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 http://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/