Lynas – Barbarians at its Gate?
It’s easy in all the euphoria currently swirling in the Lithium to forget that Rare Earths and Lithium were mentioned in the same breath as “no-hopers” only a few years ago. The factors that made Lithium what is was also held true for Rare Earths.
Let’s look at it. Both bubbled to the surface as sexy new things in 2009-10. A lot of press ink was spilled and scores of new vehicles were created. As we have often sustained the appearance of REEs “saved” Lithium from a similar bubble to be burst. Lithium plays were probably around 30 in number (and only 20 of any real substance) when REEs burst on the scene and created 100/200/300 listed plays (depending on your calculations). If REEs had NOT appeared then Lithium too would have been massively overpopulated. When it came down to it, there were two REE plays that got across the production line (Lynas and Molycorp) and only two new Lithium plays managed the same feat (Galaxy and Talison) and even in the case of Talison it was the reopening of an existing Lithium mine. Indeed, like REEs, there was attrition in the producers with Galaxy selling its plant in China and shutting its mine in Australia (Mt Cattlin). Sounds rather like Molycorp, except that Molycorp went bankrupt while Galaxy has lived to fight another day. And then there was one, Lynas in Rare Earths and Talison (bought in the meantime by Tanqi and Albemarle/Rockwood).
At the darkest hour the few score Lithium plays had shrunk to a mere handful while the REE space had shrivelled from hundreds to little more than ten still in contention (companies like Alkane, Peak, Ucore and Search).
Then began the Lithium renaissance and the rest is history there. However in the Rare Earth space the turn is yet to come. The creation of the first “new” listed REE entity would be a sure first swallow of summer. However, even with ten projects still plugging away, there is probably enough available in terms of doable projects to create a viable Western REE industry without new talent appearing. Ironically Jack Lifton exhorted the industry to “right-size” its projects and yet it’s been Darwinian forces beyond the industry’s control that “right-sized” the REE space down to the couple of handfuls we have today. It’s like the Poseidon Adventure of the mining space. Only a few get to reach the light.
Who is the New What?
For a while it looked like the old Lithium boom had spawned Talison as the only actual producer, as Galaxy started up then abandoned production. Orocobre and Rincon nearly got their salares to production but seemed to get lost on the final leg. If we continue the analogy then the surviving producer in the REE space (i.e. Lynas) is analogous to Talison. And yet Talison was snapped up for over $700mn in a takeover and Lynas still wallows at a valuation of less than a third of that takeover. The question that arises is why should there not be a premium for survival afforded to Lynas? It is the only takeover prospect in the REE space, indeed the only producer. It is, as they say in the trade, Plug-And-Play.
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Virtually all the rest of the universe of REE wannabes require higher REE prices to trigger a start on their projects. Even if viable at current prices, they need the price to move higher to stimulate investors to fund them. But if one posits a rise in REE prices (which we do, excepting for Cerium) then the first mover will likely be Lynas, not Tin Pot Rare Earth Mines, because it will be Lynas that can send higher prices cascading from a more robust topline down to a healthier bottom line. Meanwhile Tin Pot Rare Earth Mines will only be able to dust off their begging bowl and set themselves up on a hot air vent on Bay Street to rattle it with gusto at the passing punters.
As we can see from the chart below, Lynas has been essentially flatlining since the start of 2015, surely there should have been at least some uplift in the price for the changed perceptions in the marketplace of the prospects of the specialty metals sector.
Back to Basics
There is now nothing to compare Lynas to in the REE space, with the demise of Molycorp. Indeed it could be said that Lynas’s financial are unique and incomparable! Therefore we offer the latest earnings statements for perusal. The more recent quarters are missing a lot of the detail that would make informed decisions easier.
It’s evident from this that sales are on an upward track even without REE prices having staged a rebound. It the price rises rather than the volumes increases that will put Lynas back in investors’ good books. But when it happens it will certainly take by surprise all those who have taken their eyes off this ball.
The mistakes that Molycorp made could fill a book, but one of the key ones for us was not to have developed a second mine. There were plenty of down and out juniors that could have been snapped up for a song (indeed for MCP stock) and yet it remained wedded to a pit that could never in a million years have provided it with enough of the REE mix that the market wanted.
It will be interesting to see whether Lynas uses an early resurgence in REE prices to add another mine to its harem. Names to conjure with are those with “sightlines” to Malaysia. This would include the likes of Northern Minerals (NTU.ax), Peak Resources (PEK.ax) or Mkango Resources (MKA.v). Maybe even Arafura might be considered if the others did not bite. Alkane’s DZP is unique in its multi-metal nature and thus would be beyond Lynas’s price range and have lots of products that would not be part of the Lynas flowchart.
Then there is the issue of whether Lynas itself might be a target. Certainly a PE fund might make a run. Even at a hefty premium to its current market cap it would still be quite a lot cheaper than that what Magris paid for the Niobec asset of Iamgold, for example. The Chinese would definitely NOT be allowed near it, but a respectable buyer from Japan or South Korea would not be totally inconceivable.
Therefore in conclusion we would not discount that Lynas may either become an aggressor or a target itself with the very near future. Its days as a bargain buy may soon be numbered.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>