Lynas Bets $500 Million on Rare Earths Market Expansion

Lynas Rare Earths Ltd.‘s (ASX: LYC) August 3 announcement that it will invest an additional $500 million to rewrite its own already aggressive growth plan is risky, sure, but then, when it comes to rare earths, what isn’t? Managing Director Amanda Lacaze appears to be reading the demand-pull market for Lynas’ main products, neodymium (Nd) and praseodymium (Pr), as further accelerating, despite some hits to the “green” economy from the war in Ukraine. There are sound reasons supporting such a view, including the commitments by EU auto manufacturers to cease all gasoline production by 2025 and recent (surprising) political developments in the US, especially passage of the CHIPS Act (supporting redevelopment of a US-based semiconductor industry) and the current Inflation Reduction Act (also known as Build Back Better in disguise) likely to be approved this week by the House of Representatives and signed quickly by President Biden.

Lynas is particularly well-positioned to benefit from this latest legislation as it already has two agreements with the US Department of Defense for construction of two separation plants: a $30 million light rare earths plant (deal signed in January 2022) and also in June a $120 million deal for a heavy RE plant. This in addition to Japan’s ongoing demand, a not insignificant factor as Lynas self-identifies as controlling 80% of that market.

So, if all looks positive on the demand, where are the risks? Well, unvarnished success will require the split-second timing of a juggler. Expanding output at Mt. Weld should be a green light: the deposit and its characteristics are well known and should present few obstacles to an experienced team (with the usual caveats about the weather which these days can be a real Devil).

But, there is a problem with Malaysia. Despite winning an unprecedented two EcoVadis awards, political and public concerns about radioactive materials led the Malaysian government to refuse to extend Lynas’ cracking and leaching permits. (ESG Comment: this goes to show how history haunts even companies who had nothing to do with previous problems, and how hard it can be to gain and retain trust.)

Lynas announced in February of this year that it has received Ministerial approval for its Kalgoorlie rare earth processing facility, clearing the way for construction to begin. This new facility will strip and store the radioactive elements (uranium and thorium) and then ship the “clean” material to Malaysia for final processing. Thus the timing issue. If the processing plant can be constructed in record time with no unexpected issues, it could dovetail nicely with the increased output from the mine. Otherwise, lower through-put or possibly storage of mined materials could be necessary, providing a cost hit. And even if the timing is impeccable, there will be some increased product cost due to shipping to and processing at Kalgoorlie and then onwards to Malaysia.

Nonetheless, kudos to Lynas for a bold move, going for market share in a booming market with positive political signals and economic momentum. As Christopher Ecclestone said to InvestorIntel: “Lynas just goes to show that it is a doer when so many others are just talkers in the Rare Earth space.”

Lynas Continues Its Reign Under Amanda The Great

Look online, and you will discover that while Lynas Rare Earths Ltd. (ASX: LYC) is covered by 9 research companies, it is impossible to find one PDF Equity Research Report online. For Australian-listed companies, sometimes they publish the reports on their website; unfortunately, not for Lynas.

Dig deeper online and you may see a headline about whether Lynas has too much debt… these conclusions are in my humble opinion quite wrong, and underestimate this rare earths’ ruler outside of China, Amanda Lacaze.

I ran my conclusions by a semi-retired analyst, who requested anonymity and wrote me back promptly in agreement: “Saw their balance sheet and they are running just over 1x debt: cash flow and their cash flow is strong based on growing sales and commodity prices.”

The media loves to tout Chinese control of rare earths, but it is a woman with an iron fist that rules the rare earths world. Proud of how she likes to watch the pennies, it is unquestionably the reason why she has held the role as a Non-Executive Director for ING Bank Australia Ltd. for over 11 years.

Now let’s start with some prenuptial notes on Lynas, before you decide to make a commitment to this industry giant.

Lynas Rare Earths Ltd. is listed on the Australian Securities Exchange (ASX: LYC). The company also has a sponsored Level 1 American Depository Receipt (ADR) program through the Bank of New York Mellon (Code: LYSDY). On June 6 (Australia), the shares closed at AUD$ 9.35. There 902.4 million shares outstanding, giving the company a market capitalization of approximately AUD$8.4 billion (US$6.1 billion. At December 31, 2021, Lynas reported six month results including AUD$741.7 million positive working capital (including AUD$674 of cash and short term deposits) and AUD$156 million long term debt. Cash and short term deposits increased to AUD$768.4 at March 31, 2022.

Lynas’ quarter ended March 31, 2022, had the following highlights:

  • All necessary approvals received for the Kalgoorlie Rare Earth Processing Facility (Australia based processing facility)
  • Site clearing of the Kalgoorlie facility location is complete
  • Delivery of major equipment to Kalgoorlie site with foundation and building work underway
  • Kalgoorlie should be on track as part of the company’s 2025 Foundation Project program
  • Planning is underway for the US Rare Earths Processing Facility including contracts signed with the US Department of Defense
  • Record quarter for operations including:
    • Sales revenue of AUD$ 327.2 million (AUD$ 202.7 million previous quarter)
    • Sales receipts of AUD$ 262 million (AUD$151 million previous quarter)
    • Total REO production of 4,945 tonnes (4,209 tonnes previous quarter)
    • NdPr production of 1,687 tonnes (1,359 tonnes previous quarter)
  • Lynas noted quarterly price strength for NdPr contributed to record financial results
  • Automotive demand for rare earths “remains strong”
  • Exploration drilling under the existing Mt. Weld extraction pit revealed continuous rare earth element mineralization along 1,020 metres of drill core. Further targeted exploration is to be conducted “with the goal of meeting accelerating customer demand”.
  • The company targets to be operating four sites in three countries with global sales in 2025

Having heard Amanda speak on several occasions in her early role as Managing Director nearly eight years ago, I recall believing that her reign would be short-lived. Her valiant commitment to the bottom line above all else seemed conservative and backward compared to the charismatic marketing styles of other leaders I quite like in the market. Commenting that weekly meetings would necessitate accountability for every dime spent, seemed dismal and droll to me, it seems, however, she was quite right.

As down winds from the recession are upon us, or gales of a correction are indeed in full force, I look to the critical materials sector for which many experts harbor no fears. And with the demand for rare earths continuing to exceed supply, it seems that the noble Australian woman whose fearless tactics took me by surprise is now the one championing it all.

Welcome to the Future, Critical Metals’ Ventures Discover Reality

Way back in 2011 there were nearly 250 rare earth themed junior mining ventures looking at 400 “deposits” mainly in Canada and Australia. Today, just two of them are producing, Lynas Rare Earths Limited (ASX: LYC) and MP Materials Corp. (NYSE: MP) (the successor in interest to the bankrupt Molycorp of yore). These two ventures, even then, stood out from the pack by their common purpose of delivering a value-added product, individual separated (or blended) rare earth chemical forms, in the case of Lynas, and “magnets,” in the case of Molycorp. All of the others, without exception, stated that their saleable product would be a “mixed con.” This was the great “con” of the rare earths’ boom and bust of 2010-2013.

A concentrate of a mixture of all of the rare earths, from which the chemical elements that interfere with the separation of those rare earths into individual, or purposely blended combinations, of individual rare earth salts, is what is targeted to be produced at a mining operation where the ore is “mined,” concentrated, cracked and leached, and then is chemically processed to remove elements that interfere with the next step, selective separation of the individual elements in a form required for the next step in the supply chain that ultimately results in a finished product for sale to consumers.

For the rare earths this concentrate is, for practical purposes of safety and economics, a mix of rare earth carbonate solids. This should have been the initial target of 2011’s 250 rare earth juniors. It wasn’t. They overwhelmingly (other than Lynas and Molycorp) did nothing to advance towards this target. That turned out to be a good thing, because the only non-Chinese customers for this “mixed con” before 2017 were Solvay in France (9,000 tpa capacity to produce individual rare earth salts), Silmet in Estonia (2,500 tpa), and assorted small operations in Asia, outside of China, with a combined capacity of perhaps 3,000 tpa. All of these bought their feedstock from China or (a tiny amount) from Russia at the time.

No 2011 junior sold a single gram of mixed con to the marketplace prior to 2017 (Lynas)

Why was the first 21st century, rare earth boom, such a bust?

Because none of them had the knowledge, education, experience or skill in processing or mineral economics to see that integration into a total rare earths supply chain targeted to a final product is necessary for profitable operation. Almost without exception the profitable part of the rare earth supply chain is concentrated in the metals, alloys, and magnet making end, and the only way to make a mine and separation system profitable is to distribute costs along a total supply chain. (America’s Energy Fuels Inc. (NYSE American: UUUU | TSX: EFR), which is operating on a total supply chain model through magnet alloys, is an exception, because it is able to make a profit selling a mixed carbonate due to the skill of its administrative and operation management and a unique, for North America, existing processing infrastructure).

If there is to be a domestic American, or European, total rare earth permanent magnet supply chain then there will have to be in place operating commercial rare earth separation systems, rare earth metals and alloys production, and rare earth permanent magnet production capability and capacity to support it.

In fact, if there are to be total domestic supply chains for any critical metals, then, not just a mine, but also all of the downstream elements of the supply chain have to be in place before that can happen.

I note that for the cobalt chemicals necessary for the production of lithium-ion battery cathodes, the Canadian integrated cobalt processing junior, Electra Battery Materials Corporation (TSXV: ELBM | OTCQX: FTSSF), has entered into a supply agreement for cobalt concentrates from the world’s largest non-Chinese producer, Glencore, to process that concentrate into fine cobalt chemicals for the battery manufacturing industry in its existing Canadian facility. When and if Electra can produce cobalt concentrates from its company-owned deposits there will already be in place the downstream operations to support that. In the meantime, it will buy feedstocks from others, and/or also toll them for others. Electra’s management looks also to have given considerable thought to pricing, so as to ensure profitability.

This business model, to have in-house as much of the total final product supply chain as is necessary to be profitable, is the only practical business model for the production of critical metals and materials.

As of December 31, 2021, America’s Energy Fuels (rare earths) and Canada’s Electra (cobalt) are setting the pace for the future development of a North American critical metals’ industry by commencing operations.

Happy New Year!

The 600 pound gorilla in the room – welcome, Lynas Rare Earths

In the rare earths space, it is the 600 pound gorilla, but we mean that in a positive way. Investors familiar with rare earths will know this, but for those of you just coming to learn about the company, it is one of only two producers of scale of separated rare earths outside of China and is the second largest in the world.

Welcome to the “new Lynas” Corporation, officially renamed “Lynas Rare Earths Limited” (ASX: LYC) on December 1, 2020. Listed on the Australian Securities Exchange, the company has a market capitalization of approximately AU$3.3 billion. The company’s share price hit an all-time high on December 4, 2020 as the market pays close attention to this industry leading company. Lynas ADRs can also be found on the US OTC, trading under the symbol LYSDY.

What a difference a year (or three) makes. It was just 2017 when the company consolidated its shares on a 1:10 basis, after five challenging years in the rare earths market when the company was on the verge of going bust. Recall that the global rare earths’ price bubble collapsed in 2014 on the back of a negative World Trade Organization decision against China. A global industry had all but been decimated and lowest cost production and industry dominance was now Chinese.

Except for Lynas. The company mines rare earths in Western Australia at Mt. Weld, which is one of the world’s highest grade rare earths mines. The mined ore is concentrated at the Mt. Weld concentration plant and sent for further processing to Lynas Malaysia’s Advanced Material Plant near Kuantan, Malaysia where the facility, commissioned in early 2013, produces separated rare earth oxide products for sale to customers in Japan, Europe, China and North America. Currently, the most valuable product produced at the plant is praseodymium/neodymium (NdPr), used in magnets.

With the increasing interest in all things electric and electronic, rare earths have again come to the fore. Specifically, because so many things need electric motors (more than 140 small electric motors in the average automobile – electric and hybrid electric vehicles use even more small electric motors and larger traction motors), global demand is increasing.

We have known about this for a long time and the world is only now (again) starting to pay attention. Because of previous global price increases and the subsequent price collapse in the rare earths, China arguably has the world’s most complete rare earth industry chain. This means in order to make full use of the rare earths mined in various countries, miners must come to China for processing. China produces approximately 80% of the world’s rare earths but can only supply about 30% of the raw ore.

This is a problem, because the digital transformation is unstoppable – there could be as many as eight rare earths metals in your smartphone and who can’t wait to get the next latest and greatest device? However, companies using rare earths for our end-use products are becoming focussed on supply chain resilience and suppliers who are closer to home (also a strategic decision). This was also recognized by US President Trump, who signed an executive order at the end of September 2020 declaring a national emergency in mining in an effort to jump (re)start the domestic industry.

Ahead of the curve, management of Lynas had already recognized this and despite being a global leader in rare earths, in 2019 put into action “Lynas 2025” – a plan to grow production and create a new rare earths processing centre in Western Australia. In addition, also in 2019, the company announced a Memorandum of Understanding to develop a rare earths processing facility in the United States. To be located in Texas, Lynas and the company’s partner announced in April 2020 that they will receive “Phase 1” funding from the U.S. Department of Defense (DoD) for planning work for the construction of the facility. Initial plans are to process ore at the facility from the company’s mine at Mt. Weld and it was announced that in July, 2020 the companies signed a contract with the US DoD for detailed design of a heavy rare earths processing facility.

As goes the rare earths industry, so goes Lynas and in August 2020, the company successfully raised AUS$425 million in new equity to fund future and ongoing activities in Australia and Malaysia, giving the company an even stronger balance sheet to finance future growth plans and maintain an industry leading position in the rare earths space. At year-end June 30, 2020, the company had positive working capital of approximately AUS$84 million plus a loan of AUS$164.9 million.

The world absolutely needs more rare earths to supply a seemingly unquenchable demand for new and evolving products. The rare earths supply chain has been dominated by China, but refreshed interest in strategic and domestic supply has caused the world to re-evaluate the current rare earths supply system. Despite a number of new and promising startup rare earths companies, Lynas continues to be the global leader. Does it belong in your portfolio?