transcript of investor relations call

As with last time I have prepared a transcript this time a little better but leaving out some of the questions. I do not take an responsibility for any material presented here or for the voracity of any of the information. Not everything was clear on the phone lines. As always DYOR.

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LYNAS QUARTERLY REPORT INVESTOR RELATIONS CALL
12TH MAY 2011
8:00 AM

TRANSCRIPT


"Thank you and thank you again for your interest in Lynas and your support of the company in the very busy period we have undertaken and is in front of us. We've had a quarter with very significant progress in the company and I will tell you more about where we are, a constructional operational update (52) of both WA and Malaysia and talk about our phase 2 expansion plans and other relevant activities that we're doing.

I do want to just open a little bit by mentioning what is in the media this morning and the announcement we've made yesterday with respect to Forge.
Ah? the transaction has, as the announcement said, been at this point abandoned, we do not intend to re-pursue that any stage. The Crown Deposit remains an asset for Lynas. We believe that the best practice corporate governance has gone into pursuit of this transaction. We believe that it is appropriate that the company has been fully transparent at all levels on the transaction. We believe that it is appropriate that there was a disclosure notice on the transaction and then there was conversation with key shareholders, eh, was undertaken. We have listened to conversations and, fundamentally, best practise in corp governance is to be transparent with the shareholders and act on them. That is what is we have done after a world wide trip discussing the matter with the key shareholders of the company. So we accept that the shareholders have decided that this.. have indicated that this is inappropriate timing for this particular transaction and the board has listened to that, and withdrawn the transaction, and we move on from that point to pursue the exciting opportunity which the RE business is worldwide? Particularly this company is focused on developing its RE assets and will remain focused on that, and that's where we think the high growth opportunity is in the company.

The key issues of the last quarter have been about moving forward on construction and operational reality. At Mt Weld, we had heavy rainfall during the quarter, and that created a fairly long delay, but neither the plant, nor the mine site experienced any damage whatsoever. All construction activity at the Concentration Plant was completed during that quarter, with practical completion actually occurring on 31st March. We have continued to pursue the license to operate, which was finally issued yesterday, and first feed of ore into the Concentration Plant is scheduled to occur next week. That is a very major milestone for the company. We will be producing concentrate within 10 days, and to that end, I think that probably THE key milestone in terms of development.

The operational staff has increased, from 38 to 48, for the Concentration Plant. We have commenced drilling, last month. The drilling is taking place to the west end of the current open pit. We'll collect ore samples, and metallurgical test-earth, and we ope by the end of the year to be able to model further development of that ore body. We think that is an exciting expansion potential for the company.

In Malaysia, the construction stage of the Lynas Advanced Material Plant continues, and achieved 2.2 million contractor man-hours in the last quarter. And I'm very pleased to say that with over 2.2 million contractor man hours, the site has remained off-time injury free.

Engineering is effectively complete, down to the detail. Technically 99.7%, and that is a major asset for Lynas. The amount of work that goes into the detailed engineering of the project is often underestimated. We now have a full proprietary set of drawings and information on the construction of the first new rare earth plant outside of China. We believe that to be of great importance to the company. The vast majority of equipment have been awarded, and all construction contracts have now been awarded. The critical part is mostly around foundations and kiln erection, but we believe that we are on-track for completion of the LAMP, firstly the kiln, by 30th September. The number of operational staff has increased in accordance with the delivery of the plant in September, up to 80 in Malaysia. The completion of all operational preplanning is now about 80% complete. We are working very extensively on the residue issues in Malaysia.

I have mentioned here that there have been significant local community questioning and concerns about the nature of the residue materials, we've been through this before, in 2007 and 2008. We are completely confident that the material that we have has a very low level of naturally occurring radiation, that has been classified as not dangerous, in Australia, and presents absolutely no hazards to our employees or to the community. But in the wake of Fukushima, and certain local political issues, there has been some local political agitation against it, perhaps this was potentially damaging, it is based on dissemination of extensive misinformation, and we are addressing that at local community level. What I can say is that the government of Malaysia has taken its people's concerns seriously enough to ask for an independent inquiry, we welcome that. We believe that the International Atomic Energy Agency is the best possible authority in the world to understand the science, and actually umpire, on whether or not there is any risk to the community, associated with it. We will respect their findings completely. I believe their work will reinforce the findings of the Atomic Energy Board in Malaysia, which has already indicated that this has no community risk. We have the full support of the Malaysian government to pursue this project, subject to this independent inquiry coming through with the results which we anticipate that it will come through with, but we're not going to pre-empt. And we do not believe that this represents a long-term risk to the project of Lynas, but we respect very much the government's right to investigate, and to ask the questions.

We also, through the quarter, did a very important strategic alliance with Sojitz Corporation. Sojitz representing, in fact, a joint venture, the company in alliance with a joint venture between Sojitz and the Japanese Government, directly. That is to give us the funding for the expansion of the plant, through to 22,000 tonnes per annum. We believe that that funding will enable us to initiate immediately, in fact, we have in fact bid, put the tender out for the engineering procurement construction contractor for phase 2, and that tender has now closed, and is being considered, and planning has commenced to accelerate the expansion of the concentration plant. We believe we will be fully expanded to 22,000 tonnes, by the end of 2012.

The other important transaction during the quarter is the purchase of the Katakunde Carbonicate(?) Plant in Malawi. We agreed to its purchase in 2007. We took some time to break through the governmental procedures, there were some specific issues we needed to work through, but we did purchase it at a price equivalent to 2007 prices of Rare Earths, at $4million. It's an extremely interesting asset, with a confirmed resource of 107,000 tonnes. We are optimistic that there is a considerable upside to that resource. Its gradient is 4.24%, at a 3.5% cut-off grade worth noting, and 3.5% cut-off grade is a relatively high head grade in todays market place. Tests already completed show composites amenable to a low-cost gravity separation concentration, producing a 60% REO concentrate. We've commenced an environmental-associated economic baseline study, and we anticipate an approximately 18 month period to really determine what the direction is, for that particular asset. We do not know, yet, whether we will simply concentrate in Malawi, or whether we will go further downstream in Malawi, to produce a mixed-rare-earth carbonate(?), that is a matter of current feasibility research, and we will take into account the economics and community issues around all of that. But it is worth noting that this deposit is particularly low, even lower than Mt Weld, in Thorium and Uranium, being about 11ppm Thorium per 1% REO, versus 44ppm Thorium per 1% REO, at Mt Weld. So we think we're in a very good spot for some upsides.

In terms of the industry itself, the dynamics of the industry continue to be favourable, the Ministry of Land and Resources in China has released a production quota that is slightly up, at 93,800 tonnes. I think it's worth saying, though, that what has substantively changed in the Chinese market is that these quotas are serious. The Chinese government has shut down a very significant amount of illegal mining activity, which provides at least 10,000, perhaps as much as 20,000 tonnes, to the market, the global market, before. So when the Chinese Government is giving a production quota of 93,800 tonnes, we believe production in china will largely reflect those quotas.

They've also imposed a significant natural resource tax, a 60rmb a cut, and 30rmb a cut. And there's many reasons why this is important, not just the financial reasons, but because that is a control measure for the government, in terms of production of materials, in China.

So those Rare Earth supply constraints, which have been further expressed in the quota in China, there was a small increase in quota, one-and-a-half-thousand tonnes increase in quota, but the quota still falls far short of non-China global demand. Those have, of course, seen the average quarterly price move up, very strongly. FoB China bases the average quarterly price is $92.84 per kilo, and that was an increase of over 49% over the quarter. The average price for the actual Mt Weld composition, as of Monday this week, was $162.66. Now, we are not in the business of making a forward forecast on the average price, but we will say that we do not see any demand destruction, at these prices, nor do we see any substantial inventory buildup, being something which could damage forward prices in turn, but we do think that there will be continued stress on the supply side, with continued demand for the foreseeable future.

Part of doing the Sojitz deal was to alleviate this stress of shortage of supply in the Japanese market. We have had to provide, and part of it we're very proud to provide, an allocation for a minimum of 8,500 tonnes per annum of rare earth products to the Japanese Market, over a 10 year period. That's about 40% of our total production capacity, and reflects the fact that Japan is the biggest non-China user of rare earths in the world, and we think it probably represents about 30% of the Japanese market demand, so when we are talking percentages of total markets in the order of 20-30%, we think we have an influential and substantive position in the business.

We are engaged in a number of negotiations with other key customers, concerning the position and a potential additional supply agreement, they are non-China based, they are in Europe, and the US, and we are very pleased with the demand-side of the market, at the moment.

The company is in good shape, we did raise some additional equity around the top of the Sojitz transaction. Cash balance at 31st March was $204.7m, we saw, of course, the continued rise of the AUD, which has had some effect on costs, but is also had some affect on adjusting our cash balances in Aussie dollar terms, because we have US dollar and Malaysian ringitt deposits, and that's about a 5.7m negative adjustment in the company's cash position, going on exchange rate when reported in AUstralian dollars. In the next quarter we anticipate production ramp up and operating expenditure to be approximately $10.6m, and capital expenditure to be approximately $75m, reflecting the increased construction activity.

We are very pleased with where we are, we are very conscious of making sure that we work through the Malaysian issue, in co-operation with the Malaysian government so we don't have any delays in start-up. We are comfortable and confident that we'll be able to do that. That is probably the key external issue that we have in the quarter. Internally, we are very focussed on ramping up the concentration plant to its full capacity over the next quarter, and to delivering the plant in Malaysia, first feed to kiln. Again, I want to thank you for your support for the company, we think there is a very strong future, global future, for Lynas, as the rare earth company, globally, as a key supplier of rare earths for a sustainable future, and we welcome, at this point in time, questions, thank you."


INSTRUCTIONS FOR HOW TO LODGE QUESTIONS

REMINDER TO SUBMIT QUESTIONS

PAUSE TO ASSEMBLE QUE


START

Ian Preston, of Goldman-Sachs: Just two very quick questions, the independent review have they appointed the team for that, and so do you have an end date in place for that, and the second one, on your pre-operating license, all the data has been submitted, when is the latest that you should receive it in terms of the six month period they have to review?

NC: So, in terms of the panel, the panel is arriving in Malaysia on the 29th of May, and we believe will take one week to collect data in Malaysia. And I think it's important to note that this is an audit, effectively, of work already done, not a redo of the baseline?

IP: Yep, yep.

NC: so it should be a relatively short period, but I'm not in a position to give you the panel determination as to how long or otherwise it would be, I think that would be inappropriate for me. In terms of the pre-operating license, the government has made it clear that they're not going to give us a pre-operating license until the panel review is complete?

IP: That takes a month?

NC: That'll take a month. And, eh, but we have put the data in. What we think that the the regulation says up to 6 months, we think the data is in good enough shape, and the authorities sufficiently familiar with the project, to substantially accelerate that six month period. Again, it wold be presumptuous of me to put a date on the regulators job, but they have, by law, the right to take up to six months, but they are very aware that we are on the public record as wanting to open the kiln up on the 31st of September.

IP: Thanks very much, thank you.

Michael Evans, BLSA: G'day nick. Thanks. Just one question. The financing you've arranged recently has sort of indicated confidence that it will get you through to 20,000 tonne rate at the end of 2012, is that the final number, does that include all working capital requirements beyond that?

NC: Um, look, yes, broadly. We are in negotiations with our working capital provider, Michael, to pre-empt a little bit, because of course we gave security to associates in the facility, though we do realise that we have to work through a bank-related working capital facility, and we're in the midst of doing that at the moment. What I can say is that we are highly confident that we can find, and have in place, adequate bank working capital facilities and there will certainly be no recourse to equity for any working capital.

M.E: Thanks Nick.

Sam Bereted, Royal Bank of Scotland: Good morning, I was wondering, it might be a little bit early, but I was wondering if you could talk about costs at the moment, I mean, I understand in ramp up that a lot of these costs are going to be capitalised, and I know you've got a figure of about $10 a kilo out there in the market, could you give some advice about how you expect these costs to come out once they're in economic production, and how you expect those costs to look in stage 1, and then stage 2.

N.C: Sure. Let me qualify it by saying, 70% of those costs are variable costs, things like price of sulphuric acid, price of energy, have a major impact on the final cost, so it's very hard to predict those variables, with any level of accuracy. This is a chemical oriented business, in the same sense as a chemical company, and as such has very high variable costs, and relatively low fixed costs, but with that caveat, we think that the $10 mark represents C 1, or the cash cost, or cash operating costs at current variables of going into full ramp up production of 22,000 tonnes. We do believe that for the first year, there will be some premium on that $10. We're not in a position to give you the exact data on that premium. Not staggering, but there will be some premium on that $10 as we get ourselves into gear toward the 22,000 tonne. Does that answer your question?

S.B: Yeah, yeah, I suppose, as much as you can at the moment, with the variable moving around. I suppose a follow up to that, on production, obviously its an extremely complex plant, it's not a gold project, and there are additional variables there, so with that in mind, when do you think you'll be able to start giving firm guides as to rare earth production for stage 1?

N.C:



Royston Bradshaw: This goes back to the Forge transaction, if I may. I just like to ask whether there's been a reconsideration into the view of the Crown resource, and whether you now consider it to be a core asset, and no longer immaterial?

N.C: No, Royston, we don't, in light of my last answer to the question, the Crown material is considered only useful if Lynas does not have to pay very significant capital risk that distracts its resources and attention, to be able to access its rare earth. This rare earth is the core business activity of the company. In that sense, the non-rare earth assets that are in Crown continue to be non-core. We will re-examine that asset in the fullness of time, but at this point, its part of us.

R.B: What about in terms of its significance in terms of materiality, I mean, there's been quite a lot of comments in the media and by?

N.C: We discussed that quite publicly last? the opinion is that since that evaluation was such that it was of a value that is immaterial to the total site, but the board has considered all the shareholder concerns, and is no longer proceeding with that transaction.

R.B: Right. So, we might see some further investigations to determine its value further down the track?

N.C: We may. I think we have a pretty good grip on its current state, but it would be a very significant project for a non-rare earth metal in, ah, light? at the moment. As I say, the key mission of my key strategy, which has been resoundingly endorsed by all of the shareholders I've spoken to, is to focus substantially on the extraordinary opportunity we have in rare earth, and deliver the value held in that to shareholders.

R.B: Right. Thanks for that. But I think there's a number of shareholders that would welcome the opportunity to be involved in the Crown resource?

N.C: I still? I read Hot Copper to?

R.B: Right? so, you'll give us the opportunity to begin developing in that direction?

N.C: Look, I'll just say one thing. The relationship that is required to develop that asset requires technical skills, substantial capacity of proven capacity to develop in the marketplace, and a trusted and intimate relationship with Lynas.

R.B: That's right?

N.C: So that was the basis on which, if ever it was developed, it would be developed, by a third party; we don't foresee that. We are parking Crown, we've heard shareholders, we are focussing on our main business, which is the business of developing our rare earths assets.

R.B: Right. Right? I understand that, and I understand the need for a trusted party? I just question the trusted party being yourself when you are transferring the asset.

N.C: No, that was all. We've heard you.

R.B: Ok. Thank you.

THERE WERE NO FURTHER QUESTIONS.