Neo Performance Materials

Good morning, ladies and gentlemen, and welcome to the NEO Performance Materials, Inc. 3rd Quarter 2023 Earnings Call. At this time, only internal lesson only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Friday, November 10, 2023. And I would now like to turn the conference over to Mr. Ali Madhavi, Senior Vice President, Corporate Development and Capital Markets. Please go ahead.

Thank you, Operator, and good morning, everyone. Just as a reminder, a replay of this call will be available starting tomorrow in the Investor Center on our website at neomaterials.com. Joining me this morning are Rahim Suleiman, NEO's Chief Executive Officer, and Jonathan Bach, NEO's Chief Financial Officer. 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 and contracts. 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 US dollars. Non-IFRS financial measures will be used during this conference call. Further information regarding NEO's use of non-IFRS measures is available in NEO's year-end earnings press release, which is also available on CDAR and our website at geomaterials.com. Let me now turn the call over to Reem.

Thanks, Ali, and good morning, everyone. It's been a little more than 100 days since I've been in the role of CEO, and as you might expect, that first 100 days has been a whirlwind. I've recently slept in more hotel rooms and airplanes than in my own bed, but it has been worth it to spend quality time meeting with our employees, local leadership teams, key customers, key partners, industry colleagues, and other critical stakeholders around the world. Frankly, I've never been more excited about NIO's future with our extraordinarily talented employees, technical knowledge, a diverse manufacturing base, and a unique value proposition. These have helped to drive our decades of experience in product innovation, our loyal customer base, and our positive free cash flow generation. Yet, these have not been fully reflected in our growth opportunities or in our share price. Despite having more cash and inventory than our actual market cap, despite having 10 well-capitalized manufacturing facilities around the world, and despite offering our customers a unique parallel supply chain for rare earths, both inside and outside of China, our share price reflects a significant undervaluation of this company. Somewhere in this market dynamic, the core story of our opportunities and our capabilities is just not taking hold. I'd like to use this morning to share my thoughts on the future focus of NEO, the industry at large and the growth case of why NEO will succeed as a global leader in the rare earth magnetics industry. Jonathan will then take you through the third quarter results. In addition to our earnings release, we will be publishing an updated investor presentation outlining our vision, our opportunity and our roadmap. I won't specifically walk through that presentation today. But it provides for some context for what we see as a generational opportunity in front of this company and why NIO is best placed to capitalize on this opportunity. Which leads me to our new vision. To fast forward the clean energy transition as a global leader in rare earth magnetics and critical materials. Now maybe that doesn't sound too different from NIO's story over the past year. We're already global, we're already based in rare earths, and we are a magnetics company. But NEO has not participated in the largest and most valuable application of rare earth magnets, sintered magnets. We have built the number one specialty bonded magnet business as the absolute leader, but in a niche market with a nuance, and a nuance that is an important takeaway. The sintered rare earth magnet market is roughly 15 to 20 times larger than the bonded magnet market. And the sintered market will also continue to grow incredibly fast due to electric vehicles, wind turbines, and other energy saving applications. NEO maintains other critical material businesses that perform quite well. They are profitable, positive cash flow, sticky product categories that will remain engineered into critical applications for many years. Many of these will be part of the future of NEO and will be a source for growth, but I won't speak to those at length today as I want to spend more time defining the generational opportunity in sintered magnets and NEO's vision to be a driving force in this segment. With that in mind, let me go a little bit deeper as to why we are so excited to be talking about our rare earth magnets expansion. There's a culmination of several macro trends that set up this growth opportunity. The transition to a sustainable electrified economy that values carbon neutrality. Two, the technical development of electric motors and permanent magnets. And three, the shift to diversified and localized supply chains across global manufacturing. All three of these combine together to create a truly generational opportunity for NIO. We have to acknowledge the supply risk today for magnet manufacturing. magnetic rare earth elements are considered critical and strategic materials in just about every major jurisdiction today. But China dominates the rare earth industry and has for some time. Historically, about 90% of rare earths were mined in China. Today, there are more rare earth mines operating outside of China, including Linus, MP Materials, and Cerro Verde. There are also numerous projects in the industry pipeline, that all seek to solve for the geographical imbalance in the supply of rare earth materials in an environment where demand for rare earth magnetics is skyrocketing. But the next three phases of the supply chain, rare separation, making metals and alloys, and the ultimate prize of manufacturing rare earth magnets are absolutely dominated by China today with some 80 to 90% concentration. For magnets specifically, Roughly only 10 to 20% of magnet making capacity is located outside of China. Yet 60% of all magnets are assembled into motors, which are eventually consumed outside of China. This creates real risk. It is clear that OEMs and governments are looking to reduce the dependency on any one geographic source. And that's true of any single dominant source of supply. There is substantial investment, including by NIO today, to help accelerate the transition to a more resilient supply chain around the world. Many government bodies not only acknowledge that, but they are supporting new infrastructure through grant and loan programs, such as NIO's recognition through the European Just Transition Fund to support our current Phase 1 magnetic project in Estonia. Let's talk about RARES magnets, but just for a quick moment. Rare earth magnets are simply the most powerful and efficient magnet technology in the world. There is no better technical solution for delivering the most power, torque, or precision to a finely tuned electric motor. The end market uses of these motors is growing at a tremendous pace, tied largely to the world's energy transition movement. Rare earth magnets are used to power electric motors for offshore wind turbines, energy efficient circulation pumps, battery cooling pumps, electric bikes and scooters, and so much, much more. And of course, with the development and rapid commercialization of battery electric vehicles, the primary propulsion mechanism, usually a traction motor or an e-axle, benefits from the unique and powerful properties of raref magnets. A more efficient electric motor reduces weight to increase an EV's battery's range and prevent battery drains. We estimate that about 85% of all EVs are using rare earth magnets as the technology to drive their traction motors. This is in addition to rare earth magnetics driving other automotive electric motors used in cooling pumps, automatic sliding doors, seat motors, and so much more. The automotive and energy sectors have been talking about lithium and cobalt for more than a dozen years. What lithium and cobalt are to batteries, rare earth magnets are to electric vehicle motors. As I said, rare earth magnetics represent a generational growth opportunity. The overall rare earth magnetics market today represents approximately 200,000 metric tons of material. Five years ago, that market was about 120,000 tons, so an increase of 80,000 metric tons. According to Atomos Intelligence, that 200,000 ton market is expected to grow to more than 500,000 tons by 2035 and nearly 700,000 tons by 2040. The world requires substantial investment in new magnet making capacity in order to enable the global energy transition. Again, this creates the opportunity for NEO and the size of that opportunity is very, very large. For the 60% of demand of magnets outside of China, that number is roughly 120,000 metric tons of magnets consumed today and is expected to grow to more than 400,000 tons over the same timeframe through 2040. The end use applications for these magnets is quite diverse as we've already discussed. Let's look at just one example at the demand growth for rare earth magnets, traction motors for electric vehicles. The total universe for rare earth magnetics is much bigger than this, but this is an easy example for everyone to see. From recent estimates from the Bank of America, there will be approximately 40 million electric vehicles produced and sold every year outside of China by 2035. Those 40 million vehicles will require approximately 60,000 metric tons of magnets. At current raw material prices, 60,000 tons of EV traction motors would equate to approximately a $4 to $5 billion market opportunity. And mind you, this $5 billion market is truly a new market opportunity. This means that as NIO seeks to establish its product portfolio, we are not competing against legacy suppliers or existing infrastructure. This is not a situation of substitution or lifecycle management within a product set. This is truly net new growth. NEO's targeted phase one and phase two magnetics project in Europe is for 5,000 metric tons or less than 10% of just this one discrete market opportunity. This is just the beginning of NEO's journey. So the market opportunity is massive and it's real. And NEO's competitive strengths combined with an emphasis on focus and accountability will ensure that we succeed. Let's take a deeper look into the landscape of players so that as to know who can fill this void and take advantage of this great opportunity. And remember, we're just talking about the outside of China opportunity. We believe that existing in new Chinese companies will very likely continue to represent the majority of rare earth magnet manufacturing. Equally true though, is the world's desire to reduce dependencies on a single source for such a critical supply chain. Beyond the Chinese magnet companies, the remaining 10 to 20% of magnet companies at scale are largely located in Japan, the likes of Shinetsu, TDK, and Hitachi. NIO has worked with and supplied each of these companies for many years, and we are familiar with their expertise and competencies. They are all technical leaders, and we believe that they will take part in this future growth. But not all of it. We also believe that much of the Japanese magnetic industry has earmarked future capacity expansion to support various other Japanese industries, including consumer electronics industries and, of course, automotive. So beyond the current incumbents, the need for growth and new suppliers co-located to regional motor assemblies is crucial. But what does it take to be that leader within magnetics? Magnet manufacturing is a critical link between the world's mining and electric motors. From our perspectives, there are three essential skills required. First, you must be experienced in supplying the automotive industry with highly technical products as opposed to mining materials from the ground. Second, you must have a proven technical skill set and the know-how to manufacture rare earth magnets. And third, you must navigate the complex dynamics of the rare earth industry, including understanding upstream projects, rare separation, metal making, and ultimately manufacturing rare earth magnets. NIO has a proven track record to deliver against all three. NIO is an award-winning partner to the automotive industry. About half of our business goes into the automotive supply chain through qualifying highly engineered and technical parts. NIO has been the industry leader in bonded rare earth magnetics where we have been manufacturing magnetic powders and magnets for more than 25 years. And we have been doing so with our unique parallel supply chain, both inside and outside of China. And NEO is an industry leader across rare earths. We have been processing and separating specialty rare earths for nearly 30 years. Again, our skill sets and capabilities here are unique. The ability to separate rare earths inside as well as outside of China. and the ability to separate both light rare earths and heavy rare earths, and the footprint to manufacture magnetics both inside and outside of China. I would go as far as to say that NEO may be the only company in the world that addresses the span from rare earth separation of mined materials all the way through fully formed magnets. The technical transition for making bonded magnets to sintered magnets is not huge for NEO. The fundamental understanding of formulating rare earth magnets is the same. They rely on the same neodymium and praseodymium rare earth inputs, or the magnetic active ingredients, where NEO has decades of experience. We're proud of our expertise and technical understanding of magnets, which is underpinned by our research lab in Singapore over the past 25 years. Through innovations and customer cooperation, Magniquench helped pioneer the world's first and only heavy rare earth free magnet, to be used in traction motors for hybrid electric vehicles. We are supplying magnetic powders to Dido today, which are on several Honda vehicle platforms. Look, we'll discuss the importance of heavy rare earth magnets on another day, but the key takeaway is that NIO has a tremendous history of manufacturing rare earth magnetics. We're also adept at scaling new magnetic production. In 2019, we acquired Asia Magnetics, a leading bonded magnet manufacturer. And over the past four years, we have quadrupled the size of its magnet production. And we recently purchased SG Technologies, the leading permanent magnets company in the UK. This provides us with additional resources, a deeper understanding of magnetics, and access to even more customers. All of this is in addition to the technical expertise of SG Tech in areas like assemblies and soft magnetics. We're excited to compete and bring something different to the table. NEO's integrated and non-captive supply chain allows for immense flexibility for our customers. We can offer our customers the unique value proposition of having rare separation, metal making, magnet manufacturing, and recycling combined in a single value chain. That creates options and flexibility. Some customers may have a preference to work through the entire NEO value chain. Others may selectively utilize our expertise. We will support both. Equivalently, we have the ability to source rare earth oxides internally through our rare earth separation capabilities, but also externally through our other global partners. And we will support both. Much has been made for the need of a concrete upstream strategy. This is absolutely true if the focus of the business remains rarer separation. However, as we are focusing on rareth magnetics, our options for supply are much greater. Even today, MagnaQuench purchases only about 10% of its material supply from our internal separation units. The rest is purchased externally, and we will continue to do so. We also operate the value chain with an industry-leading sustainability and ESG practices. We have earned three gold medals from Equivatus, representing the top 5% of companies worldwide, as well as two silver medals. Our vision is to improve the world. Our products have been enabling clean air, clean water, energy-efficient solutions for years, and our manufacturing sites have led the industry in environmental and safety metrics for decades. We have just published our second annual sustainability report, and we encouraged by the momentum and recognition of our long-standing responsible practices. It's an extraordinary roadmap for growth, and NEO will be laser-focused on implementing the key strategic initiatives to achieve it. Earlier this year, we announced the launch of the first rare earth magnetic sintered plant dedicated for electric vehicles and traction motors in Europe. Our groundbreaking was in June, and it was well attended by customers, suppliers, ambassadors of various countries, and local government officials. I would encourage everyone to hear the President of the European Commission speak about the importance of the project and NEO's credibility to deliver it. The project is still in early stages, but it is on track and on budget, and we are currently sampling magnets with potential customers, and we continue to build our customer and project pipelines. We've also been very successful in attracting great talent to the project, both locally and rare earth magnetic experts. And while I can't verify this as a fact, I suspect NEO has more rare earth advanced degree technical experts across processing, metallurgy, and magnetics than any other company outside of China or maybe even Japan. There will be more details to come as we continue on our journey for growth. But some of the key areas for me personally in driving this company to the next level will include a laser focus in achieving key objectives that we lay out, an allocation of resources, all of time, energy, money, and people to key projects that improve growth, return on capital employed, and ultimately shareholder returns, and real and hard-based metrics accountability. So today, I am establishing several near-term targets and accountabilities that our team will be driving toward. In the coming three to six months, we are targeting to announce one to three MOUs with customers for rare earth magnets, one to two additional offtake agreements for the expanded supply of rare earths or magnetic oxides, and one to three changes in our manufacturing footprint and operational strategies. These will be tough to deliver in the timeframe, but we have dedicated teams in place to accomplish them, and we are going to get them done. In addition to our magnet developments, there will be a significant increase in NEO's public awareness and shareholder engagement for both existing and new shareholders. We have an amazing story to tell. We need to make sure that it's being heard. and we need to make sure that everyone sees how we are getting this done. This is all in addition to our recent announcements we made in adding Mr. Mohammed El-Mahmoud to our new executive vice president for our rare metals business unit, along with adding a new director to our board. We are continuing to build the team that will get this done. So do I believe it? Well, I'm a buyer of NEO shares today, and I have been throughout my time at NEO and particularly since being appointed as president and now CEO. And I will continue to invest in this company in our future and continue to invest more of my own personal net worth into NEO. I am the new CEO and I was formerly the CFO of NEO. I understand the numbers. I understand the opportunity and I understand that we can and we will execute this. With that, I'll now turn it over to Jonathan to talk about the quarter.

Thanks, Rahim, and good morning, everyone. Rahim outlined our vision and growth strategy moving forward. I'll focus on our Q3 performance while emphasizing why we're in a financial position to deliver the strategic objectives Rahim just outlined. Q3 shaped up to be a positive quarter. We reported sales of $137 million and adjusted EBITDA of $13 million. Our net income was $3 million, and we reported diluted earnings of $0.07 per share. Our ability to generate positive free cash flow in a declining rare earth pricing environment has been evident through the first nine months of the year. We have generated about 42 million in free cash flow while meaningfully expanding our growth capex. Our Q3 sales were 7% lower year over year, driven by declining rare earth prices partially offset by higher volumes. Yet our adjusted EBITDA improved by over 80% compared to the same quarter of the prior year, which was adversely impacted by negative lead lag. Our Q3 performance was a step in the right direction, as our expected margin profile shows signs of reemergence in a less volatile rare earth pricing environment. Taking a closer look at rare earth pricing, the key rare earth inputs for magnetics, neodymium and presodymium, averaged $69 per kilogram this quarter, compared to $114 in the prior year period, or a decrease of about 40%. As we've talked about before, the real critical measure for us is not the absolute price levels, as we have passed through pricing with many of our customers, but instead it's price volatility, which creates lead lag risk over short periods of time. So focusing on price volatility, we are happy to report that we've seen stability in rare earth magnetic prices over the past six months. For context, neodymium and presidium pricing has been range bound, moving between roughly $65 to $75 in Q2 and Q3 this year. Compare that to the same period prior year where pricing was on a steep downward trend from $145 to $95. The key takeaway being we're in a less volatile pricing environment, which results in less lead lag impact. Neo-strategic pass-through pricing creates a more reliable margin over the long term, which is evident in today's market and will continue if rare earth magnetic pricing remains stable. As you know, we do not like to speculate on forward-looking rare earth prices, but we will say that through the start of Q4, neodymium and presodymium have maintained their pricing stability, which is a positive sign. Shifting to strategic initiatives, we continue to execute our top two strategic capital projects, namely our European-centered magnetics plant and relocation of our modernized environmental catalyst plant in Zibo. With a centered magnetic facility, we remain on track and continue to make progress in the early stages of the project, including preparing the site, excavating, laying foundation, and sourcing equipment. At our environmental catalyst manufacturing plant, we are nearly complete on erecting all of our building structures and have transitioned into equipment installation. These two capital projects remain a top priority for the company, and both are progressing in line with our expectations. Shifting to quarterly financial and operating performance. Within MagnaQuench, Q3 volumes were higher versus prior quarter and prior year, driven by recovery in automotive, continued growth of the magnetics business, and pull-in of certain shipments from Q4 into Q3 due to timing of national holidays in China. Despite the positive volume trend in select end markets, demand remains mixed among regions and applications, with continued market softness in Europe and non-automotive applications. In addition, the fourth quarter typically has the lowest seasonal volume of the year, and we expect that trend to hold given the timing of our Q3 shipments. The magnet quench segment continues to make strong progress on driving operational efficiencies, as well as integrating back office functions within the newly acquired SG Tech business. In addition, the magnet business continues to grow and win new platforms in the automotive space. While the size of the magnets business is small compared to magnetic powders, we are encouraged by both the underlying unit growth and economic profile. We continue to develop product knowledge and expertise in magnets, which will be a key strength leading into our European-centered magnet expansion. At C&O, the core business remains mixed, although the net result is substantially improved compared to the prior year. EBITDA generation and profitability was substantially improved versus the past four quarters as the adverse impact of lead lag continues to diminish in today's stable rare earth pricing environment. Product shipments in Q3 also improved compared to the same quarter prior year. This is underpinned by continued strength for our specialty heavy rare earth products, our environmental catalyst products, and continued momentum in our clean water treatment portfolio. Q4 seasonality in C&O is usually a bit more pronounced than magna quench, so we would expect product shipments to slow slightly as we approach year end. However, continued rare earth pricing stability should neutralize the effective lead lag and translate to greater margin stability for the segment. Our rare metals business unit continued to be a reliable contributor in the third quarter, albeit with lower volumes and margins compared to the prior year. Hafnium pricing in the market has remained very strong. However, the end customer demand has normalized. This reflects the aerospace industry getting caught up to a more balanced inventory cycle. Although demand has moderated, the fundamentals of the hafnium business remain strong and we expect to maintain stable volumes at healthy margins over the coming quarters. In addition, our gallium recycling scrap material business performed well in Q3, as pricing for gallium has increased substantially as a result of current export restrictions from China. As you are aware, NIO operates the only gallium recycling operation in North America and one of the few recycling operations in the world. China controls 96% of virgin gallium market So recycling outside of China is a key strength of NIO. As Rahim alluded to, we're very excited to welcome Mohamed El Mahmoud as our new EVP and business unit leader for rare metals. Mohamed's proven track record as a proactive and operationally savvy leader makes him an extremely valuable asset. We look forward to his ability to implement growth strategies through a highly focused metrics-driven framework. I'd like to close by emphasizing that our balance sheet and cash generation remains strong. We've generated $16 million in cash from operations during the quarter. On a year-to-date basis, we've generated $59 million in cash from operations. We invested $5 million in our key strategic capital projects during the quarter, and we have made significant progress on our NCIB program, investing $15.5 million towards repurchasing shares during the quarter, along with returning $3 million to shareholders through our quarterly dividend. We continue to maintain strength and flexibility across our balance sheet with 113 million of cash and cash equivalents. We're excited to move into the next phase of our strategic initiatives. Our core business generates reliable free cash flow, and we remain steadfast on investing our capital into the highest returning growth projects for the company. With that, we'll now open up the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the 1 on your telephone keypad. Should you wish to cancel your request, please press the star followed by the 2. If you're using a speakerphone, please leave the handset before pressing any keys. Once again, that is star and 1 to answer a question. Your first question comes from the line of Yuri Link from Kanakor Genuity. Please go ahead.

Good morning, guys. Good morning, Yuri. Rahim, thanks for the updated strategic roadmap. I guess the obvious question is what we can expect from the new centered plant that's under construction in terms of revenue and EBITDA contribution for phase one. And then as a follow-on to that, when do you think this plant comes online and can you talk about the qualification process with customers and how long that might take?

Sure. I'll start with the second half, you know, where we would expect construction to continue to 2324 installing equipment in 24 start making samples and production volumes in 25 probably the tail end of 25 to see to see production volumes. I think that then ties into the timeline for customer qualifications, so the programs that we're targeting. Our generally programs are launching in 25 and some in 26. There are some programs that we will target where we will kind of take a me too type approach where we will join an existing platform. We do have samples in with customers. So we know that we are, our samples are technically meeting the requirements of our customers. So we feel pretty good about that, which is hence the, the aggressive view of, of we need to be accountable to start delivering on some of those things. So that's why I've talked about we'll, we'll talk about those MOUs with customers within the three to six month period.

So first production in late 2025? And is that when the qualification process starts?

No, no, we'll have qualified before then.

So we'll be in serial production in 2025. So 2026 could be the first year of kind of run rate? Revenue and EBITDA are, I guess.

Look, personally, I think it takes longer. I think it is the automotive industry. I think we need to be pragmatic and realistic about what ramp curves really look like. So it'll be the cross of two different trends, right? The OEMs are trying to get there really, really fast. And they're encouraging us to go as fast as we can. And we want to get there as fast as we can. And that's where all our deliverables are going to be. So we could kind of make comments on how we'll be at full production in 2026. I've just been in the tier one space for too long to think that we could ramp that quickly in that short of a time frame. So call it a more conservative view, but I think it's not till the end of 2026 or sometime in 2027 that we start hitting that kind of a run rate. And what is that run rate? Well, that would be the phase one run rate, which would be the 2020. 2,000 tons of blocks, call it 1,500 tons of actual magnet sales. Current pricing, that's probably in the $80 to $100 range.

And would that be at the – what I'm trying to get at is kind of the EBITDA contribution?

Yeah, look, I think you'd probably use something like 15%. EBITDA contribution is probably a reasonable – place to start. Maybe it could be a little bit higher than that, but, you know, it might have customers listening. So, you know, some number that looks and feels like that is probably a reasonable expectation.

Okay. And between now and then, I mean, obviously that's three, four years off. So, I mean, is there an opportunity to accelerate your move into centered magnets before the plant is up and running, or we're waiting for that?

No, I think acceleration will occur. I think that there is incredible demand pull that I think we'll be building phase two prior to that timeframe. I also think that we will announce North America within a reasonable short order as well. You know, I won't give you exact dates on that just yet. I mean, we'll announce it and then we'll have a glide path for when we're going to launch and get to material volumes there as well. So I think what will happen is it's fair enough to say that there's probably a couple of year period here that folks are waiting for the proof of concept. But I think once you get there, the growth curve on all of phase one, phase two, and then North America, will actually be really fast.

Last one for me and I'll turn it over. What about the supply of this facility? Where are we on supply agreements? And are you changing your tact at all on the upstream plans for the company?

So yes and no. So when we talk about supply, We have talked a lot about it in terms of an upstream strategy, which looks very close to kind of a mining strategy, right? And we have a number of offtake agreements and we have an investment in Greenland and we have a number of things that we're doing there. And we're going to continue to do those things. We're going to continue to investigate offtake agreements. We're going to continue to encourage the supply base. We're going to continue to provide technical advice on flow sheets. We will continue to partner with everyone on the mining side to get them to a product that can be processed by rare separators. We still in Estonia have the rare separation facility, which between ours and the facility that Solveig is going to start separating rare earths for others as well. Linus is captive, MP is captive, but they can also expand their capacity. There's adequate, there's going to be a continued need for more separation. But the way that I would kind of differentiate it is this. When you think of the company as its historical, in its historical frame, It starts with rare separation, right? That was the core of what the company was 30 years ago. That's what everything began by. And when you think about it in those terms, then supply becomes critically important because you're thinking about how do I feed the rare separation beast, which means you're doing it through an upstream strategy to a mine. When you think of the company as a rare earth magnetics company, you're now three or four separate steps separated from the mine. That doesn't mean you don't need a supply strategy, but it means you need a sourcing strategy. It's different than an upstream strategy because our sourcing strategy can then accommodate all of the material that becomes available from anyone else in the value chain. As I talked about, MagnaQuench today purchases 90% of its materials from other people. There isn't a requirement that we have to get the material straight from the mine. So if any of the mines are announcing that they're going to get there and they're going to have separation capacity and all of those types of things, We can buy mined material. We can buy the rare earth oxides. We can buy rare earth metals. We can buy any number of inputs into the magnetic quench process. So it just depends on what your perspective is. We absolutely need a sourcing strategy, and that will include upstream. But that is customer flexibility. That is optionality. It's not a limiting factor. It's not a dependency for growth. So that's kind of the differentiation that I would make. It's not to say that we're not going to continue to focus on upstream strategies. It's just to say that it's not the limiting factor that it is if you think about it only within the rare separation context.

Okay. I've taken up enough time. I'll hop off. Thanks. Thank you.

Thank you. And your next question comes from the line of David Acampo from Cormac Securities. Please go ahead.

Thanks. Good morning, everyone.

How are you?

Rahim, I just wanted to touch base here on just the CapEx requirements over the next quarter and into 2024. Because even when I look at Zeebo, you guys have spent $18 million a day out of the total 75, and then you still have the center facility. So I was hoping you could just square up those numbers for us for our modeling purposes here.

Sure. So we'll spend a lot more in Zeebo in Q4. And then, you know, I mean, the budget of the project was 75 million at capex. That had probably a 10 million contingency in it. So I think we're probably going to fit it in maybe even without the contingency. So I think that's where the total capex of that project will look like. As Jonathan talked about, the buildings and core infrastructure will all be in place by the end of this year. So a bunch of money will get spent in Q4. A bunch of money will get spent in Q1. But then there'll be money that gets spent throughout the year as there's the finishing process, right? Because that is a long tail type item. And further, there'll be automation, there'll be a bunch of modernization things that we're doing in that facility as well. So order of magnitude, I mean, it's really hard to project how much cash gets spent in a single quarter, but I'd say kind of 15 to 20 million kind of in the short term period, and then another 20 million over the longer term period to kind of spread out. And I would say the vast majority of that really just gets spent by the end of 24. In terms of the NARVA project or the Estonia Magnets project, we're spending money now. We're at the beginning phases of that. I think the R-CAPEX estimate for that project was around $65, $70 million. We are still on budget to do that as well. I'd probably say that 70% of that money probably gets spent in 2024. But again, there's timing around equipment commissioning and when equipment gets landed. So the exact timing when the cash goes out the door is more variable than that, but that's what we kind of feel like today.

Got it. That was super helpful there. And then, In the MD&A, you've talked a little bit about your efforts to improve the inventory performance at Magnet Clench. And I was just curious what that could mean for the order of magnitude for the lead lag impact on that business and the potential impacts on just your working capital position.

Yeah, so we need to take – and we are taking a much more metrics-based approach and structured approach to getting inventory down – That takes time. There's decades of behaviors that we have to turn into decades, that we have to turn into data. So it takes time. Within MagnaQuench, I think that they're doing a good job. They're doing a really good job of reducing inventory levels today. And they're reducing their conversion costs today. So we are seeing kind of the key things that we need to see in terms of return on capital employed improving for MagnaQuench today. For lead lag, I think it's, you know, within MagnaQuench, the last two years has been exceptionally volatile movement in rare earth prices. I would say normally MagnaQuench can stay within a reasonable range just because of the fact that it also has timing with respect to its sales contracts. So I think we'll reduce inventories in MagnaQuench, but I think they're on a great path. Where lead lag largely affects us is in the C&O side, but particularly the separation side. And it's an odd dynamic, because truthfully, separation doesn't actually contribute that much gross margin on a steady state basis. It's a decent business, but it doesn't actually contribute enormous amounts of gross margin. But when lead lag was benefiting us, it was recording 300% of its expected gross margin. And when lead lag is hurting us, it's reporting negative gross margins. So the real effort needs to be to reduce both lead lag in terms of timing of materials, as well as the amount of inventory that we have at CNO because both of those are the most are the largest drivers on lead lag and on the volatility of our results. I kind of say the same thing. It's a journey. to figure out the right set of metrics and the right set of behaviors. We can't wave a magic wand, but I think that we will get to metrics-based accountability to get that reduced.

That's super helpful. I'll hop back in the queue. Thanks.

Thanks, David.

Thank you. Once again, should you have a question, please press star, then the number one on your telephone keypad. Once again, that is star and one to ask a question.

Thank you, operator. It seems like we don't have any other questions. Should you have any further follow-ups, please feel free to reach out to me directly. That concludes today's call. I'll turn it over back to the operator to wrap things up. Thank you for attending.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may all disconnect.