*** china buys into australian rare earths

*** China Buys Into Australian Rare Earths

The share prices of both Lynas Corp [ASX: LYC] and Arafura Resources [ASX: ARU] have moved very strongly this week.

And in the last month the Arafura share price has doubled from 35 cents to 70 cents, while Lynas has nearly tripled, moving from 20 cents to 55 cents before easing back.

So, what's the hubbub over rare earths? Well, seeing as we've opened up the Weekly Update to reader mail, here's a comment I received from subscriber David:
"The proposed sale of over 50% to China is a disaster given its rare earth resource. I know they need the funding but surely this is at a huge cost to shareholders and Aus in general. With the demand supply ratio working in LYCs favour over the coming years one would have thought a local bank would have come to the party. I just hope the FIRB puts a stop to it. It's hard to believe that a project like this could be lost to Australia."
David's not wrong. It's a fabulous resource with great earning potential. But before I respond to David's comments and explain why the sale shouldn't be stopped, here's some background on what's happened.

As I mentioned in last week's Weekly Update (which you can view online using the username and password, or just search through your email inbox), Lynas has secured a heads of agreement with China Non Ferrous Metal Mining Co. The deal, as reported by the Wall Street Journal means:
"China Non Ferrous Metal Mining Co agreed to take a majority stake in Lynas Corp for $252 million… Under the deal, China Non Ferrous would arrange a USD$104 million senior loan for Lynas from Chinese banks to help build the project."
For a company that has had to 'moth-ball' the Mt Weld project due to a collapsed financing deal this is an offer clearly too good to refuse.

But is it right this project should be half sold to the Chinese? Unfortunately, it's the consequence of having an economy skewed towards primary production and services, but little in the way of manufacturing.

The fact is if the Chinese were prevented from investing then no-one else would. Australian banks are too concerned with propping up the property sector to concern themselves with rare earths mines. Other Australian mining companies are either too large to bother with such a specialised industry, or they are equally as small and specialised as Lynas and therefore can't afford to diversify.

Even if a local financier could be found, the Chinese would still hold all the bargaining chips on the demand side. Who else would Lynas sell its rare earths to? And if it did find someone, what would stop the Chinese from undercutting them?

Whether we like it or not Australia has chosen the path of primary production and services, forgoing manufacturing. More importantly for shareholders, Lynas has decided that a massive cash boost from China is better than letting the project gather dust in the desert.

As for Arafura Resources, they provided an excellent example of how to turn an enquiry from the ASX on yesterday's big price move into a PR release. It was an effort that could help boost the price further today.