Lynas Rare Earths Limited (LYC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lynas Corporation half year results briefing. [Operator Instructions] Please be advised this call is being recorded today. And I'd now like to hand the conference over to Lynas. Thank you. Please go ahead.

Good morning, and welcome to the Lynas Corporation Half Year Results Call for the 2020 Financial Year. Lynas CEO, Amanda Lacaze, will present today's call, and she's joined by Andrew Arnold, General Counsel and Company Secretary; and Gaudenz Sturzenegger, Chief Financial Officer. I'll now hand over to Amanda Lacaze.

Morning, everybody, and it is a beautiful day here in Sydney. I'm not planning to spend a lot of time speaking as an introduction this morning. I think that you've got -- most of you who are on the call follow us pretty closely. We've disclosed already a lot over recent times, and getting to your questions is probably more important than parroting again what we've already put out in our announcement. But of course, it would be remiss of me not to highlight in the first instance that the big news, of course, is the license renewal that we announced to the ASX yesterday. We're absolutely delighted with the 3-year license renewal. The AELB conditions do not trouble us. We're well progressed in the 2 key areas. The first is the construction of the PDF and the second is the construction of cracking and leaching in Kalgoorlie. So we're focused on delivering both of these projects. They're good for our business, and they will be part of the reshaping of our business as we go forward. In terms of the half year that was, and I think Dylan has shared, there's never any surprises because we give quarterly updates. But I think that -- always interesting to have a look at it when the accountants have got their paws on it rather than just cash results. Revenue, we're actually pretty proud of the revenue outcome. In a much weaker price market, it stayed consistent with last year, and that really is an indication that our pricing and quality strategies are paying off. So it reflected the fact that we've got most of our NdPr -- not most, but far, the greatest majority of our NdPr is placed outside of China and that gives us a benefit. The second is that the quality initiatives that we've implemented with respect to lanthanum and cerium is starting to pay off, and that gives us -- I know that people often look at them and they're only a couple of dollars a kilo, but an extra price on a kilo of lanthanum is just as valuable as extra price on a kilo of NdPr. So we certainly are taking the opportunity to continue to progress those strategies, and we think that we will get further benefit from them as we go forward. I'm also pretty proud of the fact that we showed -- demonstrated very clearly that the costs are under control, even with lower volume. So we -- as everybody, I think, who's followed us for a while would know, there is some volume advantages and scale advantages and across the 6 months, we did not run at maximum rates. We did very specifically, as we've talked about previously, take a deliberate strategy this year to run at lower rates rather than shutting the plant down altogether. Notwithstanding that, we did end up with a CNL shutdown for sort of the last 9 or 10 days of the year. So we started everything up again and had a little bit of time in the first couple of weeks of January to refill our work in progress. But the plant, and I'll touch wood when I say this, but it's running really well at present, and we're pretty pleased about recoveries, reliability and just throughput. One of the things which, I think, is probably new for some people who will be looking at this is the accelerated depreciation that's been included in this. And I believe that is a very technical point that Gaudenz can answer any questions on that. We continue to really invest a lot of time in ensuring that we delivered safe operations in both locations, whilst previously, we're extremely proud of our 461 days Lost Time injury free. We unfortunately broke that record and so we have reinvigorated our approach to safety. You can never bank safety. It is something that you need to have a focus on all the time. And the other thing is that we've had a really successful, I think, 6 months in terms of broader engagement, particularly within Malaysia, but I want to always remind people that we spend a lot of time engaging and being part of the local community in Laverton. And as we are developing our plans for our diversified industrial footprint, that now has extended to really significant activities to engage with the community in Kalgoorlie. Most recently, last week, our team was there at a business networking session, had a series of excellent discussions. Of course, there are people there who are interested in what would be the opportunity to do business as a result of our project. There were others who really just wanted to understand more about our project. And we're very well advanced in making sure that we do have these engagements with all of our local communities. And then, of course, the exciting thing for us is the progress which is being made on the Lynas 2025 initiative. We do now have a properly constituted project team. And well, at least, the core of it, we will need to add to that as we move through each phase of the project. But our core engineering and project management and approvals teams are all in place. So I'm sure there will be questions about what the effect is, the external environment, and I'm sure that many of you are sort of listening to me with one ear and watching your computer screens with the other. The -- there are lots of moving parts externally. Certainly, coronavirus, Malaysia, the politics in Malaysia at present, which you can dream up if you were writing a book. But frankly, for us, what we have always adopted as our strategy, which has always paid off for us, is to really focus on our core business and our core work. We do important work in Lynas. The products that we produce are essential for all the technologies that we take for granted in the 21st century and are critical to the technologies which are going to allow us to address climate change. We are the only one outside China and if there is one sort of key message, which comes from the current coronavirus situation, it is that as things -- reliance on a single geography doesn't mean that it's just about political risk. It's -- the risk can come from any number of different avenues. And we really are looking at a very exciting time in terms of our business. So we're very focused on, notwithstanding the dynamism of the external environment, really remaining very focused on our core and making sure that we are executing on these really exciting transformation plans that we have in place. So with that, I'm really happy to just take some questions now.

[Operator Instructions] And our first question comes from the line of Dylan Kelly from Ord Minnett.

Congratulations to you and the team on a great outcome yesterday with the license renewal. There's been a lot of events in the last couple of weeks. I just wanted to walk through, starting with the WLP, with the permanent disposal facility. It's not clear to me how you can use the $50 million in the rehab bond. Can you explain to me what the sticking point is or what portion of it could possibly be used or what the holdup or why the AELB is deciding to hold on to that for the moment?

I don't have any specific insight into the AELB's decision-making process, but I would suggest that we're unconcerned about this in the medium term. It's part of, I think, a demonstration that there remains sufficient funds there that if something goes wrong or we don't actually meet our license requirements or otherwise, there's sufficient funds on deposit to be able to address the rehab provisions. So do I have a -- am I going to speculate on if or when that bond will be released? I don't think so, not right now. The way that we have looked at doing this project and the way that we've engaged the contractor, we can fund this. And at some stage in the future when our responsibilities have been met, then we would expect that we will get the bond released, as you do in any time that you have a security bond.

Okay. Fair enough. So just moving to the receipt of the license, do you have any understanding around the changes around the importation cap currently in place and whether or not there's potential for that to change following receipt of this?

I actually know because the AELB license has already given us the increase on the import. It's the DOE license on the processing. So this is not specifically connected to that.

Okay. So it has been increased and there's nothing towards the back end of this calendar year that could cause a repeat of previous years?

No, no. What I'm saying is that there are 2 licenses. One is how much we can import. The AELB approved the uplift in volume that we could import over a year ago. But we need a matching approval from the DOE to the amount that we can process and that's the one that we're missing. So we have been focused on getting the license to operate. And now we will go back and engage with the DOE again on that processing license.

Okay. Fair enough. So in the context of processing run rates and how things are running, you said the plant's doing really well. How are you thinking about production output? Are you thinking about matching output with market demand? Or are you trying to push the plants as hard as you can?

We're still not searching for sales for NdPr. We have more than enough purchase orders. So we are running the plant pretty hard, very, very close to sort of consistently at the next rate, which is really good, so we won't see that completely this quarter because the first 2 weeks, we had to rebuild the WIP. But other than that, the plant's running well and we have plenty of demand.

Our next question comes from Daniel Morgan from UBS.

So a bit of a follow-on, I guess, from Dylan's question about the concentrate processing license being lifted. So just bear with me for a moment. So you've announced a PDF contract, which has very specific U.S. dollar payments associated with it. Now I imagine if you have these U.S. dollar-specific payments associated with it, there's a volume amount that sits behind or next to that. Does that include the assumption that we're going to get this higher volume so we're going to be able to run at Lynas NEXT? Or -- just wondering how that relates your volumes.

Okay. So first of all, I probably should have said the contract is actually designated in ringgit, and one of the reasons why we originally expressed it in U.S. dollars was because that provided people with a bridge to the PDF, but it is expressed in ringgit. The second thing is there are elements -- I mean, clearly the contract, there are some paths of -- the cost of this, which are relatively fixed, like actually building the deposit -- the facility. And there are other parts which are more variable to the extent that once we get to the stage of trucks going down the road, sort of putting material into it. But we have made a forecast on the amount of material that will be produced, and we have forecasted based upon current rates and also the uplift. So that will be factored into the engineering and the design of the PDF to ensure that there is sufficient there for the higher volume because we remain pretty confident that this will get resolved now that we have the operating license resolved.

Right. And if the contract is in ringgit, as you articulated, I mean, the markets are moving all over the place at the moment. Do you -- can you give us what the exchange rate is just so we know what the ringgit value is at all?

It might be easier if I give you the ringgit value.

Of course, yes.

That's all right, Andrew, isn't it? So over the course of the whole contract, it's MYR 400 million.

MYR 400 million, okay. And then obviously, the -- so you've got the license renewal, which is very much a key catalyst for you guys. So well done there. Focus now moves to the -- enacting the restructure plan. Wondering when we might know, in a more fulsome manner, the nature of the restructure in terms of what it is you're going to build in Kalgoorlie and the CapEx associated with that and the operating costs.

In the fullness of time, Daniel. We -- we're getting tighter and tighter on this, but it's still moving around a bit and providing estimates, which are still, at least, I would say, plus or minus $50 million without even taking into account the contingency, which is built into it as well. I don't think it's all that helpful. I think as we've said previously that -- and this remains our objective, is that we need to have a cracking and leasing facility in Kalgoorlie. We need to upgrade some of our Mount Weld facility, in particular, to make sure that we can continue to feed, and we will have some sort of reduction in grade as we go further into the ore body. And we will have a small amount of work, which is required in Malaysia as well, to process that material. We've said that the capital envelope to do those things is AUD 500 million. That remains our guidance. So there might be a bit of give and take across the sort of 3 big buckets of work which are required there, but our objective is to remain within that AUD 500 million envelope.

And 2023 is when you have to enact this by -- partway through the year. Wondering what the critical path on that is to achieving that outcome. Is it the approvals that you'll need to get in place in Australia or is it ordering long lead items? If you could just talk to either or both of those things.

All of the above. We've already put out our first request for tender on our longest lead item. So we're running these things in parallel. Without question, the lead agency and major project status gives us confidence on our ability to navigate our way through the various approvals. But even with that, bear in mind, that we've probably got at least a 12-month runway for most of the approvals. We are looking at what is the work that can be conducted, as said, in parallel with that. Certainly, a lot of the engineering work orders for the long lead time items and some of the -- we're hoping that we'll be able to start some site works, which are within the regulatory framework. We can only do things which can be relatively easily remediated if the approval set comes through, which we're not expecting to be the case. But nonetheless, we're looking at can we do that. So we've got many of these things running in parallel. The project team's already engaged across a wide variety of contractors, looking at sort of the packages of work that need to be done for this. So I don't think there is a single sort of bottleneck that we're looking at, at present. We have multiple streams of work and we are actively managing them in parallel, which for sequential thinking engineers, can be a little bit of a challenge.

Our next question comes from Andrew White from Curran & Co.

Just a short one on where the focus is. I know you've talked a lot so far in this call about the project team you have working on Kalgoorlie. Initially, before various other questions were asked, I was just going to ask where the current focus is in terms of the proportion of work being done on the Blue Line joint venture or MOU, we should call it, and Kalgoorlie. So just the question really is, how much of a proportion of time is being spent on the projects in the U.S. compared to Kalgoorlie?

We have a different team doing the work in the U.S. So it's well on track. We actually did the major work around design, costing, et cetera, ahead of the submission of the tender documentation in mid-December. There's a second tender that the U.S. government has put out with respect to light rare earths separation. And so the team has extended their thinking to that but it is a separate team.

I see. So when is the tender process closed for the light rare earths tender?

Early next month.

Our next question comes from Matthew Chen from Foster Stockbroking.

Just wanted to ask, so with the coronavirus, has this pushed your engagement with potential or existing customers to source non-Chinese rare earths?

Sure. We'd be a bit silly if we didn't take advantage of that now, wouldn't we? As I said, I think that it's more to do with -- the conversation which Paul is having with the customers, and particularly end use customers, is a conversation about the risk that they introduced into their supply chain by not having -- sorry, by not having a diversified supply base, where that diversity is not just suppliers, but is geography. So I think, in rare earths, there's been a great understanding of sort of the risks associated with the geopolitics of everything, but maybe rather less associated with the other types of events that could highlight that risk and disrupt supply chains. So I think that what it's doing is that it's reminding end users of manufacturers all over the world of the importance of a more diversified industrial footprint, just like we're doing ourselves. And so I think that, even I was talking to some of our Japanese colleagues about, so there's the effect in Japan. But even there, whilst there's a lot that they do which is independent of China, China is still very entwined in all of the supply chain. So I think everybody is -- it certainly is an opportunity for us to remind, particularly end users, of the value of diversity in their supply chains.

Great. And so just on staying on China, I mean, some of your product goes into China as well. Have you been -- can you say anything about the impact on logistics or customers' comments there as a result of the coronavirus?

No, I don't really have anything on that. And the amount of product which is going into China is so de minimis now really. Certainly not a big issue for us.