Growing bilateral ties between Australia and China may benefit Lynas
Lynas Corp (‘Lynas’, ASX: LYC) has experienced a rollercoaster ride in the markets even as it has been trying improving performance and increasing production at its Lynas Advanced Materials Processing (LAMP) facility in Malaysia. However, yesterday, Lynas completed and closed its share purchase plan to raise at least AUD$ 30 million, as announced last April, prompting a 9% share price increase before announcing a trading halt in view of a proposed top up placement. The halt is expected to last until May 30 or when the placement goes through. The funds will allow Lynas to continue operations and “further time to strengthen its financial profile through the buildup of cash flow from production and sales”. Nevertheless, there is some optimism brewing in the Australian rare earths sector.
Lynas has managed to increase production and sales, generating some enthusiasm for its long term performance potential, even though its expenditures have increased 32%, due to higher than expected salary start-up costs at LAMP. Lynas maintained it had sufficient funds to keep running for at least 12 months even before the share raise and the additional placement. Lynas indicated that it will consider all reasonable solutions to improving its performance and to ensure its long term survival. Chinese investment has already helped more than one Australian rare earth mining company, the most notable and recent example of which is Arafura Resources (ASX: ARU), which signed a Memorandum of Understanding with China’s Shenghe Resources Holding to help develop its Nolans Rare Earths Project in the Northern Territory.
The possibility of Chinese intervention has increased and the conditions for this in the short term are ideal in ‘geopolitical’ terms. For starters, while the Pacific Rim region is ripe with tensions and a brewing arms race, the disappearance of Malaysian Airlines flight 370 last March has brought forced Chinese and Australian authorities to work together in a highly sensitive context, which, for better or worse, has set the stage for greater bilateral cooperation. Moreover, the volume of Australian exports of goods and services toward China has surpassed the AUD$ 100 billion mark in 2013 according to the Australian Bureau of Statistics. Therefore, China now accounts for nearly a third of the volume of Australian exports of goods and services and accounts for a much larger slice of that trade than the next highest countries including runner-up Japan (AUD$ 50 billion), South Korea (AUD$ 21 billion ), the United States (AUD$ 16 billion) and India (AUD$ 11 billion). Moreover, also in 2013, the volume of trade in both directions between the two countries reached AUD$ 151 billion or 20 percent more than 2012.
The trend underlines the fact that China is Australia’s main trading partner of Australia and suggests that Canberra may be edging closer to signing a free trade agreement with Beijing. Such an agreement has been on the table for many years, it remains under negotiation but similar agreements were recently signed with Japan and South Korea. Insofar as China and Lynas are concerned, the former would gain from Lynas’s highly advanced and environmentally superior processing facility. In the past, Australian politics have interfered in a deal involving China, Lynas and/or the Mt. Weld rare earth mines.
Now, companies like state-owned Chinese conglomerate China Nonferrous Metal Mining may aspire to acquire large pieces of Lynas with greater hopes of success as it seems Australian politics may be far more welcoming of such prospects than in the recent past (in 2009, the Australian government blocked China Non-Ferrous Metal Mining from acquiring a majority stake in Lynas in order to preserve resources) – given that the Australian Foreign Investment Review Board would need to approve such an acquisition. According to Morgans, a renowned Australian trading house, the Chinese ‘landing’ in Australia is already underway: “The Chinese are cementing their position in [Australian] resources, moving from investors to direct control.’’