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

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

Good morning, and welcome to the Lynas Rare Earths investor briefing for the half year ending 31 December. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director. And Amanda is joined by Gaudenz Sturzenegger, CFO; Andrew Arnold, General Counsel and Company Secretary; and Daniel Havas, Vice President of Strategy and Investor Relations. I'll now hand over to Amanda. Please go ahead, Amanda.

Well, good morning, everybody. Delighted once again that you have seen fit to dedicate some of your day to listening to us talking about our results. As always, Rare Earths has been much in the news recently, including for a variety of reasons, geopolitical reasons, supply chain dependencies and, of course, a number of aspiring entities who are happy to talk to this market. I'm really delighted to present the Lynas results today and to reaffirm that, for investors, Lynas provides an excellent opportunity to be exposed to the good news in the rare earths market. We are a proven producer now for many years. We have a track record of on-time, on-budget execution, which is something which has really dogged the market outside China. We make money without any fancy adjustments to our P&L. And I must say that, in terms of an investment in this market, it looks to me on the fundamentals that we are significantly cheaper than some others. I have had some feedback already this morning that our presentation is light. Well, I guess, others need to pad their presentations with -- where they have light or no operating data. I would rather our numbers speak for themselves. And our numbers are excellent. So for everyone who has followed our business for any time and who is a shareholder in our company, I would expect that you are very pleased with these outcomes. Sales revenue is up. Cost of sales is actually just down just a little despite the fact that we have produced and sold more NdPr than in the prior corresponding period. Our EBITDA at $80 million. I would remind you that, that is across a 6-month period where the price ranged from $41 to $49 on average across that period of time. So of course, as we look at the price, looking more positive at present, it doesn't take a math genius to be able to work out what the effect is on our EBITDA. And our net profit after tax is up a very satisfying 944% from the prior corresponding period. It was a busy 6 months, and we have talked about this previously at the quarterly results. But I think that, of course, cash results always have a number of distortions in them, whereas here, we have sort of a purer view of the outcomes. So our ready-for-sale NdPr production at 2,700 tonnes. As we have indicated previously, we are not running at full capacity. And the reason we are not running at full capacity is that there are still a number of challenges, which I'll speak to shortly on -- introduced really by continuing effects of the COVID-19 pandemic. Our sales volume was up on the prior corresponding period. So the COVID-19 challenges are not just health challenges. And I'm sure that anybody who's involved in any sort of business would understand this. We have reinforced and strengthened our health and hygiene protocols in both Malaysia and Western Australia. This is because it is the right thing to do for the health and well-being of our people and our communities. Malaysia has been experiencing a significant third wave of infection since October 2020 and ensuring that our people and our local communities are well protected is essential. So the sorts of things that we are doing, communication, education, disclosure reporting, but most importantly, testing of our people, ensuring physical distancing in the site, hygiene and precautionary procedures. And we're proud of the fact that we've been recognized within Malaysia as the best practice organization and have been asked by MIDA, which is -- to provide briefings to other firms. Many of the cases in Malaysia have come out of workplace clusters and the fact that we have been able to manage ours in the way that we have is the testament to our people who have followed the procedures and our people who have actually implemented the protocols. During this time, we are pleased to be able to say that we have also increased our contributions to our local communities. Many others have stepped back. We have stepped forward. The -- our local communities on the East Coast of Malaysia are not only suffering the economic effect created by movement control orders and other initiatives in Malaysia, but also we had our most significant flood season on the East Coast since 2014. And our team in Malaysia, our community team has stepped up their activity with additional contributions of all sorts of practical items, which range from comforters, so that people without houses have something to sleep on through to sanitary products for teenage girls. Not always seem to be sort of the things that you would necessarily want to put in headlines, but a crucial part of our operations. The COVID-19 pandemic also creates other challenges for us. Probably the most significant of those, which I talked to in the quarterly report, is the variability and unpredictability in some of our shipping schedules. Getting availability of shipping can be difficult. But even once we have either our raw materials, including our concentrate going from Australia to Malaysia or our finished goods departing Malaysia for our customers, particularly in East Asia. There is variability, and I think, most recently, we've had sort of virtually all of our shipments rescheduled in some way. So we are having to take actions to carefully manage that, including increasing our raw materials inventory for at-risk materials and the strategy that we have implemented for 6 years now to really buy as much as we can locally in Malaysia and, therefore, really create the benefits that are associated with being an [ FCCI ] with the ongoing -- the expanded economic benefit certainly assists with managing our raw material process. And of course, we've also recognized, as we talk about COVID-19, that we have had a very good 6 months in terms of profitability. We applied and were granted the JobKeeper subsidy in Australia at the beginning of the process. We also received some small payments from the Malaysian government of a similar sort given our performance in the 6 months to the 31st of December. We will refund those funds which were associated with those subsidies for that 6 months. Many on the call are watching with as much enthusiasm what's happening in the market as we are. We have been saying for some years now that the long-term thesis for this market is positive. It's interesting that even in the time of the pandemic that demand in the new sectors, these are the sectors that will influence industry and consumer behavior over the next decade, has continued to strengthen. Of course, this is electric vehicles, new energy solutions, consumer electronics and automation as some of the sort of key mega themes. So really an excellent 6 months in terms of operating performance. We continued to demonstrate our ability to be successful, no matter what the external market conditions are. Of course, having got to hear, as I've said on many occasions, we're not in the business of saying, "Ah, isn't that great, let's now all go and have a glass of bubbly and hang out by the pool." We have a very ambitious growth plan for our company. This includes the Lynas 2025 initiatives that we briefed to the market previously, specifically the Kalgoorlie Rare Earths Processing Facility. And during the 6 months, we were pleased to receive sort of really very pleasing support from equity capital markets to fund those activities. During the 6 months, we've had it confirmed that this is not a controlled action under the Federal EPBC, which means that it is -- approvals rest with the Western Australian government, and we have submitted the referral to the WA EPA. Detailed engineering design is complete. We know what the project -- what the facility in its finished state is going to look like. I'm loving the 3D imaging that happens these days amongst the engineers. We're moving very efficiently along the path of procurement of our long lead time equipment. And the kiln fabrication is underway and on schedule and we get a great deal of joy out of seeing the pictures as they come through. We have an extensive community engagement program, the local community in Kalgoorlie, including all our stakeholders. And we, once again, recognize and value the support that's been provided by the Kalgoorlie-Boulder City Council. We've also had some exciting news on our U.S. project. As many would know, the U.S. has been absent separation capability for rare earth for many years now. This is certainly perceived to be a risk for many industries in the U.S., which is one of the reasons why the U.S. government via the DoD has opted to provide grant funding to certain firms. We've previously announced, of course, that we've received Phase 1 funding related to heavy rare earth separation. And we're delighted that, in January, this is a condition subsequent, we've received the funding for -- partial funding for the development of light rare earth separation plant. So really, in summary, a great set of numbers. I think Australia's greatest treasurer used that line at some stage, didn't he? But anyway, so a very pleasing set of numbers. And once again, rare earths are an excellent investment opportunity for exposure to the global megatrends that will shape our economies and our behaviors over the next decade. And Lynas, amongst all the opportunities, is uniquely positioned to respond to those megatrends. So with those comments, I'm very happy to take questions.

[Operator Instructions] Our next telephone question comes from the line of Jack Gabb from BofA.

Amanda, I just wanted to get a bit more clarity, I guess, on the heavy rare earths potential in the U.S. Can you give us a bit more sense of timing there? I know you've done a lot more work on the heavy proposal than on the light side. And then secondly, just any guidance you can give us on capital spending, I guess, over the next couple of years? Really, when is the bulk of the cracking and leaching CapEx is going to hit the cash flow statement?

Okay. Yes, delighted, too. So the heavy rare earth timeline we are not updating from the previous advice we've made to the market, which is that we expect to be -- to have finalized all documentation and discussions with the USG within this financial year. All of our engineering work is substantially complete as far as that's concerned, but there are many issues to be dealt with for a project of this size and complexity, and we continue to work through those processes. In terms of CapEx, as you will have seen, we've started to have some CapEx spend related to Lynas 2025, particularly the Kalgoorlie Rare Earths Processing Facility. We will see some increase in that in this 6 months, but we expect the bulk of that capital to be expended in the next financial year.

Our next telephone question comes from Dylan Kelly from Ord Minnett.

One question for me just in regards to what's happening with pricing at the moment. What's your understanding or Pol's understanding or his latest e-mail around expectations post-Chinese New Year in terms of that run? Second question, just in regards to your strategy. So under what conditions or price levels are you prepared to change the strategy about where you sell? I know I'm going to butcher this, but you've often told us that you tell Pol to make sure his 3 points are sell it, do it at a premium to the Chinese domestic price and sell it ex China. Are you prepared -- that final point about sell it ex China, are you prepared to step into the domestic market when prices are this high?

Okay. So what's happening with pricing of gold stuff, you're asking, Dylan? But I'm sure that you will understand that my most likely response is the same as it has always been, which is that we don't participate in forecasting what's going to happen with price. What we do, do is source as much market intelligence as we can on whether the price changes have some foundation in actual behavior or whether they are speculative. And certainly, at this time, we continue to see strong demand. We are seeing, as I said, all of those megatrends we've all been talking about for at least sort of the past few years really starting to take shape. And so we, as always, don't get drunk on the price. And maybe one of the things that I'm most proud of is that despite the improvements, we have not lost our core DNA with respect to cost control and cost efficiency. And that means that we're able to bank all of the upside. There are many firms at one stage or another who sort of find themselves opening their checkbook, I think, rather more -- with rather more alacrity at times when time's good. So we continue to plan our business on a more conservative footing. But we would say that the market settings are strong and positive and that the price trends have more to do with market fundamentals than they do with some of the speculation, which has sometimes previously fueled price changes. Pol hasn't always achieved his objective or his KPI of selling everything outside of China. We have some very good customers in China for our materials, and we continue to serve those customers. I know that many of you on the line have sort of harassed me over the last 6 months, and I'm quite a delicate petal. So -- but about why are we running at 75%, and that's really a risk management strategy for us as we're dealing with all of the various challenges that operate in today's world. But on the other hand, I'm sure that many of you would be pleased that we are selling today at a price significantly higher than the $40 a kilo that we would have been selling it at, at the beginning of this sixth months. So we are balancing our production, balancing our ability to manage risk in our supply chains. But we sell to strategic customers, some of whom have inside China operations, some of whom are Chinese, but of course, the bulk of our material goes to outside China markets.

Okay. Understand that, Amanda. And I'm going to dig in here just on that point. If we've got a position where you're running at lower capacity and prices are where they are, yes, you can have some customers selling into it. But surely, if most of NdFeB market growth is going to be mainland based, doesn't that mean, ultimately, there's going to have to be a shift into country?

Others can sell to China in large volumes. Our objective has always been, and we have always articulated this, that our objective is to grow the outside China rare earths market to create a strong and capable ecosystem in outside China geographies, and our strategy has always supported that process. Our choice of where to sell and when, of course, is influenced by price and the relationships with -- which we have with specific customers. But I don't -- our core strategy does not change, which is that we are in the business of supporting the development of additional processing capability outside China as well as serving our inside China customer.

Our next telephone question is from Daniel Morgan from UBS.

Just wondering -- on the decision where you're running the plant at 75%, just wondering how do you -- what is your decision process? Or what do you need to see to decide to run the plant at higher throughput levels?

So look, we are assessing this on a continuous basis. We haven't lost any of the disciplines that we had in the difficult years. We still have a weekly sales and operations planning meeting. And even though we have a much nicer cash balance, we are continuing with the weekly cash flow forecast. As you would recall, part of our 75% decision related to some of the restrictions that we have for people on site as well as some of the logistics things I talked about and also a major piece of maintenance that we were undertaking on one of our kilns. That kiln has come back online. Certain of the MCO orders have been lifted just in the last week in Malaysia. And so we certainly are looking at opportunities to ramp up production at this time. But once again, we're very alert to ensuring that we have sufficient material, which, sorry if I keep saying the same thing, really has a lot to do with shipping and ensuring that we have sufficient material both on site for us to be able to feed that increased production, that's concentrate, it's raw materials of one sort or another because there is no point in us ramping up and then having to dial it down again. So we're working through that process. And we would expect to be able to get some increase in our production profile as we move further out of the pandemic.

We'll move on to the next question. Our next telephone question is from Trent Allen from CLSA.

Congratulations on a good result. Just also on Malaysia, just a quick question. I'm always interested in the progress of the PDF that you're building there. I was reading that the public commentary period has extended by a couple of weeks on that. So I was wondering if you could give any color around progress there? Also there was some conversation, the usual noise in the newspapers there about your contractor, GSSB. Can you talk a bit more about how they were selected as the contractor? Do they have a record of other projects? And also there was some comment that it was partly owned by the local royal family who have now divested their shares in that. Is that a concern or something that we shouldn't really be thinking about?

Thanks, Trent. So yes, all of the usual suspects have popped up. And I'm always reminded of the EIA report, which says that their concerns found no basis in science. And so many of these -- much of this commentary is, once again, speculative and not based on science. We actually have, after all of these years, a pretty high degree of confidence that the Malaysian government ultimately makes its decisions based upon science. And so the EIA process is an important part of the process, and it's quite interesting with some of the articles that you're referencing. They talked to the fact that the EIA identifies risks. Of course, EIA identifies risks. That's -- the purpose of the EIA is to identify the risks and also to identify the mitigating actions, which can be implemented and which will be implemented to ensure that the residual risk is low. The extension of time, of course, once again, and the movement control order means that sort of exposure of the EIA, the ability to view it, all of those sorts of things has just been given some extra time. And it allows us to continue to work with the DoE on really improving, wherever possible, the quality of the document so that we can all be confident going forward. With respect to the contractor, you would have noted from the media that the site nominated by the state government will be a multi-purpose industrial waste site. And Lynas will occupy less than 30% of that site. The government nominates -- governments anywhere nominate particular contractors to manage these types of sites. GSSB is that contractor. So we undertook our own independent due diligence on the company to understand its ability to complete the work. We satisfied ourselves on that. That was over a year ago, and we advised the ASX and the market at the time of that decision and the conditions of the contract.

Very good. Just one more. This is just a logistical question. It's a 202-hectare site, is that right? How much of that will be for Lynas? And how much is for other uses?

It's just under 30%, I think, is the Lynas allocation.

Our next telephone question is from [ Jay Erlandson ], who's a private investor.

So congratulations, not only for a great quarter, but congratulations for guiding Lynas through a very challenging political morass using integrity as your north star. I know it's probably a difficult strategy at times, but it certainly paid off. So anyway, I just thought to pass that along to you from a few shareholders I know. A couple of questions here. First question I have is -- and I only have two. Is the U.S. listing on the NASDAQ? I know it's something Lynas is going to pursue, and I'm not asking you for a specific date or anything, but I was wondering if you could discuss Lynas's plans for a NASDAQ listing and your thoughts as the implications for such a listing. And second question. I'm sure you're aware of the recent breezes in Texas. They've been freezing for 2, 3, 4 days before they finally warmed up. I'm wondering if that will alter the Lynas' plans for the separation facility west of San Antonio? I know there's many, many pipes in a chemical plant. And I'm just wondering if that's going to affect anything as far as you guys are concerned.

Okay. So thanks, Jay. We don't have plans for a U.S. listing at this time. It is possible for U.S. investors, as you know, to invest by the ADFs. And of course, the U.S. listing brings significant costs with it, including -- and some nightmares, particularly for our financial guys with sort of other activities that need to be undertaken. I understand the intent of your question, which is, gosh, there's a lot of money swapping around in the U.S. looking for a home, and wouldn't it be nice if it was easy for that home to be found at Lynas. At this time, we have a watching brief on it, but we don't have any plans to list on the NASDAQ at this time. In terms of the snowstorm in Texas, you're right, I mean, we had a video call last week, and we had -- one of our people on the call was sitting there and the whole of the -- under the house was flooded because the pipes had frozen and then had burst. And another one of our team was sitting in a hotel because he had no electricity at home. And so yes, we're very alert to the effects of it. On the other hand, it is a once in a -- I don't know, how many sort of years it is since there's been a snow storm in Texas. So in and of itself, it would not cause us to reconsider the facility in Texas.

Yes. The saving grace is San Antonio is in Southern Texas, which is closer to the Equator, so it's a little warmer.

So when I was there, I got to tell you, it was very warm. It was about well, I guess, in Fahrenheit 100 degrees. And so it was pretty warm, which I think is generally the case.

It's kind of our outback here. So...

Yes, it looked a bit familiar.