Lynas Rare Earths Limited (OTCPK:LYSCF) Q1 2023 Earnings Conference Call October 26, 2022 8:00 PM ET
Company Participants
Jennifer Parker – Vice President of Corporate Affairs
Amanda Lacaze – Managing Director & Chief Executive Officer
Pol Roux – Chief Operating Officer
Gaudenz Sturzenegger – Chief Financial Officer
Conference Call Participants
Paul Young – Goldman Sachs
Daniel Morgan – Barrenjoey
Levi Spry – UBS
Austin Yun – Macquarie
Operator
Good day and thank you for standing by. Welcome to Lynas Rare Earths 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. Please go ahead.
Jennifer Parker
Good morning and welcome to the Lynas Rare Earths Investor Briefing for the September Quarter of FY ’23. Today’s briefing will be presented by Amanda Lacaze, CEO and Managing Director; and joining Amanda on the call are Gaudenz Sturzenegger, CFO; A – Pol Roux, Chief Operating Officer; Sarah Leonard, General Counsel and Company Secretary; and Daniel Havas, VP, Strategy and Investor Relations.
I’ll now hand over to Amanda. Please go ahead, Amanda.
Amanda Lacaze
Thanks, Jen. Good morning, everybody. Actually, we’ve got — we’re attending in force today in terms of the Lynas team and it’s an interesting reflection of life in 2022 that we are literally scattered all over the world. So we’re calling in from a variety of different destinations but we are all very focused on ensuring that we find a better second quarter performance than the first quarter. It was a difficult quarter. I think that everyone on the call is — well, across the fact that we had the serious issues with water. I think I’ve said to many of you, it’s a matter of ongoing frustration to me that we operate on the wettest content on earth and on the driest content on earth and water is a challenge in each location. During this quarter and previous quarters, we’ve often had ongoing challenges with our continuity of water supply in Malaysia. But generally, we’ve been able to implement initiatives which have mitigated the effects of reduced supply. During this quarter, we weren’t able to do that when a major pipe burst and we had 0 water delivered to the plant for nearly over 2 weeks.
So, I think that the important thing here is that, it’s a sign of strength. It’s really a sign of how strong the market is, so we still booked $164 million in revenue. And we ended the quarter with over $1 billion in the bank which is particularly pleasing given that we’ve got a very heavy call on capital at this time as we’re really accelerating our activities in Kalgoorlie, in particular. And as we start to invest more in Mt Weld’s capability. So notwithstanding some of the challenges of the quarter itself. As we’ve indicated in the report and as I’ve said on other occasions, we are really focused on growth.
And just to pick out the highlights on that, the big — we had 2 big pieces of news associated with Mt Weld through the quarter. The first is that, we’ve commenced the 2-year exploration program into the carbonatite. This is into the primary mineralization below the enriched weather zone which we have been mining to date. We’re delighted that via JARE, JOGMEC, Japan Oil, Gas and Metals Exploration Corporation [ph] is providing us with additional technical support on that program. This is really exciting stuff geologically. Our GOs sort of very excited to find out what lies beneath as indeed are our colleagues at OPEC. In addition to that, JARE provided additional financial support for the exploration program in the form of a US$9 million equity placement to fund those program activities.
And, of course, the other really big news at Mt Weld is the expansion which we announced in early August. Sometimes sort of say, a little Riley that it appears that most things come in $500 million chunks in rare earth. Indeed, this is another $500 million program at Mt Weld. It’s very exciting. It will take us a first step to 12,000 tonnes a year of NdPr. We have 2 further enhancements that the team is working on which we will announce in due course which will see us be able to increase that output by a further 2,500 tonnes each.
It is really important to just take a moment to reflect on this. The — it can sometimes be easy in a market where there’s a lot of focus on some of the processing activities that we remember that feedstock is essential. Any downstream investments are only going to deliver a return if they have feedstock and the quality of the Mt Weld ore body continues to be the thing that underpins value and value creation within Lynas. Of course, I know everybody always wait to see what’s going on at Kalgoorlie and it is so exciting a couple of weeks ago, I was out there on the Monday with the Board and then on the Wednesday with the U.S. Ambassador which is pretty cool. And even within those 2 days, I could see changes on the site.
The team is very excited every day to see this plant really coming together and you can see it in some of the favors that we’ve included in the report. We have provided a little bit of a further update on this as well. Those of you who listen to these calls often would know that we received a grant from the Australian government under the Modern Manufacturing Initiative for a new industry-first carbonation circuit. I was hopeful that we would be able to accommodate that within our original budget. But with some of the various pressures, particularly around construction costs and logistics, that’s not been possible, as well as that remained a decision to put in some circuits which will allow us to further upgrade capacity at Kalgoorlie over time.
And then as I said, there has been a few sort of increases in construction contracts and logistics. And so, today, we’re just announcing that we expect that will come in about 15% over our initial budget but that, as I said, includes both the scope increases and any cost increases.
In the quarter, I’ve spent quite a bit of time on aeroplanes. So delighted to be back in a single location now, hopefully, for a few days. Being to the U.S., terrific opportunity to view the site and we — the proposed sites and the plant there, we will update the market on that once we’ve completed our negotiations but I think that it will be an excellent location for our facility, also had extensive engagement with U.S. government with respect to that contract. And things are progressing well there with the delivery of our Phase II deliverables as part of that program. And then last week, I was in the U.S., again, met with many investors and that was terrific. There’s great interest in the rare earths industry. But as well as that, there was sort of probably the premier rare earth conference of the year.
And so, I had a great opportunity to really engage with other players in the market as we all seek to ensure that we are actually stepping up to deliver the sort of supply requirements for this market as it continues to grow through to 2030. But notwithstanding all of that, it still remains whilst there’s a lot of action in the market, Lynas is the only producer at scale of separated rare earths outside of China. And we see that that will probably be the case for some time yet. And so, ensuring that we maintain a focus on getting back online, having a much stronger second quarter in terms of production, it’s really at the sort of the focus of everybody on the team at present.
So a bit of a mixed quarter, notwithstanding some of the challenges. We still delivered sort of a nice uplift in cash whilst funding the growth programs and hopefully, we’re looking into a better second quarter as we head through to the end of this calendar year.
So with those opening comments, I’m very happy to take any questions or if you want to specifically direct your questions to any of the others on the team, please let me know.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Paul Young of Goldman Sachs.
Paul Young
Amanda, first question is on the water challenges in Malaysia. Great news that water supply has now normalized. Can you step through what changes you’ve made? And what gives you the confidence that the water supply challenges are now fixed? And I also note that you make the commentary around — or comments around you can actually ramp up production volumes pretty quickly. Just trying to get a sense of how much catch-up can you — or how much catch-up can you achieve on NdPr production over the next couple of quarters?
Amanda Lacaze
So, I’m not sure that we’ve ever said that we’re comfortable with the water supply situation. So, as I said, we’ve got sort of a long history of challenges. The situation in September was extraordinary. There was a — I think it was about a 1.5 meter pipe which was 10 meters underground burst. And that means that everybody in Kuantan, including residential users as well, had no water whilst that pipe was being repaired. So that pipe has been repaired. As well as that, prior to that, there were some challenges around the pumping station and there are new pumps which have been put into place. So we think that we have a better situation than we’ve had previously in terms of the supplier but we are continuing to investigate and not on our own, with some of the other industrial users within the Gebeng Industrial Estate. We’re looking to investigate other options for building redundancy into the water supply situation, including do we need to put a pipeline to an alternative supply source, etcetera.
Locally, we had used a lot of the water which was sitting in, we call the disused bauxite pit which is essentially next door to our plant. But we’re coming into the monsoon season. So we think there’s going to be a fair bit more water there. But the other thing is that, as we’ve indicated at the last quarterly, we were implementing a new circuit to improve our water recycle rates. Now, that’s a little bit behind time now because it’s hard to recycle water if you don’t have any. But we think that that will improve our performance. And then the other thing that the technical team is looking at is other solutions that will allow us to increase water recycle. That’s our preferred pathway here is to continuously improve the recycle rate rather than just finding a different source of water because that means that we’ve got more control over it ourselves.
So in terms of being able to catch up, as I think we’ve indicated in the report, we certainly see that we should be able — the sort of production volumes which I think most of you analysts have got included in your models which are at or about the same sort of levels as we had in the previous year, we would think that we will be able to — certainly be able to catch up and deliver those sorts of results over the following 9 months.
Paul Young
Okay. All right. And maybe moving on then to the CapEx increase on Kalgoorlie. I mean, you’ve been asked this question around that capital estimate probably over the last 18 months from time to time. And the increase we’re seeing today that you’ve announced, probably not too dissimilar to what other companies are experiencing in the industry with respect to inflation. You’re pointing out logistical — increase on logistical costs and etcetera, a bit of a scope change there, I note as well. So more of the question I have is around the total CapEx budget you have, including Mt Weld and LAMP, etcetera, of $1.2 billion over the next 2 years. Am I correct by saying that’s now $1.275 billion? But what’s the risk around the same issues that have impacted the Kalgoorlie cracking and leaching estimate impacting the 2-year budget? And maybe more of the question is what contingency have you actually built into that number? What risk should we see on that increasing beyond the $1.275 billion now?
Amanda Lacaze
So Paul, it’ll stay at $1.2 billion when we’ve got enough headroom in there to accommodate this increase within that $1.2 billion which has been disclosed. So you don’t need to put the $75 million [ph] on top of that. Yes, we’ve been asked about this for some time. I would point out that we got all the equipment in — on budget and on time. Of the increase, more than half of it relates to the scope increase. And as I said, we were originally which means that frankly, that the cost increase is well within sort of 10%. We were hopeful that we would be able to cover the scope within that initial budget. And if it wasn’t for some of these sort of more extraordinary cost increases which has occurred over the last 12 months, we probably could have. So we think that it’s prudent on the scope that we do the work now. You only get one shot at being sort of a low-cost producer and that’s when you size your equipment. And so, that’s the reason I have made that call to do it now. Each of the projects has its own contingency in it. And yes, the contingency that we put into the Mt Weld budget is larger than the one that we had in the Kalgoorlie project budget initially.
Paul Young
Okay. All right. So absorbed by contingency. That’s helpful. I’ll just ask one last one, Amanda, just on the market. Still a bit of volatility NdPr prices in the period, a bit of feedback from trade journals, etcetera, was a fair bit of restocking and destocking and seasonality in the price volatility. I know you made a comment in your report here around the stated 25% increase in the Chinese production quota and had that led to some concerns in the market. Can you maybe just — any information you have around what production — what Chinese production volumes are actually doing at the moment? What you’ve actually seen or heard of what they’re doing?
Amanda Lacaze
Okay. I might pass that across to Pol. I mean, there’s sort of limited information coming out of China at present as you would no doubt appreciate, with the sort of continuing various lockdowns. But just — I mean, Paul will — I’m sure will explain a little — the arithmetic around the 25% moment there. In fact, we were quite welcoming that number, where others, I think, Sarah [ph] is being maybe a little bit more risky. So Pol, maybe if you’d like to talk about what you are seeing out of China in terms of production?
Pol Roux
Yes. As you said, it’s been a long time since I last visited China and I spend more time dealing with water in quantum than with NdPr price in the market. But basically, China increased their production quota by 20% in the first 6 months of the year, 25% in the second month — second half. When you combine that with the production of Lynas, you end up with an increase of production in the calendar year by 21% worldwide. And when we compare that with the production increase of magnets and as you know, we — as you guess, we know pretty well how much each magnet maker inside and outside China is producing, converting this into NdPr consumption, we match with the same number of 21% increase. So I think we do this calculation very carefully within Lynas. I guess, there are people doing that very carefully in the mid-teen China. And what is interesting to me is that, they decided to shut exactly at the balance point so that things remain the way they are. And that’s basically how you saw the price stabilizing after a bit of a shutting [ph] earlier on. Some concern because a lot of people say, well, 25% increase is not too much. But finally, after a while people realized that things were still in balance and that’s where the price stabilized nowadays.
Now, for the future, I was expecting some kind of stimulus package from Xi Jinping but he stopped short of this, just signing up for another 5 years. So I don’t know what he will do from these 5 years but we’ll see how the Chinese economy moves from now on.
Operator
[Operator Instructions] Our next question comes from the line of Daniel Morgan from Barrenjoey.
Daniel Morgan
So just wondering how hard you can run the Malaysian plant for the remainder of the year. What gives you confidence that you can meet last year’s production numbers despite the slow start to the year? Is there any maintenance that we should be thinking about coming up? Or did you use the downtime to take care of some maintenance issues?
Amanda Lacaze
Yes. So the simple answer to that is yes. So we used — well, we’ve had already scheduled the only major kiln maintenance that we needed to do during the year, we had already scheduled that in the first quarter. We took the opportunity to do another piece of maintenance in that time as well. So we certainly see that we should be able to run all 4 kilns with normal preventative sort of maintenance downtime but we should be able to run all 4 kilns through to the end of the financial year.
Daniel Morgan
The increase to the Kalgoorlie budget, you intimated quite a bit or half of it was scope. Can you elaborate on what is the increase to scope? Is this preparing for potentially the expansion of system capacity towards 16.8000 [ph] tonnes per annum of NdPr? Is that what you’re referring to?
Amanda Lacaze
Yes. You’ve followed us for quite a long time haven’t you, absolutely. So there is 2 things, Daniel. The first is the carbonation circuit, as you will recall, it’s about $30 million in total and half of it will be picked up by the Australian government and the other half will be picked up by Lynas. And as I said at the time, I’d hoped that we would cover that within our contingency but that’s not going to be the case. And then, of course, the second piece is, as we look at how do we put together all the pieces of the jigsaw puzzle and capacity, we do need to make sure that we’ve got the opportunity to be able to increase capacity at Kalgoorlie and particularly as we continue to increase our output from Mt Weld. So those are the 2 things that are sort of driving that scope increase.
Daniel Morgan
I note that your cash costs or cash outflows for production and royalties, etcetera, was $104 million in the quarter. I know it’s quite a messy quarter where you didn’t produce as much as you would have liked to and you had to make a bunch of decisions on the side to fixed water issues and whatnot. But I’m just wondering, given — is this a level of cash outflow we should expect for the rest of the year each quarter? Or will it go up with volume going up?
Amanda Lacaze
So a lot of that — and that issue on cost has been sort of quite challenging, particularly around things like probably the most significant has been sulfuric acid cost increases which is sort of unavoidable, A and B. You can’t — we can’t choose to dose different amounts. So it’s not something that we can just sort of say by using less. Having said that, in Pol’s team, they’re very focused on further opportunities to reduce the usage and/or finding sort of new suppliers. But really, that increase in cost has got more to do with increasing input costs than anything else and it really comes down to what happens with the market prices on some of those things. But I’ll let Gaudenz maybe say a little more, I may have said that the one which is highest in my mind is sulfuric which has gone up by about 2.5x.
Gaudenz Sturzenegger
Yes, I think I would like to add that here, we — if you refer to the data, Daniel, it’s cash. Obviously, cash follows a couple of weeks, or even month to month after the — after consuming it. And particularly on the royalty, basically, what we are talking about here is really the royalty we paid at the high point of the prices. So definitely on that, you will see coming back on it. And also what we have seen is probably also WIP balance which is probably different than or what you have in normal operations. So there will be some adjustments to it. I would not expect it to see it higher than it was in this quarter. But again, I think we need to see how the price develops. I mean, indicate on the chemical inputs as they are probably coming through with about 45, 60 days’ time gap.
Daniel Morgan
Okay. And last question, if I may. Just on the back to Kalgoorlie plant. The budget has increased. I appreciate some of that scope but is there anything you might add just on the timing? It don’t look like you’ve changed the timing from July 2023 which has always looked like a tight time frame. Just wondering if there’s any update here.
Amanda Lacaze
It is a challenging time frame and no, there’s no update. At this stage, we continue to manage all elements of that plant to be able to bring it online in the event that we are unable to continue to produce in Malaysia.
Operator
[Operator Instructions] Our next question comes from the line of Levi Spry from UBS.
Levi Spry
Maybe can I just push a little bit more on the last question. So what is the critical path? What will we see? And, I guess, what were the expectations around commissioning in certain parts of the circuit?
Amanda Lacaze
So, of course, you would be aware the critical path moves around when something goes direct with it gets fixed and then something else will becoming a clinical path, it’s like dealing with sort of bottlenecks in an industrial operation. We will advise the market when we have first feed on. In terms of commissioning, we have already recruited the operational management team that will run the Kalgoorlie facility, including a commissioning manager and we are well placed to be able to commence that process as soon as equipment is ready to go through the commissioning process.
Levi Spry
Okay. And maybe just one for Pol. So, can you share with us a little bit about your calendar year ‘23 expectations for some magnet demand or production? So it sounds like you’re not adding much volume, if any, to the supply side. So what are your expectations around demand? Has it rolled over? Is there any signs of it rolling over a little bit? Yes.
Pol Roux
Yes. We — I think it’s fair to say that the 21% increase in magnet production worldwide in ’22 and 16% in ’21, included some restocking or refilling of the supply chain that had been — I mean, everyone decreased their inventories during the COVID, not knowing how far it will go, how long. From our direct or Lynas customers and most of them are Japanese, so everything is pretty well scheduled. We see a substantial increase, I mean, at least 10% increase for next calendar year. Now, there are, obviously, uncertainties in regards, especially on Europe situation, the semiconductors availability.
What I would foresee is that, at least wind turbine in ’23 which should be much stronger than in ’22 and that doesn’t relate to much on semiconductors. And as of today, we still see a very strong growth on the electric cars. This is just accelerating all the time. For the rest, like home appliances, robotics, this is more related to the global economic situation. So if the economy goes down, you will have less new buildings, less air conditioners, etcetera. So that’s where most of the uncertainty lies. But for the specifics that we enjoy which is wind turbines and electric cars, I think ’23 is a very good year ahead again for us.
Operator
[Operator Instructions] Our next question comes from the line of Austin Yun of Macquarie.
Austin Yun
Amanda, just two from me. The first one is on the capital management. I see that the restrictions have been removed. Just wondering if you have any plans to provide further clarity on the capital management or potentially update your dividend policy, understanding that focus is on the growth and executing multiple projects in your pipeline. I’ll come back with the second one.
Amanda Lacaze
Thanks, Austin. Great question. And we’re very pleased to agree these variations in the senior loan agreement with JARE, who have always been supportive. And I’d actually forgotten the history, it was just before my time, when these came in, it was to avoid the potential risk of the company breaching other more sort of normal debt covenants. But I think that we’re now — we’ve now grown up as a business and it is appropriate to do this. We and the Board of Lynas, we’re very pleased that this will allow us to have a more normalized [indiscernible] capital management, including sort of the opportunities to provide both a capital and a yield return to our investors. That will just be considered as a normal part of sort of the Board cycle. So all Boards consider the payment of dividends is part of their half year and annual results. And with this now as a new agreement with JARE, we will be able to do that. So we’re very pleased with it and we see it as being a strong indicator of the maturity of the business.
Austin Yun
And the second question is on the cerium production to see that you delivered a few large orders in the quarter. Just trying to understand from a production perspective, do you have a minimum cerium delivered kind of commitment every year.
Amanda Lacaze
I’m not sure I completely understand the question. We have the ability to produce cerium at times where we have had challenges around some of the inputs, like particularly in water, we will preference the NdPr circuits, of course. And that’s really what we’ve seen over the past couple of years. We have significant customers for what’s now more than half a dozen different grades of cerium even within our cerium portfolio, then we really are developing some higher margin products within that portfolio, including for applications like water treatment, in addition to the more traditional applications like the cerium which is used in auto CAD systems. So we do have [indiscernible] of customer contracts associated with this, our ability in sort of normal operating conditions to be able to make those contracts, plus more cerium is in basically in plentiful supply throughout all suppliers.
So yes, does that answer — is that really what you were sort of seeking to understand? Pol can probably add as well.
Austin Yun
Yes. So basically, the product mix will normalize for the rest of the year, right and which is going to help the average realized prices, given that the NdPr will be a larger proportion for the next 3 quarters?
Amanda Lacaze
Yes. That’s right.
Operator
[Operator Instructions]
Amanda Lacaze
Okay. Record call, sounds like.
Jennifer Parker
Are there any more questions, Desmond?
Operator
At this time, there are no further questions on the queue. Back to you.
Amanda Lacaze
Okay. All right. Terrific. I’m sure if any of you think of some further questions, you can drop a note to Daniel and/or Gaudenz, we will certainly — at Lauren, we’ll certainly get back to you. But once again, thank you all for your time and attention this morning. And I look forward, hopefully, to seeing many of you between now and Christmas, maybe even some of you will come to the AGM. So, thank you all.
Operator
Thanks for participating. You may now disconnect.
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