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

Good day, and thank you for standing by. Welcome to Lynas Rare Earth's Full Year 2022 Results Investor Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Ms. Jennifer Parker, Vice President, Corporate Affairs of Lynas Rare Earth. Please go ahead, ma'am.

Good morning, and welcome to the Lynas Rare Earth's Investor Briefing for the 2022 financial year. Today's briefing will be presented by Amanda Lacaze. And joining Amanda here in Sydney today are Gaudenz Sturzenegger, CFO; Pol Le Roux, VP Downstream; Daniel Havas, VP, Strategy and Investor Relations; and Sarah Leonard, General Counsel and Company Secretary. I'll now hand over to Amanda. Please go ahead, Amanda.

Good morning, everybody. So we have a full court press here today. And so I think that should make for a very interesting call. You all get to hear from me quite a lot. But today, fortunately, I have many of my colleagues who can deal with any of the more gnarly questions that you might choose to ask. In particular, I have Pol Le Roux sitting next to me. Many of you know Pol and he's going to show himself.

Hello, everyone.

So there he is. We're trying this as a video but it turns out that we really have to snuggle up close to each other to be able to do this really effectively. It's always polite to make an acknowledgment of country. I think for those of us in the minerals industry, it is even more important. We would like to acknowledge the traditional owners of the lands on which we live and work across Australia and particularly in Western Australia. We acknowledge and value Lynas' Aboriginal and Torres Strait Islander employees, partners and communities. And we pay our respects to their elders past, present and emerging. We take this seriously in our business. It is not just a case of form over substance, and we are working hard to engage with our local communities, particularly in Kalgoorlie and Mt Weld to ensure that the prosperity that we're reporting today can be shared within the community. Well, what a year. For many of you, particularly the analysts who pour over our various results because of our quarterly reporting format, we don't have a lot of new news, although it is, of course -- sorry, I'm trying to move this along here. There we go. We don't have a lot of new news, but of course, we see this on an accounting basis. But notwithstanding that we don't have a lot of new news, I would like to just take a few moments to reflect on a fabulous year because after all of those years of very hard work of heavy lifting, it is a great time for us to be able to celebrate the reality of what, I think, I said to many of you who have been shareholders with us for many years, which is that we would be positioned to take full advantage of the benefit as the market picked up. So I'm going to spend a few moments on that and then really talk a lot about what next because to stand still is to go backwards. And so we are enthusiastically marching forward in our business to ensure that we are able to continue to generate prosperity for our business and for our shareholders as the market continues to grow. So of course, what were the high points in the year-to-date? A record profit. That seems to be an understatement when we look at $540.8 million in NPAT compared to last year's, which was, I think, also a record profit at $157 million, but it's certainly a significant uplift from there. Nearly $1 billion worth of sales. We did -- right through the year as we looked at our sales and operations planning process keep on having a chart which had $1 billion mark on the x axis -- sorry, on the y axis, and we were very keen that we should actually hit that. But there were certainly some challenges that we continued to face in terms of external environment. This, sort of , to us as we come a little bit short on that. EBITDA at $601 million and finishing the year with $965 million in the bank certainly made us very happy. What are the things, though, that we really are -- I don't spend a lot of nights these days lying awake at night in my bed worrying about the business, but I still spend the occasional night where I worry about the business. So what are the things that, maybe a better way to put it really, our key focus areas? First of all, production. Production was up in the year just passed. NdPr production was up 7.7%. We would have liked it to have been more than that. Our March quarter was particularly strong and gave us a great deal of confidence about our ability to be able to drive throughput, particularly through the land. But we do continue to manage some quite significant residual external challenges as a result of COVID. I'm sure that many of you, who have listened to lots of results presentations, will have heard about continuing logistics challenges. And for us, in Malaysia, we have an additional challenge, which is really about utilities, specifically water and the availability for that consistently within our business. Both of these things have seen us have to modify the way that we go about managing our production, including the addition of -- the addition of charter vessels in addition to our normal commercial shipping to ensure that we have material on the ground in Malaysia ready to be processed. But also with water we've put in place a number of mitigating strategies, but we're not always able to mitigate when the pipeline is dry. Of course, all of you, who have been to other results presentations, would have also had a lot of information on some of the challenges associated with costs. Certainly, we've had some extraordinary increases in the business particularly associated with the reagents that we use, sulfuric acid probably prime amongst those, where the prices increased by up to 100%. And so finding ways within our business to mitigate some of those extraordinary increases has been and remains a key focus for our organization. I think that alongside these excellent financial results, we have seen some really good progress in terms of a number of our ESG initiatives. It has remained through the FY '22 financial year and even today that we need to be focused on keeping our people safe through the pandemic, but also, of course, just our operational and process safety. We were delighted to have achieved a milestone of 100 days LTI-free at Mt Weld. But we continue to build our workforce. This is really important as we look at a continuing growth market that we are building our workforce in a way that really increases our capability. That means continuing to focus on diversity. We report a gender diversity because that's what the ASX requires, but it is not the only lens that we bring to diversity. As I mentioned earlier, we are working very hard, particularly in Kalgoorlie to engage with our local and potential indigenous employees and suppliers. And we are very pleased that we have been able to engage productively there, but there is more to be done. We certainly have seen significant improvements in gender diversity. And as we look at our statistics, I mean, clearly, to be able to get up to our target of at least 30% by the end of this financial year, we need to ensure that we are recruiting women at a faster rate as we seek to change these stats. In both jurisdictions, particularly in WA, we are very mindful of the findings of the respective work reviews as well as the West Australian government review and reviewing our processes and our systems to ensure that we provide a safe workplace, not just physically, but also psychologically for our people from diverse backgrounds, whether that's gender, I don't think I'm that diverse, but apparently I am, but also from diverse ethnic backgrounds. And there are things that we can do practically, and we are doing those things practically as well as continuing to focus on ensuring that where we do have casual sexism, of which I'm often guilty because blokes, they've got a few challenges, don't they? That's a little bit of casual sexism. But nonetheless, ensuring that we don't have casual sexism, which really translates into unconscious bias is really important within our workplace. Of course, the other things which are incredibly important is focusing on our climate change -- mitigating climate change effects. Our products are important for the technologies, which will see the globe be able to address some of these. And ensuring that we embed thinking on our effect on the environment and everything we do is really important. A small instance of that is the fact that all of our CapEx forms now have a requirement for the people who are proposing the CapEx to actually provide specific information with respect to environmental impact and emissions. So you'll note that I didn't really make much of a comment on sales or the market. And once again, Pol is with me today, and we'll discuss this as you ask questions. But this -- the biggest challenge that we have today with respect to the market is really just the speed at which it is growing and ensuring that we preserve our prosperity as we grow with that market. And so it's pretty exciting when we look at our growth plan. We have ahead of us 3 actually pretty big years in terms of capital investment, 3 major projects. So the upgrade that we announced a couple of weeks ago at Mt Weld at about $500 million. That provides us not only with the ability to more than double our throughput also to implement a number of initiatives to improve our resilience with respect to climate change, but also in terms of improving our effect on the environment. So that includes water, improving our water recycling up to sort of 90% recycled, could also include looking at alternative energy solutions to our current solution, which none of us like, which is, of course, our diesel fire power. The second project and some of you had the opportunity to actually see progress here, of course, is our new Rare Earths Processing Facility in Kalgoorlie, which is progressing at pace. We finished the year more than 40% completed on that, and I can tell you that it's significantly ahead as we speak. And every day, a visit to that site, see something new and different in place. And then, of course, the other very exciting thing was after sort of many years of quite diligent work, we had the award for the Heavy Rare Earths plant in the U.S. alongside previous award for construction of the Light Rare Earths plant. We are now well progressed in a phase 2 deliverables of that particular project. And as with Kalgoorlie, we expect project -- we expect progress to now accelerate it. But alongside those major projects, we have a number of complementary projects of smaller size, which are really about building our capability as a business as we go forward. The exploration program at Mt Weld is very exciting. I don't pretend that I get quite as excited as CEOs do, but nonetheless, as I've briefed previously, we have identified an exploration target as a result of our 1 kilometer deep drill hole that we did last year. It is very exciting. We saw continuous mineralization right through to the bottom of that drill hole and that is certainly highly prospective for us to be able to continue to operate the Mt Weld deposit for many years to come. Debottlenecking activities at Mount Weld to continue. And in Malaysia, we remain very committed to our Malaysian facilities. We are increasing. Many of you who have been with us for many years would know that we've had pretty low sustaining CapEx over many of those years. We're now really looking at ensuring that we direct CapEx to ensure asset integrity in the most important areas. And as is indicated in both our release and in our financial report today, we have a number of projects in Kuantan, which will see us be able to pick up throughput growth over the next 2 years as well. So as always, I think it's best if I talk rather less in terms of outlining the situation. You've got a number of documents, including our financial report, the release and also the presentation, which I'm sure that you can go through at your leisure. But really, the best opportunity is for us to take your questions. And so I'm very happy to do that now.

[Operator Instructions] Our first question comes from the line of Paul Young from Goldman Sachs.

Amanda, hopefully, this question is not too gnarly, but thanks for additional information around the CapEx for '23 and '24. Just trying to figure out what you need to spend on LAMP to get that facility from 7.2 to 10.5. You've given us the Kal CapEx of $600 million or so. You've given us Mt Weld to $500 million clearly, nothing comes cheap at the moment to expand a small concentrator. But just trying to figure out what of the -- of the $1.2 billion you've outlined today in '23, '24 is going into LAMP? And what is the budget to expand LAMP?

So in terms of the expansion and the investment in the LAMP facility, there are a few areas in that, and so it's a little bit difficult to just pull out just the single point around uplift in terms of throughput. So the big areas that we're talking about in the LAMP, the first is actually the [ MRIC ] receivable, so that's receiving the material which comes from Kalgoorlie. And as part of that, receiving that mixed rare earth carbonate and, therefore, dissolving it ready to feed into the process. We are putting in a number of enhanced activities there, including things like management of soda ash and receivable and a number of other areas. The actual throughput uplift as it relates to the ability to get material through salt and extraction is a relatively small capital number because we're putting in place a flow sheet enhancement. So we haven't finalized the actual number on that, but it's in the low tens of millions as opposed to hundreds of millions of dollars to do that because we're taking this new approach to a flow sheet and we will be putting in additional capability in our product finishing area, once again in the low tens of millions of dollars to do that by putting in new furnaces for production there. A number of other things that we're doing within the LAMP investment is really more about enhancing, as I said, asset integrity. The plant is now a little older. It's still relatively new plant, but still it's a little older. And also some significant process efficiencies like, for example, continuous precipitation rather than batch precipitation. So that gives you a sense. We will give a more detailed update on the LAMP capability. What we wanted to do in here was to put in some sort of markers for the size of that capital, but in the same way that we provided more detail on Kalgoorlie and that well, we will, at the appropriate time lines, we've completed all of that task, provide more information on the LAMP.

Yes. Okay. That's really helpful, Amanda. Maybe just further to that, is there a little bit of CapEx in FY '25 to finish off LAMP and also the U.S. refinery to hit the 2025 target? I presume there is.

There will be a little, and it's always a bit tricky. There's a capital commitment and then there's where does the cash actually go out. So putting this sort of 600 plus 600, that should certainly, by the end of FY '24, we should be looking at the commitments have all been made. It won't necessarily mean all the cash has gone out for the U.S. because most of that is coming off the U.S. government -- from the U.S. government grants. That will just be a cash flow basis as we will have some cash go out and then it will actually come back to us as we claim that through the grant program.

Okay. Okay. A final one for me for now is around, I guess, heavy -- production of heavy Tb Dys, et cetera. First of all, thanks for clarifying the 12,000 tonnes of NdPrs on a product basis, not equivalent. But just at that rate, can you guide us to how much -- what production of heavy use will you have on an annualized basis?

Yes, we can do that. Pol, would you like to address that?

Yes. I think we have this here.

Look at us, we could be in one of those nice sort of photos from a century ago.

So focusing on -- this is high tech, right, 1 single person can fit in the box. So at the 600 tonnes a month of NdPr, basically -- and again, it depends on the mix of ore we get from that well, but the average content of Dy is around 70 tonnes of Dy a year and 15 tonnes or 20 tonnes of terbium. So this would move up proportionally, it should move to -- when we move to 900 tonnes a month. And assuming we have always the same mineral coming, but of course, here, there might be some development as well.

So just on that, one of the things that the exploration program and our continuous resource drilling focus is on is not just mining for grade but mining for elements. And so up until now, we're really mined the grade, and so the heavies that have come with the NdPr have simply come with the NdPr. But as we do more resource drilling, we understand that there are areas within our ore body where the heavies are relatively enriched. And so we will look at our -- we're at present reviewing our mine program, and we will look to be able to move into some of those areas preferentially as we put our production capability in place.

Our next question comes from the line of Hayden Bairstow from Macquarie.

Just a couple for me. Just on -- firstly, on the tax for the accounts. I just want to understand how much more tax credits you've got so you can bring back on the balance sheet and sort of give yourself tax shelter going forward? And then just some comments on the NdPr market, maybe from Pol. Just came to understand why the prices have come off as aggressively hefty, particularly in the last few weeks, what you're seeing on that front? Is it just literally these power restrictions in China closing our manufacturing? Or is there something more to it?

Thanks, Hayden. And I would love those questions but I'm not going to answer either of them. I'm going to throw to Gaudenz to talk to you about tax, and then I'll throw it to Pol to talk to you about the market.

Yes, and a quick point on the taxes. So I think we are still in Malaysia under the pioneer status, so you will not see the taxes coming through in Malaysia. In Australia, I think we did use up the tax loss carry forwards. However, with the commissioning of the Kalgoorlie plant, there's another event happening there, which will probably also take this forward. And yes, I think it's pretty cleaned out on the tax side.

Okay. I'll pass to Pol.

Yes. So in regard to market and I guess the only focus is on price. Just a reminder, NdPr price was RMB 290 in July '20, RMB 550 in July '21. And today, it's RMB 630. So yes, I know that it was RMB 1,000 a few months ago, but RMB 630 a kilogram is equivalent to USD 85 CIF China. It's not that painful. I think what is important to understand is that the demand, and that's what we see, the demand increase and continues to increase substantially. So we expect -- sorry, we are looking at this in calendar years, but the calendar year '22, we expect this to be way a few percent more higher than 20%, so probably 22%, 23% up versus '21, which was 16% up versus '20. 2020 was a bit slow growth, but I think a few businesses grew as much as 3% growth, and before it was 6% to 9%. So we are really in a situation of very strong growth. And the main driver, I think it's very important to understand, the main drivers for this growth, basically very simple. Our first element is wind turbines and I think after years, and I think in the presentation pack, there is a slide on wind turbines. You will see that after talking about wind turbines for many years, in fact, the new installation of wind turbines was rather flat until 2020. 2021 is a step change, so we reached 93 or 95 gigawatts units to extend every year. But the most important is to see the portion of direct drive. And direct drive, as you know, consumes a lot more NdPr or magnets. So it's 550 kilos of magnets per megawatt. So 10 gigawatts consumes basically in direct drive, 3,000 tonnes of NdPr. And we foresee a continuous growth. If you look at GWEC, I think they're very recognized Global Wind and Energy Council. Numbers, just the confirmed projects around the world show continuous growth of minimum 6% to 7% in the next 5 years and a growing portion of direct drive. So this is first drive for the global demand. And every wind turbine maker meet is very eager to secure their motor supply. Second trigger or driver for the growth is automotive. So global economy being a bit uncertain, I think it's reasonable to not plan for growth, any growth in the global automotive market. So let's assume that you would still have 80 million, 85 million cars sold a year worldwide in 5 years' time, and then we will see, hopefully, the world will become easier, but let's be reasonable. When you build internal engine, internal combustion engine car, you're having sudden average of 1.2 kilograms of magnets. When you go for hybrid or plug hybrid, it's 2.5 kilograms of magnets. And when it's battery cars, it's 3 kilograms of magnets. All in all, what the key numbers to keep in mind is that for 10 million cars, if it's an internal combustion engine, it consumes 4,500 tonnes of NdPr oxide. If it's a hybrid of flat hybrid, it's 5,000 tonnes more. So when you replace internal combustion engine with hybrid, plug hybrid, you actually consume 5,000 tonnes more of NdPr oxide. And if you replace that by batteries, EVs, it would be close to 7,000 tonnes oxide more. And that is exactly that what is happening in Europe. This morning, there was an announcement for California to ban internal combustion engines by 2035. I was in France enjoying too hot chemical weather last month. I was amazed to see the number of electric cars today it's ahead of diesel cars, which is something that is very new. So this doesn't change. The demand is very strong. So you have a temporary situation where we saw recently the price decreasing, again, to a level that is not to pay forward. $85 a few years back would be our dream, not even in our dreams. But well, not forgetting that the costs have increased a lot. So everything is relative. But the key question is on supply and the key question was how much production quotas China will release. So it was announced at the end of July or early August. I know that magnet buyers and makers were expecting a 40% increase in quotas. Real suppliers would prefer 20% And at the end of the day, the increase was 25%, which is -- which shows that actually China is concerned about maintaining a certain stability in the market. And that should make us all very comfortable with the price forward. But again, as I always say, the best way to enjoy NdPr price is buy some from us, put this in your garage and you will make a lot of money sometime.

Okay. Great. Just following back on that tax question, Amanda, just on when does that holiday run out? I mean, you've been operating for almost 10 years now in Malaysia.

Yes. So Gaudenz?

Yes, it's running until '26. That's another 3 years to go.