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Neo Material Technologies Inc. (NYSE:NEM)

Q4 2007 Earnings Call

March 7, 2008 10:00 am ET

Executives

Alex Caldwell – Corporate Secretary

Constantine Karayannopoulos – President & CEO

Michael Doolan - CFO

Analysts

Justin Wu - GMP Securities

Daniel Kim - Paradigm Capital

Yuri Lynk - Canaccord Adams Inc.

Terry Thib - Haywood Securities Inc.

David Wargo - Cormark Securities Inc.

Youssef Abboud - Clarus Securities Inc.

Operator

Good morning ladies and gentlemen and welcome to the Neo Material Technologies Inc. fourth quarter and year end results conference call. (Operator Instructions) I’ll now turn the conference over to Mr. Alex Caldwell, Corporate Secretary, please go ahead sir.

Alex Caldwell

Good morning everyone and thank you for attending Neo Material’s fourth quarter and year end 2007 financial results conference call. To help you prepare for today’s call you should have received a copy of our new release. If you did not receive one a copy can be downloaded at our website at www.neomaterials.com. At the conclusion of the presentation the management team will respond to analyst and investor questions. Alternatively analysts, investors and members of the media may direct their inquiries to Ali Mahdavi at 416962-3300, ext 225.

Listeners to today’s call should take note that certain statements in this conference call are forward looking and may not give full weight to all of the potential risks and uncertainties. These forward-looking statements include statements that are subject to risks and uncertainties. Forward-looking statements are subject by their nature to risks and uncertainties and actual results, actions or events could differ materially from those set forth in the forward-looking statements. Any forward-looking statements speak only as of the date made and the company is not undertaking to update any information in the forgoing reports until the affective date of its future reports required by Securities laws. Unless otherwise indicated all of the financial information reported in this call is denominated in US dollars. With me on the call today are Constantine Karayannopoulos, President and Chief Executive Office and Michael Doolan, Chief Financial Officer. I will now turn the call over to Michael who will provide a review of Neo Material’s results followed by Constantine’s overview of the business, Michael?

Michael Doolan

Thanks Alex and good morning everyone. For the three month period ended December 31, 2007 net income was $8.6 million with earnings per share amounting to $0.09 and $0.08 on a basic and fully diluted basis. EBITDA was $17.2 million for the quarter. This compares to net income of $8.6 million and EBITDA of $14.2 million for the corresponding quarter of 2006. Revenues in the fourth quarter were $65.9 million representing a 47% increase over the $44.7 million of revenues generated in the corresponding period a year ago. Cash provided by operating activities in the quarter was $9.5 million. For both the quarter and the full year operating income as a percentage of sales declined from 2006 levels. However on a dollar margin per kilogram basis, the impact was offset by our increased selling prices and as a result of the higher volumes total gross margin increased.

Operating income increased 18% quarter over quarter and up 19% on a full year basis. For the full year 2007 net income was $28.2 million with earnings per share amounting to $0.32 and $0.30 on basic and fully diluted basis. EBITDA was a record $61.6 million. This compares to net income of $27.8 million and EBITDA of $54.6 million for 2006. Adjusted net income for the year ended December 31, 2007 was $30.5 million, this after backing out the $2.3 million write off of previously deferred financing costs relating to the original August, 2005 financing.

Revenues for the year ended December 31, 2007 were $240.5 million compared to revenues of $162.6 million for 2006. For the year ended December 31, 2007 cash flow provided by operations was $12.5 million compared to $18.5 million in the same period in 2006. As at the end of the year Neo Materials had $17.2 million of cash and cash equivalents and had reduced its net debt to $48.6 million from $78.1 million at the beginning of the year. With raw materials at least currently stabilizing, we expect to return to stronger operating cash flow levels in 2008.

But during the year the company, just to remind you, reached an agreement with Hitachi Metals on an exclusive field of use license. This exclusive license arrangement provides Magnequench with the ability to maintain base business margins and to also continue its current successful patent infringement and testing programs through to the expiration of the patents in July of 2014. The company was also able to restructure its balance sheet with the equity offering in the third quarter and the elimination of the convertible debt instrument.

I mention both of these events because they position the company for net income improvement going into 2008. Our interest costs were $12 million for 2007 and as a result of the debt restructuring and our strong cash flow they should be roughly $5 million for 2008 as things currently stand.

The Hitachi deal as previously mentioned allows the company to pursue tax planning opportunities which would allow for affective lower tax rate and further bottom line improvements. In fact the company was able to enact some tax initiatives in the fourth quarter which brought our 2007 tax rate in slightly lower than previously anticipated.

One other area I would like to comment on is the company’s SG&A expenses. SG&A expenses were up $4.7 million from 2006 levels. Three main factors contributed to this. The mark-to-market on our LTIP, the long term incentive plan, is $2.5 million in the year. The inclusion of DAMR our third OEM rare earth facility was $1.3 million and increased sales costs in our Japanese subsidiary were $0.50 million. And on that I would just like to comment though that sales in Japan increased 156% year over year and the increase in sales costs is commensurate with that sales increase.

In summary, on a year over year basis, overall performance remains strong with strong operational performance and coupled with the completion of the previously mentioned accretive transactions the balance sheet is stronger than ever with net debt to capitalization declining to 30% as at December 31, 2007 from 60% as at the end of 2006. An increase in short term debt in the quarter required for working capital partially offset the reduction in long term debt. And on an annualized basis return on capital employed exceeds 30% for both the quarter and the year ended December 31, 2007. And on that note I’d like to turn the call over to Constantine.

Constantine Karayannopoulos

Thanks Michael. Good morning everyone and thank you for joining us for Neo Material’s fourth quarter and year end 2007 conference call.

Let me stress again some of our key accomplishments in 2007 and you heard from Michael on the two key ones. By far the most significant ones were first, the successful conclusion of year-long negotiations with Hitachi then the resulting extension of our key Magnequench patent portfolio to 2014 and second the early retirement of our convertible debt.

Robust volume, the revenue and operating income growth was the result of increasing demand across all of our main markets as well as our ability to develop and grow new applications in our target markets. Both business units showed again in 2007 just like they did in 2006 remarkable ability to pass cost increases on and protect dollar unit margins in an environment of extraordinary raw material cost increases. Raw material prices stabilized late in the third quarter which resulted in a very strong free cash flow in the fourth quarter. We expect this strong free cash flow generation to continue absent of course of any significant raw material cost increases.

Now turning to the individual divisions, let me start with Magnequench which reached record revenues, volumes and operating income in both Q4 and 2007. Magnequench sales in volumes in the fourth quarter reached $35.6 million and 1,183 MT of Neo powders respectively with an operating income at $13.1 million. Revenues grew by 11% and shipments by 8% in the fourth quarter from the third. Compared to the fourth quarter of 2006 revenues and volumes were higher by 40% and 23% respectively. During our last quarterly results conference call last November, I discussed extensively the affect of our significant selling price increase in August which led to a substantial inventory draw down by our customers during the third quarter. Normal purchasing patterns resumed in the fourth quarter which coupled with strong hard disk drive demand, reversed the traditional seasonality in this business and resulted in excellent growth in both base and new application volumes from the previous quarter.

For those of you who track our new application volumes, these resumed their strong performance after a rather soft third quarter and they were 13% higher in the fourth compared to the third and 38% higher than the fourth quarter of last year. For the year, new application volumes were 58% higher than the year before led by applications in office electronics and automotive. Particularly in automotive we saw good growth and continuing traction in new applications that went commercial a couple of years ago such as Neo magnets for electronic power steering motors as well as the commercial start up of new key applications such as smaller, lighter, more efficient power seat motors using magnets made with our powders.

The bulk of new applications are the result of our ferrite replacement efforts. While Neo powder prices have increased substantially since 2006, new business growth has remained quite resilient. This is partly the result of continued high prices for other motor raw materials such as copper and steel but also the continuing efforts by motor producers to reduce the size, weight and energy consumption of their systems.

Let me now turn to the AMR Performance Materials division which also achieved record revenues, volumes and operating income for both the quarter and the year. For the quarter AMR sales were $38.5 million on 2,315 MT shipped with operating income at $4.6 million. The year over year increase in revenues and operating income is the result of increased demand, higher selling prices and the addition of the DAMR plant which was commissioned in late 2006 and operated at near full capacity during 2007. Demand for rare earths increased across all application areas in an environment of tightening raw material supply. During the fourth quarter AMR became the largest supplier of rare earths to Magnequench’s operations which most of you will recall was one of our stated strategic objectives of the merger back in 2005. On January 1st, 2008 China implemented another increase in export taxes on all rare earths and we reacted again by increasing our prices pretty well across the board.

Global demand for rare earths remains robust through 2007 driven primarily by those rare earths used in magnets, flat panel displays, energy efficient lighting and hybrid electric vehicles. Selling prices for the rare earths used in these applications have seen significant increases over the last 12 months as a result of this demand. We expect selling prices to remain relatively high over the near term. We also expect however that the mining and export restrictions imposed by the Chinese government to continue to impact the availability and cost of raw materials resulting in continued high input costs.

Even though we have a very strong position in China we continue to explore opportunities to diversify our current product offering and search for alternative sources of raw materials in other parts of the world outside of China.

Thanks to the hard work, dedication and commitment of all of our employees Neo Material had a very good 2007 while our external environment presented us with extraordinary challenges. Looking ahead our outlook for 2008 is positive in spite of continuing inflationary cost pressures in China and the troubles with the US economy. Market trends continue to be in our favor and drive increasing demand for our products in key end markets.

At Magnequench we will continue to focus our efforts on new applications growth in automotive, appliance as well as office and consumer electronics markets, while capitalizing on a bullish hard disk drive demand to grow our higher margin based business.

At AMR we will continue to expand our existing facilities to meet the strong demand in our end markets while working closely with our customers to develop and produce next generation rare earths specialties for next generation applications.

As Michael mentioned we ended the year with net debt of $48.6 million compared to $78.1 million at the end of 2006. With our anticipated strong internal free cash flow in 2008 and $17.7 million warrants expected to generate approximately $44 million by July of this year, we should be in a position to retire our debt this year. As a result we are extremely well armed with a strong and flexible balance sheet which will enable us to pursue growth opportunities that will complement our strong organic growth profile.

In closing let me say that despite concerns in the markets and we do share these concerns and we are watchful, relating to an economic slowdown particularly in the United States, we continue to see strong demand within our normal visibility horizon for all of our products in all of our end markets. Our order books are full. Thank you for your attention and now I’d like to ask the operator to open the call to any questions.

Question-and-Answer Session

Operator

Your first question comes from Justin Wu - GMP Securities

Justin Wu - GMP Securities

A couple of questions, first a couple for you Michael. The dividend paid to minority interests; can you provide some comments on that?

Michael Doolan

It’s exactly that. We actually took advantage of in part some of the tax planning. You may be aware that there’ll be a withholding tax enacted on dividends out of China now in 2008. So we took the advantage of removing earnings in 2007 to avoid the withholding tax but with our minority partners they were entitled to their share and that’s what’s represented on the cash flow statement there.

Justin Wu - GMP Securities

Okay, is that just a once a year dividend that pays out or every quarter, I don’t think it showed up.

Michael Doolan

Quite honestly, its not even necessarily once a year, this was precipitated because of tax changes in China but we reviewed the cash needs going forward on an annual basis and if they’re not required for the company we will dividend them out but it is annual at best and if the cash is required in the company we leave it there for further growth.

Justin Wu - GMP Securities

Okay and can you remind us what your percentage ownership of DAMR is?

Michael Doolan

Well legally it’s zero, as you recall we have no direct equity percentage in it but in substance we are entitled to 51% of the earnings of that entity which is reflected in our consolidated results and with ZMAR its 95 and with JMR its 90.

Justin Wu - GMP Securities

Okay and the second question is just on tax, can you give us a sense of where we should expect tax rates to be this year?

Michael Doolan

Yes as I think I mentioned on the call we were able to do a few things in the fourth quarter that got us a bit ahead of the curve and we have the low rate in the fourth quarter and an annual rate of 24 which is lower than the 26 that I was kind of advertising. In 2008 I would expect the rate to be again just approximately say 23, somewhere between 20 and 25. Quite honestly the wild card in all of that is the tax rate that will apply to our Tianjin operation. Historically as you read in our MD&A and so forth, we enjoyed a high tax exemption rate and that’s applied for on an annual basis and for 2008 we have not received that yet. We anticipate it but if it’s not received then that would take a portion of our earnings up from 10% to 25%. That’s kind of the wild card so on the presumption we get it I would suggest sort of a 23% affective rate for 2008.

Justin Wu - GMP Securities

Okay and your performance materials divisions, the tax rates on those facilities is the statutory rate in China which is currently…

Michael Doolan

Well it’s actually for 2008 they’re all going to 25%.

Justin Wu - GMP Securities

Okay, 25% so the 23% you’re talking about is implying in Q, or Magnequench receives 25% or the lower rate?

Michael Doolan

No that’s assuming that Tianjin receives the lower rate but bear in mind a lot of our earnings currently are still in the US because that’s were the Magnequench intellectual property is held and the US rate is 35% plus state so we pay sort of 37%, 38% rate in the US which is why its only 23 and not something lower given the Chinese rate of 25.

Justin Wu - GMP Securities

Okay, and just a question on Magnequench, I was wondering first of all if you can talk about what you’re seeing in terms of first quarter volumes, because normally the seasonality in Q1 are you seeing the normal level of seasonality or has demand been pretty strong?

Constantine Karayannopoulos

Well I think it’s fair to say, I mean I did make a comment that we saw a reversal in seasonality in the fourth quarter. As I’m sure a lot of the listeners know typically the Magnequench business more so than the AMR business peaks in the third, drops in the fourth and it sort of goes sideways and maybe sometimes drops again in the first quarter of the following year or picks up slightly. But fundamentally the fourth quarter of the year and the first quarter of the following year are the two soft quarters and then we grow again in the second and peak in the third as the supply chains get ready for Christmas. This year and I tried to explain that we feel that the main affect in 2007 in the third quarter was because of our very significant price increase in August and that sort of forced people to work inventories down. In the fourth quarter they came back and in addition to seeing very, very strong hard disk drive volumes it led to the numbers that you saw in the fourth quarter. I think it’s fair to say that we are not seeing any slowdown in hard disk drive demand in the first quarter and the rest of our applications are remaining quite strong. So we’re optimistic that hopefully this year you will not see the more historic seasonality but again we still have a few weeks to go and really we don’t, I’m afraid Justin you might have to wait for our first quarter results call in May.

Justin Wu - GMP Securities

Okay, that’s fair. What’s your sense of your customers’ inventories both in terms of the Neo powders they’re buying and their hard disk drives?

Constantine Karayannopoulos

We think we’re doing a much better job now with our inventories compared to what we were doing three years ago. Especially in China and frankly the bulk of our shipments when you look at our business, about half or more than half of our shipments are affectively in the People’s Republic of China just because that’s where the electronic and a lot of the automotive manufacturing supply chains are. If you look at what happened a few weeks ago with, people were getting very tight on inventories, we had to airfreight stuff at their expense of course, to them but our general impression is that given the level of price increases that we’ve put through in the last few months both at Magnequench and at AMR our immediate customers and I can’t really, we don’t have [inaudible] of the visibility through the entire supply chain all the way to the consumer but I think for our direct customers we expect that their inventories are running very lean. In the order of perhaps a month or less so any sort of disruptions, any in supply or any sort of unexpectedly large orders could take a fairly immediate affect. We don’t think that customers given what has happened in the last couple of quarters are tying up an awful lot of cash in large inventories of say more than a month.

Justin Wu - GMP Securities

Okay, that’s great. And have you reduced the prices on your Neo powders given that new dimium prices have I guess fallen from the peak levels and look like they’re fairly stable right now.

Constantine Karayannopoulos

Yes well we held our fairly high prices right to the end of November but it was getting a little embarrassing to be frank with our neo powder pricing. The supply chain was getting pretty bludgeoned in terms of its profitability. We did increase our prices by between $5 and $6 a kilogram back in August and we gave back about on average around $2 a kilogram at the beginning of December. This still gives us a little bit of a cushion because we don’t know what’s going to happen to new dimium prices. They have been steady since September or so at significantly lower levels but right after the lunar New Year holidays in China prices for rare earths have started to move a little bit again. So we were being cautious. If prices drop again we might drop prices again just to provide a further incentive for continuing volume growth. But as we have discussed in the past we try to maintain a relatively constant, and this is not a terribly fine tuned instrument here, at times we could be a little blunt, but we try to maintain a target dollar gross margin per kilogram in both of our businesses and our prices tend to move with regards to that when raw material prices go up, in addition when other costs go up, like the Renmimbi exchange rate, when the Renmimbi revalues against the dollar we tend to recover that through price increases. But at the end of the day we try to maintain a roughly stable dollar margin per kilogram through bulk of our divisions.

Justin Wu - GMP Securities

Okay great, thanks very much.

Operator

Your next question comes from Daniel Kim - Paradigm Capital

Daniel Kim - Paradigm Capital

I wonder if you could just give us precise numbers if you have them handy with regards to growth in new applications in the quarter and for the year please.

Constantine Karayannopoulos

I thought I’d just done that. I tend to speak a little fast plus given my accent you may have missed it. Let me get back to my Magnequench comments, okay, on new applications, in the fourth quarter were 13% higher, new application volumes in the fourth quarter were 13% higher than the third and 38% higher than the fourth quarter of last year. These are the quarterly figures. Year over year, 2007 over 2006, new applications volumes were 58% higher. We did get a little bit concerned in the third quarter because as I did mention in my comments, we did have a rather soft quarter. We saw a slight reduction in base volumes and very flat new application volumes but again it was such a massive price increase and massive is a relative term. Historically Magnequench is not given price increases, in fact it has conditioned the supply chain to expect price reductions year over year but that was easy as long as new dimium prices were flat line between say 1998 and 2005, at the end of 2005. But as, affectively new dimium prices have tripled since 2005 or more, we were forced to pass these price increases on. And the affect in the third quarter is what I described; people sort of buttoned down, drew down inventories and hoped that prices will reduce and they did somewhat and we passed a little bit on to our customers.

Daniel Kim - Paradigm Capital

Okay great. In terms of Magnequench MQI in Thailand, I’m wondering if you can share your thoughts with regards to when you think you’ll be at full capacity in those facilities please.

Constantine Karayannopoulos

Well Thailand we are running our two jet casters that were started up earlier in the year and we are in the process of commissioning our third and we expect that either during this year or in the following we will be commissioning or fourth jet caster. Now full capacity is a bit of a moving target because as I talked about it in the past, we do have a very smart engineering and production group that always come up with new ways to extract additional capacity and throughput out of our existing facilities without spending too much money on them. What I could tell you about our facility in Korat is that our biggest customer in Thailand has fully qualified our product line from Korat. They are taking shipments; the volumes are building up nicely. If there’s one sort of difficulty I would see with Korat is the fact that pretty well all of our customers in Thailand, in Malaysia and Southeast Asia in general, which is sort of the target market for the Korat facility, they’re all Japanese. And it takes them forever to qualify new sources of raw materials but Korat I think in 2007 ran and shipped at the level of about 50% of its nameplate capacity. Which is just about where we wanted it to be. So it’s ramping up quite nicely and we expect those volumes to continue to build in 2008. There’s still, I think it’s fair to say that we’ll qualify products with all of our customers in that part of the world and it’s just a matter of when they bring different products on stream during different times through the year.

Daniel Kim - Paradigm Capital

Now do the customers need to re qualify in the new machines up and coming or is that a faster process once they’re already qualified?

Constantine Karayannopoulos

No we don’t have that issue. I mean the ones that qualify product do qualify products out of the plant. How we make what machines we use to produce those products is our internal decision.

Daniel Kim - Paradigm Capital

Last question, just on the inner segment sales, I wonder if you can share with us your view on how that might look going into 2008 please?

Constantine Karayannopoulos

I think you saw a very strong fourth quarter for shipments from AMR to Magnequench. I would say that going forward we will probably see something stabilizing around this level, well give or take a little bit. We don’t want to be 100% captive, we want to have other folks in the supply chain but for all kinds of reasons and all of them make sense from supply security to Magnequench to having a nice attractive substantial base load for AMR and all kinds at the same time of cash flow implications. We would like to maintain this level of around say 70%, 80% of Magnequench’s requirements coming from AMR. Now there will be times that that might have to change because as I have said in the past we want to be opportunistic. If AMR can sell the same new dimium molecules by tweaking them somewhat and if it could sell at a much higher margin to one of our Japanese for example customers and make a lot more money, then we will do that and Magnequench will go back to its existing suppliers and just tweak that supply chain. So we want to maximize our profits, we’re not going to maintain this level or increase it just to continue supplying internally but we will be opportunistic and we’ll try to maximize the amount of money that we make.

Daniel Kim - Paradigm Capital

Okay understood, so just to be clear then Constantine do you anticipate the level will be the same as the annual inter company sales for ’07 or from as a Q4 run rate?

Constantine Karayannopoulos

I would say the Q4 run rate. Again because of the requirements in the supply chain and because of commitments in two other suppliers to Magnequench it took us a while to ramp it up but I think the fourth quarter run rate is a fairly comfortable level for inter company sales.

Daniel Kim - Paradigm Capital

Thank you very much.

Operator

Your next question comes from Yuri Lynk - Canaccord Adams Inc.

Yuri Lynk - Canaccord Adams Inc.

Constantine you touched on it briefly earlier on the Chinese RMB and the weak US dollar, can you just given the continued weakness in the US dollar can you just give us an update if you’re doing anything else besides just raising prices to offset it and maybe also update give us a sensitivity and updated sensitivity for maybe a 10% move in the RMB?

Constantine Karayannopoulos

I’ll let Michael handle the latter part of your question. As I mentioned a lot of our shipments come now from China. And at least on the AMR division those shipments to domestic Chinese customers are in RMB. That provides a bit of a natural hedge I mean it doesn’t provide complete protection. At the same time we are continuing to [re jig] our debt from Renmimbi back to US dollars. So we try to take advantage of whatever means we have at our disposal. However at the end of the day the China environment represents really a cost structure to us that is denominated in Renmimbi so the simplest way we can handle the Renmimbi appreciation is through price increases. Not necessarily in China in Renmimbi but outside of China. With Magnequench for example we track our raw material costs in US dollars and that’s how we usually justify price increases to our customers.

Michael Doolan

In terms of your question in terms of a 10% shift, what we used to say is that we have on a net cash flow basis about $50 million equivalent exposed which would be $5 million. As Constantine said, with the trends to more Chinese that is coming down over time. So it’s not an exact number but its going to be currently. It’s a 10% shift would cost the P&L somewhere between $4 million and $5 million on a pre tax basis. From a balance sheet perspective, obviously we’re trying to [inaudible] Renmimbi assets reduce our exposure our exposure to Renmimbi denominated debt which we’ve been trying to do, get more in US dollars. But there’s still, I think with the strong cash flow and so forth we’ll be able to reduce our Chinese debt levels over the course of ’08.

Yuri Lynk - Canaccord Adams Inc.

Okay, that’s helpful. It looks like you’re going to be pretty close to debt free by mid 2008, can you just give us an update on your thoughts of various options, where you’re leaning at this point between acquisitions or buy backs, dividends, what your thoughts are on those three options?

Constantine Karayannopoulos

Well we could have just more of a philosophical discussion Yuri as opposed to talk specifics because naturally we can’t do that, but we do have a few options on our radar screen that we are pursuing. As I have said before we are a material science company. We like the materials business and we do have a skill set that allows us to manipulate molecules and get them to do what our customers need them to do. We do have a rare expertise and a rare [malurgical] and magnetic material expertise that is very strong and quite unique. So and of course we have a skill set that allows us to produce very sophisticated products in China and Asia. I think this is a very good platform to allow us to extend it to other materials businesses and naturally we’re looking for fits with materials businesses, for example materials that our customers buy. And they go into similar applications into markets that we understand and we can put meaningful strategies together. So again I can’t be any more specific than that but we are looking and we are talking to folks. In the absence of any acquisitions let’s say by year end if we’re sitting on a substantial amount of money my first choice would be to start buying back shares. And I would expect that over the next little while we will be going to our Board to ask for the authorization to put in a normal course issuer bid because at the end of the day I don’t feel terribly comfortable with having zero debt, lots of cash on the balance sheet and 119 million shares outstanding. Especially when our shares are trading at the level they’ve been trading in the last little while and that’s sort of an internal problem that at $4 a share or $4.20 whatever it is, I think we could do a lot worse investing that money in other acquisitions as opposed to just buying back our own shares. So we think that our valuation right now is inexpensive and in the absence of acquisitions that can be accretive and strategic over the long term I think our best bet would be to buy back our own shares.

Yuri Lynk - Canaccord Adams Inc.

Okay and lastly on the rare earth supply situation, any update on incremental supply, do you see any supply coming anywhere Australia or anywhere else?

Constantine Karayannopoulos

The short answer is no. I think at best, well for those who follow what’s going on in the junior mining sort of environment, there’s a lot of people that have raised a lot of money in the last couple of years. I was at a conference in Hong Kong in November and I gave a presentation on the state of the industry. There were all kinds of people coming out of the woodwork promoting deposits and potential mines for rare earths around the world. There was all kinds of bankers in the room. At the end of the day my sense was that the most likely producer, the most likely miner would be [Linus] out of Australia but they recently, I don’t know if you saw their fourth quarter comment, I think they pushed back their start up by another three to four quarters to the end of ’09 and that project has been pushed back a number of times but I still to this day I think that’s probably the one producer that is more likely to come on stream before anyone else. We’re looking ourselves. We don’t talk a lot about what we do and where we do it. We have a particular sort of view of the rare earth world that I think when I listen to what everybody else is doing I think our view is rather unique. We’re looking for rare earth deposits that are rich in heavy rare earths. We like the heavy business. Most of our rare earth sales are heavies, that’s where we expect future shortages to come from, more pronounced than the lights. And we’re also looking for situations where there are cost advantages in getting them out of the ground and by that I mean tailing situations, waste streams, co product situations, et cetera. It’s still too soon for us to talk about what we’re doing in any more specific way but I’m pretty optimistic and hopeful that over the next few quarters, we should be able to give, to signal to the market with a bit more specificity what it is that we’re doing.

Yuri Lynk - Canaccord Adams Inc.

Okay and the heavy rare earths would be like dysprosium?

Constantine Karayannopoulos

That’s one of the very, I don’t want to say sexy, but it’s a very sexy rare earth. Dysprosium for the particular reason that right now we are the biggest producer of dysprosium in the world. Again we don’t like to advertise that, we try to fly under the radar, but if for example in this room we decided to send everybody in the company on a two months holiday, I think the hybrid industry would be very hard pressed. Every hybrid car has these very large electric motors under the hood that dysprosium is one of the key ingredients that keep them operating. So if we shut down, if China shut it down, its dysprosium output or we shut it down, our dysprosium production I think, there’d be an army of Toyota folks trying to knock our door down. There are certain key industries that are very dependent on rare earths. The hybrid industry is very dependent on dysprosium as well as new dimium and new dimium iron [inaudible] on magnets. The low energy lighting industry and I did sort of refer to it conjunctionally in my comments, it uses a lot of terbium just like the flat panel displays use a lot of terbium to generate the light and colour that they do. Terbium is in order of magnitude more rare than dysprosium and again it doesn’t take much to disrupt that sort of supply chain. So dysprosium, terbium, europium and other lighting phosphor rare earth and yttrium which also goes into lighting and display phosphors those are very key heavy rare earths and those are fundamentally what we’re looking for around the world outside of China.

Yuri Lynk - Canaccord Adams Inc.

Okay, very helpful thank you.

Operator

Your next question comes from Terry Thib - Haywood Securities Inc.

Terry Thib - Haywood Securities Inc.

Just to follow-up on Daniel’s questions regarding MCI and the new apps, I was wondering if you could be a little more specific and give us what percentage of total volumes in the quarter the new apps made up.

Constantine Karayannopoulos

Terry I don’t think I can be that specific for competitive reasons. Our base business is really more competition insulated. I mean if you’re making hard disk drives you cannot make hard disk drives using any other magnetic materials. In new applications though we have competition from other what we consider to be inferior magnetic materials. And we’re trying to displace those. So because we do have a lot more competition in that environment we try to sort of keep them guessing a little bit so I wouldn’t want you know, ferrite magnet producers to know what sort of quantities we sell into applications that we’re trying to replace their magnets. But it’s fair to say that the proportion of our overall volume that is coming from new applications has been increasing steadily and you can sort of take a guess as to what that means but I think it’s a very steady continuing increase. And I think it’s also fair to say that the bulk of our volume growth year over year would be coming from new applications. It’s only natural.

Terry Thib - Haywood Securities Inc.

Okay, fair enough. And out of the end markets that have the apps for serving mainly automotive, appliances and electronics, where would you be seeing the most significant growth?

Constantine Karayannopoulos

This quarter actually we saw it in automotive. Our biggest customer [Dyno] Electronics they’re running flat out, you know we tailor a very unique magnetic material for the magnets that they make that go into [Nydex] electronic power steering motors. They’re running flat out. They’re adding more capacity and I think that part of the automotive demand is very strong. My sense is that we will continue to grow applications that have been commercialized over the last couple of years. We continue to ramp up. Some of the more exciting areas are as I mentioned, appliance, we got a first beachhead into refrigerator motors in 2007. We got another beachhead in power seat motors and we’ll expect those will continue to ramp. But it’s fairly spread across application areas and markets there.

Terry Thib - Haywood Securities Inc.

Okay, fair enough. One other quick question looking near term sort of to Q1, did you have any issues with respect to the storms that passed through China affecting any of your production during that period?

Constantine Karayannopoulos

Yes, there was a pretty serious situation in China however, we did feel it. It impacted our operations somewhat. It didn’t really impact Magnequench because we have an open channel for new dimium. It did impact however to a very modest degree, our rare earth lands. I guess the saving grace there was the fact that that trouble with the weather happened around the lunar New Year holidays and a lot of the plants were scheduled to be turned down anyways. But again the sight of a million people outside of the Quan Dong train station was something quite unique. There were troubles with trucks navigating the roads in the south over the mountains, there was a lot of snow and it’s an area that usually doesn’t get a lot of snow. But overall I think there is a bit of a modest impact. That impact was moderated by the fact that plants were scheduled to be turned down anyways over the holidays and that perhaps is also creating a little bit of the price increases that we are seeing in the markets when everybody got back to work after the holidays. So in a nutshell, yes there was a modest affect but I wouldn’t expect it to be anything major.

Terry Thib - Haywood Securities Inc.

Okay, thanks very much, I think most of my other questions have been answered so I’ll pass the line.

Operator

Your next question is a follow up from Justin Wu - GMP Securities

Justin Wu - GMP Securities

Just a follow-up on Yuri’s question earlier on dysprosium and some of the rare heavier elements, not being a material scientist I don’t know the answer to these but are there any substitutes for that type of material for dysprosium for the hybrid electric motors or for terbium and europium and yttrium for low energy lighting?

Constantine Karayannopoulos

The short answer Justin is no. dysprosium in those applications actually, well there is a substitute for dysprosium but it’s terbium and its almost in order of magnitude more expensive so affectively no. I think the Japanese industry; the Japanese centered, new dimium iron bore on magnet industry has been trying for a number of years to deal with the dysprosium requirement for higher operating temperature magnets. I think the best they can do and the state of art is we’re seeing R&D output and patents and so on coming out at somewhat reduced dysprosium levels but these levels are not drastically different from what’s being done now. I think there will be a continued effort to reduce dependence on dysprosium but when I talk to our material scientists they really don’t see a replacement for dysprosium. Not a replacement in any way that’s cheaper or that works better.

Justin Wu - GMP Securities

Okay, and can you talk about the types of volumes or maybe perhaps if you can’t specify specific volumes, the kind of growth you’ve seen in both the hybrid programs and your low energy lighting over the last say, year or so.

Constantine Karayannopoulos

Well if you look at our volume growth year over year by far the largest portion of that growth came from volumes that were produced in the new plant in DAMR. And DAMR is a heavy plant so if you take the incremental growth about I would again, I’m giving you sort of bird’s eye view, impressionistic comments here, I would say about half of the output of DAMR went into those types of applications, phosphorus for low energy lighting primarily and dysprosium for hybrids. Well whether it was directly or indirectly or it was replacing volumes in other applications. It’s a bit of a complex discussion but I would say about half of the output from DAMR is phosphor and hybrid related.

Justin Wu - GMP Securities

Okay great, thank you.

Operator

Your next question comes from David Wargo - Cormark Securities Inc.

David Wargo - Cormark Securities Inc.

Hey Constantine I have a couple of questions for you, basically on the magnetic side of the business we’re seeing copper at about $4 a pound, I was wondering what kind of internal hurdle rate the electric motor producers use to move from ferrite magnets to neo magnets based on copper prices?

Constantine Karayannopoulos

Good question, there isn’t a hurdle rate per se, but $4 a pound copper is a great incentive for motor designers to switch from ferrite to neo. The simple reason is that when you switch from ferrite to neo you reduce the amount of copper by about, to half of the original requirement. Same goes for electrical steel, silicone steel which is a very expensive type of steel. However the overall decision and it’s a compound threshold if you want, and it varies according to motor type, size and application. So copper prices going up definitely helps but other considerations that go into the deliberations are steel costs, weight, and right now in automotive this is by far the more important factor as opposed to sheer cost. Sure automotive producers don’t want to increase their costs by going into parts that are better but at the end of the day if they can reduce the weight of their systems substantially then cost is not as big a factor as in other applications. So I’m not avoiding giving you a direct answer, there is no specific [inaudible] or breakeven level for copper prices but the higher they get the better it makes our lives a little easier actually.

David Wargo - Cormark Securities Inc.

And basically another question for Jeff Bedford on the rare side, I mean the Japanese are concerned about getting raw materials or base materials out of China, the quotas they continue to tighten, how are things going with working with your client base to add value to the rare earths themselves, like maybe moving into a [furrow] dysprosium or a rare earth [inaudible] intermediate that you could actually falls outside the quotas, are there any programs like that going on now?

Constantine Karayannopoulos

We are working with a number of customers, actually it’s not only the Japanese, and it’s also the American customers and the Europeans that are facing the same issues in terms of export quotas from China. One of the, and this is a conversation we’ve had for years, we have been implementing certain changes to both our own product line but also working with customers to produce materials that are pure rare earths, they’re products, the value added products that contain rare earths and they’re not subject to export quotas and export taxes and yes that’s something that’s ongoing and I expect it will continue to happen over the next little while. As long as export quotas stay in China and export taxes, anything along these lines that would improve the cost performance of the exports and it would improve foreign customers’ access to Chinese rare earths so I think it will all, everything helps. And we are pretty active in this space.

David Wargo - Cormark Securities Inc.

Okay, I guess one last question, how is the mixed oxide business on the auto cad side going, with the increase in taxes I would imagine that the auto cad companies are probably lining up at your door to get your formulations, do you expect growth in that business this year?

Constantine Karayannopoulos

Yes of course, we like that business. We’re very active but as you’ve noticed from our press release we no longer talk individually about our zirconium and mixed oxide business. It is an intensely competitive [inaudible]. We’re doing well, we’re having quite a bit of success and we’ll continue to pound that market. And we have some fundamental advantages over our key competitors. If you look at [inaudible]. Both of these companies have to get cerium from China to produce their mixed oxides either in the UK or in France or in Japan or in the US and cerium molecules right now are very difficult to get out of China because cerium by itself doesn’t, is not valuable enough to use up export quotas and export taxes in combination with the quotas are meant to be quite expensive for cerium, zirconium mixed oxides to be produced outside of China. We of course produce our mixed oxides in China so we have an [inaudible] package and that is helping our cause naturally.

David Wargo - Cormark Securities Inc.

All right, thank you very much.

Operator

Your next question comes from Youssef Abboud - Clarus Securities Inc.

Youssef Abboud - Clarus Securities Inc.

A couple of questions here on Thailand, regarding the operation there, now this is not a new business, correct me if I am wrong, this is mainly moving the business from China to Thailand because you are located close to your hard disk drive clients there, is that correct? Is it new business or its just moving the business from China to Thailand?

Constantine Karayannopoulos

That is correct, that business is growing but fundamentally these were customers that were originally supplied by our Tianjin facility and now we’re supplying them from Korat.

Youssef Abboud - Clarus Securities Inc.

Okay and my second question is the export, now because of the export prices so the export tariff has increased in China when you report your AMR, I mean when you book on your [inaudible] the price do you include this one or is including the tariff?

Constantine Karayannopoulos

Well the export tax is the cost to our business and our ultimate selling price let’s say in the United States has to reflect the fact that our costs have gone up because of the tax so I guess indirectly that is built into our selling prices outside of China.

Youssef Abboud - Clarus Securities Inc.

So it’s built in your selling prices and in your revenue, but at the same time it’s built into your costs as well?

Michael Doolan

Yes.

Youssef Abboud - Clarus Securities Inc.

Okay, and the, Michael question on the SG&A, what we should be looking for 2008, I saw your, the last two quarters Q3 Q4 keep going up what we should be looking for 2008?

Michael Doolan

I guess the wild card is a bit of the again our share price and the mark-to-market but we closed the year at 502 I believe so if its, on that basis, I’d be looking at on a full year excluding the depreciation and amortization around 28, 28.5.

Youssef Abboud - Clarus Securities Inc.

Okay, and just back to the question of the tax rate, I think I missed it I came at the end, so why your tax rate was low in Q4 and what we should be looking for 2008?

Michael Doolan

Just quickly then, in ’04 and I don’t think its appropriate to get into the specifics of the tax initiatives but we’re able to introduce some initiatives in the fourth quarter ahead of sort of what I was originally, we were anticipating, so that served to produce an 18% rate in the fourth quarter and a 24% rate annually which was sort of down from the 26 or so I was advertising.

Youssef Abboud - Clarus Securities Inc.

Right, is it related to the US issue, the tax [inaudible] right?

Michael Doolan

In part yes.

Youssef Abboud - Clarus Securities Inc.

Okay and going forward for 2008, what we should be expecting effective tax rate?

Michael Doolan

The answer I gave earlier was say stay around 23%. There was some caveats that I also spoke about but I can just review those with you afterwards as well so I don’t repeat myself but if you’re looking for a full year rate in ’08, say roughly 23%.

Youssef Abboud - Clarus Securities Inc.

Okay, thank you very much.

Operator

Gentlemen there are no further questions at this time, please continue.

Constantine Karayannopoulos

Thank you everyone. That concludes our call. Thank you for your attention and we’ll talk to you again after, during our first quarter call in May, thanks again.

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