The best market deals sometimes hide in plain sight. Joining the story dots, though, can be a leap of imagination.
Lynas Corporation (LYC) is one, I think, of easy mental gymnastics. The market, however, dismisses it as too hard/too risky.
Lynas sits neatly in a huge geopolitical jigsaw between the USA and China. It accounts for the only 20% of global production of rare earths not controlled by the PROC.
And that’s where the story gets all the more interesting. Stick with me – this has more twists and turns than a Chinese New year’s parade ceremonial dragon.
At the pointy end LYC’s share price has settled back to around $2.12, well off its Wesfarmers inspired takeover highs, and below where Wesfarmers unsuccessful $2.25 a share bid was pitched.
Lynas’s deadline for renewal of its Malaysian production licence is next month – March 3.
And frankly the Malaysian Government’s chain has been yanked by the Chinese in putting Lynas to the test. Repatriation of radioactive waste, created as a by-product in processing rare earths is said to be the issue. The reality is the Chinese, the biggest rare earth miners and processors want to control the global trade, for as long as possible. And it has muscled the Malaysia Government to try and roadblock Lynas.
Enter Uncle Sam in the form of the US Defence Department, Specifically the F35 Lightening strike fighter, Javelin and Tomahawk missiles and Predator drones. All use copious amounts of special magnets from rare earths. The strike fighter has some 450 kgs of rare earths in its entire computer systems.
And the Defence and US State Department witnessed firsthand China’s underhand ways of blocking Japan’s importation of rare earths. The realisation is the USA needs its own production plant and operator as well as long term – ex China – supplier of rare earths. And Lynas is at the head of that queue. The proposed Texas plant will be funded entirely by the US government.
The Japanese were early adopters of Lynas’s ability to be an independent rare earths supplier. Sojitz, a Japanese hedge fund and JOGMEC, a state owned energy entity tipped in $203 million funding for Lynas a couple of years back. This is due for repayment this year. Given Japan’s negative interest rates, it’s a fair bet both parties will be happy to roll the debt funding over for an extended period.
A proposed $250 million processing plant, to be built near Kalgoorlie, for the Mt Weld rare earths has been given Federal Government status as development of national significance. This means basically get out of the way of the bulldozers or get run over. Very much also the hand of Washington telling Canberra to get a move on. Lynas says plant construction will take about two years.
Not yet clear is whether Lynas plans to finance the plant via equity or mostly debt. Lynas gearing ratio is pretty much in single digit territory – a far cry from a year ago when the company was knocking on bankruptcy’s door. Current CEO Amanda Lacaze has done a brilliant turnaround job. Debt providers, including government export import banks, I imagine, are knocking down Lacaze’s office door with financing offers. The big bulge brokers, sniffing the wind, are getting in on the act as well.
Ahead of the March 3 decision, the LYC short position has risen about 1% to just fewer than 4%. No signs yet of Chinese government linked hedge funds running massive shorts in the stock.
Whilst rare earth sales are mixed bag, Lynas management is beating market consensus revenue forecasts and revenue looks set to double in the next 5 years due to the demand for electric vehicles. Price targets are edging up to and over $3 a share for LYC.
While Net Profit after Tax (NPAT) this financial year is a forecast skinny $24 million. It’s a different story in a couple of years, as ballooning rare earth prices drive this figure almost 10 fold higher to over $250 million. But don’t expect any dividends. LYC will be ploughing this back into the business.
Australia, remember, ranks sixth in the world in terms of rare earths, but Mt Weld, an inverted volcano is one of the world’s highest grade, rare earth deposits.
This is a real threat to China’s global supply domination. Reckon it makes the five eye Huawei concerns look like a tea party.
John Le Carre possibly is taking notes for his next spy book!
By Kim Slater
