1. Very high grade: From memory the average grade is between 9-14%, whilst the competition is around 3-5%.
2. Supply: The supply of rare earths is dominated by China, such that they produce 80% of the global supply, as well as processing the stuff.
3. Increasing applications: Rare earths, a groups of some 30 metals - the light series and heavy series, and I am going from memory, are increasing used in some pretty high value applications.
4. Quantities required: The small quantities of the metal required in any application mean that the price of these metals could soar very high if the Chinese have the power to manipulate supply. i.e. The price of elasticity is very low. I might draw a parallel with platinum, because very little platinum is used in car catalyst converters, so prices can go very high because the car industry substitutes platinum for palladium.
5. Substitution: I am less aware of the availability of substitutes for rare earths, since there are so many of them, however I would expect substitution to be a less compelling motivation.
6. Lack of resources: You might find this difficult to imagine, but rare earths are actually quite rare. Well, more accurately, its rare to find them in commercial quantities. This is where Mt Weld is special because millions of years of insitu weathering in WA have concentrated the rare earths from this volcanic plug, making it quite the oddity.
Now there is an even more important factor than the Chinese power over the market. Its the angst of China over iron ore, that Australia and other countries seem to be 'conspiring' against the Chinese to keep iron ore prices. Of course these iron ore magnates are inclined to take over each other to control market pricing. This annoys the Chinese of course who are forced to pay high prices. This has forced the Chinese to develop their conceptual thinking skills. They have appreciated that just as Australia, Brazil, South Africa, Gabon, etc dominate iron ore, they dominate a few metals as well, particularly rare earths.
The interesting issue is whether the Australian Labor government will approve the move by the Chinese to control the company with 51%, even if Nick Curtis, the CEO has the controlling equity in the company. Nick will support the investment because he's an 'independent' director with a lot of stock in the company.
The implication is that an investment in Lynas is risky in the sense that the Australian government could reject the takeover. I would suggest however that acceptance is more likely for several reasons:
1. Australia has a great deal of control over the iron ore market
2. Australia will not want to annoy China, because there is probably a gas contract at stake
3. Australia has no control over the processing of rare earths anyway because the metal will go to China
4. The US has a strategic supply in the USA, so it will not care either
5. These metals are rare until the next discovery is made. Rare metals have no uses. When prices skyrocket, it will take them 10 years, but then they will suddenly find millions of tonnes of the stuff in outback Russia...my guess the Ural Mountains.
Anyway, my point is that when this agreement is finally reached, the price of Lynas Corp stock will have a very sure path to heaven. It might take some time, but I'd expect some movement on the expectation of some market manipulation by the Chinese. The Chinese have never been so market-savvy, though after the Rio price fiasco, its fair to say they know what they are doing now. We are currently in recession, but that company is going to soar one day. Unless...I'm wrong and the Australian government rules against it. Well that is of course are even rarer story!
Andrew Sheldon www.sheldonthinks.com