EXCLUSIVE PAUL GARVEY WE AUSTRALIAN 1Jun19 (Extract)
When Lynas’s vice-president of sales and marketing, Pol Le Roux, boards his flight to the US tomorrow, he does so knowing the rare earths producer he represents is enjoying some of its strongest tailwinds in some time. Mr Le Roux’s stateside schedule for the next two weeks has been inundated with new meetings in the days leading up to his departure, with potential customers spurred into action by reports China may look to stop its exports of rare earths to the US amid the latest worsening in trade relations between the two superpowers.
The talk of the ban — which by sheer coincidence emerged on the same day Lynas announced plans to establish a new rare earths processing facility in Texas — has in a matter of days addressed many of the issues that have dogged Lynas for months. It has triggered an immediate spike in rare earths prices, which should translate into sharply stronger margins and fatter margins for Lynas. It has driven a near-70 per cent spike in the company’s share price, putting it well above the $2.25-per-share takeover proposal from Wesfarmers. And it may have helped focus the mind of Malaysian Prime Minister Mahathir Mohamad, who on Thursday gave the strongest indication yet that his government will allow Lynas to continue operating its critical rare earths processing facility in Malaysia after its current operating licence expires in September.
(Wesfarmers, for its part, said yesterday its interest in Lynas was unchanged but it would review its position once there was regulatory certainty around Lynas’s operations .)
But the China-US tension also validates many of the key themes Mr Le Roux has been telling customers and investors for a while — in particular, that Lynas is the only company able to provide a meaningful and reliable source of rare earths from outside China.
A key focus of Mr Le Roux’s visit to the US, he told The Weekend Australian, would be the proposed Texas rare earths processing plant. That plant will produce the so-called “heavy” rare earths including dysprosium and terbium, the materials needed to produce the rare earths-based permanent magnets that are central to a host of hi-tech applications such as electric cars, wind turbines and defence systems. Right now, the US does not produce any of those magnets and is entirely dependent on supply from China.
In a “build it and they will come” moment, Mr Le Roux hopes the prospect of a Texas rare earths plant will spur US companies into developing their own permanent magnet factories and protect the country from being cut off by China in the future. “In this case, I will bring everything for Americans to invest in magnet making,” he said. “I can help them get the metal, I can help them get the alloy, I can help them get the technology … I can connect the people, but they have to make the last piece.”
For all the headlines about a potential freeze in Chinese rare earths exports to the US, Mr Le Roux says it is a ban on magnet exports, rather than rare earths, that is of far more risk to the US. The US is the biggest customer by far for the lanthium rare earth that China has in excess, so a ban on that, he says, would potentially hurt China more than the US. “What would hurt Americans is to get more expensive or limited quantities of magnets,” Mr Le Roux said. “They currently have no alternative.”
In 2010-11 China cut back rare earths sales to Japan amid tensions over islands in the South China Sea. That prompted an extraordinary surge in prices to levels never seen before or since, and helped prompt the Japanese government to effectively bankroll the development of Lynas. He thinks it is unlikely the current uncertainty will spawn another Lynas since the company already produces more rare earths than is consumed by the rest of the world outside China.
LYC Price at posting:
$3.05 Sentiment: Buy Disclosure: Held
(20min delay)