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Lynas to Marry China
Lynas Corp (LYSCF), the Australian rare earth element mining company, announced it will accept an offer from China Non-Ferrous Metal Mining Co to provide A$252 million of equity capital in exchange for a 51.6% equity position in Lynas. As part of the deal, China Nonferrous will provide guarantees to help Lynas secure financing from Chinese banks for two loans worth $104 million and $80 million. Lynas said the second loan is not needed immediately but is to be made available at the request of its board.
According to this report, while the majority of the stock would be held by the Chinese apparently the entire arrangement will be governed by a contractual agreement which, among other things, specifies that there will be 4 Chinese directors on an 8-person board with a ninth vote being held by CEO Nicholas Curtis, whose title is Executive Chairman.
In time, Lynas will issue a press statement that confirms or modifies the understandings stated above. A that point, perhaps better information will be available.
For now, what is an American investor - or any non-Chinese stockholder - to make of this development? Here are the salient facts:
1. The financing should ensure that the company can develop its Mount Weld ore.
2. Control of the operation appears to remain in the hands of Mr. Curtis, not the new stockholders.
3. Mr. Curtis is an old China hand, having successfully worked in China in the minerals business. Therefore, it can be assumed that he is well aware of the potential risks and rewards of doing business in and with China and has the skills needed to navigate such waters.
4. One could be leery of owning stock in an enterprise that could come under Chinese control. On the other hand, there are plenty of very successful Chinese enterprises in which westerners are happy to hold minority stakes.
5. While there is a potential conflict between the Chinese government potentially wanting to secure Lynas’ minerals at less than market prices, the Chinese also have a larger interest in maintaining their international credibility as a business partner. After all, China is on its way to becoming the largest economy on the planet at some point in the next 25 - 50 years. It is laying the groundwork for the yuan to become an international reserve currency some day. It is primarily concerned with peacefully transitioning from an agrarian society to a 21st century power in all respects - which above all requires peaceful cooperation with other world powers. That, in turn, will require a plethora of future business deals with western companies. I suspect such a goal will help govern matters in regard to Lynas.
6. The proposed deal between Lynas and CNFM requires approval by the Australian government. There may be additional negotiations and agreements on the subject of operational controls before a final deal is approved.
7. While the deal would ensure that Lynas could start up its engines and motor rapidly toward full scale mining operations, there could be some delay before the final deal is signed and implemented, particularly if there is political backlash in Australia. So it could be some months before Lynas moves back into production mode.
Considering all the pros and cons of this deal my sense about Lynas stock is two fold. First, the stock price is likely to fluctuate in a range of U.S. $0.30 - $0.40 until a final deal is consummated. That could be a matter of many months, although I’m sure Mr. Curtis will be pushing for a rapid conclusion. It will be interesting and instructive to see how he navigates this deal toward a conclusion.
Secondly, it seems to me that if the deal is concluded and if the final form of it looks pretty much as described above (particularly that Mr. Curtis or, if he becomes unable to act, some alternative western manager is able to cast the controlling vote on board matters), then I suspect the stock will tend higher over time. It is still potentially a very rewarding investment, particularly if the price of rare earth elements rises in future years as many expect. In fact, with ample financing in hand, Lynas may well be a more attractive investment after this deal than it was before.
Finally, I would note that another Australian company, Arafura Resources (ARAFF) is alternative play on rare earth elements. I own some shares. Arafura, which also has Chinese partners, seems to be a bit further from actually mining and selling minerals than is Lynas. But we can’t be sure of that. It will depend, among other things, on how quickly Lynas can complete its Chinese deal.
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10 responses so far ↓
1 Isaac // May 2, 2009 at 1:50 pm
Thanks much for the detailed update.
“4. One could be leery of owning stock in an enterprise that could come under Chinese control. On the other hand, there are plenty of very successful Chinese enterprises in which westerners are happy to hold minority stakes.”- An example of this is Warren Buffetts 10% stake in BYD.
After the performance of US companies such as Worldcom, Enron, Lehman Bros, etc., I’m not so sure American companies can claim to be better run than Chinese ones.
Good Weekend to all.
2 Simon // May 3, 2009 at 12:12 am
Thanks Jim, I bought some Lynas and then sold it. Drat! Arafura and Deep Yellow are also on my watch list.
When I was a child there was a nice little catermaran sailing boat for kids called an Arafura. I always wanted one then.
Being in New Zealand I trade mostly Aussie shares
3 Jim Kingsdale // May 3, 2009 at 6:08 am
Here is further information. CEO Curtis has been quoted as follows: “It has been worrying a number of people in the downstream supply chain that China has such a dominance in the rare earths industry,” Mr Curtis said.
“I imagine reaction to this in the initial parts will be oh dear, China is really dominating again.
“This is not correct, because a specific part of this particular transaction is that the business model is the same and we will continue to supply Japan, European Union and the United States,” he said.
Here’s a link: http://www.businessspectator.com.au/bs.nsf/Article/China-Nonferrous-to-invest-186-mln-in-Lynas-Corp-RM5PF?OpenDocument
4 Jimp // May 3, 2009 at 11:58 am
Can anyone give context to how valuable Lynas Corp and rare earth elements are?
I realize they are used in IPODs, LED lighting, Hybrids,etc. Which is great.
I’m having a hard time understanding how Lynas fits into this grand puzzle. At this point in time, is Lynas basically one of the very few rare earth miners that supply the world besides China of rare earths? Furthermore, Lynas owns one of the largest deposits currently known on the planet? Is it correct that China’s supplies of rare earths (miners,) are more and more used solely for domestic supplies? Ultimately leaving Lynas and a few others to supply the rest of the world?
Is this an investment opportunity that has a very large potential? Or is this like investing in a new gold or copper operation?
Jim Kingsdale, is this like a miniature tsunami investment opportunity?
Forgive my naivete, and as always I find your site most informative.
5 Jim Kingsdale // May 3, 2009 at 5:38 pm
Jimp - REE’s are used in a lot of new technology products and seem to be increasingly useful as technology becomes more complex. One of my posts on Lynas contains a list of products in which REE’s are used. You can access all my Lynas posts by clicking on the “Rare Earth Element Miners” heading in the left column.
It is correct than China is increasingly using its REE production for its own internal purposes, whether they be for inventory or for use in products they make. This does not seem like a trend that will reverse any time soon given China’s growth rate.
I think the company does represent a potentially dramatic investment opportunity. I own about 1 million shares, making it one of my largest holdings. I could be completely wrong, of course. Any early stage company presents above average risks. But I think the REE mining business as an industry is a fairly low risk one. I think the outlook for REE’s is unusually bright.
6 Jim Kingsdale // May 3, 2009 at 6:16 pm
Lynas has issued a press release that essentially confirms the information in my post. It adds a timing expectation: 3 - 4 months before the agreement (and therefore the funding) can be completed. They also anticipate a 12 month lag between funding an the start of revenue generation. That puts us in 3Q10.
The question is: what would a 10,500 tpa (tons per annum) rare earth operation be able to cash flow? Does anyone have any ideas about that?
Here’s a link to the company’s announcement:
http://www.lynascorp.com/content/upload/files/Announcements/2009/Introduction_of_CNMC_as_a_new_majority_shareholder_to_Lynas_final_719680010509.pdf
By the way, anyone interested in more information about REE’s and their markets should check out the Lynas web site.
7 Jim Kingsdale // May 3, 2009 at 6:19 pm
P.S. 10,500 tpa is Lynas’ phase 1 goal. Phase 2 should take them to double that, 21,000 tpa.
8 John Sloan // May 9, 2009 at 10:35 am
Thanks Jim
I bought some Lynas over 3 years ago - it went up and then back down - I have been getting disappointed - so this is great news and I can forget selling at this point.
9 Patricia // May 13, 2009 at 3:32 pm
I, too, am very pleased with this news. I have bought three separate lots of Lynas over the past two years and have been a bit despondent of late!
Also, thank you Gumshoe for all your hard work and for your informative newsletters with their sometimes quirky turn of phrase. I actually enjoy reading them. They are a pearl amongst the plethora of uninvited offers of diplomas, huuuuge inheritances and penis enlargements. The latter not on my shopping list, as I am female!
Thanks.
10 China Tightens Grip on Rare Minerals | Innovation Toronto // Sep 2, 2009 at 11:18 am
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