with a recent venture into magnet manufacturing through Magnet Quench Studio, we leveraged their years of experience in making high-quality, high-performance magnetic powders into producing compression molded magnets. The extension of the powder business into magnet manufacturing has been remarkably efficient, and the results have surpassed our expectations. Although the finished magnet side of our business is still relatively small, it exhibited growth of 28% year-over-year in the quarter. It also has expanded from its core electronics market focus into fully qualified magnets for demanding automotive motor applications. These tend to be larger magnets integrated in more complex motor assemblies. These early signs of success are what we seek in our extended approach to growth. We will continue to evaluate and look for capabilities that leverage our existing expertise and, when combined, will allow both our existing operations and new application areas to grow. Today, more than half of our MagnaQuest business is directly related to the automotive sector. This was a deliberate shift which we focused on more than a decade ago in order to diversify our customer base away from its primary focus on electronics at the time. And please don't get me wrong. PS5s, smartphones, and laptops, and tablets are all great markets for our business. Now, however, with concrete steps being taken by both industry and governmental bodies to encourage the rapid growth of electric and electrified vehicle manufacturing, a magnet wrench in CNO businesses, rather, are poised for a new era of growth. One primary area where we see demand rising rapidly is Europe, and I've talked about this before. Forecasts for EV production and demand in the EU continue to be revised upward. More importantly, public and private sector investment is flowing in increasingly large numbers. Tens of billions of euros have reportedly been committed the electric mobility sector alone, focusing in particular on securing supply chains and establishing manufacturing capacity for resilient drive train and battery supply chain. OEMs have been making major announcements on a seemingly daily basis as to how they will proceed on their own paths towards electrification. Needless to say, growing demand for the critical materials needed by these platforms because that's a massive opportunity for companies that can reliably supply them. With a decade of experience in producing high-quality, customized rare earth materials and the only rare earth production facility in Europe, Neil is positioned at the right time, the right place, and with the right expertise. We'll continue to capitalize on opportunities, for growth and innovation for new clean air and clean water products. And we will design a supply chain to operate synergistically with our customers. We'll increase customer pull for these products in Europe, the continent, and the primary geographic focus for our growth strategy. The U.S. Magnet Quest division has been operating in magnet markets for almost 40 years. in the chemical and oxide division in rare earth markets for almost 30. Our plant in Estonia has been operating for decades more. Over that time, we've seen a number of commodity cycles and supply-demand imbalances that have contributed to some very volatile, dynamic, and unpredictable pricing environments. Even those investors who are not intimately familiar with our industry are likely familiar with a massive rare earth pricing spike during the 2010-2012 period. Of course, our customers remember well what happened with rare prices back then. While there's some similarities in today's market, there are also aspects of the current pricing environment that are different. For one, pricing volatility in 2010-2012 was largely driven by Chinese government policy, rare export quotas to be exact. Today, higher prices are largely demand-driven and are more related, particularly, to specific rare earths, namely the magnetic rare earths neodymium, paleodymium, dysprosium, and terbium. These have all seen strong upward movement in pricing over the past six months. And while pricing was relatively modest through much of 2019 and 2020, an inflection point was hit last year in the third quarter due to concerns monsoon season flooding in southern China, as well as a more recent coup in Myanmar, which is a major source of supply for air concentrates in China. NIO experienced no supply disruptions, but these events did exacerbate supply imbalances due to the growth in demand fueled by a recovering manufacturing sector, pent-up consumer demand, and supply chain restarting. We prefer to stay out of the prediction game on how rare earth pricing evolves. Objectively, these magnetic materials are currently trading at the high end of the range seen in recent years. Now, we do not see panic in the market the way we did back in 2011. Our customers have a better appreciation for the potential price fluctuations of rare earths. They also have a strong confidence in the industry to bring additional supply to ensure a sustainable market. After all, two large industry suppliers, Linus of Australia and Empty Materials of California, reportedly produced more than 50,000 metric tons of rare raw materials and separated products last year. These supplies did not exist during the 2010-2012 time frame. NEO typically passes along a raw material cost on a regularly adjusted pricing formula in a customized specialty materials command evaluated premium on top of the underlying commodity price. The raw material pass-through is often priced on a one-quarter lag. As such, a fourth quarter 2020 results largely reflect third quarter market pricing. And Rahim will provide an overview of the LEED live applications for our MagnaQuench and CML businesses. Given that we're not a mining company, we're always working to improve the diversity of our raw material sources in order to power and secure our growth. This is why we were especially pleased to announce, jointly with Energy Fuel Resources, a new rare earth material supply chain project starting with byproduct mineral sands in the United States. This U.S. to Europe supply chain is pretty unique, environmentally oriented, and highly capital efficient. First, the Kimworth Company produces monazite as a byproduct of mineral sands in the southeastern United States. Colorado-based energy fuel then processes the monazite at its White Mesa facility in Utah. There, using available capacity, it extracts naturally occurring uranium for use in nuclear power generation from the monazite, as well as produces a mixed rare carbonate to our specifications. This material is an ideal feedstock for our air separation operations and fillment. NEO received as carbonate and SILMAT, our existing European processing plant in Estonia, to produce value-added rare earth materials, especially environmental catalyst precursors and magnetic rare earths. We're proud to operate Europe's only existing rare earth separation facility in Estonia. This is a highly strategic asset. I want to note how rapidly and effectively the team at Energy Fuels moved from concept to reality in this effort. Mark Chalmers, the CEO, and his excellent team there are well-versed in chemical processing and separation technologies. But this new process presented some unique challenges. They tackled this effort extraordinarily quickly and very effectively. In doing so, they have opened up new possibilities and growth opportunities for both NEO and Energy Fuels. Looking forward, we expect this collaboration to help NEO expand the production of separated rare earth products in Europe, improve the resiliency of European manufacturing, and enable greater supply of rare earths for the continent's rapidly growing EV manufacturing base. The supply chain is highly capital efficient. It utilizes the byproduct material from existing mining operations, The mixed rare earths are extracted using existing available capacity and skills, while in parallel generating uranium credits. NEO utilizes available processing capacity in Estonia, and by getting our plant to run at 100% capacity there, we will produce more rare earth materials in Europe, just as Europe's demand is increasing. The capital cost of implementing this phase of the energy fuel NEO supply chain is extraordinarily low. It is also an excellent example of how to build new critical material supply chains in a matter that respects environmental values and advances the model of a circular economy. The feedstock from this new supply chain will complement material that we now receive in Estonia from a highly valued supplier, SolarCams Magnesium Works in Russia. SolarCams has been a trusted supplier and partner for our European operations for more than 30 years and are currently running at maximum capacity. SolarCAMS just celebrated its 85th anniversary in business earlier this month. That's an exceptional achievement, and I would like to congratulate the entire SolarCAMS team for more than eight decades of successful operation. NIO looks forward to many more years and decades of cooperation with our friends and colleagues there. As the global economy continues to evolve into a more circular economy, the sourcing of raw materials required by new technologies and environmentally focused applications, such as EV, becomes a material concern to companies like ours, as well as to our customers and their customers. In fact, several of them have asked that we continually evaluate the procurement practices to incorporate as much recycled material as possible. For NEO, helping to build a more circular economy is driven both by our customers' desires as well by our approach to manufacturing our advanced materials. For example, our Magnet Quench division uses recycled rare earths to supply magnetic powders and magnets for one of the world's largest manufacturers of smartphones. You may see the announcements, their announcements rather. This allows the manufacturer to do something that no other major phone manufacturer has been able to do, at least to our knowledge, rely on recycled material for their air of madness in their phones. From a conservation and net emissions perspective, if the best source of material is a recycled loop, then the second best source is a byproduct. And many of the raw material inputs we use are derived from byproduct waste streams. For example, we produce high-curious rare metals such as gallium, indium, beryllium, niobium, and tantalum for both scrap and recycled feed materials. The rare earth concentrate supplied to me by SolarCAMS is a byproduct of magnesium and titanium production operations. The mixed rare earth carbonate we receive from energy fuels in the Utah is made from a byproduct of other mining operations. Mia's continuing focus on promoting ESG values and practices is a natural extension of our business model. To further enhance the sustainability of what we make and how we make it, we conducted external third-party reviews by EcoVadis, a well-known reviewer in this field, in 2019 and 2020 at four of our largest production facilities. Each received a silver medal in terms of its performance, and at present, Five of our facilities representing more than 90% of our revenues are going through the ecovirus process. We see this initiative as important, as very important, in helping us shape our environmental, social, and governance strategies going forward. Last, although I typically refrain from commenting on capital markets, It is important to note that our largest shareholder successfully completed two private secondary offerings in recent months. In coordination, we have made a concerted effort of reengaging new and historic shareholders. In conclusion, let me say that we feel very fortunate to be at the epicenter of critical materials discourse. or rather at the epicenter of the critical materials discourse, right on the cusp of a global energy transformation. Through the hard work and discipline of our employees around the world, we've been able to weather this pandemic so far and strategically position the company for new growth. As the global economy begins to return to a new normal, Governments around the world are also spending trillions of dollars in highly focused efforts to stimulate economies, restore and create jobs, and move the world onto a more sustainable and ecologically sound swimming. As I see it, those macro trends all point to very healthy growth opportunities for NEO and our customers, both organic and strategic. We will pursue those opportunities aggressively. And with that, let me turn the call over to Rahim.

Thanks, Konstantin, and good morning, everyone. Before I begin my commentary about the results of the fourth quarter, let me first acknowledge the point that Konstantin made earlier. The COVID-19 dynamic has been impactful to families and societies all over the world for a rather extended period of time now and will continue in various parts of the world here in 2021. Today, I'm going to talk about the robust recovery that Neil has seen in many of its end markets. But we don't need any of the commentary to be insensitive to those families and regions where recovery is still a little more fragile or a little more distant. It is interesting and challenging to summarize our full year results. From NEO's performance perspective, the full year feels very much like two very different worlds. Today, I will focus my commentary on our operating performance over the past quarter as it doesn't seem particularly relevant to speak about the year in totality, given the dramatic impact of COVID-19, particularly in Q2 and Q3 of 2020. I'll spread the comparisons out to the prior year, which was a pre-COVID environment, and to this past third quarter to get a sense of the sequential changes and the momentum of growth. Of course, all information to review full year results and full year comparisons to the prior year are available, in the company's MD&A and financial statement documents. Our fourth quarter results reflected strong recoveries across most of our major markets. As we discussed in our last call, we began to observe signs of a turnaround in the third quarter, and this positive momentum continued through year-end and into the start of 2021. The main driver of performance in the fourth quarter was increased product volume. This was a combination of higher volumes required to support increased activity, as well as the supply chain rebuilding inventories ahead of anticipated continued growth. This has been true across our automotive, healthcare, general industrial, and consumer electronics sectors. And we have seen less growth or recovery in our aerospace industry, affecting both volume and price. And this is one of the reasons why our rare metals business has significantly underperformed. During the fourth quarter, we reported a consolidated $110.4 million in revenue compared to $94.6 million in the prior year period and $77 million in the third quarter. We reported net income of $2.4 million, or $0.06 per share, and our adjusted net income was $9.6 million, or $0.25 per share, in the fourth quarter of 2020. We reported adjusted EBITDA of $12.3 million compared to $12.5 million in in the prior year period and just 5.7 million in the third quarter of 2020. We will jump to the business unit performance in a moment, but it is worth noting here that Magniquench and C&O combined to show a 30% improvement in adjusted EBITDA in the fourth quarter of 2020 over the fourth quarter of 2019. However, this improvement was offset by charges in the rare metal segment that we will walk through in a few moments. There have been many positives experienced during this recovery. On the automotive front, passenger sales have accelerated from the lows of the first half of 2020. And while the industry will take time to return to previous vehicle sales levels, there are significant improvements as we enter 2021. There has been additional demand and higher prices for many of our rare earth element products, particularly the magnetic applications. that drive higher energy efficiencies, new technologies, and those that are significant enablers to the electrification of automobiles. Jumping to a detailed review of each business, let's start with Magnet Clench. Volumes for Magnet Clench were 1,626 metric tons in the fourth quarter of 2020, compared to 1,387 metric tons in the fourth quarter of 2019, an increase of 17%. over the prior year. This compares to 1,095 metric tons in the third quarter of 2020, an increase of almost 50%. Adjusted EBITDA in the fourth quarter of Magnus Lynch was 11.4 million compared to 9.5 million in the fourth quarter of 2019, an increase of 19%. And compared to the third quarter of 2020, the increase in adjusted EBITDA is greater than 100% or more than double. Shipments for MagnaQuench powders were very strong in the quarter, continuing the trend that started late in Q3 and which continued throughout Q4. The strength was near ubiquitous across all major geographies and end-use applications. Automotive applications led the strong recovery and accounted for more than 60% of total sales volumes. The growth in automotive set the pace, and nearly every other application followed suit. new and emerging magnetic technologies continue to gain momentum at replacing larger, heavier motors across the automotive platform, consumer goods, factory automation, and healthcare, all showing signs of resiliency. The exception here was some older legacy applications, such as hard disk drives, which continue to become a smaller and smaller piece of the portfolio. We believe that the increase in product volume is driven by both finished goods consumption and to a lesser extent through rebuilding inventory levels throughout the supply chain. Many of our customers seek to replenish their on-site inventory in order to provide flexibility to respond to recent dynamic orders, including preparing for future increased demand. Thus far into 2021, many of these volume trends have remained in place, and we anticipate the trend for strong shipments and inventory building to continue in the first quarter of 21. Another bright spot in Magnet Clench continues to be the improvement in our compression molded magnet business. As Constantine mentioned, our magnet volume improved by nearly 30% in the fourth quarter over the prior year. We are seeing growth across all the traditional magnet applications, including box fans, laptops, server racks, and increasingly popular gaming applications. Notably, we have also commissioned new capacity and are now qualified and in production with our first automotive magnets. We are pleased with the success and the continuation of expanding our portfolio of solutions to address growing market segments. Let's turn to our chemicals and oxide business, or CNO. Revenues for CNO were $48.4 million in the fourth quarter of 2020, compared to $33.7 million in the fourth quarter of 2019. an increase of 44% over the prior year. This compares to $36 million in the third quarter of 2020, an increase of 34%. Adjusted EBITDA in the fourth quarter for C&O was $7.1 million compared to $4.4 million in the fourth quarter of 2019, an increase of 61%. And compared to the third quarter of 2020, the increase in adjusted EBITDA in the fourth quarter is greater than 80%. Similar to Magnet Clench, chemicals and oxides benefited from the continued recovery across the automotive space. Our auto catalyst business started to see momentum during the third quarter, and this momentum continued across all regions throughout the fourth quarter. Part of this strength is related to customers rebuilding stock, but the above-market C&O recovery trend was also supported by C&O winning increased market share, in both its existing applications as well as in newly launched applications showing growth despite the pandemic. In fact, overall, auto catalyst volumes for the year were similar to prior year despite the general slowdown in automotive production over the year. Within our rare earth separation business, Constantine mentioned the key demand trends that are affecting the most valuable rare earth elements, the magnetic elements. As mentioned earlier, Increased demand for these magnetic elements and the unique, powerful rare earth magnets they enable is being driven by key global trends in energy efficiency, in the electrification of automobiles, and in the trend for smaller, lighter, and more powerful motors, among others. These trends are not going away. And as we move toward a world surrounded by more technology with a key emphasis on environmental considerations. Despite constantly increasing demand requirement for these elements. Pricing of these elements has traditionally showed levels of volatility. The spot prices of some of these elements are up in the 20% to 50% range as compared to the end of Q3. And with the continued dynamics in the first quarter of the year, which Constantine mentioned, we have seen market spot prices for these elements continue to increase an additional 20% to 50% since the start of this year. Accordingly, from a lead-lag perspective, C&O is currently benefiting from the increased selling prices with having lower cost inventory on hand. There was some benefit of this in the fourth quarter, but the majority of the benefit will be seen later as the rapid price increases occurred later in the quarter and in the first quarter of 21. Conversely, this also means that NIO will have higher working capital requirements in this environment, both in terms of accounts receivable and inventory, particularly as NIO is now buying higher cost raw materials. at these higher costs. NIO has adequate cash balances to manage this increase in working capital. We started to see at the end of Q4 and into Q1 2021. Lastly, in rare metals. The difficult demand trend that began in the second and third quarters of 2020 remained throughout the year. Our view of the aerospace market has not shifted, in which we anticipate that 2021 will likely be a challenging year for this business. While replacement aircraft will still be required, growth is largely an open question for the industry at this point. Revenues for rare metals were $12.1 million in the fourth quarter of 2020, compared to $21.6 million in the fourth quarter of 2019, a decrease of 44% from prior year. Adjusted EBITDA in the fourth quarter for rare metals was a loss of $3.3 million, compared to positive adjusted EBITDA of $1.2 million in the fourth quarter of 2019. Volumes in aerospace are likely to be continually challenged in 2021, as they were in the latter half of 2020. However, the lower volume levels were not the primary cause of the significant loss in Q420. The rare metals division also took a $3.3 million charge related to the lower of cost or market adjustments on inventory in the quarter. This relates to having purchased higher cost inventory earlier in the year and then being negatively impacted by lower demand and lower prices at the end of the year. Selling prices fell about 15% to 20% for some products within the rare metals group in the second half of 2020, which we believe is highly correlated with weaker demand from the industry. New raw material purchase costs reflect this lower market price generally. so there's a somewhat corresponding change in overall production economics. However, we had to take a significant charge in Q4 2020 relating to the historical inventory balances that were already on hand and purchased at higher cost levels. We anticipate that slower industry performance will continue to be a challenge for rare metals in early 2021. However, this sizable 3.3 million LCM charge should not be a recurring item. notwithstanding that pricing and cost can always change over time. Despite these near-term headwinds, our commercial and technical teams continue to develop new applications, exploring new end markets, and are evaluating significant operational improvements. This includes evaluating new sources of feedstock, such as recycling and scrap material feeds across the rare metals business. We have also been utilizing the slower production times for both required maintenance and evaluating growth and efficiency projects. While the aerospace industry has not experienced the same type of recovery as the automotive industry and others, our customers have communicated that there will be demand in 2021, and we think of entering the year with a cautious approach. With respect to the consolidated results, One would notice that our SG&A expense came in higher for the year and higher in Q4 as compared to prior periods. We found it a little counterintuitive given the numerous cost savings plans that were put in place and executed during the year. We would note that SG&A expense was also impacted by higher valuation charges related to our legacy long-term incentive plans. These one-time valuation adjustments were triggered due to our largest shareholder no longer maintaining majority control, which we achieved through the two secondary offerings in December 2020 and February 21. There were also unusual costs incurred to execute the secondary offerings, as well as costs associated with senior management changes made earlier in the year. In terms of normal recurring SG&A costs, Legal defense fees were elevated during the three-month and full-year periods as we continue to incur costs to defend ourselves in these matters. As for the financial position, we continue to have a very strong financial position with $72 million in cash balances. We generated operating cash flow of $10 million during the year. And although tempered, we continue to make $7.3 million in capital investments in our business, including expanding magnet-making capabilities. We maintained our dividend in the year, and we returned $11.3 million to NEO shareholders throughout the year. We also repurchased $3.1 million of shares through our NCIB program. As mentioned earlier, we anticipate that we will be investing in working capital in early 2021 with higher rare earth prices generally, but with the $72 million in cash and very little debt and a history of cash flow generation, we are comfortable and confident that we can make the necessary investments to continue to grow our business. With that, Amy, operator, please open the line for questions.

All right, this time, ladies and gentlemen, if you would like to ask a question, please go ahead and press star, then the number one on your telephone keypad. Again, that is star one to ask a question. Your first question today comes from the line of Yuri Link with Canaccord Genuity. Please proceed with your question.

Good morning, guys. Good morning. Constantine, great quarter. Just with the higher rare earth prices, when does it start to hurt magna quench and its ability to displace heavier materials that are usually less expensive. Are we at that point? Is it something we need to worry about in terms of potentially impacting volumes as we go forward here?

Thanks, Yuri. I'm not sure I fully understand the question. Are you referring to heavy where it's being replaced by the NQ3 type magnets that our powders go into or the typical replacements gain in the industry between neomagnets and different types of magnets.

Exactly, yeah. More especially against ferrite.

Yeah, yeah. Clearly ferrite is an expensive material and makes lower cost magnets, but ferrite historically cannot achieve the type of performance that the neomagnets can. I mean, I mentioned the high torque precision motors that go into industrial robots, and these are right across the board. Automotives, you know, appliance, as well as semiconductor foundries. You can't get there with that. Or, you know, if size and weight is at a premium, as well as performance, precision, are at a premium, then you really don't have the option to go to fair. However, you know, as I said, you were covering us back in 2011, and I did say that I think the industry is running the risk if with the pricing of our materials, we are providing a strong incentive to very smart people, very smart engineers with very deep pockets to design rare-based technologies out of the end applications. And in 2011, we clearly got into that stage. We're not there yet. Again, I don't think there are any hard and fast rules. However, I still think that there's a little bit of room for neodymium and crazy neodymium prices, perhaps a little less so for dystopian and terbium prices to continue to rise. But I don't, as I said in my comments, I don't see the panic that I saw in 2011 where driven by a concern of keeping plants operating because of the export restrictions, people were just paying crazy prices. I just don't see that. I think the industry has learned its lesson. I think the regulators... in the largest market, in the largest production base in the industry in China have learned their lesson. I don't expect to see the type of crazy prices like we saw in 2011. But again, I don't have a crystal ball, but I do see a greater degree of discipline in the market, which also is being affected by the fact that Linus and NP Materials are large producers supplying both raw materials and separated products into this business. So the industry structure and dynamic is very different than 2011, and I also don't see sort of arbitrary changes bureaucratic interference to control either supply or prices. So I'm a bit more optimistic. I still think that in a nutshell, and if you let me talk, I'll keep going for hours here, which I promise not to do, but I don't see the same dynamic as 2011. Yes, there are concerns. Yes, there's a bit of pain, but keep in mind that MagnaCrenche adjusts its prices. Most of our business is on a quarterly, price adjustment formula. Some of our businesses are monthly formula. Other is on six-month formula and the like. However, we can pass our price increases through. And to the degree that Magniquent continues to be almost, you know, nothing is completely indispensable, but they're close to being that. I think we will have the ability to pass the price increases on. We don't like it. We don't want to do it. In fact, the more expensive the magnets and the motors with these magnets get, the less competitive they are to alternative technologies, and that's an envelope that I think the industry as a whole should be smart not to push too far. But on balance, what I see over the next... few months within our ability to forecast our business. I'm not too concerned about the overall competitiveness of the industry.

Okay. Thank you, Konstantin, and congrats on a good quarter. I'll get back to you. Thank you.

And again, ladies and gentlemen, to ask a question, please press star 1. Your next question comes from the line of Mark McGill with Scotiabank. Please proceed with your question.

Hey, good morning, guys. Thanks for your time. I guess I have some bigger picture-type questions on the production agreement with Energy Fuels. I apologize. I may not have sequenced them properly, but I'll give it a shot. So I guess, you know, NEO and Energy Fuels, I guess there's other industry players. You mentioned Linus and MP Materials. the fact that you're trying to create a vertically integrated supply chain that doesn't exist outside of China. I guess my first question, do you think the market's big enough and they're growing fast enough to potentially support multiple vertically integrated players? And maybe the better question is, is there a significant personal advantage to whoever can do it?

Great question, Mark. The First of all, Linus has been part of the industry and its supply chains for almost a decade. So the Linus production is really not new. Mollicorps, sorry, MP Materials, the old habits die hard, I apologize. MP Materials has been doing this for over a year now. And, of course, all the mineral concentrates all the basins I concentrate go to China currently, but when they start separating in California, that will change, of course. At that point, which I expect over the next one to two years, we might see perhaps a slight oversupply by today's standards, but When I also see the demand growing, both inside and outside of China, primarily driven by EVs, Mark, I'm not too concerned. I think the world will need a lot more supply of rare earths in order to get to where the planners and the major industrial players want to get to. So that doesn't keep me up at night. On the other hand, NEO and Energy Fuels, our deal is very small. It's disciplined. It's highly capital efficient. And it's very low cost. You know, this is when I keep harping to the point where it gets tiring at times, I'm sure, about the extremely low capital efficiency or high capital efficiency, low capital intensity of our project. It's, you know, we followed, if you want to think about it that way, a very Chinese model of putting this project together. Byproduct economics at the mining resource extraction step, just like Balto Steel has been doing for three decades in the Inner Mongolia, taking the byproducts from higher north, where the mining costs are essentially paid for by different operations. You end up with the rare concentrates in your tailings. Similarly, Timors in Georgia have been stockpiling the monazite for years because the primary source mining operation recovers zircon and imonite for titanium production. So you start with a very low, you know, I don't want to call it zero, but very low cost mining operation at the front end. Then The rarest and the byproduct uranium are extracted by energy fuels using available capacity, and there's lots more available capacity there. And finally, this product is going into our SILMET facility, which over the last year or so has been operating at about 75% capacity simply because we couldn't get any more material by our current suppliers there. So this is the combination of very, very low mining costs. when utilizing available capacity where you don't really need to spend any capital of any significance and then driving plants to operate at higher throughput really provides very powerful economics. What happens when we take this to the next stage with some more energy fuels and NEO, clearly we will have to spend some more capital But the fundamental operating costs that involve zero or close to zero mining costs using available capital equipment in energy fuels to provide probably the lowest cost of material out there will continue. In fact, the bulk of the operating cost is transportation more than processing. In a nutshell, Mark, again, I don't think there's – I'm not concerned about creating an oversupply outside of China. And what I would add, as Rahim said and I said earlier, what we see now is a pricing environment for rare earths, primarily for magnetic rare earths. that is very, very much demand-driven as opposed to what happened 10 years ago, which was a supply-restricted pricing behavior. So as long as the demand continues, as long as the world needs more EVs, better, more efficient EVs with longer ranges – I think neodymium-praseodymium magnets provide the ideal solution to that. So, you know, I tend to be a bit more bullish about EV growth and its effect in the industry than I have been with pretty well most other applications over the last 30 years.

Got it. Maybe if I can ask a follow-up question then, Konstantin. I'll volunteer because it's a bit of a long one, but I want to get it all in. But there's, I guess, I'm just curious sort of where you think or how you think sort of NEO best fits sort of in the supply chain outside of China. Is it selling separate or rare earths? Is it sort of downstream magnets and magnetic materials? So, you know, maybe another magquench type facility in Europe? And sort of, I guess, your views on how important it is to be vertically integrated or to own the feedstock? And I guess the flip side, you know, talking about the know-how and the risk involved in others moving downstream, not NEO, but the others. in terms of figuring out the separation, the molecular manipulation, getting qualified with customers, how long that takes, and maybe just trying to understand the barriers that are around your business. I apologize for the length, but yeah.

Well, it's a loaded question, so I apologize ahead of time for probably giving you an answer that's too long, too. Listen, I've said this before, but needle, we do. what our customers need us to do. So right now, and as I said in the third quarter call back in November, our customers are really trying to convince us to establish additional rare earth production capacity in Estonia, as well as start doing more in the downstream part of that supply chain into rare earth metals, rare earth alloys, and raref magnetic powders and magnets. Now, it's one thing for our customers to be pulling us in that direction, as well as the regulators and the policymakers in Europe, but it's a completely different proposition for us to want to do that and be willing to make the investment. I mean, at the end of the day, we will do whatever our customers want us to do as long as we can make money doing it. The two need to go hand in hand. So this is sort of the phase of the evaluation we are at in order to be looking at all of these opportunities. So in the fullness of time, ideally, CILMED will be a bigger facility, perhaps two times bigger, three times, maybe separating heavy rare earths, as long as the right supply arrangements can be secured. So I do see doing more in Europe. It remains to be seen how far down our already existing internal supply chain from rare silverweight to magnets where we will go, but we're looking at all the opportunities. We will be not only opportunistic, but also long-term greedy. I mean, we need to provide a proper return on capital for our investment as well as, you know, a sustainable economy. long-term growth. In the industry, it's not all that easy, especially when you are competing against large companies that dominate the space, especially in China. I think there's room for cooperation with exploration companies around the world. There's room for a lot more to do with our friends at Energy Fuels. And there's, of course, room for the supply chains to cooperate, even with some of our Chinese competitors or other folks who are going down that supply chain. At the end of the day, when you look at the macro picture related to supply chains, this is a conclusion that you don't only reach for rare earths. But, you know, the world will need to produce a lot more rare earths if we're going to achieve decarbonization and 100 million of EVs produced per year by 2030, 2035, whatever the target is. So you need a massive increase in the supply of rare earths and the downstream products around the world. You will also need a lot more copper, a lot more cobalt, a lot more lithium and all that other and all those other resource-led materials that are critical for the production of EVs. So I'm looking at this as a massive opportunity, and we will take it as far down as we need to to keep our customers happy, but also by making sure that we will be making money while doing this. Sorry, I hope I wasn't too immersive, but we will do what makes sense for our customers and for our shareholders.

That's great, Constantine. I'm interested to finally leave it there, but I appreciate the time. Thanks. Thanks, Mark.

Your next question comes from the line of Frederick Baskin with Raymond James. Please proceed with your question.

Good morning, everyone. Good morning, Frederick.

Constantine, I appreciate that you're only a few weeks into your supply agreement with energy fuels, but could you give us a sense of how things are going? And as you look forward, what are the potential pitfalls that you need to be mindful of?

Pitfalls? Jim, you really want to hit on the negative side. Right off the bat, that's a fair question. Right now, honestly, the one of the biggest problems we're facing, not just us, but all supply chains, is logistics problems. You know, it's tough to get containers to move between production and jurisdictions and where the demand is. Delays in shipping, congested ports. If you're shipping or if you're receiving anything through the port of Long Beach, In California, you're probably adding two to three weeks, if you're lucky, to your times. So, you know, the more immediate challenge is, you know, as supply chains are sort of digesting, you know, going from severe limitations during COVID and then exploding into a growth pattern that we haven't seen in a while. macroeconomists, at least from what I've been reading, tend to be very bullish for 2021 and GDP growth. All of that will put a lot of stress on supply chains and especially logistics. In terms of the rest of the challenges that the Energy Fuels meal arrangement will face, I'm really not To concern, we've been working, the two companies have been working together since last spring, and even though we managed to put this in an extraordinarily fast way, as I said in my comments, you know, Energy Fuels has extremely capable and smart chemists and chemical engineers, just like we do. So we've been dealing with technical problems all along, but Energy Fuels now has received a large quantity of monazite from Chemours, and they're in the process of turning it into finished uranium and mixed rare earth carbonate to ship to Soma. So we're going through that. So I do expect the first four container shipments to start either by the end of the second quarter or shortly into the third. And it's all going according to plan. I'm not seeing any extraordinary difficulties out there. And it's simply because both companies, both Neo and Energy Fuels, we've been doing this sort of thing for a long time. So it's not like we're taking a walk on the wild side here. It's the stuff that we do every day. We're just doing it in a new way. And, again, this is – as I mentioned earlier, this is not something that keeps me up at night. So I don't really see anything insurmountable in terms of what energy fuel is or what we're trying to do.

That's great to hear, Konstantin. Didn't mean to play on your parade here. The next question I have relates to, I mean, you mentioned that you potentially see energy you know, the CILMET facility potentially doubling, even tripling in size with respect to its capacity. At which point would you start making that decision to increase the capacity? And the related question is how expensive or how capital intensive is it to expand the manufacturing capabilities there?

Again, another good question for other CABs. Clearly, from a demand point of view, we see the opportunity to expand so much by a factor of two, three, four. The European policymakers have made it very clear to us that they consider rare earth production in Europe and raref magnetic materials and magnet production in Europe to be of critical importance. For the newly formed European Raw Materials Alliance, an EU-sponsored body, the two highest priorities are raref and raref magnet production in Europe. That is one of the fundamental reasons why I'm pretty bullish about Cilnet, and I did say that it's a very strategic asset since it's the only raref production site in Europe, which means that the skill set is there, the institutional memory is there, the capabilities are there, and whenever you try to install new capital equipment and install capacity, it's a lot less costly to do so on an incremental basis, adding to the existing infrastructure, as opposed to a greenfield expansion. So, I would see the opportunity to at least double SOMET. Now, that will depend on energy fuels, ability to secure additional monazite streams to increase its capacity, to increase its output of mixed rare earth carbonate. It will depend on solar camps, magnesium works, being able to squeeze out a few more tons of the raw material that have been supplied to us for the last 30 years. Plus, depending on whether we decide to go into heavies, heavyware, it will depend on our ability to identify enough producers or emerging producers in South America, in Australia, elsewhere. And keep in mind that the energy fuels suite of rare earths in that stream that we're getting does have significantly elevated heavies. But right now, SOMET does not separate those. So we'll have to take into account the availability of raw material. The capital cost, I would expect, for example, to double SOMET from 25, 2800 tons a year REO, which should be something in the, again, don't hold me to this, But notionally, in the 50, perhaps as much as $100 million, I would expect to be lower, closer to the lower end. So these are not decisions that we take lightly. We need to ensure that the return will be there, the appropriate return will be there for the capital that we will invest.

Awesome. Thanks for the call, Eric. Exciting time to have. Thanks. Indeed. Thanks, Eric.

Your next question comes from the line of Mark Wall with Clomark Securities. Please proceed with your question.

Hi, Constantine. With Neil historically being really close to the customer in terms of his product design, as your materials are giving them so much of their capabilities in the product, how far are you along in those relationships now? when you're looking at Europe and European operations? Are you already well-advanced in the development of actual products using your materials, or is that something that will take, you know, a year or something of that length?

Thanks, Matt. Good question again. Europe has been a big market for both Magnique and C&O. Of course, we have metals. It's a primary market as well. So the relationships are very close. A lot of the product design and development historically has been done together with our European customers. And when you look at the folks that we supply, they're all global names, tier ones and OEMs. And in fact, We supply them in Europe. You know, the Unicors and the Johnson-Matthews and the BASFs of this world, for CNO, as well as the Bosch, Brose, Siemens, Grundfos, Schaefflers of this world, for MagniQuench, are all headquartered in Europe. But they're all global players. So we supply Unicor in Europe, in Belgium, in Poland, We supply them in Burlington, Ontario. We supply them in the States. We supply them in India, in Korea, in Japan, and in China. So when we work closely with our customers, it's not always with a European focus in mind because these applications are global. And in turn, they... supply OEMs and their customers on a very global basis. However, what is going on in Europe right now is unique because you have an extraordinary confluence of regulatory incentives as well as industrial priorities coming together in a way that I haven't seen in a while. And that's another reason why I'm pretty bullish about Europe. So the conversation we're having is mostly with customers of ours that have been customers for over a decade. With Bosch, for example, we make magnets for them. We make magnetic powders for some of their other magnet suppliers. So the conversation we're having around EV-related expansion is all within the same context. So we're not reinventing the wheel radically. Now, Magniquench will have to sort of expand its capabilities in the magnetic space in order. If we go in that direction of larger centered EV magnets, but it's not like doing something that we've never done before. We are probably the world's premier magnetic and magnetic materials technology experts. So the route to making the right magnets for in question around the EV supply chains is not a terribly big or risky leap. In terms of the timing, I think it's going to take longer, I think, to come up with the right economic slash return formula in discussions with industrial and government partners in Europe as opposed to figure out the technology. So I'm pretty optimistic that given the level of discussions that we've had so far and the planned discussions for the next few months, I would expect that we should be making a decision by the end of the year which way, which direction we're going to go So, yeah, it's not an overnight phenomenon, but I think it'll take probably 2021 and 2022 to put the actual industrial infrastructure in place. So, and be in production, so sort of 2023 type of timeframe. But we're not there yet. We still have a lot of work to do. And as I said, most of that work, is at the front, and the challenges right now are not the serious challenges and not the technical challenges. The serious challenge is finding the right way to go into this and do so while achieving an appropriate return on our capital. Okay.

Okay, so it sounds like it's not a situation where it's cannibalistic, like demand in Europe, if it's from the same customers with very similar products you've already been building with them, it's not a situation where it'll be cannibalistic to your operations in Asia and out of China because they're saying, look, don't send us stuff from China. If we're going to grow, it better be domestic. So it's growing in addition to and they just don't want that necessarily to come from the sources that they're currently getting. Is that fair?

Correct. The growth that we see in Europe is totally additive to everything else that we're doing, and it's incremental even though it could be big, but it's still highly synergistic with what we're doing and totally additive to what we're doing. Okay, I understand.

And then my second question is just maybe to Rahim. I'm just looking, I'm wondering about the write-downs. I went back and read, like in the rare metal segment in Q419, you wrote about less inventory in the system. And then in Q1, noted the majority of the IPOC historical raw material has been used in production with only a small amount remaining. So what's happened here is that the balance of 2020, it got worse. Or is there a mix issue? Or I would have thought you would have had even cheaper purchase inventory.

No, I think you've raised a really good point, Mac. And, you know, you hate to tie something to COVID, but it really is what had happened here is we were running down inventory in the back of 2019. And in the first half of 2020, we were using kind of a lot of our older inventory and running it down too. When we needed to kind of restock inventory, I would say through 2020, our suppliers were having COVID supply chain issues. So we ended up with, let's say, extraordinarily high purchase of inventory, kind of just at the end of Q3 type timeframe. And then so we were purchasing an extraordinary large amount of inventory because we had no sense of regularity of shipment. And then, unfortunately, the price of the finished good price really fell off in Q4, October, November, December. So rather, I don't want to say unfortunate. I mean, there's dynamics that are tied to COVID. You know, it's true that, you know, our purchasing at the end of the year is probably higher than it should have been. Given the environment, those are a number of things that are associated with the root cause and some of the corrective actions that we're going to put in place. But a lot of it was rather unique circumstance around COVID. Okay.

And just to follow up on that, do you think by the end of this year, then, if you were in a stable volume environment, like let's just say things don't get worse, but in the rare metals, you're kind of hovering where they are, you've taken the right down, you might be pretty lean in your inventory. Do we actually see by Q4 or something, a pretty good improvement in margin at rare metals? Is that possible on flat volumes?

Yeah, look, I think it depends on what we define as pretty good. If we're defining it against 2020, then the answer is absolutely. If we're defining it against historical periods, I would say that I don't quite see an EBITDA profile that looked like kind of some of the historical periods in the past. So, I mean, both of those are kind of lower EBITDAs than we would be targeting for that business. So, I guess whichever metric I give you is going to be lower than our expectations. but certainly better than 2020, but perhaps not recovering yet in terms of absolute dollars to, you know, the numbers that we would have had in 2017 or 18. Okay, that's helpful.

Yeah, that's helpful. Thank you. Thank you.

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