source of supply outside China. This is unquestionably
a strategic asset that could be immensely profitable if
everything goes to plan.
The range of outcomes from here is wide. Lynas today is
burdened by regulatory obligations to deal with its waste.
Under its current Malaysian operating licence,
waste must be recycled or stored but regulators have
suggested that will change. A renewal of the licence,
due in September this year, will depend on meeting
stricter waste disposal obligations. Lynas is currently
investigating ways to comply with the stricter rules.
Wesfarmers’ bid has put Lynas in play and there are
many suitors for an asset that is both strategic and
potentially profitable.
While Chinese and Japanese interests are both logical
buyers, Wesfarmers is also a sensible owner. With a
huge balance sheet that will comfort regulators who
worry about another miner making a mess and walking
away, Wesfarmers also has some chemical expertise.
It could even move the entire processing chain back to
Australia to maintain long-term production. That would
be expensive but it would secure supplies and remove
the political risk that has long hung over the business.
Despite the market’s misgivings, we’re impressed by
Wesfarmers’ choice of target. Lynas could become a
hugely profitable business and the current share price,
even after rising following the bid, values the company
at less than $1.5 billion.
To justify that market capitalisation, it would need to
make, on average, about $100 million a year in net profit.
Last year it made $53 million but that was with historically
low commodity prices while operating below full capacity.
At full capacity, Lynas could easily generate over $200
million in net profit – more if commodity prices kick higher.
Still, investors should bear in mind the high degree
of risk. Lynas has already earned a warning from its
auditors and there is still a possibility of the company
going broke. But the more likely outcome is that another
buyer emerges – or at least another bid.
The poor history of rare earth miners, and of Lynas
itself, has meant few have taken this business seriously.
It could be time to put it on your watchlist.Gaurav Sodhi is senior analyst at Intelligent Investor,
part of the InvestSMART Group. To unlock more stock
research and buy recommendations, register for a free trial
at investsmart.com.au/money. This article contains general
investment advice only under AFSL 226435.The poor
history of
rare earth
miners has
meant few
have taken
this business
seriously