U.S. Markets open in 4 hrs 24 mins

Edited Transcript of LYC.AX earnings conference call or presentation 22-Jan-19 1:00am GMT

Q2 2019 Lynas Corporation Ltd Earnings Call

Sydney, New South Wales Jan 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Lynas Corporation Ltd earnings conference call or presentation Tuesday, January 22, 2019 at 1:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Amanda M. Lacaze

Lynas Corporation Limited - MD, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Andrew White

* Cathy Moises

Patersons Securities Limited - Head of Research

* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* Massimo Guglielmucci

* Matthew Chen

Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst

* Tim Hannon

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the quarterly results briefing. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, the 22nd of January 2019.

I'd now like to hand the call over to your speaker today from Lynas. Thank you. Please go ahead.

--------------------------------------------------------------------------------

Unidentified Company Representative, [2]

--------------------------------------------------------------------------------

Good morning, and welcome to the Lynas Corporation quarterly briefing for the period ending 31 December 2018. Presenting the briefing today are Amanda Lacaze, CEO; Gaudenz Sturzenegger, CFO; and Andrew Arnold, General Counsel and Company Secretary.

I'll now hand over to Amanda Lacaze. Please go ahead, Amanda.

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [3]

--------------------------------------------------------------------------------

Good morning, everybody, or actually I think for Australians, just good afternoon. Thank you, once again, for joining us for our first call now as a mining -- quarterly call as a mining production entity. So you will have noted that we have lodged our normal quarterly activity report, but we are no longer required to lodge a cash flow report in the form of an Appendix 5B.

Given the fact that we are making this transition, we thought it was still important that we lodged our report in substantially the same format as we have done previously so that you've got a clear ability to compare results. Of course, some more important results will be the half yearly results, which we'll be releasing at the end of next month.

In terms of today's report, as always, I think some of you thought we'd probably do better and some of you thought we'd probably do worse. On balance, we think it was a positive quarter for Lynas. Production and sales performance remained strong despite the temporary disruptions and the regulatory matters that we had to deal with in Malaysia during the period. There were some really significant highlight for us. The most important I think is actually the launch of the new product, and we included a photo of this in the report, and this is separated Nd. And you'll see it's a rather fetching shade of -- or sort of a lilac-y sort of a color or -- no, actually probably more heading towards indigo, a blue-y purple color.

It's really very exciting to be able to launch a new and valuable product of this sort. The first production and the first sales were delivered during the quarter with a number of shipments made and the addition of separated Nd and Pr to our product range is important because for a number of our customers, that allows us to meet more of their rare earth needs, and that means that we're increasing our share of wallet with those customers.

One of the things which is very pleasing for us is that our skilled Malaysian team has designed a separation process that is much more cost-effective than the process which was originally incorporated in the plant's initial design. For those of you who have visited, the initial design envisaged the use of what was then SX 8, which is on the second floor of the Phase 2 sulfur extraction area, this is over 100 separation stages, which would have included a huge amount of hold up of both Pr and Nd. The team has actually executed the design which is much shorter, has much less hold up, and it's somewhere just over the 40 stages, I think. This is another real example of the value that we bring to Malaysia by way of developing IP and also upscaling our workforce.

The second really positive outcome during the quarter was the fact that we produced over 600 tonnes, in fact, in October. In fact, it was by far our highest production month, and it was the second consecutive month after the 600 tonnes in September. And that gives us confidence we can sustainably produce at that rate once we are feeding on a consistent basis. The cost balancing there is the fact that production in November and December was significantly affected partly by the final commissioning of the Nd and Pr separation processes I mentioned above. For a little more color, that entailed the shutdown -- we covered this in the quarterly report but it entailed the shut-down of one of our SX 5 separation trains for a period of time to actually complete mechanical tie ins and then, of course, it took some time for those batteries to balance with the new production process. And more significantly, throughput was affected by the production halt in December when we reached the annual approved limit for processing of lanthanide concentrate. As we've identified, the kilns were shut down for virtually a full month. We still had some production during December as we extracted every last bit of work in progress, all of our material that we had our storage tanks full coming into the shutdown, but still the December production was very low.

We used that time productively for work that can't be done while the plant is operating. It's the only complete shutdown of the plant since it commenced operation in 2013. And so therefore, it provided us with a good undertake -- opportunity to undertake some particular tasks, for example, cleaning the inside of tanks that we would have not have been otherwise to do. We planned the start-up carefully, but of course, given this was the only shutdown, we were uncertain how the plant would respond after being shut down to such an extended period of time. Production did start on schedule at the start of January following a brief ramp-up in the prior week.

In the market, the Chinese domestic published price remained low at an average of USD 39.4 per kilo during the quarter. The softness in price is balanced for Lynas by continuing strong demand from the global manufacturing supply chain. Demand for Lynas NdPr has always been secure, but I'm really pleased to say that we now have 100% of our lanthanum output committed via long-term customer contracts as well.

Sales revenue at AUD 79.9 million, let's say, AUD 80 million was a creditable performance given the loss production which we estimate was worth probably in excess of about $25 million in revenue. The sales result was off the back of record sales volume. However, with the skew towards lower value products, which we service by drawing down inventory, the average selling price per kilo was lower than in the preceding quarter.

When we think about cash utilization, our cash usage included the continued funding of Lynas NEXT project. Only 1 key project remains in Kuantan, which is an extension to one of our tunnel furnaces, the one we use for lanthanum, which allows us to control quality better.

Mount Weld still has a number of projects in train, and work is expected to continue over the next 6 months. And I hazard to say, this a timing effect only with no change in scope, and Mining Campaign 3 commenced as planned and we included a photo of blasting for removal of overburden in the report.

We serviced some key liabilities during the quarter including the 6-month interest payment and the penultimate payment associated with the AELB PDF security deposit, bringing the total security deposit paid to date to USD 42.2 million.

As everyone is aware, the regulatory environment in Malaysia presented us with many challenges in the December quarter. Positive outcomes in the quarter included the publication of the Review Committee report, which found Lynas operations to be low-risk, safe and compliant. Balancing the positive report of the Review Committee was the advice from the Ministry that the renewal of the company's operating license due on the 2nd of September 2019, will be subject to new precondition that required all stored WLP to be exported from Malaysia.

Lynas has lodged an appeal against this condition and is continuing discussions with the Malaysian government to seek to resolve these issues. I know that the continuing uncertainty relating to the regulatory environment is difficult for many of our shareholders, but we are engaging effectively with the Malaysian government and we believe we will find a mutually acceptable position.

Business continues as usual in this quarter, and we're cautiously optimistic about where we will finish the quarter. So with that, I'm happy to take any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first questioner is from Cathy Moises from Patersons.

--------------------------------------------------------------------------------

Cathy Moises, Patersons Securities Limited - Head of Research [2]

--------------------------------------------------------------------------------

I've got a few sort of more broad-brush questions. Just with the appeals process, are you allowed to continue business as usual whilst that appeals process plays out? And on the same sort of vein, given you haven't got your permitting approvals for NEXT, I presume you're going to continue to run at the NEXT expanded capacity on the expectations that, that will be approved in due course. And then the final question, with the lower price received, I know you said you delayed sales of the heavy rare earth, but I presume that you also delayed some sales of your NdPr in preference to selling lanthanum and cerium over that period.

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Cathy. So yes, we can continue on a business-as-usual basis during the appeal process. So the letter explicitly related to the renewal of the license, not to a variation of current license conditions. The second point which is yet to receive some of the approvals or the only really the one key approval related to the increase in processing volume for lanthanide concentrate to consistently produce 600 tonnes per month. We definitely are proceeding on the basis of producing 600 tonnes per month, bearing in mind that a 28-day month will produce less than a 31-day month. I certainly have to say that canned line to remind me of that. But nonetheless, we'll certainly be working on that basis. And our expectation is that with the improved recoveries that we're seeing that, that will help us to bridge some of that gap as well. The third question, no, we didn't significantly hold back. I mean, we finished with more inventory that we normally would simply because of the timing of the way in which we managed the shut. We shut down in early December, and we made sure we still had some lanthanide concentrate in hand to -- before we reach the limit. And so we started up again about a week or so before the end of December so that we could start to be filling the tanks in the meantime. And of course, there was some production came out during that time which was not sold during the quarter but which were sold early in January. Certainly, on the SEG, we feel that as we've indicated in the report that it is likely to be a better financial outcome for us to continue to hold that stock. There's no question that in China, and I think I've talked about this before, but the U.S./China situation certainly has seeped into the confidence right through Chinese industry. And so we would expect that we'll get a normal improvement in conditions after Chinese New Year because that normally happens in any year, and we will retest the market on the SEG at that time.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) Our next questioner is from Daniel Morgan from UBS.

--------------------------------------------------------------------------------

Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [5]

--------------------------------------------------------------------------------

Can I just ask a couple of things? So the -- you mentioned that you're now splitting Nd and Pr, and that's one of the key great things out of the report. Just wondering if you can give us any sense, even ballpark, about the steady-state volumes that you might do, like what ratio of Nd and Pr separately you might do versus an NdPr combined product, which you've been doing? That's my first question, and then I've got some question about the AELB bond. What happens to that in a scenario -- different scenarios regarding the West?

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [6]

--------------------------------------------------------------------------------

Okay, Daniel. The separated Nd and Pr. We have 4 separation trains in SX 5. Each of them produces 25%. One of those is being converted to separated Nd and Pr. So we would expect about 25% of our NdPr production will be in the form of separated Nd and Pr. As we indicated, we have achieved on-spec Nd actually in the December quarter. Pr, we've got some of that, but without yet the stability that we have had -- that we've achieved with the separated Nd, it's a more difficult material to produce which is, of course, why it brings with it a price premium. However, it is moving through. It's not an issue for us, by the way. With this, one of the neat things is we can simply blend material back in if it's not on spec specifically. But about 25% of our production we would expect to be a combination of the separated Nd and Pr. Just a little bit more color on that. Pure Nd sells for about the same price as NdPr. Pure Pr sells for a slight premium compared to NdPr. So we get a very small benefit in terms of pricing. The more significant benefit is that it allows us to increase share of wallet with our existing customers, and they are welcoming that, particularly a number of our Japanese customers, because it means they don't have to have a relationship with an alternate supplier. In terms of the AELB bond. The AELB bond is designated primarily for dealing with PDF, it's often called the PDF bond. However, there is also some element of it which is related to a bond, in fact, towards decommissioning of the plant related specifically to any of the elements within the plant which have some level of radioactivity associated with them. So that's always -- we've got a clear plan on those things but of course, any decommissioning is many, many years ago -- away, decades, would be our intent. As we reach a resolution on the management of the residues, and we use that term very -- in a very considered way, this is not waste material of interest. When we think about -- when we look at it, I think it's about 2.5% NdPr which compares favorably to many of the deposits that junior projects are seeking to develop. So we see this as potentially a valuable feedstock. It also has commercial value as we've demonstrated from our research for use as a soil conditioner. Notwithstanding that, we would expect that if the resolution is either some form of export or PDF resolution for the residue, that there will be a release of funding that would assist us in funding that activity.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

And our next questioner is from Matt Chen from Foster.

--------------------------------------------------------------------------------

Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [8]

--------------------------------------------------------------------------------

My query is around just to clarify the separated Nd went to existing customers in Japan. And was that something that they had sort of been angling for or asked of from you? And then the other one is about Mining Campaign 3, when does the mixed REO concentrate from Campaign 3 get to Kuantan? And does it have a significantly -- well, I mean, it'll have a slightly different profile from the Campaign 2 mixed REO con?

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [9]

--------------------------------------------------------------------------------

Okay, Matt. So separated Nd to Japan, did our customers want it? Absolutely. So at this stage, the 3 shipments that we sent all went to one key customer. And certainly, it's something which we have been discussing with them for at least a couple of years since we started to get the plant stable and operating. So yes, it is definitely something where we're responding to demand. We're not building it and hoping that they will come. So our Nd is fully committed as is our Pr. Although with the Pr, it does give us the opportunity to test entry into some new segments, including things like ceramics, for example, which could be very financially attractive. In terms of the Mining Campaign 3, I can't tell you off the top of my head exactly when it will hit, but bear in mind we're still in the business of the overburden removal. So we won't actually start the mining process, I think, until at least next month. And then it will still take some time before that starts to be fed through the concentrator. Metallurgically, not significantly different. And I think that once again, as we've moved through over the past 5 years, we've understand our -- understood our metallurgy much better, which has allowed us to balance the con grade in a way that is most suitable for feeding here in Malaysia. And so that's included things like understanding not just the grade of the concentrate but also the balance, which covers things like the amount of ion phosphate in it, has a significant effect on our recoveries and cracking and leaching, those sorts of things. So we're not expecting that there will be any significant disruption, but it will be some months yet before we see that material coming through to Kuantan.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next questioner is from Andrew White from Curran & Co.

--------------------------------------------------------------------------------

Andrew White, [11]

--------------------------------------------------------------------------------

I just wanted to ask a question about the NUF storage given that the 15th of February is coming up close. Just wanted to ask what tasks need to be completed by Lynas to ensure approval of that storage on-site? And what are the expected outcomes if that approval is not received by the 15th of Feb?

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [12]

--------------------------------------------------------------------------------

Thanks, Andrew. So we're working quite intensively with the DOE on this matter. There are 2 areas that the Ministry has asked us to proceed with as far as our action plan is concerned. And so the first is the licensing of the premises as a prescribed premise. Now that requires the completion of some variations to the original EIA, the -- we've been working on this for some time and the DOE, as I said, is engaged directly with us, and some people may have seen the Instagram post from one of the DOE -- or 3 of the DOE representatives who were here on Friday. The second thing is that the commercialization of the NUF has been accepted as being -- it's always been our position is, by far, the best thing for us to do, which is reuse, recycle should be our watchwords in the 21st century. And so the reuse of this material productively is particularly important. So we have at present several live projects with potential offtakers of the NUF material, and that forms part of the action plan as well. So we're cautiously confident about the progress of the matters related to the NUF.

--------------------------------------------------------------------------------

Andrew White, [13]

--------------------------------------------------------------------------------

Okay. And is there any consequences of not achieving that by 15th of Feb? Sorry to push that.

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [14]

--------------------------------------------------------------------------------

Well, there would be. But we're not seeing that as a likely outcome.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

And our next question is from Max from Old Peak.

--------------------------------------------------------------------------------

Massimo Guglielmucci, [16]

--------------------------------------------------------------------------------

Look, well done during the quarter given the potential distractions. And I just really wanted to ask a couple of more questions on the waste management issues -- sorry, not the waste -- well, before talking about that, I want to ask you really about the comment you made in the release relating to ongoing approvals as you ramp up production. Some of these conditions in the operating license may require amendments to allow for your expansion. So I just really wanted to know what type of conditions specifically might need those amendments.

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [17]

--------------------------------------------------------------------------------

Okay, so Max, thanks for the kind comments. This includes the approval by the DOE for the increase in lanthanide concentrate processing. So you may recall that the AELB has given us an approval for -- the AELB has given us approval for an increase in the amount of our lanthanide concentrate that we can import into Malaysia. We have yet to receive the matching approval from the DOE on the amount of lanthanide concentrate that we can process here on Malaysia, so that's really the key element as it relates to our license.

--------------------------------------------------------------------------------

Massimo Guglielmucci, [18]

--------------------------------------------------------------------------------

Okay, okay, got you. And relating to the waste storage or rather the, not so much the NUF but the WLP, you've submitted an action plan, I guess, to the Ministry. Is that correct?

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [19]

--------------------------------------------------------------------------------

So on the NUF, we have submitted a full action plan on the -- sorry, we have submitted a full action plan on all residue management. We have not had all of that action plan accepted or approved. So we now have a parallel path, so the NUF action plan is specific to NUF and it has the 2 key strategies that I mentioned before when I was talking to Andrew. In terms of the WLP, we do -- we are engaged with the Ministry on the discussion around the management of the WLP. Any -- as you would recall, the Review Committee made a recommendation that it be deposited in a permanent disposal facility. The Ministry at the beginning of December gave an alternate set of conditions prior to the renewal of our operating license on the 2nd of September requiring the export of the material. So we're working with the Ministry, understanding the implications for the different pathways, and we're cautiously confident that we will be able to meet -- that we will be able to reach a resolution on this matter.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And the next questioner is from Tim Hannon from Newgate Capital.

--------------------------------------------------------------------------------

Tim Hannon, [21]

--------------------------------------------------------------------------------

I'm just really interested more broadly and generally about Malaysia and -- yes, what it's trying to achieve in its sort of industrial and it's meant (inaudible) base? I mean, we've seen some newspaper articles recently about their intention to produce electric vehicles within the country. And one minister in particular even highlighting, yes, the fact that we've -- they've got rare earth and can produce rare earth magnets and that's the future of the [all-electric] vehicle manufacturing. So just the -- just raw comments and just your sort of your opinion would be really helpful for us to I think to sort of understand on the ground what's going on in Malaysia?

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [22]

--------------------------------------------------------------------------------

Yes, okay, thanks, Tim. I think, I talked about this. I think Malaysia is throwing us a few curve balls and challenges, but I'm not sure that it's any worse than if I was trying to run a business in the U.K., France, the U.S.A. or even on Christmas day, I was at a family lunch and my sister-in-law's brother was there, he said, "Oh, I wish I was in a stable a political environment as you are, Amanda." And I said, "Oh, where are you? And where are you working these days, [Pete]?" Because he's worked in some quite excising places like Burkina Faso. And he said, "Oh, the Queensland of oil and gas industry." So I understand that because Malaysia appears maybe a little more exotic particularly towards our Australian investors, it can appear a little more confusing. It politically is like just about anywhere on Earth today. There are some voices of reason and there are some voices which are less reasoned. So certainly, Malaysia understands the importance of building a strong industrial base. And all of the things that we're asked to do as a foreign direct investor, including employing Malaysians, developing skills and all of those sorts of things are seen very, very positively by those, yes, particularly ministers and others in power who are concerned for the economic well-being and of the population. And you probably are aware that we've got a new Sultan in Pahang last week. And in his first speech as a Sultan, he concentrated quite significantly on discussing the importance of economic development. But as in every political environment today and not always is it the opposition that has an alternate voice, sometimes it's within the government, and that's what we're facing here, we have some alternate voices to that. And really, the process which the government is going through here is one where it's grappling with managing a government which is 4 -- a coalition of 4 separate parties, each of which has a slightly different position on different issues. And so what we're really seeing is, in my view, is the government really going through the process of balancing sort of this economic development with social impact -- economic development and its social impact with some of the other sort of demand from other members of the government. I think on balance that the Malaysian government has more voices, which favor development than those which would see sort of a hiatus in that development. But it is certainly an interesting process as this coalition of 4 parties actually learn how to work in a way that delivers the best outcomes for Malaysia.

--------------------------------------------------------------------------------

Tim Hannon, [23]

--------------------------------------------------------------------------------

I mean, I suppose, yes that's a point well made. And I think it's politics everywhere, even in Australia, it's just -- it's natural and normal. And yes, well done so far for dealing and grappling with it.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

(Operator Instructions) And we have a question from [Jay], who's a private investor.

--------------------------------------------------------------------------------

Unidentified Shareholder, [25]

--------------------------------------------------------------------------------

It's [Jay Erlandson] from Colorado. Anyway, keeping on the big picture theme here, I was wondering what you thought about expansion? I know it's probably not the appropriate time right now. But looking down the road, maybe 5, 10 years, where do you see Lynas fitting into the industry?

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [26]

--------------------------------------------------------------------------------

Well, let me tell you, [Jay], we can manage more than one thing at a time and we are thinking about -- yes, I had lots of shareholders last year wanting to know what's next after NEXT, and I asked everyone to give us just a little bit of breathing space and finish NEXT first. But clearly, we are thinking about what does the business look like 12 months from now, 24 months from now, 36 months from now. And so in terms of thinking about our industrial footprint, at present, we have an industrial footprint with heavy concentration here in Malaysia. And as we think about how we grow, we will consider whether growth capital is best placed here or where whether growth capital is best placed elsewhere. What we do know is that the market is going to grow. What we also know is that our aspiration is to continue to be a leading supplier to the market, if not the leading supplier to the market over time, and we do know that we have a 25-year resource that's unmatched in terms of quality and -- unmatched in terms of quality. So we are thinking about this, and we are thinking about how do we grow with the market and how do we ensure that whatever we invest, we are balancing out what I was saying to Tim before about there's sovereign risk everywhere. So how do we actually organize our resources in a way that gives us good risk mitigation in terms of any sovereign risk that we might face. I'm not going to tell you where we're going to build what if that was what you were hoping, because we had -- certainly have not resolved that, but we certainly are thinking about it.

--------------------------------------------------------------------------------

Unidentified Shareholder, [27]

--------------------------------------------------------------------------------

Well, it makes for good speculation on that [counter]..

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [28]

--------------------------------------------------------------------------------

I'm sure it does, but I'll leave the speculation for others and we'll just focus on doing what you're paying us to do.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

There's no more further questions at this time. I'd like to hand the call back to the speakers for any closing remarks. Please continue.

--------------------------------------------------------------------------------

Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [30]

--------------------------------------------------------------------------------

Okay. Well, once again, thank you all for joining today. And yes, I look forward to speaking with you again at the end of February when we release our half yearly.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect. Goodbye.