Rare earths supplier Lynas finally out of the woods
Australian Financial Review
4 July 2017, by Tony Boyd
A fourth and final important element in the resurgence of Australia’s only globally significant producer of rare earths is the role played by Japan.
Japanese entities, both private and publicly owned, kept Lynas alive by providing a financial lifeline when Chinese suppliers flooded the rare earths market and crunched prices to record lows.
The resources sector is no stranger to geopolitics. It’s just that in the rare earths space the protagonists were operating behind closed doors. No one really knew who was pulling the strings that manipulated prices.
Conspiracy theorists were quick to blame China’s desire to see Lynas go bust as the reason why world rare earth prices collapsed and stayed low for years.
The flip side of that is the role played by Japan, which is the largest market in the world outside of China for rare earths. Japan needs rare earths for a range of important industries, including its automotive sector.
Naturally, it did not want to see the demise of the only significant supplier of rare earths outside of China. Had Lynas gone bust, China would have been the only rare earths producer with a vertically integrated supply chain.
There is probably some semblance of truth in the conspiracy theories, but we will never know. Suffice to say that China’s recent crackdown on illegal producers of rare earths within its own borders has had a dramatic effect on prices.
The rare earth price most closely watched in relation to Lynas is NdPr Oxide, also known as Neodymium and Praseodymium.
NdPr is attractive to car makers and others using magnets because it weighs much less than the traditional material used in magnets, ferrite material.
The price for a kilogram of NdPr rose from $US33 in March 2016 to $US36.6 in June 2016 and to $US39 in June 2017, according to Asian Metal. The NdPr price rose 7 per cent last week and 1.5 per cent on Tuesday. In the first quarter of this year Lynas had a cost of production of $US10.90 a kg.
During the dark days when China was flooding the market, the price of NdPr fell as low as $US29 a kg.
This rare earth is sometimes written as PrNd but the dominant member of the compound is the other way round. About 78 per cent of the compound is Neodymium and the balance Praseodymium.
The recent upward movement in rare earth prices has prompted similar upward movements in the Lynas share price. It is up 40 per cent since May to 11¢ a share.
Michael Evans, a director of stockbroker Curran & Co, says Lynas is benefiting from a greater consciousness among consumers and manufacturers of the need for high environmental standards throughout the supply chain.
“There are increasing demands from consumers for companies in every field to understand the supply chains for their goods,” he says.
“That is playing out in the rare earths market where the major suppliers in China are cleaning up their act. That is leading to more disciplined Chinese production. You can see from the last Lynas quarterly report that it reported record free cash flow.
“I would say when Lynas releases its June quarterly report in the next two or three weeks it will set some records on a number of fronts.”
Evans, who has a “buy” recommendation on the stock and a 12-month price target of 17¢, keeps clients updated weekly on movements in rare earth prices.
He is travelling to Malaysia next week with other analysts that cover the company to visit the Lynas processing plant just outside of Kuala Lumpur.
This tour will be hosted by Lacaze, who is on a roll after the March quarter report revealed record sales revenue and record output from its processing plant.
The processing plant was built at a cost of $800 million. It processes concentrate prepared in Western Australia at the Mt Weld mine, which holds some of the richest reserves of rare earths in the world.
Lacaze is a turnaround specialist who joined the company in January 2014. She inherited a company with a grand vision supplied by entrepreneur Nick Curtis.
But Lynas lacked the people who could execute on the strategy of having a reliable alternative supply of processed rare earths. The company lacked proven execution skills.
The processing plant was not functioning properly, which meant the company was struggling to meet its debts.
Lacaze focused heavily on getting the plant operating at an optimal level. Since the first quarter of 2015 the unit operating costs have fallen from $US24.40 to $US12.40 in the March quarter of this year.
Over the same period, the finished output has risen from 1800 tonnes to 4274 tonnes. The total amount of NdPr produced by the plant rose from 407 tonnes in 2015 to 1375 tonnes in March 2017.
Lacaze managed to double the capacity of the plant but trebled the output by improving the efficiency of operations.
The challenges facing Lacaze remain significant. There is no guarantee that rare earths will take a large share of emerging markets, such as electric vehicles. To be a long-term success story, Lynas must work with end users of the product in many different countries to convince them it can offer reliable, long-term supply.
It must convince original equipment manufacturers in global supply chains that magnets made from rare earths are preferable to the alternatives.
Lacaze told Chanticleer this week that she is determined to ensure that Lynas is “match fit” for the changes in consumer demand and the shift to new technologies.
“We are pleased that the market is showing signs of stable growth and we are well placed to take advantage of that,” she says.
Lacaze says the Japanese backers of the company have been important to the recent success. The senior secured lender is JARE and the commercial trading partner is Sojitz.