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

Good day, and thank you for standing by. Welcome to Lynas' Quarterly Results Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Lynas. Thank you.

Good morning, and welcome to the Lynas Rare Earths investor briefing for the December 2024 quarter. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director; and joining Amanda will be Gaudenz Sturzenegger, CFO; Pol Le Roux, COO; and Daniel Havas, VP, Strategy and Investor Relations. [Operator Instructions] I'll now hand over to Amanda Lacaze. Please go ahead, Amanda.

Good morning, everybody. Happy new year, I think we're still allowed to say that when we're only halfway through January. And I trust that everybody who managed to have a break over the Christmas period had a fabulous time and for those who celebrate Christmas that Santa was kind to you. Santa was a little kind to us, as you will have seen from our report, in delivering some chemicals on Christmas Day. So sometimes in your stocking, you get the things that you want and sometimes you get the things that you need. Anyway, the quarter as we saw it, was definitely a quarter of some positives and also some negatives. On the positive side, our sales revenue was up compared to the prior quarter and indeed, the previous corresponding quarter. And this was basically off the back of volume. Our Kalgoorlie facility was officially opened, and it was a terrific day, actually, with the Resources Minister and other dignitaries in attendance and really gave our people a chance to show off what is quite a significant achievement. And the other positive that Kalgoorlie is now producing at very close to the target volumes that we have set, so producing on volume. The Mount Weld expansion is going -- continues to progress well with Phase 1 now fully commissioned and tied in with current production and working as designed and already delivering benefits for us in terms of our Mt Weld operation. And the other positive is that after a lot of intense work and reassessment of alternatives, we have found a pathway through to deal with some of the permitting issues that we have previously flagged at [ Seadrift ] and continue in very positive discussions with the DoD now on how we execute against that newly defined pathway. Unfortunately, there were also some negatives. And I think that everyone has read the report and understand those. The December production was lower than we were hoping that it would be. As I said, Kalgoorlie is producing at very close to our target volumes but not yet at target quality. And so there's some impurities in the Kalgoorlie mixed rare earth carbonate that we need to deal with at least at present in Malaysia. In the medium term, the solution is clearly that we deal with those in Kalgoorlie. As I've indicated in the report, this is certainly not unexpected with new processing that will be a period of time in the first instance where -- and this is sort of sequential, where you have to get your volume throughput working in the way that you expected to. But we are dealing with a bit of a new process, and all natural resources have some level of impurities. And the way that they have presented and the way that we need to manage them is not unexpected, but has certainly been a challenge, particularly during December 2024. The other negative, of course, is the continuing low prices in the market, still sitting sort of around or just under USD 50 a kilo for NdPr. And we look forward to the market starting to pick up again as we see activity in China improving, and that's not just for inside China consumption, but also as we look at some of their export figures, particularly in automotive. However, at present, the pricing continues to be subdued. So I guess the good news is that most of the negatives [ can ] and are being addressed. The work that we did in December on truly understanding the various different impurities in the mix rare earth carbonate and their effect in the way that they [ deported ] through the process in Malaysia is -- has been very productive. And we have a series of actions identified, which we are currently implementing. Slightly harder to fix, of course, is the issues around the market, but we are focusing a lot of our efforts in terms of sales and market development on not just how do we sell to the highest-value customers on the best terms that can be achieved, but also what more can we do alongside other market participants to support the ex-China market development because we see this is critical for us in the longer term. So whilst, yes, we were -- none of us were particularly happy with the NdPr production, particularly through December, we do see this as a sort of a short-term issue that we have the skills, experience and competence to be able to address it, and we see that we should be able to move forward with more focus on the positives and rather less incidences around the negatives. So with that as sort of some introductory comments, I can see that we've got many questions in the queue already. And so to ensure that we're able to get this done in plenty of time, let's just move across, and I'll take questions now.

[Operator Instructions] First question, we have Paul Young from Goldman Sachs.

Amanda, first question is on the challenges with processing the MREC from Kalgoorlie up at lanthanum. I mean I'm just wondering if you can provide a little more color and detail around those challenges and maybe how things have been tracking in January? And maybe the first question is really around these impurities, and I understand that you -- at [ Kalgoorlie ] also at LAMP at the front end there, you actually do drop out a solution on iron, aluminum and phosphorus, they are the main impurities. So can you maybe just expand on which impurities are high? And how you're actually addressing those impurities?

Sure. And I'll put it sort of historically as well because I remember sitting with some of these same sorts of challenges a decade ago when we were first starting up the Lynas Malaysia facility. So our material comes through, in addition to the rare earth, yes, iron, phosphate, but also zinc and aluminum as other elements within that material. And in the very early days at LAMP, we had high -- well, they weren't high, but we had impurity levels there which created further challenges for us downstream. Our technical team implemented a number of -- some things that we would see as definitely our own IP on being able to remove those impurities cost effectively as early in the flow sheet as possible. I think on the very original design, they tended to be sort of removed once we got to finishing stage. But we've been able to find ways to remove them earlier in the process. So as we look at the material that comes out of Kalgoorlie, and we review this -- the quality on a weekly basis, when we started, the level of some of those other elements was higher than is desirable. Very pleasingly, we're seeing them come back much closer to being within the range that we need them to be. However, some of that early production, which is on site in Malaysia, we have had to deal with those impurities. The other thing is that as part of the process, we have sulfate in the material. Once again, actually, I think it took us quite a long time to get to producing a low-sulfate material when we originally started up the LAMP. We are now on a pathway to being able to do that, but we still have to have a sulfate removal step at this stage with respect to MREC processing in Malaysia. So those are the sorts of things that we're dealing with. As I said, none of them are impossible. And certainly, we have the technical know-how to do them. But just because it's going through a different initial process in Kalgoorlie, they present slightly differently, and we just have to learn how to manage them, and we are doing that as we go. I'm happy if Pol wants to add anything more to that, but essentially, the team -- the process improvement team is very focused on this. And the interim step, which sees us with a chemical treatment for dealing with that will definitely only be interim because we do see a pathway to being able to solve these issues at source, which is actually in Kalgoorlie. But for the materials that we already have on site in Malaysia, we have to do the additional treatment.

It sounds like just optimizing that neutralization step in Kalgoorlie. So -- and then the follow-up question is actually just on that throughput constraint you have at the cracking -- at the kilns in Malaysia. Look, I must admit I wasn't aware of that -- of the throughput permit level on the Mt Weld concentrate on throughput and the kilns, I thought there was an NdPr production cap or permitting limit. But just on that throughput, I know the kilns, I think, are rated at 65,000 tonnes per annum of concentrate. Is that the number that we should be thinking about? That's what you permitted to in Malaysia, 65,000 tonnes of concentrate throughput through the kilns?

No. Actually, we -- this -- it is an unhelpful anomaly of our licensing in Malaysia, which we've been living with for some time now. So we have an import license, which is higher than our processing license. We haven't disclosed the explicit number on that. But sufficient to say that certainly, we are -- we have a license to import sufficient to be able to produce at the -- what we used to call the Lynas NEXT rate, but for a whole variety, and that's awarded via what's now called ATO, which was the AELB. And that has been in place since 2018. There are multiple reasons, many political, which have seen the matching permit from the DoE not actually come through. We've always been cautious in the way that we manage this. And when we have hit this processing limit previously, we basically used the time to do things like major maintenance that we would not want to disrupt production through the rest of the year. This year, we thought that with the addition of the MREC that we would be able to sustain production through December and without going back over it again. We've already discussed why that was not the case. We're currently doing a further EIA in Malaysia, which we believe will allow us to address that processing limit, which remains in place.

Our next question comes from the line of Austin Yun from Macquarie.

Amanda and the team, just one question on that impurity again. I'm trying to understand -- I understand you have an interim step to try to resolve the issue. But if I -- for the next 6 months, does this kind of hiccup impact your timeline to demonstrate the 10,500 tonnes production capacity by the end of financial year '25?

This is a good question, Austin, and one which is certainly exercising Pol and his team's minds every day. We have a plan which sees us to be able to demonstrate because we've said for a long time, our target is 10,500 tonnes of capacity. And by that, we mean 10,500 tonnes operable capacity in FY '25. And so we believe that the series of initiatives that we're taking means that we will still be able to deliver that performance this financial year.

Okay. And just a quick follow-up. After the 10-day maintenance at the [ cracking and leaching ] facility in Malaysia in December, how should we think about the ramp-up profile in the March quarter? Has that plant being fully ramped up now?

So in terms of the ramp-up in the March quarter, we've taken some actions in terms of flow sheet for the MREC, which is seeing it move through the system more efficiently. We still have 2 kilns offline because, as I said, we always take the opportunity when we when we had the kilns down to do major works of one form or another, and it's worth remembering that they're now 10 years old. So there's -- we've got -- this actually gives us a little bit of headroom to be managing the MREC as well. And we expect that will all -- that those kilns will come back online in due course during this quarter alongside for more efficient mixed rare earth carbonate processing that we're progressing at present.

Next question comes from the line of AL Harvey from JPMorgan.

Just wanted to get a sense, in the release, there is a mention of -- you guys are now looking to produce 2 different types of concentrates out of Mt Weld, just to, I suppose, optimize the feed to Malaysia and [ Cowal ]. Just wondering if there's any relationship with that decision on the impurity issue. I suppose, I just want to get a sense of what will be the difference between the 2 feeds? Is it around lowering that lanthanum in the feed that goes to Malaysia or anything like that? And I suppose the extension of that is, what's the impact on the Mt Weld cost base? Is there any extra kit or productivity impact of producing 2 different types of concentrate?

AL, I wish we were quite yet as sophisticated as being able to remove lanthanum and cerium at Mount Weld. At some stage, that will be something -- it is certainly on the list of things that would be excellent for us to be able to do. At this stage, what we're basically doing, however, it's not elemental, it's not based on elements, the difference in the cons. It's a difference in grade and moisture as relevant. So clearly, if we can get lower-moisture product, and this is one of the big benefits of bringing in the dewatering circuit that was part of the expansion; it allows us to have a lower-moisture product going to Malaysia. The less water we ship, the better, of course. And also, as we look at sort of process and the way we optimize recoveries and grade, once again, higher-grade con to Malaysia makes more sense in terms of sort of logistics costs as well. So not yet really a quite a sophisticated as you're talking about, but definitely, on the to-do list.

Yes, understood. I suppose just -- I suppose what is the benefit of the 2 different concentrates? Like if you get those benefits from dewatering grade, why not send them to both plants?

Look, it's just, at this stage, an operational decision. And the kilns in both facilities actually do work slightly differently. And so just ensuring that whatever we're doing with con is most closely correlated to what we're seeing in terms of kilns operation and recoveries is really what we're trying to do. We're just trying to make sure that we match. It's not a significant cost impost in that world. And it's just recognizing that if we can tailor-make the con for the kiln that is feeding, that can give us a better outcome.

Our next question comes from the line of Chen Jiang from Bank of America.

Amanda, one question from me, please. So under the scenario if Lynas have the chemical inputs available for the additional treatment of the Kalgoorlie feedstock, the production won't be impacted for 3 or 4 weeks, 1st November to 25th of December, is that right?

Yes.

Okay. Okay. And then if Malaysia's cracking and leaching is down, like what happened in December this quarter, will the Malaysia plant be capable of processing the carbonate from Kalgoorlie as an alternative feedstock without the recurring chemical processing issues going forward?

It will be in the future, right? So there are two -- in fact, there's about three different approaches that the operations team is implementing at present. The first, which is what we're talking about now is the least desirable, which is we have material produced with impurities that need to be corrected later in the flow sheet, and we are correcting them with this additional chemical treatment. The second is to find a more efficient process flow in Malaysia to do this without necessitating the additional chemical treatment. But the third and the sustainable solution is the one that sees us bring the process under control in Kalgoorlie to produce materials which do not have the troublesome impurities in them. We have action plans which are associated with each of those pathways.

Right. Amanda, I really appreciate you outlined those three different, I guess, approaches to tackle the issue. Maybe just a follow-up. So the sustainable solution is still on Kalgoorlie to, I mean, lower your impurities. And -- but at the moment, Lynas is working on additional chemical treatment because the impurity levels are still relatively high.

That's right. That's right. But we can see a pathway, and the team has a plan. We -- I'm just going to tell you when -- the day it's going to happen because, I mean, these processes always have opportunities to throw up new challenges, but we have a plan ultimately to produce within spec on a variety of these impurities, so we don't have to do the post treatment essentially in Kalgoorlie.

Next, we have Daniel Morgan from Barrenjoey.

First question, just you said in your outline that Kalgoorlie is producing on volume. Is that at the 9,000 tonne per annum capacity for the plant? Or is that at your budgeted throughput for the quarter?

No, we didn't think that within 6 months we'd be at full capacity there. No, it's producing on our target, I'd say, said close to our target volume. So we know that we aim to get to 10,500 tonnes per annum production this year. You can do the arithmetic, given how much of that's going to come out of the Malaysian kilns and how much of that is going to come out of the Kalgoorlie kilkn. And we will -- this is all about sort of produce at a -- produced at a low rate, get it stable, stepping up, produce at a slightly higher rate, get it stable, stepping up, produced at a slightly higher rate, get it stable, step it up. The decision then on how we balance the capacity across those 2 facilities will simply reflect market conditions and sort of cost considerations as we move forward. But no, we're not producing at equivalent 9,000 tonnes in Kalgoorlie, and we're producing in Kalgoorlie at a rate that if it's combined with what we produce in Malaysia, we can demonstrate the 10,500 tonnes of NdPr production.

Yes. Clear. And then just a follow-up. I mean, you outlined the end market softness, which has been the case for a while. And you obviously outlined several months ago that your strategy is not to run at full capacity, which I understand. But given that you lost a month of production more or less in December, you're not yet at full tilt in January, would you plan to be just to catch up what your budgeted production you were thinking for the year for the rest of the fiscal year? So might you really run hard at the end of this quarter and into next? Or have we lost that production, and it is lower production this year than you would budget?

Does someone actually shared with you our weekly sales and operations planning, Daniel?

No. I don't know them all.

Because, yes, certainly, our plan and -- with a relatively good level of confidence is to run hard at the -- as we move through this quarter and we get both of the kilns back online and certainly run hard into the end of the financial year. So we think that we can recover the production that we've lost. We think it is important, notwithstanding that the market, pricing remains fairly low. I mean we've still, as we've demonstrated in December, been able to sell successfully into that market. And we have had some drawdown in inventory. I mean we're not quite we were for many years where we finished the quarter with sort of 20 tonnes in inventory. But we would like to see ourselves with a little more finished goods inventory available. So yes, we will be running hard every day.

Our next question comes from the line of Regan Burrows from Bell Potter.

A lot of my questions has been asked, but potentially one on the product mix. Obviously, the achieved price is higher than what I think everyone sort of thought it would be. Just curious, I mean, do you have sort of contractual obligations to sort of fill larger quantities of other rare earths, I guess, in the periods coming up? And do we sort of see a scenario where you have to sort of reduce your NdPr that you're selling in the future periods and potentially that achieved price comes down a little bit over the next couple of quarters?

Yes, it's a good question, Regan. Yes, product mix does have an effect and the fact that we have certainly prioritized and continue to prioritize NdPr and SEG. I mean, within the product mix in the quarter was just passed, NdPr, but there's also SEG, which is contributing to that higher price. And it will go sort of bounce around a bit, and we will have some obligations for the -- that we need to meet on lanthanum and cerium. So we have identified that in the report that we do -- we have got benefits from mix, and we've also got benefits from sort of currency as well. So we recognize that. In other quarters, we have penalties associated with it. But we would expect that we will have additional sales of non-NdPr products in the last 2 quarters of the financial year.

Got it. And potentially just one sort of quick one. Capitalization of the processing cost at Kalgoorlie, do you sort of have an idea as to when we'll start to see those costs show up in the cash flow on a quarterly basis, I mean it's out of the CapEx expense?

We think having reached a position where we are able to produce what we say we're going to produce in terms of volume now gives us the platform for that transition. And Gaudenz and his team are working with the auditors to get signed off on the various accounting measures that need to be kicked off to make that change.

Our next question comes from Shannon Sinha from Morgan Stanley.

Maybe my first one just around Malaysia. So the maintenance that was done during the quarter and replacing the kiln bearings, is there any other maintenance that could be required basically over the next year or maybe a few years that would require a longer shutdown?

Yes. The kilns are big -- complex mechanically and chemically, but we're pretty sort of knowledgeable about how they operate, but there are always sort of -- there's always a potential for maintenance challenges. We've stepped up our preventive maintenance schedule and sort of the systems that we use to get that preventative maintenance targeted in the right places. The bearings, we had one bearing failure, so we're now sort of addressing that on each of the kilns rather than waiting for another failure. We have various different elements that we are addressing. We don't have a plan at present for sort of a major shut because we have been able to use this time where the kilns have been shut down both last year and this year to address many of those major issues. But I'll invite Pol to comment on that as well. If you had anything further that you want to say, Pol?

Much. We did really, and we are still doing actually, very intense preventive maintenance exercise on our kilns, including replacing bearings on 2 of them. So yes, in this period of time when the demand is not very strong, we found this is the best moment to really get our kilns ready for maximum production. Now, there is always things you don't expect, but at least, we're doing everything possible for going for a long period of time at maximum capacity.

Maybe the next one, I was just wondering if you could provide any details around how the heavy separation circuit is progressing as well.