China-US tension boosts Australian rare-earths miner Lynas

Mount Weld — Sprawled across a spent volcano on the remote edge of the Great Victoria Desert in Western Australia, the Mount Weld mine seems a world away from the US-China trade war.

But the dispute has been a lucrative one for Lynas Corporation, Mount Weld’s Australian owner. The mine boasts one of the world’s richest deposits of rare earths, crucial components of everything from iPhones to weapons systems.

Hints in 2019 by China that it could cut off rare-earths exports to the US as a trade war raged between the two countries sparked a US scramble for new supplies and sent Lynas shares soaring.

As the only non-Chinese company thriving in the rare-earths sector, Lynas shares have gained 53% in 2019. The shares jumped 19% last week on news that it may submit a tender for a US plan to build rare-earths processing facilities in the US.

Rare earths are crucial for producing electric vehicles and are found in the magnets that run motors for wind turbines, as well as in computers and other consumer products. Some are essential in military equipment such as jet engines, missile guidance systems, satellites and lasers.

Lynas’s rare-earths bonanza this year has been driven by US fears over Chinese control of the sector. But the foundations for that boom were established almost a decade ago, when another country — Japan — experienced its own rare-earths shock.

Export quotas

In 2010, China restricted export quotas of rare earths to Japan after a territorial dispute between the two countries, though Beijing said the curbs were based on environmental concerns.

Fearing that its hi-tech industries were vulnerable, Japan decided to invest in Mount Weld — which Lynas acquired from Rio Tinto in 2001 — to secure supplies. Backed by funding from Japan’s government, a Japanese trading company, Sojitz, signed a $250m supply deal for rare earths mined at the site.

“The Chinese government did us a favour,” said Nick Curtis, who was executive chair at Lynas at the time.

The deal also helped fund the building of a processing plant that Lynas was planning in Kuantan, Malaysia.

Those investments helped Japan cut its rare-earths reliance on China by a third, according to Michio Daito, who oversees rare earths and other mineral resources at Japan’s ministry of economy, trade & industry.

The deals also set the foundations for Lynas’s business. The investments allowed Lynas to develop its mine and get a processing facility in Malaysia with water and power supplies, which were in short supply at Mount Weld. The arrangement has been lucrative for Lynas.

At Mount Weld, ore is concentrated into a rare-earth oxide that is sent to Malaysia for separating into various rare earths. The remainder then goes to China for more processing.

Mount Weld’s deposits have “underpinned the company’s ability to raise both equity and debt funding”, Amanda Lacaze, the company’s CEO, said in an e-mail to Reuters. “Lynas’s business model is to add value to the Mount Weld resource at its processing plant in Malaysia.”

Andrew White, an analyst at Curran & Co in Sydney, cited “the strategic nature of Lynas being the only producer of rare earths outside China” with refining capacity for his buy rating on the company. “It’s the refining capacity that makes the big difference.”

US facility

Lynas in May signed an agreement with privately held Blue Line Corporation in Texas to develop a processing plant that would extract rare earths from material sent from Malaysia. Blue Line and Lynas executives declined to give details about cost and capacity.

Lynas on Friday said it would submit a tender in response to a US department of defence call for proposals to build a processing plant in the US. Winning the bid would give Lynas a boost to develop the existing plant at the Texas site into a separating facility for heavy rare earths.

James Stewart, a resources analyst with Ausbil Investment Management in Sydney, said he anticipated that the Texas processing plant could add 10%-15% to earnings annually.

Lynas was in pole position for the tender, he said, given that it could easily send material processed in Malaysia to the US and convert the Texas plant relatively cheaply, something that other companies would struggle to replicate. “If the US was thinking about where best to allocate capital,” he said, “Lynas is well and truly ahead.”

Price pressures

Challenges remain, however. China, by far the leading producer of rare earths, has stepped up production in recent months, while declining global demand from electric vehicle makers has also driven prices down.

That will put pressure on Lynas’s bottom line and test the US resolve to spend to develop alternative sources.

The Malaysia plant has also been the site of frequent protests by environmental groups concerned about the disposal of low-level radioactive debris. Lynas, backed by the International Atomic Energy Agency, says the plant and its waste disposal are environmentally sound.

The company is also tied to an operating licence that expires on March 2, though it is widely expected to be extended. But the possibility that more stringent licence conditions could be enacted by Malaysia has deterred many institutional investors.

Highlighting those concerns, Lynas shares fell 3.2% on Tuesday after the company said an application to increase production at the plant failed to get approval from Malaysia.

Still, Lynas said it sees great long-term potential for the niche it has carved out. “We will continue to be the supplier of choice to non-Chinese customers,” Lacaze told the company’s annual general meeting in November.

Reuters