Sojitz, the top Japanese trader in rare earth minerals, has just signed a deal with Australia’s Lynas to jointly market 3,000 tons of rare earth minerals from Lynas’s new Mount Weld mine with shipments beginning in late 2011. Volume would quickly rise to 8,000 to 9,000 tons a year. The two companies would distribute 80,000 to 90,000 over the ten-year life of the agreement.
The deal is a big milestone for Lynas since it puts a very concrete date on the beginning of shipments from Mount Weld.
“Of the various rare earth development projects around the world, Satoshi Mizui, a senior vice-president at Sojitz told the New York Times, “Mount Weld has the potential to be the first to begin operations. With this deal, we aim to secure a stable supply of rare earths to Japan.”
Security of supply has become a big deal for technology companies that depend on rare earth minerals for their production of everything from wind-turbine magnets to hybrid car batteries to LED lights and display screens since China imposed an unofficial two-month cut-off in shipments of rare earth minerals to Japan. Because China produces 95% of so of the world’s rare earth minerals that action has sent high tech companies on a scramble for alternative supplies.
China has also cut its export quotes for rare earths by 40% this year. Australia’s government blocked the sale of a majority stake in Lynas to a Chinese company in 2009. (For more on rare earths, what they used for, and what kind are most valuable see my post https://jubakpicks.com/2010/10/20/could-china-really-be-running-out-of-rare-earth-minerals-thats-what-the-country-is-saying/ )
Sojitz will also work to secure $250 million in financing from the Japanese government that would let Lynas expand production capacity from the current 11,000 tons scheduled by the end of 2011 to 22,000 tons in 2012. The application for that funding is to be filed by March 2011.
With this deal, plus a deal announced in November with an unnamed European company, Lynas says it has commitments for 70% of its production.
There are a number of ways to buy this very volatile stock. An ADR trades over the counter on U.S. markets under the symbol LYSDY.PK. Each ADR represents 10 shares of the Australian stock. Volume is light at 51,000 shares a day on average. The Australian stock, under the symbol LYSCF, also trades directly on the U.S. OTC market. The best market to buy and sell, if you can, is the company’s home market of Sydney where 35 million shares traded on December 3. The symbol there is LYC.AU.
Investors have had a couple of good opportunities to buy shares of any of these over the last couple of months and I think you’ll get another chance. These are volatile shares. The U.S. ADR, which traded near $16 on December 3, hit lows of $11.79 on November 8 and $11.30 on September 22. (Did I mention it’s volatile?) In Sydney the hares hit lows of $1.18 on November 8 and $1.19 on September 22. The stock closed at $1.51 on December 6 on that market.
For a buying opportunity I’d look for a repeat of those local lows. And then be prepared to ignore the volatility in this stock and hold for the long-term. Or at least until enough of the mines now working to get into production do actually start producing enough rare earths to lower prices in 2013 or so.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Lynas as of the end of the September quarter. For a full list of the stocks in the fund as of the end of the most recent quarter see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
LYNAS is on my watch list for a long time. But I have two worries about it: (1) production cost (couldn’t find any number, which could shed some light on LYNAS production cost), and (2) a danger of substitution. #2 is a serious danger, if you think about it carefully. Rare Earth elements are desirable, but not necessary elements in every single application, except lasers. However, the demand for Nd in lasers is not that high and is not considered to be the driving force for higher demand. For everything else, there are alternative solutions, which either do not use rare earth elements, or use them is much smaller amounts.
Jim – Dumb question.
What if China starts ramping up production and export quotas? That would bring down prices and cause pain to foreign producers, right?
I remember hearing a story on Marketplace a few months ago on this topic. The guest on the show said that the whole idea behind China’s move was to get foreign companies to open factories in China and create jobs there by limiting exports of these rare earths. If companies secure alternate supplies and avoid creating jobs in China, would China loosen up its exports and thus cause foreign miners pain when prices go lower?
Firstly, Lynas is scheduled to start shipping refined REO’s in Q3 next year, and the Sojitz deal will help fund the second phase of the project (to be on-line a year later). That will give a capacity of 22,000 metric tonnes of REO per year. The Lynas website: http://www.lynascorp.com gives a weekly update on the weighted average spot price of the product mix from the Lynas operation (the next few years’ ore is already stockpiled at the mine). The latest is $70.23 per kg, or about $1.5 billion a year. And this project kicked off when the spot price was in the mid-teens, and the production cost is estimated at around $6.50 per kg. Seems like a lot of “fat city” profit-wise if the prices hold, and if full phase II production comes online as expected inside two years.
I bought this when Jim first recommended it and, silly me, forgot to sell. I’ve added on dips to almost double my original position, and resisted so far the urge to cash in any shares. I agree with Jim’s present outlook, expecting continued gains over the next 18 months. This appears to me as a solid company in a speculative market segment, and while there will be volatilty (as there is with MCP, REE), Lynas still looks like the cream of the crop to me.
Jim,
I am somewhat concerned about pure speculative nature of this stock. Here is my understanding: 95% of the world production of rare-Earth metals is in China solely because of their low cost of extraction (China only has 40-50% of the world resources). I do not see any profits now or in any feasible future coming for those companies digging for rare-Earth metals (even the ones, which are doing it in China are barely profitable). Do you think it is really possible for a stock to go significantly up with no profits for the next 5 years?
Jim…
I’m so glad you added this to your watch list, because when it does dip, I’m gonna sink my teeth into this stock for sure…LYSDY!! 🙂
Thanks as always for keeping this site a freebie for everybody!
Jim had this stock in his portfolio about a year ago, but sold it…too bad he didn’t recommend buying it when it was under $5 for an extended period. Only mentioned it again after it had already gone over 13.