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Executives

Eric Noyrez – CEO and Managing Director

Luisa Catanzaro – CFO

Analysts

Mark Busuttil – JPMorgan

Andrew Harrington – Patersons

Mike Harrowell – BBY

Lynas Corporation (OTCPK:LYSCF) Q2 2013 Earnings Call July 31, 2013 2:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Quarterly Investor Relations Conference Call. Today’s call is being recorded. At this time for opening remarks I would like to turn the conference over to your host today, Mr. Eric Noyrez. Please go ahead sir.

Eric Noyrez

Good afternoon everyone and thank you for joining Lynas’ June Quarter investor relations call. My name is Eric Noyrez and I am Chief Executive Officer and Managing Director of Lynas. Joining me on the call today is our Chief Financial Officer, Luisa Catanzaro.

I would like to begin by discussing the main development of the quarter including production and sales, our customer qualification program and update you on our progress in ramping up operations. Then I’ll hand it over to Luisa to discuss our financials. After that I will be happy to answer any questions you may have.

The company has commenced its transition from the company rare earths project to an operating company supplying rare earths products to its customers. Talking about the transition, as refining of rare earths is a complex process, so (inaudible) we are committed to be a global leader in supplying rare earths and our sustainably based business model. She is relatively safe for people, safe for the environment and secure for our customers.

As you all know rare earth market volumes and prices have been extremely challenging for the past six months. We at Lynas have taken another step to strengthen the company’s position during this subject period and in turn position the company to react to improvements in market conditions. In response, as announced in June, Lynas decided to optimize production levels at the LAMP plant in Malaysia with a Phase I capacity level of 11,000 tonnes per annum of rare earths oxide equivalent. This strategy will remain [until the market tries] the product.

Subsequent to the end of the quarter, we are seeing some emerging evidence of price recovery. We are also very focused on cost reduction opportunities both at the operational and corporate level. Our cost savings programs are already delivering benefits to more optimize shared services and deferring non-core operating and capital expenditure. The company will continue to explore ways to further optimize the group cost base and minimize working capital requirements.

Now I would like to turn to the Group’s operating performance. In the June quarter, we produced 144 tonnes on rare earths oxide equivalent basis and the total tonnes shipped to customers were 117 on the same basis. While we are still ramping up production at the LAMP in Malaysia, we do regard these numbers as disappointing. In June we announced that we have achieved nameplate production capacity in fracing and leaching units of Phase I on the LAMP in Malaysia. When you achieve fracing and leaching nameplate capacity for a few days, we subsequently lower the production schedule to start feeding and ramping up the separation units for gas treatment in order to secure product quality.

The vendors reached some issues relating to clogging and cracking in leaching units and consequently had to undertake cleaning of some equipment. They also faced some premature wearing of curative quickly in some equipment like pipes, valves and some vessels and they needed to be replaced and improved. These issues are not considered unusual given the nature and the scale of a plant of nature and solutions for these issues are being procured and [resolved] for the moment.

They are not expected to impact our stated intention to optimize production at the Phase I nameplate level. However, while the issues are being identified and we believe we have solutions, some of them are still being implemented, in part due to delays or timing in securing equipment from the required vendor and in supported to implement it. So the consequences, impact on planned production during the current quarter. Solutions comprised a series of work programs involving equipment changes and material handling to improve the ability of the fracing and leaching units operate continuously at the nameplate production capacity. None of these programs involve any significant capital investments and are expected to be in place over the coming months.

In regards to the rare earth oxide shipments, [delivery] of shipments related to productions reflected the ongoing customer product qualification process. I’m pleased to report that we have achieved qualification of several of our core products with a number of customers. For some of the customers, the process continues, remains ongoing and in part due to the customer specification process timeline.

Turning to other matters now. I would like to address our Synthetic Mineral program using solid residues produced by the LAMP in Malaysia. This program is progressing in line with ramp up of rare earths production. And we received positive customer interest for Synthetic Mineral Products and continue its testing and market trials for all these products. We are also having discussions with relevant authorities in Malaysia regarding obtaining the necessary regulatory approvals, get the products status qualification and commence explore those products consequently.

I’m pleased to say that one of the products has already been tested by a third party laboratory which concluded that it is safe and meets regulatory requirements.

On other regulatory matters, I’m pleased to report that in early July, we submitted documentation outlining our plans for the commercialization of the residues of the LAMP and our plans for permanent disposal facility in the event that one is required. When it comes to the condition of our temporary operating license that we submit this documentation within 10 months of the granting of the license and the documents are not being reviewed by the Malaysian Atomic Energy Licensing Board.

Lynas intention is and remains to maximize the use of all residues from the LAMP in Malaysia in the creation of products for commercial sale.

As I mentioned earlier, although intend to produce – optimize and produce of production of the Phase I capacity until market conditions improve, our Phase II project is nearing completion. Construction was virtually completed during the quarter with more than 6.2 million hours worked without any loss time injury. This is for us something we are proud of this achievements and I’d like to congratulate all those involved behind this project.

Pre-commissioning is almost complete for this Phase II and we are starting the commissioning for the plant ahead of an expected startup in third quarter. The second ramp-up of Phase II production will be defined by various factors, the [prevalent] market conditions.

Now I would like to hand it over to our CFO, Luisa to update you on our financials.

Luisa Catanzaro

Thank you Eric. The Group reported cash receipts from sales of products of 0.6 million in the quarter. Although it should also be highlighted that actual invoice sales in the quarter were about $1 million. It should be noted that there was very negligible sales of high value NdPr and ZEG products and that this was the major contributor to the low realized average selling price in the quarter.

This mix reflects the timing of ongoing customer product qualification for these products. In future periods we expected increased sales reflecting our improved production throughput combined with sales of our complete basket of REO products which will result in a higher realized average selling price.

Ramp-up and operating cash requirements for the period were in line with our expectations as set out in the last appendix slide there. I would like to highlight that this cash requirement does take into account the necessary build-up of inventory required to support the normalized throughput of our Phase I operations at the LAMP and the acquisition of raw materials to support the preparation for commissioning of the LAMP’s Phase II startup.

In total during the period, we estimate that total cash spend on raw materials still held for current and future consumption totaled approximately 10 million. As such, our total cash cost should not be taken as an indicator of future cash cost metrics which still within current market expectations.

As Eric has outlined, management is focused on ways to further optimize and reduce the Group’s cost base. And to that end, we have differed all discretionary spending and initiated [certain] cost out projects. One example of this is the introduction of the shared services function to be based on Malaysia while another will be focusing on our fixed cost profile in our Western Australian operations for examining more flexible shifts and work patterns.

In regards to the capital expenditure program there were not material change in the forecasted total cost to complete for the Phase I or Phase II projects during the quarter. In fact, you will see there has been a significant reduction in capital expenditure in the quarter to 15.9 million which reflects the practical completion of Phase I and separately the Phase II expansion nearing completion. In other areas net interest cash flow for the quarter was 1 million. In addition, the Group had a 2.5 million positive exchange rate adjustment on cash reflecting a depreciation of the Australian dollar against both the U.S. dollar and Malaysian ringgit.

At the end of the quarter, the company had 125.7 million of restricted available cash on hand. Including our restricted cash balance which was available principally to fund the Phase II project, total cash on hand was 141.4 million. Based on our current planned production, sales and cash flow projections, we see no immediate need for further funds.

I’ll now hand it back to Eric.

Eric Noyrez

Thank you Luisa. With that I would like to now hand it over to take questions you may have.

Question-and-Answer Session

Operator

Thank you Mr. Noyres. (Operator Instructions) And your first question comes from the line of Mark Busuttil from JPMorgan.

Mark Busuttil JPMorgan

Yeah, good afternoon guys. Just a couple of things. Firstly can you give us an idea of how much longer you’ve got in the customer qualification period and when you expect to be at capacity considering the issues that you’ve had over the last few weeks in terms of production and sales? And secondly, if you make the assumption that the ramp-up goes to your plan and rare earth prices and the FX rates stays at current rates, does the balance sheet need a further top up?

Eric Noyrez

Well thank you for the questions. First one related to when we can achieve nameplate capacity. As mentioned, we have identified few hurdles, mostly time to procure the equipment, mostly implemented at the moment. So the quarter remain low. All the impact and expected outcome for reaching capacity will be seen shortly after. The second question was regarding the fastest qualification process. Depending on the applications or the end use, you can go as short as a few days or usually 1 month up to 7 months. We already have qualified our product for different applications and we are still developing and proceeding with the qualification process of others. What does impact this timeline? Certain product, then obviously positive feedback from the customers, you sample around the quantities, do the pilot test and finally producing others you require specifications, your product is approved. And on that basis we are starting to sell. The recipient market obviously has slowed down a little bit, some qualifications but not in a major way. The market is still willing to secure rare earths on a global basis. And for very specific applications which are very tight specification you are back and forth requiring some fine-tuning of assets to make sure that the level of impurity is, the performance is all right.

So the short answer, from 1 to 7 months depending on obviously the applications, several customers for all rare earth elements have been approved already and we’re still in the process of some others; at the moment fine-tuning by changing the products.

The last question was regarding the balance sheet. At the moment we don’t see any need for refinancing but the questions, the sales could start according to our production schedule. At the moment we start to see that the price start really recovering in the market and we see a little further and we believe that will be cash positive obviously by the end of financial year.

Mark Busuttil JPMorgan

Perfect. Thank you very much.

Eric Noyrez

Welcome.

Operator

And your next question comes from the line of Matthew Hockings from Deutsche Bank. Please go ahead.

Unidentified Analyst

Yeah hi guys. I just had a question around the sales thus far and I was searching – with that realized price you guys did mention that that’s indicative of some of the lighter rare earth products are being sold. How much is the higher quality products, the NdPr upside and ZED products have been produced and are still in Malaysia ready to be sold in FY14?

Eric Noyrez

Sorry, could you just repeat the question?

Unidentified Analyst

Yeah I just wanted to clarify with the sales that you’ve reported thus far…

Eric Noyrez

Okay, thanks. This is a negligible quantity at the moment. It’s in line of the market, the product suite set up the process qualification which is making a little bit longer than for selling as an example. We certainly expect over the coming months to have the breakdown of products be representative of our sales and the product suite.

Operator

Your next question comes from the line of Andrew Harrington from Patersons. Please go ahead.

Andrew Harrington – Patersons

Hi Eric, hi Luisa. Can you give us some guidance as to how much will we be producing in the next – this quarter and next quarter, or this half if that’s available?

Eric Noyrez

As mentioned, certainly remain a low level for this quarter. we’re implementing the solution at the moment so that remained at low levels and we certainly expect and plan to have the outcomes soon after and reach capacity to make sure that we optimized the plant at 11 tons – kilotons per annum production levels.

Andrew Harrington – Patersons

And will that take the next couple of months or is it an order of weeks?

Eric Noyrez

Remains low for the quarter and shortly after as you can see getting the production capacity level expected.

Andrew Harrington – Patersons

All right, thank you.

Operator

And your next question comes from the line of Joseph Khan from PP Wealth Management. Please go ahead.

Unidentified Analyst

Hi Eric, hi Luisa. I’ve got a couple of questions. So of the 27 odd tonnes of REO that’s currently being qualified, what type of invoice value would that have? Are any of those the heavies?

Luisa Catanzaro

That’s based on the corporate mix within finished goods still to be sold at the end of the period.

Unidentified Analyst

Any idea on the invoice value?

Luisa Catanzaro

We would envisage – our expectation is Chinese prices and above.

Unidentified Analyst

So you’re not answering that question then?

Luisa Catanzaro

No, as I said, our guidance has always been that we work towards an expectation of Chinese prices and above China.

Unidentified Analyst

Okay. And so is there any other tonnage other than that 27 odd tonnes currently being qualified from production from previous quarter, say from back in February?

Luisa Catanzaro

We have been very clear in our quarterly and put out exactly what the production was for the period and we’ve split out what the sales were for the period. So the difference is represent amounts available to be sold at the end of 30th June.

Unidentified Analyst

Okay. And I guess I only have a question really, so if I just deconstruct this tonnage, you’ve had basically out of 91 days, the equivalent of 5 days of production. Now I wouldn’t categorize – previous announcements you’ve stated that you’ve had normal startup issues, 27th of Feb, not materially impacting the overall production ramp-up schedule. I would categorize five days out of 90 of production as a disaster. Those are severe, severe production issues. And for us to be hearing that about that on a quarterly basis and not continuously is unacceptable. We are not in a position and potentially with the way that you chose to disclose, compliant though it may be that we won’t know the status of the company’s production until October. Am I correct or am I incorrect?

Eric Noyrez

Taking our opinion just commenting about it, we certainly have a long, a very long process of going through separation units, in fact there is a minimum is 42 days just adding the cracking performance and expected by the first product produced is any reproduced it at the 27th of February the first product. Then significantly you have to start producing the cracking, the feedstock for the separation unit and stabilize the quality and the balance of obtaining every single quantity of products of every single product in the value separation units takes a lot of time to make sure that we do based on quality. As I said we reached the nameplate capacity, in fact in leaching early June and we’re substantially up, but I think we had to disclose it.

Unidentified Analyst

Yes, I have but Eric for how long? You can reach nameplate capacity for 10 seconds and then you can announce that. The key is to sustain nameplate capacity and you know that’s the case. That’s really what the market wants to know because that’s really what we can hang our hat on that; we can run numbers on that. We can’t run numbers on vague disclosure about nameplate capacity because you’ve shown by your results that it means nothing. We can’t – the information is not usable.

Eric Noyrez

I’m sorry, just explaining. Yes we did reach the nameplate in cracking/leaching, we did that for several days. Time for being capable to ramp up the separation units we had to lower that level over the plant and certainly really reduce it to start with see it properly and increase the [cost of operational unit] is the only way to make sure that we start to produce product in quality of time. That should – secondly on that operations, we are starting to have a problem in equipment and I agree that wasn’t planned, it’s unfortunate but that was really the element which occurred. Takes out the problem at the moment which means significant change in the clause for the time to procure and bring the equipment. As I said, I’ll comment in moment, I expect the production to remain in a row close at operations this quarter to resume production level at very close to maximum capacity because of the target very soon after.

Unidentified Analyst

So for stage of life for September, it wouldn’t be unreasonable to assume that you would only produce them for sale and still another couple of 100 tonnes rather than say 2700 tonnes or anywhere near it, given that we’re already a month into next quarter?

Eric Noyrez

You’re correct.

Unidentified Analyst

Thank you .

Eric Noyrez

You’re welcome.

Unidentified Analyst

Are you happy with that Eric?

Eric Noyrez

Yes.

Unidentified Analyst

I must be in the wrong business.

Eric Noyrez

I’m sorry. What did you say? Are you happy with your comment? Hello?

Operator

Your next question comes from the line of Mike Harrowell from BBY.

Mike Harrowell – BBY

Thanks. Eric I’d probably be following the previous question in a sense and I think that his last question that are you happy that we use a number like 300 tonnes for production in the September quarter, that would what he was – certainly a question I would like just to make sure we’ve got pretty clear. And then what would be the expected starting point rate for production in the final quarter? I understand that there are market limitations but what you’re saying I think is that you would expect a plant to be running at 11,000 tonne per annum rate at the start of the December quarter and we continue subject to marketing, which you can’t really give us a firm view on.

Eric Noyrez

Make sure (inaudible) disappointed about the results. We are happy the confusion you were taken for the quarter. I think it’s realistic and the next quarter we’re obviously targeting everything to reach the capacity we wanted to target and we are preparing for it.

Mike Harrowell – BBY

Okay. Second question would just be in the quarterly, I think you’re identifying something like $23 million worth of CapEx expenditure which is up from the last quarter. Is that how we should look at it or is that 23 million actually going to be spread over a couple of quarters?

Luisa Catanzaro

I might take that question Mike. We have highlighted 23 million, we’ve also highlighted that the 23 million includes a sizeable portion which is the Phase II CapEx spend which is funded from the restricted cash balance. So I’d be using that as guidance. But remember the large part of that is Phase II which is funded from the restricted cash.

Mike Harrowell – BBY

That is still 23 million?

Luisa Catanzaro

Yes, we are finishing off as I just said Phase II and we’re commissioning Phase II in that period.

Mike Harrowell – BBY

Right. And the final question I have is that you mentioned there were 10 million tonnes of material. I’m taking that to be on the balance sheet at year-end? This raw material sufficient to ramp up both Phase I and Phase II. First of all is that a correct interpretation? And the second is just to clarify, on your sort of cost guidance that you included, this is at the 22,000 tonne rate, the presumption is you have about $100 million here of fixed costs or $25 million a quarter of fixed costs. And so the difference between the 25 million and the reported rate for the last two quarters is about $6 million, i.e. that’s the inventory accumulation over the last two quarters equaling around about $10 million to $12 million. Is that the correct interpretation?

Luisa Catanzaro

If I answer just one point at a time there, what I think we’ve said is and I’m happy if you’ve interpreted as such is $10 million correct of working capital build-up. You’ll see when we disclose the financials and the balance sheet, that’s been quite a sizeable working capital build-up in the period, which is not surprising. I think the cash cost guidance that Eric and I have slightly spoken to is the guidance of $14 to $15 per kilogram REO at a 22,000 run rate. And what we’ve said very clearly is 70% of that’s variable and 30% of that’s fixed. Now until we get to that 22,000 it will be a slightly different breakup of that. You’ll have a slightly bigger fixed component and variable cost component. So I’m happy this guides you again to that breakup.

Mike Harrowell – BBY

Okay.

Eric Noyrez

And this time you mentioned clearly that it was high teens at 11,000..

Luisa Catanzaro

And we’re currently, again, we will provide the guidance, at 11,000 tonnes which is Phase I will be comfortable for you to use high teens as the cash cost of production and as we have said, we are very focused on cost out initiatives at the moment. So based at 11,000 or beyond capacity.

Mike Harrowell – BBY

Yes, I’m happy with that. Thank you.

Luisa Catanzaro

Thank you.

Operator

Your next question comes from the line of Robert Richardson who is a private investor. Please go ahead.

Unidentified Analyst

Thank you. Eric, on the general subject of communication to we long-term private shareholders, I’ve been gleaming information from Malaysian media reports of statements that you’ve made in Malaysia about some issues but we really do have difficulty in Australia from locating any real information other than at these quarterly telephone conferences. I’m hearing that Lynas LAMP has had a serious problem with producing products to specification such that this material of several thousand tonnes can be reprocessed quite easily presumably soon. Is this correct and if so, why wasn’t this important information reported to shareholders?

Eric Noyrez

Some information has been reported in Malaysia which were not specifically issued by us. And so some cases, won’t speculate about it. So hope it didn’t misled certainly and what I’m saying is at the moment we produce some products. We reached capacity and leaching and was material enough to mentioning it. We had to lower to go to the cracking, so we lowered the throughput capable to produce and separate the various elements. Also we had 1, 2 and 3 weeks of issue where starting to identify what’s happened and obviously bringing the correcting actions. We’re currently at the moment bit disappointed to have this be down but it’s important to understand and we’re confident that we will ramp up after the solution implemented to substantial changes. It’s not a substantial amount of product lost as well you want to refer to and it’s very important that we continue to produce sales product. At the moment from the project to such a significant operating unit, so the issue is unusual, almost unfortunate but we remain confident that we can reach it as we have reached it already as those product separations and purified product and qualified [at the process].

Unidentified Analyst

Okay, well thank you. Just to finish, can I make a plea that were you conducting interviews in Malaysia with the media, could not some information from that be released by your public relations people on the company’s website or in some way so that we could get perhaps a bit more reliable information than trying to get in some cases, translated reports from Malaysian media?

Eric Noyrez

Point taken.

Unidentified Analyst

Hello? Sorry I can’t hear you.

Eric Noyrez

Yes, point taken.

Unidentified Analyst

Thank you.

Operator

And your next question comes from the line of Malcolm Howard who is a private investor. Please go ahead.

Unidentified Analyst

Yes, thank you Luisa and Eric. Yes I did have a very similar question and request as the previous speaker. I’m a retail investor. It’s very hard to get good information about the operations of your organization. I often ring Mr. Alistair Reid who never returns calls to find out what’s going on. You said point taken, I hope that means Eric that you are going to us a little more information or lot more information I should think in the future because we operate in the dark. Just like the previous speaker I have to rely on outside organizations and the media to give me information of Lynas. I hope that you would be able to provide better information for all the retail investors in the future. And I had many other questions which JPMorgan, Deutsche Bank did raise with you. And in a general context, are you optimistic that this organization will be a viable organization going forward from about the beginning of the next quarter? The way you answered a lot of the questions didn’t give me much confidence in the future operational viability of this organization. I would like you to make a definitive statement as to how optimistic you are going forward from here and what sort of timeframe you would put on when you would be reaching those goals and the aspirations you had at the beginning of this whole process. If you can just give us an indication of when you expect some progress, some real progress to be made – being made and put a timeframe on it, I would appreciate it very much Eric.

Eric Noyrez

Okay, I’ll just make that I don’t make a too long answer and first of all, various market itself is important. And as demonstrate growth over years, we had issues of prices coming from too high prices, ended up by bringing inventory and supply chain as people filling up any products. We had seen the impact on prices and recently we started to see customers restarting their own assets and asking products and that drove prices up. So the fundamental elements of having a market growing, developing and based on significant market and usage and applications for electronics, clean energy or wind turbines are fundamental drivers for the market to grow. And I’m [ringing early] as much as you are ringing and we see now really the market starting to really pick up on the right. We should probably translate that into far less inventories which have been build up at the time of the crisis.

The other thing is China itself wanted to get a fix on ability to produce sustainable. In other words to clean in a cleaner way. Our business model is based on producing rare earth in a clean way which is safe for people, safe on the environment and China is also willing to invest and support only their industry and their players which are producing according to principles. Striving that past and they also need some price NIM – pricing for being sustainable investing further and we start to deduct in fracing as well. Cash, on the market itself, I’m extremely confident and remain confident. Our ability to produce business has been developing the projects, reporting the qualification, we see our customers still willing to take the product home. And when we have some issues of production for a month or two, we have seen there is no fatal flows no show stoppers which in that case will be fully communicated accordingly. There are some hurdles. I will write about it. I’m disappointed, we take these corrective actions to make sure that they are fixed. We are implementing a moment and I remain committed and certainly convinced that very soon we will produce at expected capacity.

That combination of the market growth, pricing recovery, ability to fix our products leave me confident in our ability to deliver what we are expected to deliver.

Operator

And now we have a follow up question from Mark Busuttil from JPMorgan.

Mark Busuttil JPMorgan

Yeah hi. Maybe just a question on the market, you’ve seen the NdPr prices rise in the order of 30-35% in the last month. I’m just wondering if you can give us a bit of color on what’s going on there. I know you talked about Chinese supply discipline but have you seen inventories get to a point at which the de-stocking cycle may have ended? Have you seen demand return in magnets? Can you give us a bit of color around that market?

Eric Noyrez

Well we still report and I give just a few examples to simplify. First, the market is the single biggest growing application. So the demand side has never been really an issue and because the market was short of products, when price rises happens is where the customers field the highest inventory to give them and buy time for any shortcomings happening. As a consequence that was where the prices went down faster and when inventory builds they are lasting the longest. We see some complications that customers stop the operations for a few months and the same customers have restore or resumed operation recently. So the wind turbine market as an example, significant cost have confirmed grows and is taking significant volumes. The car market itself is taking from the (inaudible) is increasingly using those elements. So those market fundamentals are real, inventories are being ring down, difficult to give exact figures but we see that customers have restored or resumed operations and definitely. But we have seen the NdPr market is going to certainly be an off taker very soon.

Mark Busuttil JPMorgan

Great. Thank you so much.

Operator

We now have a follow up question from the line of Matthew Hockings from Deutsche Bank. Please go ahead.

Unidentified Analyst

Yeah thanks very much. Just following those production rates that have been suggested to you that in the matter of a pushback, just wondering around the justification of spending the capital on Phase II right now and effectively ramping up Phase I and Phase III simultaneously. If you’re not running at 11,000 tonnes per annum, let along 22,000 aren’t you just increasing your fixed cost base?

Eric Noyrez

Not really. We want to commission the Phase II, make sure that we get the guarantees. We obviously organize ourself in operation modes that we don’t increase the fixed costs and we’ll certainly shut it down just soon after until the markets really prove that its valuable to run both assets. By the way, I tend to say Phase I, Phase II has made significant step from 11 to 22. They are flexible assets and it’s possible to use the assets partly and ramping up according to market demands where the market has truly demonstrated the ability to value that type of operations.

Unidentified Analyst

Okay, so just following on from that and also Mark’s queries around the price support in NdPr. Based on current market conditions and the capacity you have available how much NdPr are you expecting to sell in the first half of ’14?

Eric Noyrez

I don’t want to give you any specific guidance. As I said, it’s linked to the qualification process but it’s fair to say that what produce and the current proportion of elements we have a clear intention to sell it. And at the moment there is nothing which is telling us that we cannot do it. In other words, in our core concentrate cumulative about 25% NdPr and yes, about 45% selenium, 20% [neptunium], this is what we are going to be able to see and going to sell very shortly as soon as we reach the stage.

Operator

Your next question comes from the line of Mike Harrowell from BBY.

Mike Harrowell – BBY

Thanks. Kind of my question has been answered but just with the contract, do you – you certainly a fair bit of confidence that they would – you’d be getting to full off take as soon as you basically produce that material. Is that how we should interpret it and is that what the contracts allow you to do, to actually put material to customers or is it very much driven by the customers’ downstream demand and if there is a demand slump then they will be probably going to push back that you’ll have to absorb?

Eric Noyrez

We decided to implement the Phase I 11 kilotons and another 22 right away is because between the two we have an uncertainty and we don’t want to have the prices remaining at the level they are. But also in the question, yes we do believe that our customers first we make the sales, they are in the qualification process and some have been qualified at the moment and we’re confident that further produce will be sold to the market according to the breakdown of similar rare earths elements.

Mike Harrowell – BBY

Thank you.

Operator

And that completes the question and answer for today. I’d now like to hand the call back to Mr. Eric Noyrez for any additional or closing remarks.

Eric Noyrez

I would like to thank you everyone for taking the time to participate on our conference call. We value your questions, even the challenging one, we respect the opinions and we respect also both support and also the challenge. To summarize, obviously we are happy to be on the way in our transition to producing company. We have a slow start definitively and I want to recognize it and not hide it. But we are confident we have identified the right solutions to enable us to increase production over the coming quarter. We are also pleased to see some early signs of improvement in rare earth’s market with customers restarting the production. There is no better evidence than this type of startup and production with price beginning to move up from very low or too low level they have been, which we are certainly not supporting, sustainable production and we are looking forward to speaking with you again in three months’ time. Thank you all.

Operator

That does conclude our conference for today. Thank you for your participation ladies and gentleman, you may all disconnect.

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