Ladies and gentlemen, thank you for standing by and welcome to the Lynas Corporation 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 this session, you will need to press star followed by one on your telephone. Please be advised that today's conference is being recorded. I will now hand the conference over to the Lynas Corporation. Thank you. Please go ahead.
Good morning and welcome to the Lynas Corporation Briefing for the September quarter 2019. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director, and Amanda is joined by Gaudenz Sturzenegger, Chief Financial Officer, and Andrew Arnold, General Counsel and Company Secretary. I'll now hand over to Amanda to commence the briefing. Please go ahead, Amanda.
Good morning, everybody. I hope wherever you're listening from, it's a lovely day. The sun is shining in Kuantan, and as we move into the winter months, it's got a little cooler. It must only be forecast to be about 31 degrees today. So the quarter that we've just been through was a fairly unremarkable quarter in terms of the operational details within the business, with the exception of just a couple of areas. I think the first one is that we were incredibly pleased to pass the milestone of one year lost time, injury-free in July. Unfortunately, we broke that record about 10 days ago, but we did make it to 461 days lost time, injury-free, and on any criteria, that is an extremely good result.
We remain absolutely focused on ensuring the safety of each and every one of our employees, and this is not just when they are in the workplace but on their way to and from work, which remains the most dangerous time of the day. Other initiatives have included things like having bike checks to ensure that bikes are roadworthy, ensuring that our people are wearing helmets, etc. The other thing which happened during the quarter was the release of our first sustainability report. I'm aware that many of you as investors have your funds, that those who are invested in your funds are increasingly interested in whether businesses pass the test in terms of sustainability, and this is not just on the way that we operate environmentally but also in our commitment to our people and our communities as well.
We're very proud of our sustainability report, notwithstanding some of the political shenanigans that go on with respect to our business. We are recognized globally as a gold standard. We received the EcoVadis gold medal for our sustainability, and certainly, our customers recognize that our practices and our continuing focus in this area is the best available. So then when we, of course, the other remarkable thing in the quarter, which was also external to actual operations, was the renewal of the operating license for a six-month period but with a clear pathway recognized for continued operation in Malaysia with the requirement that we pass two tests at that time.
The first is that we have a letter from the Pahang State Government approving a specific site for our PDF, and the second being that we have substantive plans for the relocation of Cracking and Leaching to Western Australia, and I can advise that we are well progressed on both of those. In terms of the operation, it is disappointing to us that we are yet to finalize our discussions with the local regulator with respect to the amount of lanthanide concentrate that we can process. However, we continue to engage, as we always have done, productively with the regulator on this matter and remain optimistic that it will be achieved before the end of the calendar year.
However, given that we don't have it, and as indicated previously, we've made a specific and explicit decision to manage the rate at which we're producing such that we don't go into a full shutdown as we did last year. Certainly, we expect that if we don't do that, our January results will be better than they were last year. At the same time, we are certainly doing everything that we can to optimize the rare earths which are contained within the lanthanide concentrate that we are able to produce, including focusing on we mentioned in this that we've installed a dryer in Mount Weld. Certainly, the lanthanide concentrate can come in with variable levels of moisture. The lower the moisture, the higher the rare earths.
That's sort of pretty clear, and certainly focusing on recoveries, which we do at all times right through the process. Having said that, NdPr production at 1,242 tons was certainly lower than we would like it to be and lower than we could place in the market. So this is a high priority within our business to resolve this matter. Notwithstanding that demand continues to be high and the significant forecast growth, particularly within the Japanese market, globally, conditions are soft. So that's sort of, and that's very much driven by the lack of confidence inside China as a result of the trade tensions.
The result, the NdPr price is pretty flat, but Pol and I still have our start of the quarter bet on what we think the price is going to be, and one day one of us will be right. But so within that context, within the context of a relatively subdued market with flat pricing and the fact that we've had to constrain our production rates, we're pretty happy with the results. We continue to build cash, and that, of course, is incredibly important ahead of our Lynas 2025 investments. And so finally, just a few words on that. We are continuing to build our team that is working on Lynas 2025. We have significant progress that's been made in this area.
Of course, most of we have two parallel streams here, one which is really about identifying what is the right location, and this has a significant number of issues associated with it, including availability of infrastructure in particular. And then on the other hand, the engineering work and really designing what we think is going to be the very best facility as we move forward.
Two weeks ago, I was in Western Australia for the In The Zone conference. This is organized by the University of Western Australia. It was a very high-profile event. In The Zone means about the Western Australian time zone, but as well as that, it included so it included representatives from governments within the time zone but also a few from outside the time zone like the U.S. government and the Japanese government. Its focus was critical minerals.
It was a very extraordinarily well-attended event, actually, and gave us a good case to showcase it gave us a good opportunity to showcase Lynas on the world stage with sort of some key stakeholders. We remain very confident about the level of interest and support for a proven non-Chinese supply source of rare earths. With that, I'm happy to stop and take some questions.
Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please just press star followed by one on your telephone and wait for your name to be announced. Your first question today comes from the line of Daniel Morgan from UBS. Please ask your question, Daniel.
Thank you. Hi, Amanda. First question I've got is just on pricing. Your pricing in the quarter was a little bit ahead of what I was looking for, and I was just wondering if you could give some insight into was it partially a greater mix of NdPr that you were selling in the quarter versus production, or was it actually that you're getting higher realized pricing from putting more product into Japanese markets? Just wondering if you could give some insight into that issue.
Yes to both of the above, Daniel. So it was a little contributed by product mix and a lot contributed by customer mix.
Awesome. Thank you for that. I'm just wondering if you could provide an update on the separation performance on your Nd and Pr lines?
Yep. All is going well as far as that's concerned. We are optimized. We really are trying to maximize the production of separated Nd. There is significant market demand, and at this time, we're probably only just keeping up with sort of our key customers in that area. And for the first time, just I think within the last couple of weeks, the pure Nd price just inched ahead of the NdPr price. Historically, Nd is sold at the same price as NdPr, and Pr has sold at a premium, but now we're seeing the Nd sort of inching forward. So we are producing at design through that or close to design through that separated unit, but yeah, we're looking at ways to continue to push the Nd production.
Okay. Thank you. And then just the last question is in the release, you've highlighted that the mining campaign, 3 ore, has got greater levels of cancrinite and carbonate levels within it. Just wondering if you could expand on is this something that's impacting the recoveries, and can you remediate that through the options you've been taking, and what's the operating cost impact? Just trying to get a feel for quantifying that or the magnitude of this issue going forward.
Yeah. So Daniel, it's a really good question, and if you want really chapter and verse, I'm going to tell you I have a chat to Kam. But what I can tell you is that unmanaged, it has a significant potential to affect production and recoveries, right? So both the cancrinite and the carbonate. Now, the carbonate, both of these things, we expect to continue to be an issue, to continue to be a feature of the ore body. And so therefore, what we need is to put in place alternative processing to deal with it.
The most significant part of that is the pre-leach circuit at Mount Weld, and it appears to be doing the job that we require it to do, but the metallurgists are continuing to do work to ensure that we are optimizing the flow sheet as we move into new ore profiles. So any time that you're processing (I don't have to tell you guys this) any time you're processing a natural resource, you're going to get variation. One of the things that we are, I think we've demonstrated a capability to do it, but we are really focused on continuing to improve our capability of managing our response to changes in the ore. So yes, it could have a significant effect. It is not right now because we are managing it appropriately.
Thank you.
Thank you.
Just another reminder, it is star one to ask a question today. But your next question comes from the line of Andrew White from Curran & Co. Please ask your question, Andrew.
Hi, Amanda. Just a quick question on the PDF that's happening. As I understand, it's with Pahang State and the AELB. Maybe you can correct me on that, but I just wanted to, I was hoping you could walk me through the major issues that need to be resolved in finalizing those details. And what are the major roadblocks in getting this approved, and what role does the central government have? Where will it be making its decision in that pipeline?
So the requirement in the license, in the six-month license renewal as it stands, is quite explicit that we require a letter from the Pahang State Government approving a specific site. Clearly, the intention is that we should not only have an approved site, but we should have a plan. This is for us. It's not specific to the license renewal that we should have a plan for that site and the ability to build the PDF. So we're working through that process at present. We don't see any major roadblocks right now, and expect that we will be able to meet the conditions of the license renewal as provided to us.
Okay. Do you have a rough timeline? What would be holding them back from approving that immediately?
We have a requirement to do this ahead of the six-month period, and so we are managing to the government's timeline.
Yep. Okay. Just on the Blue Line facility, it seems that things are progressing there. Can you just shed some light on what's the main focus on that Blue Line? Is it design work or otherwise?
Sure. So actually, Pol and Gaudenz have just returned from the U.S. about a week or so ago. And as well as that, we've had our engineers and our technical folk there. The number one task at Blue Line is to construct a heavy rare earth separation facility, and the engineering is the technical design work is done. A lot of the engineering work is done. We have some having done these things, we now need to move to a stage where we formalize sort of commercial arrangements and sort of continue the engagement with sort of relevant stakeholders. But everything is moving absolutely in the right direction.
Okay. Excellent. Just lastly, that investment you're making in Blue Line, is that going to be within the AUD 500 million envelope or outside of that?
We will provide further advice on funding as we move through the various options.
Sure. Thanks very much for that.
Thanks.
Your next question comes from the line of Dylan Kelly from Ord Minnett. Please ask your question, Dylan.
Good morning, Amanda and team. Just want to circle back to the points around production and the weakness during the last quarter. You said 1,200 tons was below what you wanted and also what you could probably put into the market. So can you just break out for us what's going on and why it was weaker? I mean, is this a function of 80% concentrate import limit sort of restrictions? Is this partially Duncan ore blends coming in and mixing up recoveries? Can you just give us some more details and try to quantify what's going on and your ability to ratchet this back up quite quickly once you get the permit?
We can ratchet it up once we get the increase.
Good point, Lynas.
It's pretty simple. It's pretty simple. If we get the increase, then we turn everything up again.
Okay. Great. So in terms of recoveries and the impact that Duncan's having on this, is there anything to say at this point what the influence of that is or what you've managed to see so far?
Well, the influence of Duncan is that we get more SEG in our material. And given the current market for dysprosium and terbium, that's a good place to be. That's the key effect of Duncan. Duncan is mineralogically very similar and is being processed similarly. It's not, as I understand the geology, it's not Duncan which gives us the cancrinite and the carbonate. That's simply a feature of the ore body, the Mount Weld ore body.
Okay. Fair enough. So with some of these heavy prices quite strong, does this change or influence your longer-term plans around what portion of Duncan ore that you process relative to the CLD? And what do you think you're running at, and where do you expect to get that sort of blending towards?
So we are working on optimizing the blend for market conditions, and we expect that over time we will be able to significantly or substantially increase, maybe a better term. SEG is typically about 5% of our total production, and we would think that we would head up, maybe increase that by 50% as we move into the Duncan ore body.
Great. So just to tidy up some of the points that you made around the Texas JV, what sort of commercial arrangement at a high level are you trying to achieve there in terms of an equity share, CapEx contributions? Is there anything that you can divulge there about some plans at the moment and how they're coming together?
No.
Okay. Any sense on a time when we could find out more?
However. Oh, we've always said that we target at the end of this calendar year to be able to provide further detail. And so there are quite a lot of moving parts. I think that you know that. And to ensure that we have something which is optimized in terms of delivering really excellent shareholder value, we just need to make sure that we have all those moving parts properly managed. But we certainly would be hoping to be able to provide something with more detail by the end of this calendar year.
Okay. Just to finish off on that point around what you could do, I mean, we've got in terms of a longer-term SEG sort of output number, you're currently at, what, 1,200 tons a year. You've got by Lynas 2025, what, a 40% increase in NdPr output. Could we expect, say, a similar order of magnitude SEG production by 2025 for the site, or is that all going to be largely Duncan dependent?
I think it will be more than that, Dylan. I don't have those numbers specifically to hand, but we will get the uplift, which is part of just the processing uplift, and we will get the uplift associated with the Duncan enrichment. Everything that we're doing in terms of thinking about engineering and otherwise everywhere, we're thinking about how we process our material. If ever there is an economic alternative, then how do we actually process third-party sources of rare earths in those facilities as well?
Okay. Wonderful. I'll leave it there for someone else. Thank you very much, Amanda.
Thanks, Dylan. I thought you were going to ask me about costs.
Oh, come on. You've left the door open. I'll have to. Come on. What's going on there? Is it purely like a scale with operations down slightly? What's happening?
No. There's a big chunk of that which is actually related to Wesfarmers defense costs, which were paid as that sort of closed out. It's a feature of our system that there are always costs associated with this sort of corporate activity. There was also some of it which was related to sort of FX and the Australian dollar weakening versus the Malaysian ringgit during the quarter. And there was a little which is contributed by sort of the reduction in volume, of course, because there are scale benefits to that. But on the other hand, the operations team are very focused on really trying to ensure that we're not increasing asset production and otherwise as those volumes go down, but there are scale benefits. But most of it was actually the more extraordinary items which were non-production related.
Okay. That's great. Thanks, Amanda.
Thanks, Dylan.
Just another reminder, ladies and gentlemen. It is star one to ask a question. Your next question comes from the line of Chris Hughes. Please ask your question, Chris.
Good morning, Amanda and your team over there. Report I thought was actually very positive, so thank you for that. And also thank you for the weather report. Sounds like an idyllic day for a day at the beach.
Excellent.
I was tongue in cheek. Thank you for clarifying that cost of production issue because that was top of my list for clarification, so that's good news. The second one, I think congratulations to everybody concerned in achieving such a highly rated gold standard for international sustainability. Truly a magnificent result and a credit to all concerned. And with that thought, I then turn to the restrictions which have been imposed on Lynas by the Malaysian regulators. And I'm just asking a question of, have you quantified what this is costing Lynas? And if so, are there any thoughts of a claim for compensation? Because as a shareholder, I'm feeling aggrieved that these people can be treating Lynas a wonderful corporate citizen with such disdain.
Oh, Chris. Yeah. Every day I think, gosh, we do everything that is expected of us as a foreign direct investor plus. We do that because it is the right thing to do. Yes, as I look at the performance of other industries in Malaysia and the fact that we are subject to such political nonsense is very frustrating. Even as we're sitting here right now, I'm sort of reading something which has come through about questions to be asked in Parliament today. The fact that we are interesting enough to have questions asked about us in Parliament is just sort of nonsense. On the other hand, suing anybody is always a risky pathway.
Suing a government is an even riskier pathway, and we won't be doing that anytime soon, particularly not as we are working to build something which is good for us and good for Malaysia. So we talk about some of the silliness here. On the other hand, we have some really substantive organizations, and I've said this many times that the Prime Minister remains steadfastly supportive. He wants the message that Malaysia is open for business out far and wide. He wants to build a 4.0 economy. He wants downstream activity in the rare earth market. So I think that we are much better focusing on these things and about the value that we can continue to bring to Malaysia rather than moving into sort of additional conflict with the government.
I understand. Thank you, Amanda. Appreciate your openness and honesty on that subject. I just wish you luck with these people. It must be so frustrating sitting there and having this wonderful asset, markets open and available to you and being unable to satisfy the demand. Truly frustrating experience.
Yeah. There is a degree. But on the other hand, we have very full days with much work to be done, so that's okay as well. There's lots to keep us busy and motivated.
I'm sure. Thanks, Amanda.
Thanks, Chris.
Your next question comes from the line again with a follow-up question from Daniel Morgan from UBS. Please ask your question, Daniel.
Thank you. Just to follow up, Amanda, on the AELB trust fund or payments that you have to put aside for the long-term storage of residues. Is there still another payment to be made? I have one in my model. Just want an update on that.
Yeah. Daniel, that's Gaudenz here. Yes, I think it will be prudent to keep that in your model. We will have to make this payment before the end of the year. So in this quarter, you will see the roughly $8 million, a bit less than $8 million payment will be made.
Right. In the discussions for a permanent storage facility, can any of that be used, or is the discussion still ongoing regarding that?
Yeah. We don't know the answer to that question yet.
Okay. Thank you, Amanda and Gaudenz.
Thanks. Thanks, Daniel.
Your next question comes from the line of Tim Ainsworth. Please ask your question, Tim.
Hi, Amanda. Just reading your comments, you very much describe a two-speed market, Amanda, with some softness in China and obviously demand from Japan. Japan is still good now, and the forecast is robust. Can you just describe the difference or the segments of demand in those two markets and setting them apart at the moment?
Hi, Tim. So yeah, I think that there are a few things that set them apart. The first thing is that, as I know that you know, there are within NdPr or NdFeB magnets, there are high-performance magnets and there are not high-performance magnets. And Japanese magnet makers are focused on the high-performance magnet segment. And while Chinese magnet makers today have, I think, 80% or thereabouts of the total NdFeB market, within the high-performance sector, the Japanese still have about 50%. So I think that what you would see is that growth in high-performance magnets is ahead of sort of overall growth in the magnet market, which is, of course, what you would expect when you look at what are the drivers for NdFeB magnet growth, which is sort of technology sectors. So I think that that's one thing.
I think the second thing is that we've had the opportunity to access the market for separated ND in China, which sort of gives us access to a market that we hadn't had previously. And so that's actually fueling some of the growth that we have. And then the magnet makers themselves, the sort of growth they're getting, I think part of that is that Japanese industry is performing pretty well when we look at things like the emission control legislation, which will come into effect in Europe, I think it is next year. I think Toyota is the only company that currently can meet those emission controls, and that's got a lot to do with the sale of their hybrids within the European market. So I think all of these things.
And then finally, I think that you've got some readjusting from outside China customers to maybe putting a little more business with Japanese magnet makers. Although it is disappointing to see that in the U.S., it appears that sort of the response from many there to the trade tensions is to stockpile material rather than to open new supply chains. But I guess that's a bit of the U.S. approach to business. But I think there's quite a few contributors, and they're all good.
Okay. Thank you.
Just a final reminder, it is star one to ask a question in today's call. I have no further questions at this time. Please continue.
Terrific. Okay. That's terrific. Thank you. Jen, did you just want to close out, or am I okay to do that?
Yep. Go ahead, Amanda.
All right. Well, look, thanks, everybody, again. It was, as I said at the beginning, to some extent sort of an unremarkable quarter. But then when I really thought about it, it's just that all this seems a long time ago, even though it was only two months ago. So there were a few remarkable things, but primarily relating to the external environment rather than sort of internally. So thank you very much, and I look forward to seeing all of you. I think the next time will be at the AGM. Bye.
Ladies and gentlemen, that does conclude today's conference call. Thank you for all participating. You may now all disconnect.