Lynas - An investment opportunity in strategic metals

Emanuel Datt

Datt Capital

Lynas (LYC:ASX) is a rare earth producer with operations in Malaysia and Australia; most recently in the news for being the target of an opportunistic takeover by the Australian conglomerate Wesfarmers (WES:ASX).

Whilst rare earths, contrary to their name, are not especially rare; they are difficult to produce commercially whilst being of exceptional importance in 'new age' technologies. Specific industries which rely heavily on rare earths include renewable energy, medical devices, electric vehicles among others. Demand is projected to grow strongly over the next 10 years.

There will be significant difficulty in meeting this projected new demand going forward, as rare earth production is highly capital intensive and there are large technical risks associated with a gradual ramp up to full nameplate production. Lynas have overcome a multitude of obstacles over the past decade to become the only significant producer outside China. This is underpinned by a Tier 1 resource at Mt Weld with a 25+ year mine life; an operational and efficient separation plant and valuable intellectual property obtained over a number of years. Recently, there was significant speculation that Lynas would have difficulties renewing their processing licence in Malaysia. Happily overnight, Dr. Mahathir the Malaysian president recognised the substantial social and financial benefits to the local community that Lynas' operations bring, and clearly articulated that their processing licence will be renewed.

The existing supply structure of the rare earths market leaves it extremely vulnerable to shocks caused by geopolitical events and decisions. In 2010, the Chinese government reduced the export quota of rare earths by 40% and unofficially banned exports to Japan; the second largest user of rare earths. This led to a massive surge in spot market prices, with the price of most rare earth elements increasing by 5 times in a short period of time. The recent trade talks between China and the USA have once again highlighted the potential re-occurrence of a similar situation, with much talk in the Chinese media of 'weaponising' it's rare earth endowment by denying the US access to these essential elements. We also note the lack of spot market supply outside of Chinese sources indicated in the graph below.

Whilst, we hope that cooler heads prevail between the US and China, we believe that there is a clear shift towards diversifying sources of rare earth supply from non-Chinese sources. We have seen great evidence of this via the flexible financial support extended to Lynas by JARE, a partnership between a Japanese government institution JOGMEC and a large Japanese trading company Sojitz. JARE will also be extending their financial support to fund Lynas growth opportunities discussed further below. In addition, there has been substantial rhetoric from the US media about the need to source rare earths from non-Chinese producers.

Independent of these issues Lynas also have some fantastic growth options, including a recent MOU signed with a small US producer who owns an existing site permitted for rare earth production. We anticipate that there will be significant US government support for this project; which may speed the commercialisation of this project. We believe the company's strategy to move into manufacturing higher value, downstream product is a sensible move and will greatly increase the strategic value of the company in the coming years.

We rate the management team led by Amanda Lacaze very highly. Amanda has very ably and astutely led the company from the brink of insolvency at the time of her appointment to its transformation into the world-class rare earth producer it is today.

Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way

2 stocks mentioned

Emanuel Datt
Datt Capital

Emanuel is the Principal of Datt Capital, a boutique Melbourne-based investment manager focused on identifying high growth and special situation opportunities.

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