more ddFerrets Stock to Watch: LYNAS CORPORATION LTD
10:00, Wednesday, 6 December 2006
RARE EARTHS PLANT MAKING ITS HOME IN MALAYSIA
Sydney - Wednesday - December 6: (RWE Aust Business News)
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OVERVIEW
********
Nick Curtis, a mining entrepreneur who originally honed his
skills with Macquarie Bank, is already down the track in a new project
which could be equally successful as his involvement with Sino Gold in
China.
Some years ago the Ferret picked Sino Gold as a Stock to Watch
when it was a bit over $3 and today the shares are more than $5.
Nick is now concentrating all his management skills on a small
miner called Lynas Corporation (ASX:LYC) of which he is now chairman.
He has realised the potential of rare earths which are a group of
fifteen metallic elements that have unique properties which make them
indispensable for many technological applications.
Rare earths already play a critical role in the electronics,
automotive, environmental protection and petrochemical sectors.
As these industries grow and as research around the world
continues to develop applications for rare earths, demand for these
materials is expected to continually increase.
The rare earths are not actually rare, but very few can be mined
with safety due to the radiation factor.
The more abundant cerium and lanthanum are as common as copper
whereas others, such as terbium, are not particularly abundant.
This leads to differing supply and, when coupled with different
demand characteristics, differences in price.
For instance, cerium oxide is $US1.6 per kg while terbium oxide
is over $US400 per kg.
Global demand for rare earths was 95,000 tonnes rare earth oxide
(REO) equivalents in 2005 and is expected to grow annually by 10 per cent
to over 150,000 tonnes REO in 2010.
The use of rare earths is expected to grow in permanent magnets,
consumer electronics, and automotive catalytic converters. In particular
demand growth will be seen in the automotive industry as more electric
components replace hydraulic systems and NiMH rechargeable batteries are
used in hybrid vehicles.
Rare earth markets will require higher purity mixed and separated
rare earth products to meet growing demand for the elements in demand.
Strong demand is expected for cerium in automotive catalysts,
lanthanum in NiMH batteries, and those elements used in Neo magnets
(Neodymium, Praseodymium, Dysprosium, and Terbium).
Global reserves of rare earths are greater than 100 million
tonnes REO, according to published sources.
However, when uneconomic resources are subtracted and the
recovery rates for current processes are taken into account, the global
net recoverable reserves that can be economically extracted are 6.2
million tonnes REO.
Global supply has experienced significant changes in the past
decade.
China has become the dominant supplier of ores (with over 90 per
cent of the total supply capacity) as well as the dominant processor and
user of refined compounds.
This has occurred as processors in the rest of the world have
transferred production to China.
However, recent government regulations will reduce the amount of
rare earths extracted from China.
Supply of high-demand elements cannot be met solely by China and
will require the exploitation of other sources.
With demand for most of the rare earths expected to grow over the
next five years at 10 per cent per annum, as well as supply expected to
be limited within China to lower than current production levels, it is
expected that the price for most of these elements will increase.
It is expected that the value of a ton of rare earths from Mt
Weld in Western Australia will increase by about 40 per cent to 80 per
cent by 2008.
SHARE PRICE MOVEMENTS
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Shares of Lynas yesterday rose 1.5c to 42.5c. Rolling high for
the year is 49.5c and low 15c. The company has 387.7 million shares on
issue with a market cap of $163 million.
An impressive overall view of the company's operations emerged at
the annual meeting on November 23.
Chairman Curtis told shareholders it had been a very successful
year for the company and shareholders.
In this period the share price had risen from 15c to 40c a share
today.
And some broker analysts are predicting the shares will double in
12 months. On October 23 Austock Securities gave the company a 60c target
price over the next 12 months.
The broking firm also commented that Lynas Corporation is in
final stages of progressing to develop the Mt Weld mine and to construct
a rare earths processing plant in Malaysia, with the view to becoming a
fully integrated source of rare earth oxide.
The chairman confirmed Lynas has completed the feasibility study
and the basic engineering design for a proposed Chinese processing plant.
Lynas has already done a successful capital raising of $75
million to enable construction to commence.
The board has decided to relocate a proposed processing plant
from China to Malaysia, saving about 27 per cent in present costs, and
has signed of a Heads of Agreement with Rhodia, a major French chemical
company for long-term supply of material.
The chairman pointed out that Malaysia has offered a bundle of
inducements, including 10 years tax free and being able to export at
will.
China has just slapped a 10 per cent tax on Chinese tax rare
earth producers.
Mr Curtis said the new Malaysian plant should be in full
production by late 2008.
"We have travelled a long way in the last year," he told
shareholders.
"We have moved from the business development phase of the company
directly into the implementation phase.
"We have a robust plan, we have the money and we have a viable
and strong business model.
He said that since the beginning of the financial year the basket
price for rare earths oxide produced from Mt Weld has risen from $US4.77
to $US8.41, which can be almost directly attributed to two key factors in
play within China.
The first is the country's crackdown on environmentally damaging
mining and processing operations in rare earths.
The second is a reassessment of the actual commercially viable
resources of rare earths available in the country.
"We had foreseen this scenario and believe that China will be
unable to satisfy global demand in rare earths in the foreseeable
future," Mr Curtis said.
"This view has been further reinforced recently by several
initiatives of the Chinese Government."
The issuance of export quotas for rare earths has been
significantly tightened, VAT rebates for rare earths have been
terminated and a 10 per cent tariff has been imposed on the export of
rare earths.
The combined impact of the VAT and tariff imposition will in
itself affect the pricing of raw and processed materials, the chairman
pointed out.
Possibly the most significant indicator of the tightening of rare
earths in China has been the imposition of production quotas on the total
volume of rare earths available for supply in the country.
Demand is now running ahead of supply as the Chinese cut back on
production quotas for export.
Mr Curtis said demand is running over 100,000 tons per annum and
growing at about 10,000 tons per annum.
"The time for development of our project has come," he told
shareholders.
Lynas has raised capital from a number of sources including
Transocean Securities, a Sydney boutique investment bank, Patersons
Securities and Ospraie Management a US hedge fund and Goldman Sachs.
The queue to offer funds probably has something to do with the
Curtis expertise as well as his old Sino Gold associates Jake Klein and
David Davidson, also directors of Lynas.
The real action began in September when the board finally
resolved to change the location of the processing plant from China to the
east coast of Malaysia.
Mr Curtis summed up the global market outlook with the remarks
that a 'perfect storm' has hit the rare earths market, with demand
growing strongly and supply restrictions in place.
Lynas has the only commercially viable deposit outside China, and
will be one of the lowest-cost producers in the world.
"We are well positioned to grow strongly as a key supplier of
essential raw materials," the chairman concluded.
BACKGROUND
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Lynas Corporation joined the Australian Stock Exchange list on
September 11, 1986.
The history of rare earth element production can be divided into
four distinct periods.
From the beginning of the use of rare earths in the 1880s to the
1960s, the rare earth supply came mainly from monazite (and xenotime,
which is rich in the yttric elements) derived from beach sands from
Brazil, Australia, India, and Malaysia.
The second period began when the Mountain Pass carbonatite of
California was opened in 1965, with additional material supplied from
existing monazite sources.
The third, transitional period lasted between the mid 1980s to
the mid 1990s when production in China increased as production of
monazite virtually ceased due to concerns of radioactivity.
In addition, production from Mountain Pass decreased due to
environmental concerns and low-cost competition from China.
The fourth period is now, the time of Chinese dominance on
production.
The cause of this shift can be attributed to the lower fixed
costs and historically less stringent environmental requirements in
China.
However, since many of the products that use rare earths are now
manufactured in Asia, supply is now geographically closer to demand.
In addition, the growth in income for the Chinese population
results in an increase in domestic consumption of rare earths.
In 2005, global production of rare earths was estimated at
103,000 tonnes REO.
Of this, 98,000 tonnes was produced in China, or 95 per cent of
the total production.
China exported 55,300 tons REO to 74 countries and regions in
2005 with a value of $US552 million.
However, recent events indicate China's total dominance is not
sustainable as rare earth demand grows.
Mt Weld can fill part of the gap created by reduced Chinese
supply and increasing demand.
The Mount Weld carbonatite complex is located 35 km south of
Laverton.
The main deposits lie in sheets within the soil horizon that
covers the carbonatite, making surface mining relatively easy.