Neo Performance Materials

please stand by we're about to begin good day and welcome to the neo performance materials inc 3q 2021 earnings announcement conference call today's conference is being recorded at this time i would like to turn the conference over to ali madavi please go ahead sir thank you operator and good morning everyone thanks for joining us this morning to review neo performance materials q3 2021

financial results. On today's call, I am joined by CEO Constantine Karyanopoulos, who will provide opening remarks, and Rahim Suleiman, NEO's Chief Financial Officer, who will give a short overview of the company's third quarter results, which were published on November 8th. 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, adjusted EBITDA, product volumes, product pricing, other income and expense measures, cash returns, and future business outlook, including potential expansion plans. 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 this month and are also available on our website. NIO 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 the conference call. Further information regarding NIO's use of non-IFRS measures is available in NIO's Q3 2021 earnings press release which is available on CDAR and on our website at neomaterials.com. Let me now turn the call over to Konstantin.

Thanks, Ali, and good morning, everyone. We're hosting today's call slightly outside of the typical pattern due to the completion of NEO's recent $100 million bought deal, which we announced its closing two weeks ago. Our third quarter financial and operating results were filed and published in early November, as Ali noted. In summary, we reported 119.8 million of revenue and adjusted net income of $9.8 million. We reported adjusted EBITDA of 17.7 million. And over the past 12-month period, our cumulative sales revenue is just shy of $500 million. This is an encouraging milestone, particularly while some supply chain disruptions continue across the manufacturing sector. Rahim will provide a bit more color on our third quarter results. From my perspective, I would note that current operating trends are in line with our expectations in what remains a strong market environment, despite the headwind continuing to face both the automotive industry the semiconductor sector, and general supply chain issues globally. In short, we continue to experience strong demand for NEO's rare earth and magnetic-based materials, and we're doing everything we can to maintain the reliable shipment of products to our key customers around the world. As we come to the close of 2021, it's a natural time to reflect on the past year and envisioning its future. The strength of our business is a direct result of years of investment in producing high quality, highly engineered specialty materials that meet the demanding needs of our very sophisticated customers. We have developed new technologies and products, and we strive to provide excellent customer service to deliver upon those. We've been around for a few decades now, and as we assemble the rarest and advanced materials company for the next few decades, we're keeping those values at the forefront of all of our strategic initiatives. Over the past year, we've been diligently working to advance four core business goals. First, protect, strengthen, and grow our core business. Second, expand through innovation, into next generation technologies and products. Third, expand and diversify our geographic footprint in order to capture growing demand for specialty rare earth products in Europe and globally. And fourth, improve our global sustainability leadership. These are the four core pillars of our growth strategy. Given a current macro environment that strongly favors the adoption and acceleration of sustainable technologies, NEO is certainly working from a position of strength, as many of the products we make are essential to the functioning of a wide range of green tech. A key example of this growth strategy is the revitalization within our rare metals business unit. Following multiple years of mid single digit EBDA margins, Our team underwent an extensive and systematic approach to improving that business unit's economic model. And through those efforts, we have been able to secure reliable sources of additional raw material feedstock. We launched several engineering projects to improve our operations efficiency. And we have identified several new paths to commercialize new products and access new markets as the recovery in the aerospace market, our main market for the business unit, continues. I've been pleased with the results so far. Rare metals recently improved its EBITDA margins to double-digit levels, and we're setting a path forward for capacity expansion and allocating more of our capacity to value-added technologies. I want to express my gratitude for the hard work, dedication, and commitment from our team members around the world in that business as well as all the business units for driving these initiatives forward. Similarly, we've been executing upon operational excellence initiatives within both our MagnaQuench and chemicals and oxides units. Within MagnaQuench, we have expanded our operating capacity for bonded magnetic powders, and we have been growing our capacity to manufacture compression molded magnets. Within chemicals and oxides, we're working to diversify our raw material feedstock for all of our plants, but with particular focus on our operations in Europe. For example, during the quarter, we started to process that new raw material supplied by energy fuels, which originates in the United States as a byproduct of other mining operations, as we target expanded capacity and operating rates. Later in the quarter, We started receiving shipments at one of our plants in China from a new heavy rare earth mining operation in Vietnam. We expect more shipments in the new year. Across all of our business units, we're proud of the strong health and safety culture that has been established over the years at our various manufacturing sites around the globe. As we look to the future, I'm cognizant of some major trends that have been accelerated as a result of the COVID pandemic and supply chain trends. Our customers have been clamoring for localized supply chains and sustainably produced materials that meet the world's leading environmental, social, and governance standards. We're carefully listening and incorporating feedback from our shareholders in terms of ESG initiatives. We're also hearing directly from more and more customers who are hungry for verification and validation of their transparent upstream supply partners. As we think through innovation and long-term business planning, ESG will be at the center of everything NEO does. For example, earlier this year, we became a participant in the United Nations Global Compact, the world's largest corporate sustainability initiative. and we committed to implementing the Global Compact 10 principles on human rights, labor, environment, and anti-corruption. We also recently joined the Responsible Minerals Initiative, which serves as an umbrella organization designed to support responsible mineral sourcing. We've always served as a trusted, reliable partner for our customers around the world. We serve our customers through a geographically diverse production footprint We not only want to meet our customers where they are in terms of their ESG practices, but also lead our supply chains to where we all need to be. This approach has led to several significant advantages by means of NIO's critical infrastructure. As the world's only rare company that operates parallel supply chains both inside and outside of China, we are uniquely situated to understand the pressures and rapidly changing dynamics of upstream advanced material supply chains. The twin crises of global supply chain bottlenecks and constrained semiconductor supply have spotlighted the risks of centralized logistics channels. This has accelerated the needs of many of our direct customers in the automotive and electronic spaces and their OEM counterparts to source locally, to rely less on ocean freight, and to prioritize responsibly sourced materials that incorporate circular end-of-life strategies. NIO has already integrated material recycling in several areas of our production operations, including our rare earth magnetic materials. Many of our top strategic plans for growth involve expanding our nameplate capacity in Europe to serve increasing demand in the region. By nearly all measures, global vehicle electrification is going to drive enormous increases in demand for permanent rare earth magnets. Not only would magnet customers need additional supply, but they will also require greater geographic diversity of supply in order to minimize supply chain risk. This is what we're hearing very directly, in fact, loud and clear, from our OEM and Tier 1 customers, especially across Europe. They've told us in no uncertain terms that they want to see NEO expand their operations in Europe into the production of rare metals, alloys, and permanent magnets. Fortunately, we're extraordinarily well positioned to respond to this increasing demand. In Sillame, Estonia, we run the only commercially operating rarest operations facility of its kind within the European Union. The strategic importance of having existing infrastructure, including a large operations base located on the Baltic Sea and a highly skilled labor force, is crucial. to accelerating a large-scale project, such as expanding into alloy and magnetic manufacturing within Europe. Moreover, our rare earth separations facility in Estonia has in the past produced rare earth metals, and it is producing tantalum and niobium metals. That capability could be rapidly restarted. Additionally, we make rare earth metals through two joint ventures, one in China and one in Thailand. and we produce rare earth iron boron alloys in China and Thailand. So while our MagnetQuench division is a global leader in the production of bonded and hot deformed rare earth magnets and magnetic materials, expanding our operations to produce centered rare earth magnets is not a big leap for NEO. The alloy jet casting process that we have invented and perfected at MagnetQuench is actually a very similar but much more severe and demanding process than the strip casting process used in the production of centered magnet alloys. We have a large number of people in NEO who are highly skilled in making centered magnets, and we're exploring partnerships with potential state-of-the-art partners who already produce sophisticated centered rare earth magnets for the EV space globally. For us, the centered magnet space is a relatively low risk with a strong market demand that appears evident at this point, and with the emerging government support. It also presents us with a global market that is an order of magnitude larger than the current addressable market for MagnaQuench with all the opportunities that this brings to the table. As we're working our way around managing the technical risk of such a project, we're staying very focused on also minimizing market and financial risks. We expect to turn the expression of strong interest by European customers and their customers into contracts once our sampling and qualification process gets underway in the new year, which will help minimize the market risk. Similarly, our expectation, one that is shared by OEMs and Tier 1 suppliers at this point, is that the European Union and the Estonian government will help NIO and the supply chain with shared funding to address the financial risk of such a project. Both elements are absolutely vital to any decision by NIO to allocate the capital required in this effort. They're also vital to the long-term commercial success of any such venture. That's why I'm especially thankful for the assistance and vision of key stakeholders, including the Estonian government and its Ministry of Economic Affairs, for their commitment to securing financial and other assistance to our project at all levels within their control. Gaining alignment through public stakeholders, such as the European Union, customers such as OEMs across the automotive, aerospace, and wind energy sectors, And our local teams on the ground is a critical and rewarding effort. We're very encouraged by efforts from all sides to date and look forward to continuing to move this process forward to a successful outcome. In addition to potentially expanding production of separated rareth oxides in Europe and moving further downstream to produce rareth metals, alloys, and centered magnets, We're also examining potential long-term expansion in other regions, including North America. While the auto industry in the United States and Canada is moving toward greater vehicle electrification, I think it is fair to say that the North American industry will likely lag its European brethren in terms of public charging infrastructure, local government commitments, and general customer adoption over the next couple of years. That said, I fully expect North American manufacturers to catch up. That will provide NIO with additional opportunities for potential expansion. While final decisions on these and other expansion plans have not been yet made by NIO, I remain optimistic that market conditions, new and expanded options on rare earth feedstock sources around the world, Rarer separation in North America and necessary government support can come together to allow these investments to proceed in a manner that makes these projects attractive to all stakeholders. A recent primary capital raise of $50 million Canadian is largely intended to support this type of growth and expansion. As we look at servicing all of our customers globally, we will continue to invest in our businesses to ensure a strong return on shareholders' capital. Further, we will seek to protect and grow our core business and incorporate sustainable technologies where appropriate. For example, we're in the process of revitalizing one of our primary operating facilities in China. This project will modernize its infrastructure, improve our operating efficiencies, and ensure a stable manufacturing site for next-generation environmental emission catalyst technologies within the chemicals and oxides business units. The products manufactured at this site are essential bridging technologies for hybrid vehicles as electric vehicles continue to grow through both public infrastructure and consumer support. The complex catalyst systems required on these hybrid vehicles are expected to continue to evolve through the adoption of the very tight Euro 7 regulations and related global standards and to be in place largely for the next several decades. In closing, The operating and market environments for rare earth and rare metals-based materials remains quite robust. Magnetic materials, in particular, have been reaching sustained heights this year amid growing end-use demand and short-term supply chain disruptions, including consolidation within China and the global shipping crisis. That said, the micro-trends towards the use of sustainable technologies requires a thoughtful view to responsibly source materials. We look forward at NIO to continuing our efforts to ensure high quality materials for our customers and to deliver the key technical customer service and innovation required to develop next generation technologies. And with that, let me turn the call over to Rahim.

Thank you, Constantine, and good morning, everyone. We are well into Q4 now, so we won't be going into too much detail on the Q3 results today as those results were released about a month ago. although we will be happy to take questions and elaborate as necessary on those results. But allow me to touch on the major highlights and to bridge some of the market trends that Constantine referred to within our short-term results. The trend this year of higher and volatile rare earth prices continued through Q3 and to date. And as we have stated in the past, although we do not rely on commodity price movements for our value-add proposition, volatility in the short term does impact our results. MagnaQuench, continued to see strong volumes in the quarter, but those volumes were tempered by the semiconductor chip shortage that everyone is well aware of. We clearly see changes in some customer purchasing behaviors and many customers have directly attributed those short-term changes to the lingering semiconductor issues. The impact extends not only to our automotive platforms, but also to many of our non-automotive markets. Despite these relatively soft ordering patterns, gross margins at MagnaQuench remain healthy, as MagnaQuench is benefiting from some lead lag impacts on which we will elaborate within C&O. In C&O, our environmental catalyst business also saw relatively slowing orders in automotive and again tied to the semiconductor chip shortage. The recent slowdown is broad-based across the industry, without any adverse trends related to our specific customers, programs, or regions. On the other hand, the rare earth separation business remains extremely strong. Of course, this business is most impacted by lead lag, but higher prices for rare earths allow for more dollar value margin in the separation business, in addition to where we have low cost inventory on hand in the short term. The price increases are primarily seen across the magnetic elements. And as we have discussed, magnetic rare earth elements are critical in a number of future facing technologies, including energy efficient motors, sensors, and traction motors for electric vehicles. Konstantin mentioned the improvement and strength in our rare metals business. Past efforts to diversify end markets, add customers, engage in operational excellence activities are all starting to see benefits in rare metals. Of course, the growth plan won't be linear. and price movements and lead lag will also impact short-term results. But we are seeing recovery in market demand, expansion in the end markets where we participate, and improved and systematic improvements in our operating performance in this business unit. Our cash balances remain healthy, and our ability to generate cash remains consistently strong, even before the recent Treasury offering that is supplementing our cash balances and targeted at future growth initiatives. Notably, our inventory balances and working capital balances are up considerably in the quarter and in the year, and this is primarily attributed to the higher rare earth prices. We are very pleased with the financial performance of the company and the path of continued growth that we see ahead. In the nine months ended September 30th, 2021, we generated $62.3 million of adjusted EBITDA, Of course, comparison to the prior year of $16.6 million doesn't seem very relevant, but even as a comparison to 2019, where we earned $41.3 million in adjusted EBITDA, we have grown adjusted EBITDA about 50% across all three business units. And now we will open it up for questions.

Thank you. To signal for a question, please press star 1 on your telephone keypad. Also, if you are using a speakerphone, please make sure that your mute button is turned off to allow your signal to reach our equipment. Once again, it is star one at this time for questions, and we'll pause to give everyone the opportunity to signal. We'll take our first question from Yuri Link with Canaccord Genuity.

Hey, good morning, everyone. Morning, Yuri. Good morning. Konstantin, as you contemplate the new manufacturing capacity in Europe and Estonia, what kind of timeline are we looking at and what should we be thinking of in terms of potential capital outlay?

Yeah. Thanks, Yuri. As we expressed in And I joined press release with the Estonian government. And as I mentioned in my comments, we're trying to sort of minimize and manage market risk, financial risk. And the fact of life remains that this industry is dominated by very large Chinese producers of magnets into Europe and into North America as well. So in order for any new investment to make sense and provide an acceptable level of return to whatever private capital is invested, it's inevitable to conclude that there will need to be government assistance. Similar to, as I mentioned in previous calls before, if you look at what the European Union did around batteries, For EVs, there's been a massive level of government assistance to every single battery producer that is building gigafactories in Europe and primarily in Germany. So we feel that based on the current programs that we have been discussing with the government of Estonia and the EU and the expectations of the Estonian government for the timing of the process, to reach its natural conclusion. We would expect to be seeing some meaningful developments in the first half of next year. So again, at least that's my expectation now. If things change, we might have to push that forward back. But I would expect that by sometime in the first half of next year, we will have some specific and committed expression of support by Estonia and the EU. at which point we will make an investment decision to commit to that project. So first half of the year is when I realistically expect it. It might slip a quarter. We're not in control of government processes, but I think realistically that's sort of the time frame. And then, as I mentioned in my comments also, I would expect North America to follow suit over the next, year or so, but we're not really in any meaningful conversations with Canadian or U.S. governments at this stage, but I do expect that as the demand grows stronger in North America, we will probably be engaging in specific discussions about doing something similar in North America, perhaps another two, three quarters later. I don't know if that answers your question, Yuri, but again, I would expect something in the first half of the year, optimistically or cautiously optimistically, but definitely within 2022, we should be making funding or an investment decision about Estonia.

And the potential move into sintered, is that necessary to further penetrate the EV traction motor market beyond where your current bonded formulation can take you?

Yeah, absolutely. That's the main driver of demand in the rare earth industry. It's EV traction motors where you go from, you know, for a small electric motor, you You're looking at something in the order of a kilogram to a kilogram and a half of neodymium monoboron running about a third or 30% rare earth metal to something in the order of two to three, perhaps more, kilograms of magnets for the larger models that have multiple motors in their dry train. Clearly, all the analysis that we have done internally and all the analysis that we've seen from credible analysts suggest that there will be an excess of demand over supply for both rare earth elements, but also in the jurisdictions where these materials and devices are needed, there'll be a shortage in manufacturing capacity. With the help of our customers, as I said, we expect that the market risk will be minimal. But clearly, our product offering currently addresses smaller motors in the automotive sector. The biggest one might be an electric power steering motor, which would have a magnet in the order of 40, 50 grams. But These electric traction motors would have four, five, six magnets totaling about a kilogram each, as I mentioned. So this is clearly technologically advanced, but also the fastest growing market for magnetic applications in the industry. So naturally, we're gravitating towards that. given our experience in serving the needs of our automotive customers where you know half of our revenue comes from automotive and it's the same people that that buy magnet quench magnets and magnetic materials that also are the big drive train producers i think it's a very good fit for for magnet quench okay i'll turn it over thanks guys thank you

And once again, it is star one for questions. Moving on, we'll go to David Ocampo with Cormark Securities.

Thanks. Good morning, everyone. Good morning, David. Constantine, you touched a lot on potential developments, and you guys do have quite a bit of cash on your balance sheet today, especially if you include their most recent offering. How should we be thinking about leverage going forward, and how much capital does that give you to deploy and deploy kind of building on that, do you guys have sort of an IRR threshold on any new potential investments?

Well, we're always looking at a number of initiatives, David, and leverage is not a bad thing, but given our footprint and nature of operations, it's perhaps a bit more challenging for a company like NIO. However, as we see the footprint transition into more EBITDA and cash flow generation from Europe and perhaps eventually North America that we expect that will shift. Rahim and his team are working very hard trying to get some working capital type loan facilities in place. For phase one of our European facility, I think we have all the cash that we need. However, there will be opportunities to explore low-interest loans and such, in which case we will take a look at that. But for now, I think we're okay to fund all of our capital needs. But I'll ask Rahim to also talk a little bit about all of our other leverage efforts and raising debt around the world.

Sure. Thanks, Nassim. Hey, David. Look, I think that we are – targeting a desirable amount of financial flexibility in each of the regions, and we will get debt instruments in various regions to support that level of financial flexibility. I think this offering and kind of the strategy with the cash that we have gives us flexibility to do a number of different things simultaneously, because I think there are a number of different things on the board and available to us But we also needed kind of the strength and the demonstration to the governments that we're working with that we have the financial wherewithal to make significant investments. So it all kind of ties together in an overall strategy. But I do think that, I guess, just to summarize, there is debt capacity that is available. We are comfortable getting a certain level of debt. We are not loading up by any means. But we are also managing the number of different opportunities that we see ahead of us.

And when you talk about...

David and Tali, just one point on that. From a balance sheet strategy perspective, and to complement what Reem just said, as you look forward, the evolution of the balance sheet, what I would qualify in a perfect world as we execute the strategy in Europe and EBITDA growth happening in Europe and North America over time, then the leverage can be put in place based on that EBITDA growth in those geographies, which If you look at it, ultimately it's going to be, you call it eliminating the lazy balance sheet scenario for obvious reasons. And as Rahim pointed out, we're, you know, as a team, as a company, we're conservative. So you're not going to see aggressive leverage, but there's going to be healthy leverage, which is going to adequately then satisfy whatever we need going into the future.

Yeah, that's great color. And Constantine, you talked a little bit about how the sintered magnet base is dominated by large Chinese players. And presumably you guys do some business with them through your chemicals and oxide business. Have you heard any pushback from those customers with you guys going further downstream?

No, the short answer is no. Besides, in all of our discussions, which unfortunately we can't have those face-to-face discussions, these days with Chinese partners, regulators, and so on. My take on how China works perhaps is slightly different than the current narrative, but, you know, this is a big market. There's a vast demand. And, you know, I recently spoke in October, actually, at the annual RARIF conference in London, and the main theme You know, plagiarizing a presentation by a friend during the summer, I used his, shamelessly used his expression from Jaws, the movie Jaws, that when Sheriff Brody saw the shark, his first reaction was, rather, we need a bigger boat. So the supply chains around EVs need a lot of really, really big boats. And when you look at all the critical materials that go into batteries and drivetrains, the world does not produce enough of those. So the demand profile for rare earths, lithium, cobalt, nickel, you name it, is such that even if a fraction of this materializes, they will need to be a massive expansion in both resource extraction, but also manufacturing capacity globally. And the big Chinese magnet producers all are trying to capture this opportunity, but they all realize that the pie is going to be so big that they will not be able to dominate it in the way that they have been dominating up to now, and especially since the main market for these magnets has been China, because China has led the world in electrification, and Europe has responded very quickly, and eventually I think North America will catch up. So I really do not see any inherent conflict with our customers, partners, and regulators in China.

That's helpful, Collier. One last one for me here. It's probably for Rahim. We've been trying to draw a line in the sand on kind of that dollar contribution per ton for the last two quarters, and rare earth pricing has gone up again. But if I think longer term or medium term, is the third quarter run rate on that dollar contribution spread a good ballpark that we should be using as kind of our normalized rates?

Yeah, look, it's difficult for us to quantify exactly. First of all, we'd split that up into magna quincino and the autocatalyst and rare metals because all of them would have different types of contributions and there's different mixes of products that are in there. I think these margin levels are still pretty healthy on a volume basis, but I think our volume, the opposite of that, I think our volume is lower than where we would expect it to be just because of the other industries, shipping and global supply chain issues. So I think that the dollar values are... on the higher end. Having said that, as I mentioned in my comments, higher rare earth prices will lead to higher dollar value margins. So it depends on the position you take there on what you think of the future of rare earth prices.

Right. That's it for me. Thanks for taking my questions.

Thanks, David. And thanks. We'll go to Mark Neville with Scotiabank.

Hey, good morning, everyone. Hi, Mark. Morning. Maybe this first question on what you're considering in Estonia and Europe. Are you willing to put any dollar figures around what the ask is or what you're seeking in terms of funding?

It's not quite like that, Mark. In the conversations with the Estonian government, they have a number of programs under their own direct jurisdiction of EU funds. So they have expressed their willingness to support us within those programs. I think out of total investment proposition for a phase one metal alloy and magnet facility, phase one meaning something in the ballpark of 1,000 tons a year of magnets production. That would be in the round numbers, without being too specific, in the $30 to $50 million of capex. And I would expect that those programs within the government of Estonians' purview could add up to perhaps half of that. That, given the feedback that we're getting from Tier 1 and OEM customers on potential pricing premium available, I think would lead us to conclude that we can extract and achieve an acceptable rate of return on whatever capital we invest. So that's sort of ballpark-ish the numbers that we're looking at. But again, this is phase one, and eventually this will be a drop in the budget in terms of Europe's needs, which we would expect to continue to expand. And we would hopefully, once we get this going, we will quickly start looking at a phase two to add capacity in the order of another four to five times what phase one would be. So again, we're taking a very methodical approach, careful, and we're not betting the farm on this, but it's definitely a very exciting opportunity, and we're trying to figure out the most rational and safe way to capitalize on this.

Sir, and that was, just to clarify, is U.S. dollars costing you, or euro? Yes. Yeah, no, U.S. dollars. Okay. The supports that you're seeking, is it primarily for sort of upfront capital or is there sort of additional supports that you could get from the government? Again, just in terms of pricing, you mentioned the customer loads, right? You get from the government and sort of VAT, something in addition that you're seeking or that would be required to sort of move forward with this?

Well, the early discussions have been on CapEx supports. But there are some inherent sort of disadvantages that making magnets in Europe entails, and there are some structural subsidies and sort of support that will be necessary to counterbalance things like the VAT, for example, that you mentioned. But this is a next phase discussion. For now, we're focusing on the CapEx and having the conversations with our OEMs and tier one customers for a premium that would cover the structural disadvantages of making magnets in Europe. Sorry, you said that conversation is with customers, not governments? Well, the government is an ongoing discussion. But again, this is... Yeah, it's even more difficult than trying to get ongoing support to cover structural disadvantages is much more difficult than upfront capital, as we recently saw, again, with the European Battery Alliance, where massive amounts of money have been invested. On the other hand, and again, the reason why we're having this conversation in Europe is because in Europe, largely, the bus is driven by the automotive OEM. We started getting a lot of feedback from our tier one customers about what they want to do in achieving a certain level of diversification of their supply chains and localized circular manufacturing in Europe by 2025. And it all made sense once we sat across the table from some of the larger OEMs in Europe, and they said, yeah, this is what, this is, you know, we read the Riot Act to all of our tier ones, and we expect that by 2025, 50% of their supply chains need to be localized and diversified. So, you know, there isn't a lot of time, and the fact that this discussion in this bus is being driven by the OEMs is extremely helpful because then you have a chance to sit in front of the OEMs and say, okay, this is what it means. If this is what you need, this is what it's going to take, both in terms of capital and operating. And you should be expecting to pay a premium of this level. And this is a discussion that, frankly, went a lot better than I expected because You know, if I had this discussion three years ago with any of the OEMs, it would have, you know, kicked me out of the room. But, you know, this is clearly a very different attitude because this is of such strategic importance to the European OEMs. And I do expect that over the next little while, this will be the realization in North America as well. Okay.

I mean, tough on the answer, but does the global sort of supply chain bottlenecks, Perhaps it makes the conversation easier today, but is that maybe a risk? If you move forward and you build it out, global supply chains are a little more fluid, and maybe there's not a strong dependency on localized supply chains?

Well, one of the fundamental weaknesses in Europe is that there is no local source of raw materials supplied. There's a few projects going on. There's a couple tailings projects in Scandinavia. There's Greenland, which looks less likely after the last political developments there. But, you know, the world has a lot of rare earths. I mean, we're working with folks in Australia, working with folks in South America. So, absent any continuing logistical developments, And I do hope that the world will learn its lesson and solve these logistic problems in the not too distant future. I think the rest becomes, do you have enough of an infrastructure, a manufacturing infrastructure, and a skill set in Europe to do what needs to be done in Europe and what the OEMs expect? So, no, I don't think it's terribly risky. Again, the primary risk I consider the market risk and the financial risk, and we're addressing both of those.

I know I've asked too many questions, but one last one. If you did go ahead with a phase one project, how long would something like that take to build?

I would expect to, if let's say first half of the year, we pull the trigger, we start engineering, I mean, we've done a lot of the preliminary design already. Engineering, design, construct, it could start next year. We would be ready to start sending pre-production samples in 2023 and be in position to start manufacturing by late 2024. You see, this is driven by that 2025 target that the OEMs and the Tier 1s are giving us. So I think we can get there. But 2024 is probably when we could start seeing some degree of meaningful output and contribution by this activity.

Great. Thanks a lot for the time. Appreciate it. Thanks, Mark.

And next we'll go to Frederick Bastien with Raymond James.

Hello, good morning. Good morning, Frederick. Question, just one question for you. Are EV traction motors today exclusively made out of centered magnets or is the technology competing with others?

No. The simple answer, again, is no. The two fundamental designs are induction motors where the magnetic field gets created by electricity. And there's different versions. There's sort of switch reluctance. But these are fundamentally non-magnet designs. However, the big advantage of using permanent magnets, rare earth permanent magnets, is that these designs tend to be significantly more energy efficient than the induction motors. As Tesla found out, if you recall, Tesla started life using only induction motors because they did not want to depend on rare earth magnets. From what I read, they've gone pretty well to rare earth permanent magnet motors across the board, simply because they can achieve a ballpark of, say, 10, 15, in some cases as much as 20% better energy efficiency out of these motors. What this means is that if you have for a certain given range for your EV, You can use a permanent magnet traction motor and use a 10, 15, 20% smaller battery, or for a given battery, you can add another 10, 15, 20% to the range of the car. Both very desirable outcomes, especially given the fact that the battery is still the most expensive component in the EV. So in terms of what we do, I've talked in the past about the work that we're doing with Daido Electronics in Japan, a very large magnet producer and one of our biggest customers, and Honda Motors, where we make a very unique magnetic material that can achieve performance levels designed and specified by Honda and by Daido without using heavy rare earths. Dido uses a unique process to make the magnet. Again, to belabor the point and cloud it even further, we make these MQA powders, and Dido makes these MQU magnets, and Honda makes the traction motors. As far as I know, this is the only traction motor technology that does not use sintered Magnets, but it uses magnets that perform like centered but made in a in a different way by by Dido and that but and the performance of that magnet according to what Honda tells us is they Consider it the the most energy efficient traction motor out there Okay, that's great but that advantage that you're seeing and the manufacturer of your bonded magnet as you kind of move and expand into a

sintered magnets, do you believe that you can bring that additional value where you could possibly manufacture magnets, sintered magnets that have a lesser of a content, lesser rare earth materials, but still produce the same kind of results? Or is that harder to achieve?

Yeah, I wouldn't, I mean, this would not be our immediate objective. I think we will start with centered magnets that the supply chains are used to, you know, essentially the same designs. And then as the world unfolds, clearly that would be one area of R&D to continue to optimize the level of rare use or, you know, the cost to performance ratio. As well as continue, I mean, we've been pretty adept at developing magnetic materials that can perform at high levels without heavier errors. That's clearly a direction that we would like to pursue. But, you know, we want to make sure that we're focusing on the highest possible priorities and optimization will probably take a bit more time once we get going. Understood.

Okay, that's super helpful. Thank you. Thanks, Frederick.

Moving on, we'll go to Ian Gillis with Stiefel.

Morning, everyone.

Morning.

With respect to centered magnets and NEO's value-add proposition, is there anything that we should be thinking about, whether it be from a revenue per ton perspective or operating margin perspective? with respect to that product relative to your existing product?

Yeah. The obvious answer there would be that, you know, center magnets, they're a lot more involved to produce. The yields are lower than bonded magnets. Bonded magnets that we make and our customers make are net-shaped magnets, so there's, you know, very high yields. But with centered magnets, Depending on the size and shape of the cinder magnet, you get much lower yields, and that is reflected in the price. So where, you know, ballpark speaking, strictly, you know, a bonded magnet would cost something in the order of 50 bucks a kilo. And keep in mind that bonded magnets contain less rareth because of the bonding agents that dilute the magnetic material. The centered magnets, the state-of-the-art centered magnets are closer to $100 a kilogram. Much higher performance, but also much more costly to produce. So, you know, round numbers, a thousand tons a year of EV type magnets would be generating something in the order of $50 million of top line.

Okay, that's very helpful detail. The other question I wanted to follow up on was the revitalization of the facility in China. As you do that, do you expect there will be any increase in capacity or throughput from that geography as a result of the work you're doing there?

You know, we're not planning on a massive expansion, but I do expect better efficiencies and there will be incremental gains. And, you know, everything we read and we're told China is jumping on the Euro 7, very, very tough emission control environment very aggressively. So, yeah. I do expect that we're seeing a very strong demand for these products over the next 10 years. If we felt that the internal combustion engine was going to die in the next two or three years, we wouldn't be doing this, but we do see a very good runway for growth and margin generation here. Again, just back to your specific question, though, I don't really see a massive expansion in capacity. There will be some incremental gains here and there, but I think it will be more of a capacity along what we have now, perhaps with a marginal increase in 10%, 20% kind of thing, but not doubling it. And of course, the continuing demand that we see for these products mean that we'll have a pretty attractive payback on whatever investment we make here.

Understood. That's very, very helpful. I'll turn the call back over now. Thank you very much, gentlemen.

Thank you.

And there are no further questions. I'd like to turn it back to our presenters for any additional or closing comments.

Thank you again for joining us today. We look forward to reporting back to you on our year-end results. That concludes today's call. Have a great day. Thanks, everybody.

Thank you, and once again, that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.