Thank you for standing by. Welcome to Lynas Rare Earths quarterly results briefing. At this time, all participants are in a listen-only mode. After the speaker's presentations, there'll be a Q&A session. To ask a question during the session, you need to press star one one on your telephone. Please be advised that today's conference is being recorded. I'll now like to hand the conference over to Lynas. Thank you. Please go ahead.
Good morning, and welcome to the Lynas Rare Earths investor briefing for the September quarter of FY23. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director. Joining Amanda on the call are Gaudenz Sturzenegger, CFO, Pol Le Roux, Chief Operating Officer, Sarah Leonard, General Counsel and Company Secretary, and Daniel Havas, VP Strategy and Investor Relations. I'll now hand over to Amanda. Please go ahead, Amanda.
Thanks, Dan. Good morning, everybody. Actually, we're attending in force today in terms of the Lynas team, and it's an interesting reflection of life in 2022 that we are literally scattered all over the world. We're calling in from a variety of different destinations. We are all very focused on ensuring that we find a better Q2 performance than the Q1. It was a difficult quarter. I think that everyone on the call is well across the fact that we had the serious issues with water.
I think I've said to many of you know, it's a matter of ongoing frustration to me that, you know, we operate on the wettest continent on Earth and on the driest continent on Earth, and water is a challenge in each location. During this quarter and previous quarters, we've often had ongoing challenges with our continuity of water supply in Malaysia. But generally, we've been able to implement initiatives which have mitigated the effects of reduced supply. During this quarter, we weren't able to do that when a major pipe burst, and we had zero water delivered to the plant for nearly over two weeks. I think that the important thing here is that it's a sign of strength.
It's really a sign of how strong the market is that we still booked AUD 164 million in revenue. We ended the quarter with over AUD 1 billion in the bank, which is particularly pleasing given that, you know, we've got a very heavy call on capital at this time as we're really accelerating our activities in Kalgoorlie, in particular, and as we start to invest more in Mount Weld's capability. Notwithstanding some of the challenges of the quarter itself, as we've indicated in the report and as I've said on other occasions, we are really focused on growth. You know just to pick out the highlights on that. The big, you know, we had two big pieces of news associated with Mount Weld through the quarter.
The first is that we've commenced the two year exploration program into the carbonatite. This is into the primary mineralization below the enriched weathered zone which we have been mining to date. We're delighted that via JARE JOGMEC, Japan Oil, Gas and Metals National Corporation, is providing us with additional technical support on that program. This is really exciting stuff geologically. Our geos, you know, sort of are very excited to find out what lies beneath, as indeed are our colleagues at JOGMEC. In addition to that, JARE provided additional financial support for the exploration program in the form of a $9 million equity placement to fund those program activities. Of course, the other really big news at Mount Weld is the expansion which we announced in early August.
I sometimes, you know, sort of say a little wryly that it appears that most things come in AUD 500 million chunks in rare earths. Indeed, this is another AUD 500 million program at Mount Weld. It's very exciting. It will take us, as first step to 12,000 tons a year of NDPR. We have two further enhancements that the team is working on, which we will announce in due course, which will see us be able to increase that output by a further 2,500 tons each. It is really important to just take a moment to reflect on this. You know, it can sometimes be easy in a market where there's a lot of focus on some of the processing activities that we remember that feedstock is essential.
You know, any downstream investments are only going to deliver a return if they have feedstock. The quality of the Mount Weld ore body continues to be the thing that underpins value and value creation within Lynas. Of course, I know everybody always waits breathlessly to see what's going on at Kalgoorlie, and it is so exciting. A couple of weeks ago, I was out there on the Monday with the board and then on the Wednesday with the U.S. Ambassador, which is pretty cool. Even within those two days, I could see changes on the site. The team is very excited every day to see this, you know, plant really coming together. You can see it in some of the photos that we've included in the report. We have provided a little bit of a further update on this as well.
Those of you who listen to these calls often would know that we received a grant from the Australian government under the Modern Manufacturing Initiative for a new industry first carbonation circuit. I was hopeful that we would be able to accommodate that within our original budget. With some of the various pressures, particularly around construction costs and logistics, that's not been possible. As well as that, we made a decision to put in some circuits which will allow us to further upgrade capacity at Kalgoorlie over time. As I said, there's been a few of the you know sort of increases in construction contracts and logistics. Today we're just announcing that we expect that we'll come in about 15% over our initial budget.
That, as I said, includes both the scope increases and any cost increases. In the quarter, I've spent quite a bit of time on airplanes. I'm sort of delighted to be back in a single location now, hopefully for a few days. Been to the U.S., terrific opportunity to view the site, and the proposed site for the plant there. We will update the market on that once we've completed our negotiations, but I think that it will be an excellent location for our facility. Also had extensive engagement with U.S. government with respect to that contract. Things are progressing well there with the delivery of our phase two deliverables as part of that program. Then last week, you know, I was in the U.S. again.
Met with many investors, and that was terrific. You know, there's great interest in the rare earths industry. As well as that, there was, you know, sort of probably the premier rare earths conference of the year. I had a great opportunity to really engage with other players in the market as we all seek to ensure that we are actually stepping up to deliver the sort of, you know, supply requirements for this market as it continues to grow through to 2030. Notwithstanding all of that, it still remains that whilst there's a lot of action in the market, Lynas is the only producer at scale of separated rare earths outside of China. We see that that will probably be the case for some time yet.
Ensuring that we maintain a focus on getting back online, having a much stronger Q2 in terms of production is really at the, you know, sort of the focus of everybody on the team at present. A bit of a mixed quarter. Notwithstanding some of the challenges, we still delivered, you know, sort of a nice uplift in cash whilst funding the growth programs and, you know, hopefully we're looking into a better Q2 as we head through to the end of this calendar year. With those opening comments, I'm very happy to take any questions or if you want to specifically direct your questions to any of the others on the team, please let me know.
Thank you. As a reminder, to ask a question, you need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Your first question comes from the line of Paul Young of Goldman Sachs. Please proceed.
Yeah, morning, Amanda. Thanks for doing the call again. First question is on the water challenges in Malaysia. Great news that water supply has now normalized. Can you step through, you know, what changes you've made and what gives you the confidence that, you know, the water supply challenge is now fixed? I also note that you make the commentary around or comments around you can actually ramp up production volumes pretty quickly. Just trying to get a sense of, you know, how much catch-up can you achieve on NDPR production over the next couple of quarters?
Thanks, Paul. I'm not sure that we've ever said that we're comfortable with the water supply situation. As I said, we've got sort of a long history of challenges. The situation in September was extraordinary. There was a I think it was about a 1.5 m pipe, which was 10 m underground, burst. That meant that everybody in Kuantan, including residential users as well, had no water while that pipe was being repaired. That pipe has been repaired. As well as that, prior to that, there were some challenges around the pumping station, and there are new pumps which have been put into place. We think that we have a better situation than we've had previously, in terms of the supplier.
We are continuing to investigate and not on our own with some of the other industrial users within the Gebeng industrial state. We're looking to investigate other options for building redundancy into the water supply situation, you know, including do we need to put a pipeline to an alternate supply source, etc. Locally, we had used a lot of the water which was sitting in what we call this disused bauxite pit, which is essentially next door to our plant. We're coming into the monsoon season, so we think there's gonna be a fair bit more water there. The other thing is that, you know, as we'd indicated at the last quarterly, we were implementing a new circuit to improve our water recycle rates.
Now, that's a little bit behind time now because it's hard to recycle water if you don't have any. We think that will improve our performance. The other thing that the technical team is looking at is other solutions that will allow us to increase water recycle. That's our preferred pathway here is to continuously improve the recycle rates rather than just finding a different source of water because you know that means that we've got more control over it ourselves.
In terms of being able to catch up, as I think we've indicated in the report, we certainly see that we should be able, you know, the sort of production volumes, which I think most of you analysts have got included in your models, which are at or about the same sort of levels as we had in the previous year. We would think that we will be able to certainly be able to catch up and deliver those sorts of results over the following nine months.
Okay. All right. Thanks, Amanda. Maybe moving on then to the CapEx increase on Kalgoorlie. I mean, you've been asked this question around that capital estimate probably over the last 18 months from time to time and you know, the increase we've seen today that you've announced probably not too dissimilar to what other companies are experiencing in industry with respect to inflation. You're pointing out you know, logistical increase in logistical costs and et cetera. A bit of a scope change there, I note as well. More the question I have is around you know, the total CapEx budget you have, including Mount Weld and LAMP et cetera, of AUD 1.2 billion over the next two years. I'm correct by saying that's now AUD 1.275 billion?
What's the risk around, you know, the same issues that have impacted the Kalgoorlie cracking and leaching estimate impacting, you know, the two year budget? Maybe more the question is what contingency and have you actually built into that number? You know, what risk should we see on that increasing beyond the AUD 1.275 now?
Paul, it'll stay at AUD 1.2 when we've got enough headroom in there to accommodate this increase within that AUD 1.2, which has been disclosed. You don't need to put the AUD 75 on top of that. Yeah, we've been asked about this for some time. I would point out that we got all the equipment in on budget and on time. Of the increase, more than half of it relates to the scope increase. As I said, which means that, you know, frankly, that the cost increase is well within sort of 10%. We were hopeful that we would be able to cover the scope within that initial budget.
If it wasn't for some of these sort of more extraordinary cost increases which have occurred over the last 12 months, we probably could have. We think that it's prudent on the scope that we do the work now. You only get one shot at being, you know, sort of low-cost producer, and that's when you size your equipment. That's the reason why we've made that call to do it now. Each of the projects has its own contingency in it and, yeah, the contingency that we've put into the Mount Weld budget is larger than the one that we had in the Kalgoorlie project budget initially.
Okay. All right. Absorbed by contingency. That's helpful. I'll just ask one last one, Amanda, just on the market. Saw a bit of volatility in NDPR prices in the period. A bit of, you know, feedback from trade journals, et cetera, was, you know, a fair bit of restocking and destocking and seasonality in the price volatility. I know you've made a comment in your report here around, you know, the stated 25% increase in the Chinese production quota, and how that led to some concerns in the market. Can you maybe just any information you have around what Chinese production volumes are actually doing at the moment? What you've actually seen or heard of what they're doing?
Actually, I might pass that across to Pol Le Roux. I mean, there's sort of limited information coming out of China at present, as you would no doubt appreciate with the, you know, sort of continuing various lockdowns. Just, I mean, Pol Le Roux will, I'm sure will explain a little of the arithmetic around the 25% and why we were never, in fact, we were quite welcoming of that number. Where others, I think, saw it as being maybe a little bit more risky. Pol Le Roux, maybe if you'd like to talk about what you are seeing out of China in terms of production.
Yeah. As you said, it's been a long time since I last visited China, and I spent more time dealing with water in Kuantan than with NDPR price in the market. Basically, China increased their production quota by 20% in the first six months of the year, 25 in the H2. When you combine that with the production of Lynas, you end up with an increase of production in the calendar year by 21% worldwide. When we compare that with the production increase of magnets, and as you know, we know pretty well how much each magnet maker inside and outside China is producing. Converting this into NDPR consumption, we match with the same number of 21% increase. I think, we do this calculation very carefully within Lynas.
I guess there are people doing that very carefully in the meeting with China. What is interesting to me is that they decided to cut exactly at the balance point so that things remain the way they are. That's basically how you saw the price stabilizing after a bit of a shoot-up earlier on. Some concern because a lot of people say, "Well, 25% increase is not too much." Finally, after a while, people realized that things were still in balance, and that's where the price stabilize nowadays. For the future, I was expecting some kind of stimulus package from Xi Jinping, but he stopped short of this, just fronting up for another five years.
I don't know what he will do from these five years, but we'll see how the Chinese economy moves from now on.
Okay. Thank you, Pol. Very helpful. Thanks, Amanda. That's it from me.
Thanks, Paul.
Questions. Once again, if you'd like to ask question, please press star one one. Our next question comes from the line of Daniel Morgan from Barrenjoey. Please go ahead.
Hi, Amanda and team. Just wondering how hard you can run the Malaysian plant for the remainder of the year. You know, what gives you confidence that you can, you know, meet last year's production numbers despite the, you know, the slow start to the year? You know, is there any maintenance that we should be thinking about coming up? Or did you use the downtime to take care of some maintenance issues?
The simple answer to that is yes. Well, we had already scheduled the only major kiln maintenance that we needed to do during the year. We'd already scheduled that in the Q1. We took the opportunity to do another piece of maintenance in that time as well. You know, we certainly see that we should be able to run all four kilns with, you know, normal preventative, you know, sort of maintenance downtime. We should be able to run all four kilns through to the end of the financial year.
Thank you. The increase to the Kalgoorlie budget, you intimated quite a bit or half of it was scope. Can you elaborate on, you know, what is the increase to scope? You know, is this preparing for potentially that expansion of system capacity towards 16,800 tons per annum of NDPR? Is that what you're referring to?
Yeah. You've followed us for quite a long time, haven't you? Absolutely. There's two things, Daniel. The first is the carbonation circuit, as you will recall, is about AUD 30 million in total, and half of it will be picked up by the Australian government, and the other half will be picked up by Lynas. As I said at the time, I'd hoped that we would cover that within our contingency, but that's not gonna be the case.
Of course, the second piece is as we look at how do we put together all the pieces of the jigsaw puzzle and capacity. You know, we do need to make sure that we've got the opportunity to be able to increase capacity at Kalgoorlie, and particularly as we continue to increase our output from Mount Weld. Those are the two things that are, you know, sort of driving that scope increase.
Thank you. I note that your cash costs or cash outflows for production and royalties, et cetera, was AUD 104 million in the quarter. I know it's quite a messy quarter where you didn't produce as much as you would have liked to, and you had to you know, make a bunch of decisions on the fly to fix water issues and whatnot. I'm just wondering, you know, given, you know, is this a level of cash outflow we should expect for the rest of the year each quarter or, you know, will it go up with volume going up? Thank you.
A lot of that, and that issue on costs has been, you know, sort of quite challenging, particularly around things like, probably the most significant has been sulfuric acid cost increases. Which is sort of unavoidable, A and B, you know, you can't, we can't choose to dose different amounts, so it's not something that we can just, you know, sort of save by using less. Having said that, Pol's team, you know, they're very focused on further opportunities to reduce either usage and/or finding, you know, sort of new suppliers. Really, that increase in costs has got more to do with increase in input costs than anything else. It really comes down to what happens with the market prices on some of those things.
I'll let Gaudenz maybe say a little more. I mean, I said that the one which is highest in my mind is sulfuric, which has gone up by about two and a half times.
I think I would like to add that, here, if you refer to the data, Daniel, it's cash. Obviously, cash follows a couple of weeks or even one or two months after consuming it, and particularly on the royalty. Basically what we are talking about here is really the royalty we paid at the high point of the prices. Definitely on that you will see coming back on it. Also what you have seen is probably also the WIP balance, which is probably different than what you would have in a normal operation. There will be some adjustments to it.
I would not expect to see it higher than it was in this quarter. Again, I think we need to see how the price develops as Amanda indicated on the chemical inputs as they are probably coming through with about 45-60 days time gap.
Okay. Thank you. Last question, if I may, just on the Kalgoorlie plant. The budget has increased today. I appreciate some of that scope, but is there anything you might add just on the timing? It doesn't look like you've changed the timing from July 2023, which you know has always looked like a tight timeframe. Just wondering if there's any update now.
It is a challenging timeframe, and no, there's no update. At this stage, we continue to manage all elements of that plant to be able to bring it online in the event that we are unable to continue to produce in Malaysia.
Thank you very much.
Thanks, Daniel.
Further questions? One moment before we take the next questions. Our next question comes from the line of Levi Spry from UBS. Please proceed.
Good day. Thanks for the call. Maybe can I just push a little bit more on the last question? What is the critical path? What will we see and what, I guess, were the expectations around commissioning of certain parts of the circuit?
Of course, you would be aware that the critical path moves around. You know, once something goes red with, you know, it gets fixed, and then something else will become the critical path. It's like dealing with your sort of bottlenecks in an industrial operation. We will advise the market when we have first feed on. In terms of commissioning, we have already recruited the operational management team that will run the Kalgoorlie facility, including a commissioning manager, and we are well placed to be able to commence that process, as soon as equipment is ready to go through the commissioning process.
Okay. Thanks, Amanda. Maybe just one for Pol. Can you share with us a little bit about your calendar year 2023 expectations for magnet demand or production? It sounds like you're not adding much volume, if any, to the supply side. What are your expectations around demand?
Uh,
Has it rolled over? Is there any signs of it rolling over a little bit? Yep.
Yeah.
I think it's fair to say that the 21% increase in magnet production worldwide in 2022 and 16% in 2021 included some restocking or refilling of the supply chain that had been. I mean, everyone decreased their inventories during the COVID, not knowing how far it would go, how long. From our direct Lynas customers, and you know, most of them are Japanese, so everything is pretty well scheduled. We see a substantial increase, I mean, at least 10% increase for next calendar year. Now there are obviously uncertainties, in regards especially on the European situation, the semiconductors availability. What I would foresee is that, at least the wind turbine in 2023, which should be much stronger than in 2022, and that doesn't relate too much on semiconductors.
As of today, we still see a very strong growth on the electric cars. This is just accelerating all the time. For the rest, like, home appliances, robotics, this is more related to the global economic situation. If the economy goes down, you will have less new buildings, less air conditioners, et cetera. That's where most of the uncertainty lies. For the specifics that we enjoy, which is wind turbines and electric cars, I think 2023 is a very good year ahead again for us.
Yeah. Nice one. Thanks, mate. Thank you.
You're welcome, mate.
Thank you for the questions. Once again, if you would like to ask question, please press star one one on your telephone. Our next question comes from the line of Austin Yun of Macquarie. Please proceed.
Hi. Morning, Amanda. Thank you for taking my questions. Just two from me. The first one is on the capital management. I see that the restrictions have been removed. Just wondering if you have any plans to provide you know further clarity on the capital management or potentially you know update to your dividend policy. Understanding that you know the near-term focus is on the growth and executing multiple projects in your pipeline. Thank you. I'll come back with the second one.
Thanks, Austin. Great question. You know, we were very pleased to agree these variations in the senior loan agreement with JARE, who have always been supportive. I'd actually forgotten the history. Well, it was just before my time. When these came in, it was to avoid the potential risk of the company breaching other more sort of normal debt covenants. I think that we've now grown up as a business, and it is appropriate to do this. We, as the board, the board of Lynas, you know, we're very pleased that this will allow us to have a more normalized approach to capital management, including, you know, sort of the opportunities to provide both a capital and a yield return to our investors.
That will just be considered as a normal part of, you know, sort of the board cycle. You know, all boards consider the payment of dividends as part of their half year and annual results. With this now as our new agreement with JARE, we will be able to do that. We're very pleased with it, and we see it as being a strong indicator of the maturity of the business.
Thank you, Amanda. My second question is on the cerium production. Can see that you delivered a few large orders in the quarter. Just trying to understand from a production perspective. Do you have a minimum cerium deliver kind of commitment every year? Thank you.
I'm not sure I completely understand the question. We have the ability to produce cerium, at times where we have had challenges around some of the inputs, like particularly the water. We will preference, the NDPR circuits, of course. That's really what we've seen over the past, couple of years. We have significant customers for, what's now more than half a dozen different grades of cerium. Even within our cerium portfolio then, you know, we're really, developing some higher margin, products within that portfolio, including for applications like water treatment, in addition to the more traditional applications like, you know, the cerium which is used in auto cat systems.
We do have a series of, yeah, customer contracts associated with this, our ability and, you know, sort of normal operating conditions to be able to meet those contracts, plus more Cerium is basically in plentiful supply throughout all suppliers. Yeah. Does that answer? Is that really what you're sort of seeking to understand? Paul can probably add to that as well.
Yeah. Thank you, Amanda. Thank you. Yeah. Basically, the product mix will normalize for the rest of the year, right? Which gonna help the average realized prices, given that NDPR will be a larger proportion for the next three quarters.
Yeah. Yeah.
Cool.
That's right.
Thank you. That's all.
Thank you.
Once again, if you would like to ask question, you may slowly press star one one on your telephone and wait for a name to be announced.
Okay. Recorded call, sounds like. Are there any more questions, Jason?
At this time there are no further questions on the queue. Back to you.
Okay. All right. Look, terrific. I'm sure if any of you think of some further questions, you can drop a note to Daniel and/or Gaudenz, and we will certainly get back. Lauren, we'll certainly get back to you. Once again, thank you all for your time and attention this morning. I'll look forward, hopefully, to seeing many of you between now and Christmas. Maybe even some of you will come to the AGM. So thank you all.
Thank you for participating. You may now disconnect.