Ladies and gentlemen, thank you for standing by and welcome to the Lynas Quarterly Investor Briefing. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Lynas. Thank you. Please go ahead.
Good morning and welcome to the Lynas Corporation Briefing for the September quarter of FY21. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director, and joining Amanda on the line are Gaudenz Sturzenegger, CFO, and Andrew Arnold, General Counsel and Company Secretary. I'll now hand over to Amanda Lacaze. Please go ahead, Amanda.
Thanks, Jen. Well, good morning, everybody. I'm delighted that you've been able to join us this morning as we talk about our first quarter results. And of course, I'm very pleased with the results that we've been able to release today. We've set ourselves a number of targets at the beginning of this quarter. I mean, of course, always to ensure that we meet our customer needs. But operationally, we really wanted to ensure that, you know, our restart after a very extended shutdown was maintained safely and that we, you know, sort of, achieved stable operations, because we know that that's good both for throughput and also for cost. We wanted to ensure that we were matching production to customer needs and not creating any unnecessary supply-side pressure in the market.
And we set ourselves a target of ensuring that as we started up after the prolonged shutdown, we would capture cost efficiencies and perform at our best cost levels, and that we've demonstrated during the period of time we've been operating our various facilities. We set ourselves a target of meeting actually a profile in terms of cash generation, as we progress with our growth plans. We wanted to make significant progress on our Lynas 2025 initiatives, and we wanted to continue to advocate for industry development in a positive, you know, affirmative way. And I'm pretty pleased because really, as I look at my checklist, I'm able to put ticks against just about all of those things. So in terms of operations, certainly, in time of COVID, there are certain imperatives in the way that we operate.
Of course, the health and hygiene protocols are non-negotiable, and even as we at present see a flare-up of cases in Malaysia, fortunately none of them in the no significant numbers in the state of Pahang where we operate. But we are ever alert, and ensuring that our people understand our expectations again, that we have appropriate testing regimes, and of course we have the appropriate protocols within the organization to ensure that we are creating a safe environment. We've mentioned, I think at the half-year, that we put a new structure in place. It's certainly working very well with Kam Leung, you know, heading up our upstream operations with full accountability for our Western Australian operations, both Mt Weld and of course the Kalgoorlie project, and Pol Le Roux taking accountability for our downstream operations, including our Kuantan facility and other customer-facing activities.
This is working well, although I think both of them feel that there's certainly plenty of work on their plates. We have been able to manage, you know, some of the issues which come from the prolonged shutdown. You know, any chemical plant always will, you know, sort of let you know that it likes to be run continuously, and so we had a prolonged and sudden shutdown. But you know, the team in Kuantan in particular, I think, has used their time very wisely, and ensured that we've implemented a proper process to really understand what, if any, effects there have been from being shut down. It's a delight to have returned to a positive operating cash position, and it is in line with our internal profile that we used as we sized the equity raise for the Lynas 2025 foundation project.
Of course, the big thing we did in the quarter with respect to Lynas 2025 was the capital raising of AUD 425 million that you know secures funding for the key foundation projects associated with Lynas 2025. The Kalgoorlie project team has made really excellent progress with the sublease signed with the City of Kalgoorlie-Boulder and the general purpose lease for the site. We've had the decision from the Department of Agriculture, Water and the Environment. That's the Commonwealth Department that this is not a controlled action under the EPBC Act, and that means the project will be regulated by Western Australian state regulators. Of course, as people know, we have signed a U.S. government contract for the phase one development of the proposed heavy rare earth plant. The other thing really is about continuing to advocate for industry development.
You know, I think there's barely a day goes by without some commentary about geopolitical matters, particularly as they relate to rare earths. I think that many of us have spoken before about the effect of COVID-19 and reminding, and reminding, any end users that singular supply chains can be risky. And then, of course, you know, we, we continue to feature in various different government announcements and, and, and statements. We're really delighted to see critical minerals and rare earths being part of the Australian government's advanced manufacturing policy.
And we are also pleased to see, and we feel we have a part to play in this, continuing to engage with Australian, U.S., Japanese, and European governments on the importance not only of having the resource and initial processing of rare earth, but actually in the development of downstream industries, which will give end users confidence to open outside and develop outside China supply chains. So, you know, I was just talking to one of my colleagues and saying, you know, to some extent, it's a business-as-usual quarter, and isn't it a delight to be back to a business-as-usual type profile. We look forward to continuing to build on the solid foundation for our first quarter this year.
So, look, I think the report, and I'm sure everybody on the call has read it, is pretty self-explanatory, and so I'm quite happy to take questions from anybody on the call now.
Thank you. Ladies and gentlemen, if you wish to ask a question today, please press star followed by one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, it is star one if you wish to ask a question today. Your first question comes from the line of Jack Gabb from Bank of America. Please ask your question.
Thanks, and good morning, Amanda and team. My first question is just on current demand. Did you see a pickup in demand over the quarter, which is what the price increase would suggest, or has it stayed relatively constant? And secondly, at this stage, do you envisage maintaining operations at around 75% of capacity into the second half of this financial year?
Thanks, Jack. Good morning. So, demand is holding up reasonably, you know, pretty well when you give, when you take into consideration the effect on so many industries of the COVID-19 pandemic. You know, two key drivers of NdPr demand, and the latest stats out of China say demand has held up there as well, are, of course, electric vehicles and wind turbines. And both of these have, you know, sort of continued to grow, notwithstanding the effect overall on automotive, particularly the automotive industry, as a result of the COVID-19 pandemic. We are at present, you know, remaining at the 75% level, but we are tracking this on a weekly basis, and looking at, you know, with our customers and our inventory and our distribution partner projects, you know, inventory levels, how they're being affected by demand.
For us, it's pretty easy to, you know, sort of, to ramp up. We know how we know when we have done this. And the only thing that we need to factor into this is that we do have a planned shutdown for one of our kilns, this quarter. So we would expect that we'll sustain about the 75% at least for this quarter, but quite pleased with the, you know, with the demand picture. But, you know, the world is still quite uncertain, so I'm loath to make any affirmative forecasts on increasing production in the second half of the year.
Yeah, understood. Thanks. Just to follow up on that, although it's not going to be needed this year, can you give us an update on the permitting for the increase to sort of above 7,000 tonnes produced NdPr in Malaysia? I think you were going to apply for it, even though it wouldn't have been needed this year.
Yeah. So actually, you know, bearing in mind once again that there are many matters on the plate of the Malaysian government at present, you know, many of them COVID-related, the breadth of engagement is really sort of limited to those things which are more time-critical right now. So, you know, our primary engagement is related to the permitting and the progression of the PDF, and I don't at this stage have an update to provide on the processing limit.
Okay. No problem. Just last one before I pass it on. You talked about, obviously, CapEx starting to step up over the next few months, on the Lynas 2025 plan. Can you just give us a bit more guidance on CapEx for this year, and into next year as well, if you can? Thanks.
As we said, where we did the capital raise, we see the significant step-up actually occurring in next financial year. But we would expect to be ramping up towards that level. But until we start, you know, sort of the you know substantive work on site, most of the CapEx is going to be related to things like progress payments, for example, on the kiln. You know, we didn't sort of pay for all of that upfront, so we got a series of those payments.
We've let one of our other long lead-time tenders, but, you know, we would be talking but we, you know, we are talking about, you know, sort of picking up to probably in the range of AUD 13 million-AUD 20 million a quarter from our historic sort of level until we hit next financial year when it's going to, you know, sort of that's when we will really start to spend the money.
Great. That's helpful. Thanks, Amanda. I'll pass it on.
Thanks.
Your next question today comes on the line of Daniel Morgan from UBS. Please ask your question.
Hi, Amanda and team. Just to follow up on the 75% decision this coming quarter. Now, I understand you've just highlighted you've got a planned maintenance shut on one of the kilns. I'm just wondering if there was an opportunity to think about trying to produce as much as possible under your licensing constraints, which I've estimated about 5,600 tons in a calendar year of NdPr. Now, I know you don't want to disrupt the price on the market, and it can be sensitive, but is there not an opportunity to build inventory that might be beneficial in future periods? Because if you don't fulfill your constraints, you know, those tons could be lost forever.
Yeah. That is certainly one of the things that we factor into our thinking. At this time, you know, as I said, we can swing in and, you know, we can swing in Train 4, you know, 3 trains, 3 kilns and 3 SX5 trains. The kilns, 3 of them can actually build a bit of stock over time. But it is, you know, the kilns have to be shut down every now and then for these sort of relatively significant maintenance programs, and we already had that scheduled into this quarter. And we actually won't be changing that schedule. But yeah, although we actively consider this every week, and decide what is going to be the best outcome, both in terms of production and funding outcomes.
At this stage, we expect that we will stay pretty much at that 75% level, in this quarter.
And that license constraint for each calendar year, that's a use it or lose it, I imagine. It, you know, the actual production you didn't do this year, that doesn't carry over, I presume?
Sure. Sure. That's right.
Okay. Thank you.
So I understand your point, and we absolutely have, as recently as yesterday morning, when we had our monthly significant sort of meeting on this, as recently as that, we had a conversation about it. On balance, right now, we think that we are better to continue to run at the current rate.
Okay. Thank you. Shifting to the growth option, so the Kalgoorlie option that you're exercising, I'm just wondering if you could just remind us of your latest thinking with regard to what's being built in Kalgoorlie and what will be built in Malaysia. So my understanding is you're going to expand production from 7,200 tons per annum to 10,500. Obviously, there's an incremental portion of solvent extraction that is in that thinking. Where does that solvent extraction step take place?
Yeah. So, isn't it a good thing it's still five years till 2025, because we still have quite a few moving parts on this? So the first piece, and this is why we sort of refer to them as foundation projects, we have to have the kiln operating in Kalgoorlie. It has been engineered and designed in such a way that it can, relatively easily—I'm guessing my operating team would hate me ever saying relatively easily, but anyway, be scaled up. And the throughput is actually a function of the con that we put in the front end. Then with respect to additional separation capability, we're assessing a number of pathways for that. One is actually reconfiguring some of the flowsheets that we have in Malaysia.
We have a quite well-developed concept by our technical lead, which would see us be able to significantly lift throughput by reconfiguring some of those assets. Of course, as you are also aware, I think the U.S. government has two tenders on foot at present. One is for light rare earths, and the other one is for heavy rare earths, and we have responded to both of those. In terms of how to get to the extra, as I said, you know, we also have a number of pathways there. If Kalgoorlie is the only facility for cracking and leaching, then, you know, we've got some options with respect to the way that we feed it.
As part of the 2025 project, we configure Malaysia so it can receive mixed rare earths concentrate and then maybe other sources of mixed rare earths concentrate that we use for separation as well. So we have a number of different pathways to achieve the uplift from the 7 to the 10.5. But they're all sort of still, some of them are still under assessment, and we certainly have time to ensure that we pick an optimum mix of those options.
Thank you. Just the last question, you highlight in your quarterly your schedule to complete a feasibility study for the Department of Defense on the tenders that they've made during this fiscal year. Are you going to be sharing the outcomes of that with us and the market, or is that something that might be a commercial in confidence with the Department of Defense?
We will, Andrew may like to answer that question more than me. Let's suffice to say that when you deal with governments, you have a conversation with them about what stage announcements are, reasonable or not. When we look at it, we look at our duties under continuous disclosure. So therefore, clearly, if we have something which is relevant under continuous disclosure rules, then it will be shared with the market.
Thank you very much.
Thanks, Daniel.
Your next question today comes on the line of Reg Spencer from Canaccord. Please ask your question.
Thank you. Good morning, Amanda and team. Just a few from me. First one is just on pricing. That slightly lower price Q1, Q2, I presume, reflects a, you know, a differing product mix into those different markets. Is that a fair assumption or presumption?
Sure. Our product mix is always significant. The other thing is that as the price, you know, we as we've shown, you know, the price increased over the quarter, we always have a bit of a lag either when the price goes up or when the price goes down because of the contract terms we have with our key customers.
Understood. Thank you. Next question is a.
Sorry, the other thing, Reg, just, you know, the price for NdPr has strengthened, and, you know, the price for SEG has sort of held fairly stable. But, cerium pricing, you know, where demand has, you know, sort of dropped out of the market,
Yep.
Because, you know, it's by no means as strong as it was previously.
Understood. Thank you. Next question is a little bit more high level. Given the still significant uncertainties that we all face with the pandemic, what do you guys consider the key risks to meeting your 2023 timeline for delivery of the Kalgoorlie project? And you know, I guess what are those key risks that might be presented or driven by the impacts of the pandemic?
Gosh. So the project team has a whole paper, I think it runs to several pages, of risks. And that is not meant to be alarming that there's that many risks. It's meant to be a reassuring that those risks have been properly considered and mitigating strategies put in place. Certainly, the longer the WA maintains its closed borders, the less flexibility there is around, you know, things like labor. And I think that we see this, and the Minerals Council has talked to, you know, sort of, labor risks as mining and minerals industry in particular picks up. So it's certainly one of the reasons why we are progressing, you know, as well. Under any circumstances, we would progress as quickly as we can.
But it's certainly something that we want to be ahead of the curve in terms of being able to access the right skills and capabilities. Clearly, we have a fair bit of engineering and fabrication of materials which will be imported into Australia. A lot of those are coming from Malaysia, actually, where we've established some very good relationships. And while, you know, Malaysia is facing a second wave from COVID at present, it is primarily driven out of Sabah, so, you know, non-peninsular Malaysia. But, you know, there could be disruptions to materials or equipment that we seek to import. Other than that, there shouldn't be too much, Reg. I mean, clearly, there's a plethora of risks. But generally speaking, we believe we have good approaches to mitigate those risks.
Okay. Look, it is a reasonably long time away, and you do have, you know, quite a fair bit of runway there. But what would your fallback position be if there was something that might not necessarily have been fully within your control, some kind of pandemic-related impact that prevented you from delivering Kalgoorlie, the current limitations of your existing operating license in Malaysia? You know, do you think that you would have some kind of fallback position, or leeway with the Malaysian government on that front if you were presented with that issue?
Reg, I'm sorry. I'm just going to give a politician's response to that because, you know, that is so highly speculative, you know, that, I think what I would say to you is that our Kalgoorlie project is now fully funded with allowance for a significant, you know, for what would be regarded as a reasonable contingency. And we have a buffer based upon our profile of our business, which, you know, if the world turns to custard, we actually have a cash buffer in there as well. So the project is funded.
The project schedule and its milestones give us, you know, given that we meet those milestones and we have a good track record on meeting milestones, give us, once again, a significant timing buffer to allow us to get the plant not only started up but actually ramped up to operating, at, at, you know, stably at, at target rates. So I think that, you know, to your point, the mitigants that we have here is that we actually have built into our planning both funding and timing buffers, which will allow us to deal with, you know, unforeseen effects.
Okay. No, that's fair. Thanks, Amanda. And one last one from me. There's been some recent media speculation about the potential introduction of export controls in China. I presume you guys are monitoring that situation very carefully. But have you guys got any comments on what's happening there?
I guess, you know, one of the things that I would say is that, as we look at what's been put in place, it reflects, again, you know, sort of, China's focus on not doing things which are just, you know, add an atom bomb to kill an ant. So what they've done is they've created a legal framework as we understand it. It's actually focused on, as we understand it, being able to be a bit selective in how they would apply any restraints. And I think that that is a reflection of the fact that rare earths are an important part of the Chinese economy, and they're not going to make decisions which have unintended negative consequences. But it's not just about rare earths. The, as we understand it, the policy, you know, is much broader than that.
But it is, from what we understand, it will allow them to more effectively target where they might put restrictions as opposed to just general restrictions.
Well, that's very useful for us. Thanks very much, Amanda. I'll pass it on.
Your next question today comes on the line of Dylan Kelly from Ord Minnett. Please ask your question.
Yes, good morning, Amanda. Most of my questions have been answered already. Just wanted to dig into the cost base. So at AUD 57 million for the quarter, it's only up very slightly versus the last one, despite the huge increase in volumes. Can you just walk us through what are the moving parts of that and how repeatable is it? Particularly referencing your comments around an internal budget, around, you know, cash generation and how we should think about it rolling forward.
Yeah, sure. So first of all, the previous quarter's number was pretty awful. So as benchmark, you know, it, it's not a great one because, of course, when you're talking in cash terms, we had a fair bit of carryover in terms of payments into that quarter for materials, you know, particularly chemicals that we had purchased in the prior quarter. That's not such an effect here because we restarted in May. So, you know, we had three months' worth of purchases for the quarter. But there's a little bit of, you know, always timing fluctuations on when payments are made and things like that. You know, I think that our last payment for hydrochloric fell across the quarter and that sort of stuff.
But we're pretty confident about, and so I think that looking at costs is always much more sensible to look at them, when we provide the half-year results as opposed to the quarterly cash picture. We're confident that we have established a stable cost base, and we've brought it down from where we were performing last year.
Okay. Thanks for that. I won't go into the comments around, you know, running at your current capacity or current run rate. Can you just walk us through what's going on with the NdPr market at the moment? I mean, yes, we've seen a price bump. Is this, do you see this as being supply-driven at the moment with, you know, Chinese supply coming off at the end of this sort of five-year plan process and putting limits on export controls, or how do you know what's happening with supply in this instance?
I actually think that this is probably more a reflection of the fact that AUD 33.80 for a kilo of NdPr is a really low and unsustainably low price for most in the industry. So if you look sort of historically at what's happened when the price goes down to those sorts of levels, it does tend to move back up to more sustainable levels. I think a lot of Chinese firms are relatively comfortable in that AUD 40-AUD 45 range. So I think it rather than any sort of big complexity around supply and demand, I think it has simply got to levels that are causing too much pain for a lot of the suppliers.
Okay. Fair enough. And just on the comments around different products, I'm just noticing there's a bit of a breakout in, say, the different prices for the separated Nd and Pr, particularly on the Nd, relative to the mix. Could you just do you have any insight there to understand how that's come about and how the separated trains are currently operating?
So, so it's funny, isn't it? And I think this is one of the things I'd make a broader point. It's one of the reasons why we talk about ourselves as a rare earths company, not an NdPr company. And when you look at, you know, sort of generally, a lot of people really want to focus on NdPr. But it is, without doubt, you know, the king of the rare earths here at present. But things change, and they change according to different technologies and, and different approaches. And, you know, we've all talked about how 15 years ago, cerium was king and Nd was a byproduct. So even, I think, three or four years ago when we first started the process of sizing, you know, sort of that NdPr separation, Pr sold at a premium and Nd sold at the same price as NdPr.
Today, Nd is selling at a premium and Pr is selling at about the same price as NdPr. That's simply a reflection of demand across different segments within the market. This is why we need to be able to make everything that we make as a reliable and a high-quality way because the users change and the uses change over time. The Train 2 , which does the Nd and Pr separation, I think we've always said that it operates at slightly lower rates than the others, but it's stable and it's producing at target rates. We're not proposing at present to increase the amount of separated Nd that we produce. But once again, it's one of the things that we just keep a watch and brief on.
Okay. Wonderful. Thanks, Amanda.
Your next question today comes on the line of Trent Allen from CLSA. Please ask your question.
Hi, guys. It's Trent. Congratulations on a good recovery this quarter. Just you touched on this with some of the other callers already. Just back on Malaysia, is there any update about progress of the PDF there? Because it's really your next deliverable. Also, can you remind us what you need to do by the deadline? Is it, is it a full permit and a plan, or do you need to be pouring concrete? Also remind us what the deadline is. Just reflecting Reg's question about Kalgoorlie, what are some of the key risks around delivering that on time? Thank you.
Hi, Trent. Thanks for the questions. So the progress on the PDF in Malaysia is just milestones again. The milestone is that we need to have commenced construction by early March 2021. To have commenced construction, by definition, we need to have all of our approvals and permits in place. We're working, you know, our team there is working very productively with now the two separate departments that are involved in that permitting processing. So MOSTI, which is the Ministry of Science, Technology and Innovation, the minister during the quarter actually visited the proposed site and also visited our site in Kuantan, which, you know, was really pretty exciting. I actually should have probably put that in the report. You know, this is the first ministerial visit that we've had in a very long time. We couldn't get the previous minister to come and visit the plant.
And we know that when we get people to the plant that, you know, the quality of the work and our people is so evident, that, you know, many of what may have been held as sort of concerns from a distance, you know, fall away. So we are working very effectively with MOSTI and also with the Department of Environment and just, you know, methodically working our way through the various approvals that need to be completed. And I should also say also with the state government because, of course, it's a land issue and requires state government and local government, you know, sort of approval as well.
So, you know, just the same thing as really, you know, Kam and his team are dealing with at WA, you just got to move through each of these dates and we just do our work, you know, sort of to ensure that we meet the dates rather than if we don't do our work well, then that gives the civil servants, you know, sort of cause to keep coming back and asking more questions. The process hasn't been significantly compromised by COVID. Although I would say that everything, you know, has the potential to just take a little bit longer. And with the second wave, the civil servants have just all been sent home again for a couple of weeks because there have been a number of cases of Putrajaya. But at present, we see ourselves on track, without too many problems.
Really, in terms of Cal, like I said, you know, we've got our critical path items already on order. We're confident with the providers of that. Progress on the engineering design and the creating packages of work that we're going to be letting to, you know, various providers, hopefully many of them local. You know, Reg started putting the fences around the site during this quarter. Sorry, Jeff, it was, started putting the fences around the site this quarter. So, you know, yes, there are all the risks that you would expect with a major project. But we have, we believe, firmly mitigated, with our approach.
Okay. That's great. Thank you.
Thanks, Trent.
Your next question today comes on the line of Jack Gabb from Bank of America. Please ask your question.
Hi, Amanda. Just one quick follow-up from me. Are you looking at blending in third-party concentrate into your cracking and leaching circuit? I guess there's no real constraint for you to produce more concentrate, but just wondering whether it makes sense or whether it's technically feasible to blend in a higher-grade concentrate, and whether you're looking at doing this. Thanks.
Yeah. Look, Jay, we've always had a watching brief on other sources of rare earths. Generally speaking, we haven't found too many where, you know, I mean, frankly, if we found something that we thought would be just absolutely fabulous, we'd go and buy it. If we found another ore body that we thought was better than putting more money into developing our own ore body. But part of the facility in Kalgoorlie is to ensure that we've got the flexibility to have alternate feedstock. And, you know, with various different parties, we do ongoing sort of metallurgical test work as far as that's concerned to understand, would it be a case of blending it or would we campaign it, say, for example?
Okay. Perfect. Thanks, Amanda.
Once again, if you do wish to ask a question today, you can just dial one on your telephone. Okay. So yeah, we have no further questions on the line today. I'll now like to hand the conference back to Amanda for closing remarks.
Okay. Thanks very much. And thank you all for joining. And I look forward to reading all of your various reports, which I assume will be glowing. Anyway, no doubt we'll talk again soon. Thank you very much for your time.
Ladies and gentlemen, that does conclude our call for today. We thank you all for your participation. You may now disconnect.