individual elements present in the ore. Lynas is already
decently profitable and returns will climb as it scales
up output and perfects its processing.
Lynas mines ore from WA and ships it to Malaysia,
where it undergoes extensive processing. Production
is characterised by a high proportion of neodymium/
praseodymium (NdPr), a pair of high-value elements that
are vital in the production of high-powered magnets used,
among other things, in electric motors and generators,
including those in wind turbines and electric cars.
The high-value nature of the output makes Lynas
particularly attractive. Since processing, which accounts
for the bulk of cost, is a fixed expense, higher-value
output increases margins.
Lynas is the world’s second largest producer of vital
NdPr and demand is increasing. China overwhelmingly
dominates the supply of rare earths, contributing about
95% of global supply.
Japanese firms are Lynas’ largest customers and, for
them, NdPr is a small cost in a large value chain. Japan is
on record, along with the US, in expressing discomfort
about Chinese dominance of the market.
China has been uniquely willing to bear high waste
and environmental costs and Lynas is now the onlyThe
earth
moves
Wesfarmers
stunned the
market with
its bid for
Lynas but
the rewards
could justify
the risks
W
hen Wesfarmers announced the
demerger of Coles, investors cheered.
Those jubilations went mute, however,
when the same company – renowned
for its investment and capital allocation
nous – turned around to make a bid for Lynas Corporation,
a miner of rare earth metals.
The market’s shock was palpable – Wesfarmers’
market value fell by more than $1 billion the day the
bid was announced. Yet when a smart investor makes
an unexpected move, we should take note.
Lynas’ share price shot up 35% but at the time of writing
still trails the $2.25 bid price, perhaps because Lynas’
management has stridently rejected the bid and Wesfarmers
shareholders haven’t offered the strongest support.
The bid has, however, sparked endless speculation.
Who else might make a move? Why is Wesfarmers
interested? How might China react?
That raises the bigger question: is Lynas really worth
all the fuss?
Let’s begin by correcting a widespread misnomer:
rare earth metals, despite their name, aren’t rare at all.
They were given that name because, in mining’s early
days, similar chemical properties prevented individual
elements from being separated. Today’s technology has
removed that constraint.
Complex processing is required to extract individual
rare earth elements from ore. It’s hard, expensive and dirty
work. Two-thirds of the cost of producing rare earths – and
all the risk and the difficulty – comes from the processing
of ore. This is chemistry masquerading as mining.
Even after rare earths are successfully separated, the
process can leave a trail of radioactive waste. Dealing
with that waste is another problem.
It’s best to think of the business not as a mining
business but as chemical manufacturing that happens
to use mined ore as a raw material. The economics and
risks of rare earths production are therefore different
from those in traditional mining.
The economics of each rare earths project differ,
and their profitability depends on the proportion ofSTORY GAURAV SODHISHARES TAKEOVERS