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Edited Transcript of LYC.AX earnings conference call or presentation 29-Aug-19 10:59am GMT

Full Year 2019 Lynas Corporation Ltd Earnings Call

Sydney, New South Wales Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Lynas Corporation Ltd earnings conference call or presentation Thursday, August 29, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amanda M. Lacaze

Lynas Corporation Limited - MD, CEO & Director

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Conference Call Participants

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* Andrew White

Curran & Co - Resources Analyst

* Cathy Moises

Patersons Securities Limited - Head of Research

* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* Dylan Kelly

Ord Minnett Limited, Research Division - Senior Research Analyst

* Matthew Chen

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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Lynas Corporation FY 2019 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 Corporation. Thank you. Please go ahead.

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Unidentified Company Representative, [2]

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Good morning, and welcome to the Lynas Corporation investor briefing for the 2019 financial year.

Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director. And Amanda will be joined today by Gaudenz Sturzenegge, CFO; and Andrew Arnold, General Counsel and Company Secretary.

I'll now hand over to Amanda.

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

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Good morning, everybody. Good to have you on the call in what is a cold and wet day in Sydney today. So the rain is slipping down the window.

I've read a couple of the short statements from the analysts already and, as each of them was keen to say, no significant new news given that we talk to you with alarming regularity and frequency, remembering that regular and frequent aren't the same, but anyway. Nonetheless, annual results are an important event in our lives and, hopefully, for you as well, notwithstanding that they are -- for a company like us that still provides a quarterly readout, it is an important opportunity to really reflect on the year that was and the achievements during that year and how that provides the foundation for continuing growth in shareholder value.

So this, as I think everybody knows, was a big year. Because it's very easy to forget where we were 12 months ago, and as we put together the annual report, it gave us a very good opportunity to reflect on that. The most -- the thing in this report of which I am most proud is the 365 days lost time injury free in Malaysia. This is a really significant improvement in our safety performance. And I think I've said to many people our duty to our people is fourfold. The first is to make sure that they have a job, and the second is to make sure that they go home safely from that job every evening. And so this is a significant outcome. But then as I was thinking about this, in August last year, some of the political issues that were only just starting to gather momentum in Malaysia -- I remember it was in about mid-August that we had the surprise visit from certain of the new government. And in the 12 months intervening, we've sort of been up and down and around and around the mulberry bush. And we've had quite a lot of uncertainty at different times of the year, but we now have a clear path forward. We have clear conditions that need to be met that we can meet, and we are working on these at present and making extremely good progress.

It's also worth noting that, in calendar year '18, so the first half of this financial year, we were still finishing the activities associated with the Lynas NEXT program. And of course, we're very proud of the fact that we have been able to hit the 600 tonne mark, that our equipment is capable of doing that, and that as I said last time, we've got the freedom now to make some choices but within our regulatory construct. And of course, by the end of this financial year, so it was in sort of late May, we had detailed some exciting new growth plans, which we've called Lynas 2025. That's not just about how do we improve operating efficiency with the uplift in capacity actually going into WA. It's also clearly about how do we meet some of the regulatory issues in Malaysia, but I guess, also very exciting, it's really about the expansion into the U.S. and the expansion of our product range further to include the separated heavy rare earths. And by the end of the year, we have made really significant progress also in terms of new product and application development for our catalytic materials, that's lanthanum and cerium. And then of course, the other sort of big challenge that we had through the year was the unsolicited corporate proposal that we released -- that we received in March, which I think there's been plenty written about the fact that, that's now off the table.

So despite all of this sort of activity as well, I'm really proud of the fact that we still delivered an excellent year operationally. We do have another year of record total REO production and record NdPr production. Pricing was -- market pricing was lower this year, and we weren't able to fully compensate the effect of that in terms of revenue and profit. But also, and I'm sure all of the analysts will be doing this in terms of modeling, we did hold over 300 tonnes of NdPr at the end of the year, which effectively didn't bring -- would not have brought a lot of additional costs with it. But I would point out the fact that we were able to deliver a 28% EBITDA, when the price was sitting for most of the year in the range of about USD 35 to USD 40 a kilo for NdPr. And this is one of the reasons why we face the future with great confidence. People ask me, "But what about competitors and look at most of the BFSs?" And they're talking about needing prices of $70 to $75 a kilo. And we can deliver a very good financial outcome even with the price at quite muted levels as it has been.

But as we've flagged in the report, the one area that I will acknowledge that I'm disappointed that we haven't got it through is the uplift in processing for this calendar year. We were hopeful that, that would come through sort of as part of the overall set of approvals that we got in the last few weeks. We, as part of the NUF approval process, completed a new environment impact assessment, EIA. And we believe that, that is relevant in terms of the processing uplift as well. However, it did not come through as a matter of course. And so we are now engaged again with the department, but as we've indicated in the release, we made the decision to do this differently from last year. Last year, we sort of ran full bore and then shut down. It turned out that, that wasn't probably the best option. And the time that took us to start up and the sort of issues that we had with some lower recoveries and those sorts of things was not optimal. So this year, we've made a decision that we will just dial it back at present so that we are able to continue to run through to the end of the calendar year. And if, as we are still hopeful, we get this improved -- we get this approved uplift in processing, then we will be in a position where we can immediately dial it up.

So I guess that's the only thing that today I'm feeling sort of that we've come through what probably I've been trying to think of what would be the title for the book. I'm thinking about the Queen in, what, 1994, my annus horribilis. But it's not quite true because, whilst we had all sorts of significant challenges during the year, we've got some really great achievements as well.

So I'm pleased to be able to present this -- these results to our shareholders. And then I think that we have very definitely continued to build on the foundations that allow us to retain our leadership role and continue to grow value as we move into, isn't it scary, the third decade of the 21st century.

So on that, I'm happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Andrew White from Curran & Co.

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Andrew White, Curran & Co - Resources Analyst [2]

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Amanda, well done on the results. I was -- just wanted to ask a quick question on there was mention of the pre-leach circuit in the full year results. I just wanted to know if that's a certainty of being installed and if that's part of the 2025 plans. Or is that just going through the initial feasibility and testing at this stage?

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

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Okay. Thanks for the question, Andrew. It's not specifically part of Lynas 2025. Every time we change -- mining a new part of the ore body, we get some changes in metallurgy. And there are these 2 elements here. And I know that Kam will be happy to give you more detail, if you would like to speak to him afterwards, but you've got the crandallite and you've got the carbonate. Now what happens is that a change in the proportion of those changes the way that the concentrate behaves through the cracking and leaching process in Malaysia. So we've seen sort of some first parts of that coming through, which is what's sort of given us -- certainly alerted to us as to it and given us some baseline data. We don't expect a significant sort of change, particularly around carbonate, to hit until we're bringing through the campaign 3 ore, which is about November. So one way to deal with this so that we're not presenting issues to our cracking and leaching process is actually to do the pre-leach circuit in Mount Weld. So it's not actually part of 2025. And it is something that is a pretty short-term activity in terms of implementing this because we want it in place by November at the latest.

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Andrew White, Curran & Co - Resources Analyst [4]

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I see. And is this to be a significant capital outlay? What sort of costs are you looking to? Is it a piece of plant that has to be built?

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [5]

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No -- well, yes, but it's not a significant capital outlay. We want to handle it within our normal capital envelope.

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Andrew White, Curran & Co - Resources Analyst [6]

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Okay. All right. So in terms of a ballpark, are you sort of looking at like just a $3 million sort of thing or...

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [7]

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Can we get back to you on that? [I know the guys] (inaudible)

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Andrew White, Curran & Co - Resources Analyst [8]

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Sure, no problem. And just I was just wondering if you had any guidance on what sort of increase in SEG output Lynas could expect as that Duncan ore becomes sort of higher in proportion in the concentrate.

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

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Not yet. Sorry, Andrew. There will be an uplift. And it's part of the work that we are doing right now on this campaign 3 because the management of how much is Duncan, sort of how we blended this material is going to influence particularly the issue around how much crandallite and carbonate there is in the materials. So the METS are doing that work currently, so I can't give you a figure, other than to say it will be an uplift.

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Operator [10]

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Your next question comes from the line of Cathy Moises from Patersons.

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Cathy Moises, Patersons Securities Limited - Head of Research [11]

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Amanda and team, congratulations on a great result. A couple of questions from me. The first one relates to the underlying delay in approval on NEXT. Just looking at my numbers, do you feel that, as the concentrate grade drops naturally over time before you get to your 2025, probably now 2023 with the permitting time line, you can maintain the previous production through sort of more dehydration? Or should we be modeling that it could potentially go down? And then the other question is, given the conditions within that 6-month permitting, should we assume a similar production profile but on the understanding that it'll be transferred to Australia earlier? Or should we be looking at tightening our time line to bring that 2025 outcome through to 2023?

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

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Well, that's a tricky one. I don't think I can give you a definitive answer on the second, except to say it has to be there by 2023, probably the end of summer, around about there. So that becomes the sort of the key milestone. Do we bring forward everything else? Well, I think Kam would be alarmed if I said yes to that. I mean I think that there will be certain things that take their time. So the team is really making huge bounds in terms of the planning on this, not just -- and we're doing a lot of work streams in parallel, including sort of not just in site selection, understanding all of the various permitting that we need to have and then, of course, the engineering work as well. So we're pretty confident about getting through this because it's very much our bread and butter, but I don't think I can give you anything better than it should be you should be thinking about that 2023 deadline. In terms of the will production go down with the reduction on the grade curve, I think that we can manage the way that we're producing concentrate. And bear in mind that one of the things that we did as part of Lynas NEXT was a lot of work on that MgO circuit, which was one of the areas where we had really big losses in Malaysia. So our intention would be that we will be able to retain production as or maybe even a little bit more than where we've been previously, notwithstanding the grade changes.

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Operator [13]

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Your next question comes from the line of Daniel Morgan from UBS.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [14]

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So on the 2023 deadline to move facilities to Australia, in simple terms, what do you see as the critical path? It would seem that, from my perspective, it's probably securing the site selection and the associated licenses from government bodies. Is that a fair assessment?

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [15]

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I think that there are a number of critical paths. I think that the site assessment, we are very, very well progressed. We've got a great deal of enthusiasm, of course, in a number of jurisdictions in WA. I think that approvals, regulatory approvals, are always -- they're time-consuming. We certainly don't see any sort of fatal flaws through the regulatory process and believe that we have sort of the right engagement to ensure that the work we do is the right work. And then I think that, in terms of the engineering and the build, we've already got some of our people 100% focused on that, but of course, we will need to be building our team significantly. So I mean that's certainly on the critical path as well as how do we make sure that we have the right people with the right skills to see us through this. So they're all important. And we actually haven't got anything which we're seeing as sort of a fatal flaw or sort of risk at this time.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [16]

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Okay. On somewhat related site selection, it looks like you've got a runoff between 2 sites. Wondering when we might expect an update on that.

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

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Soon.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [18]

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Soon.

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

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Yes, soon. It's not long.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [20]

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Right. And related question as somewhat of the analyst earlier on the new ore types. Just wondering with recoveries, if you were to assume that you don't or are not successful in getting the throughput license uplift that you've been pushing for, for a while and still haven't got, should we -- I mean, is there a recovery issue that means within a fixed amount of processing with lower ore grades, lower recoveries might be the result and therefore lower production? I just want to explore that just a little bit more.

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [21]

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Yes. So the team is -- we actually have a variety of strategies associated with this. Bear in mind that the processing limit is the wet tonne limit. So the first thing that we can do on that is how do we -- I mean, the task, without being too technical about it, is how do we get the best bang for our buck at our -- the wet tonne limit? So part of that is reducing moisture, clearly. Another one is are there alternate ways that we can manage the content -- con grade. And we've talked previously about doing sort of what we've called Direct Shipping Ore, which is we bring up some ore which is so high grade that it doesn't actually need to go through a concentrator, i.e., it's in that range of 30% to 35%. How do we actually blend that and use that within the concentrate? And which in sense we sort of avoid all of the losses that we normally get through in Mount Weld. But we've got things like the -- as part of Lynas NEXT, we put in the additional stack cell through the float circuit with longer residence time that we can improve recoveries there. We put in heat exchanges and changed the design and the feed rates in the MgO in Malaysia, which has allowed us to improve recoveries there. So we are working on the basis that we have a series of initiatives which should assist us to rebalance the sort of underlying changes that you're talking about.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [22]

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Okay. And then just the last question for me, on the U.S. government has clearly been looking at rare earths and its raw material requirements there, doing an audit of in-country and supported partners. I'm just wondering what you might be able to access, if at all, any support via this, i.e., perhaps some support for the heavies plant that you're proposing or the JV in Texas. Or holistically, anything else you might want to add on that?

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [23]

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Like how long is a piece of string? So Daniel, let me say this. At our [higher] convention, one of the people there said, "You've really seen inside the sausage factory of sort of international diplomacy." And I have to say that, in the last year, I've seen inside the sausage factory of governments around the world, maybe a little lower than is good for my mental health. So yes, your opening statement is true. The U.S. government is very interested in rare earths. Added to that, the U.S. Department of Defense is particularly interested in rare earths. We have engaged over not just the last sort of 6 months, when this has become so terribly controversial, we have engaged with governments and industry in the U.S. over, well, certainly my team here in Lynas. It's an important market. And we spend a lot of time in that market talking about the fact that it's not just about what you dig out of the ground. It is about the value chain. And so particularly with some of the commentary that's been coming out just in the past sort of couple of weeks, we've been pretty pleased that, that's now started to be acknowledged. So it's not just how do we find more resource. I mean, sure, buy green land, but's it's not actually going to fix the fact that there are intermediate steps in the value chain which need to be rebuilt in the U.S.

But the other thing that I know from looking inside the sausage machine of government is that governments move at one pace and we move at a different pace. So for us, yes, if we were able to agree something which made sense to the U.S. government and made sense for our business, that would be fabulous, but we will make our business decisions based upon what is strategically right for the business. And what is strategically right for our business is that we establish heavy rare earths separating capability. Do we do it in the U.S. or do we do it elsewhere becomes a separate question. We are significantly progressed in terms of engineering, designing the plant for the heavy rare earths separation. And we won't be slowing our process on this to accommodate governments' decision-making time lines.

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Operator [24]

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Your next question comes from the line of Dylan Kelly from Ord Minnett.

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Dylan Kelly, Ord Minnett Limited, Research Division - Senior Research Analyst [25]

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Two questions from me. So at the quarterly, you stated a production strategy that was around matching market demand, which we've gathered was weak. Your release today, the commentary around production seems to be shifting more to something to do with the -- with your concentrate import license. Has there been a change in your strategy? Or is this just more detail that you've been able to find out about your license conditions coming in through the end of the year?

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

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No. I think, the last quarter, we said, look, we don't want to be selling in NdPr at the way that it went down and touched as low as $34, $35 a kilo, absolutely. We said we're not going to do that, right? And that was why we held onto that. We had, and I think of it, as a reasonable expectation that as all of the approvals came through that this would come through as part of that suite of approvals, the approval for the uplift in Lynas NEXT. Cathy did ask me about it when we talked a couple of weeks ago, and I said, "After we've got the license advice." And yes, unfortunately, we didn't get it. And so we certainly have to think about that now, but last quarter, we were still working on the basis it would come through. But last quarter, we just did not want to be selling NdPr at $34, $35 a kilo, and we didn't have to. I mean it was just not required and not in the long-term best interest of value.

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Dylan Kelly, Ord Minnett Limited, Research Division - Senior Research Analyst [27]

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Okay, fair enough. A further follow-up question, unrelated. Overnight, the U.S. Department of Defense official is reported as stating they're talking to Australian companies about future rare earths supply. One defense commentator in particular stated the Australian firm Lynas is essential to the Pentagon's proposed plan. My question is, is this incremental? As in, is this the first time the DoD has explicitly stated your preferred status for their procurement?

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

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I don't think that the DoD actually did. I think it's the commentator that said it. And so as I said before, we've certainly been talking to U.S. government and the DoD for, I said, long before this became such a big political issue because we see that there are real opportunities to grow our business in the U.S. market. But I don't think, as I read the article, that the DoD actually did say that we were their preferred option. I would hope we are, but they -- I don't think they actually said it.

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Dylan Kelly, Ord Minnett Limited, Research Division - Senior Research Analyst [29]

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Okay, fair enough. One just short final one. Just wanted to see if there's any additional clarity on the requirements from the AELB on the license renewal. At the last call, you mentioned that the professor was off and out to site -- out looking at sites or maybe talking to them about clarifying certain initiatives. Do you have any further information in relation to that?

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

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Yes. We're very confident now about exactly what it is that we need to deliver and where -- when we would need to deliver. We're increasingly confident about our ability to deliver it, so we're -- but I'm not -- there is no value in making further commentary on it than that. It's one of these things that we're just best working with the regulators and making sure we cross our Ts and dot our Is, and then we'll let the market know.

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Operator [31]

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There's no more question at this time. (Operator Instructions) Your next question comes from the line of Matthew Chen from Foster.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [32]

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Amanda, I wanted to ask about long-term agreements. So that had been sort of something that you talked about and, I think, has sort of come off the agenda maybe in the sort of last year or so, so I was just wondering if you could fill me in on the incremental changes over the last year. Because I note the slide, what would be, 19 calls out long-term agreements. You've contracted all lanthanum production now and key customers are progressively agreeing long-term supply and pricing agreements. I just wanted to check what the incremental change is since we last talked about this.

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [33]

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Well, actually almost what it says there. I mean so it hasn't fallen off our radar. In fact, it continued be more and more important. So we have 100% of lanthanum now contracted. We have -- so as we've always talked about, pairing the -- our primary focus even before we have all of the contracts is to ensure that we can sell as much of it as we can [and sell it sharper]. And I can tell you that our forecast at present [has very visual] actually going into the Chinese market. So that is being a real positive. And we continue to work. Really the ability to get our cerium 100% contracted in the same way as we got our lanthanum will be dependent upon some of the new grades that we're working on, but we're pretty confident about -- we're very pleased with progress in terms of those grades and really just now working through what does it take to operationalize them. So I sort of always say Pol's job, his KPIs, the first one is to sell, well, everything; his second is to sell everything outside of China. That equally is important in terms of profit contribution really as sort of long-term contracts, and we're making very good progress on both items.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [34]

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Great. So I mean it sounds as though you sort of ticked the first 2 of his jobs, Pol, I mean. So what comes after that? So selling everything, selling everything outside of China. What's next...

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [35]

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And selling everything at a premium.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [36]

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And yes. And so how successful has he been in that over the last year?

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [37]

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Pretty good. Pretty good, yes.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [38]

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Great.

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [39]

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He's got a high performer star on him for that particular area, Matt.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [40]

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Very good. Just a follow-up...

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [41]

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Bearing in mind, this -- until we get into like the super specific grades, when we talk about a premium, we're talking sort of -- mostly sort of single digits and, when it's really spectacular, maybe just into the low double digits, but we're not talking about this premium. But as we move into the more specialized grades, then that's when we will really sort of see improved selling prices.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [42]

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Yes, okay. Yes, as my understanding was it was always in the sort of mid- to high, potentially, single digits...

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [43]

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Yes. That's right.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [44]

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Yes, as a premium, but the low double digits are new to me. So just...

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [45]

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You don't have to write that. We can leave it in mid- to high singles.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [46]

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Yes. Just on the sort of Mining Campaign 3 -- sorry, the -- I guess, the Mount Weld resource. I think -- I guess my query is, with that sort of rare earths content stepping lower and the increasing crandallite and carbonate, I think, what's the -- is there a timing in terms of an update on the resource and the reserves? And is that going to be like a significant effect on that? Or just trying to get a sense of the quantum, I guess, at this state of the lower rare earths content, yes.

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [47]

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No. I don't think -- it won't change the resource and reserve stack, Matt. This is simply -- we're flagging this as this is a processing challenge, not a -- not ultimately how much is there. It's just a case of how are we going to process them most efficiently.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [48]

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Yes, you're right. All right.

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [49]

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Okay? Thanks, Matt.

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Operator [50]

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There's no more question at this time. (Operator Instructions)

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Unidentified Company Representative, [51]

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Okay.

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Operator [52]

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Okay. There is no more question at this time. I would now like to hand the conference back to speaker Amanda Lacaze. Please continue.

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Amanda M. Lacaze, Lynas Corporation Limited - MD, CEO & Director [53]

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Well, once again, thank you all. I think I'll see a number of you over the next couple of days. I'm looking forward to it. And yes, here's to another good year.

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Operator [54]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.