Since reaching a new multi-year high of $2.96 back in May, shares in Australian rare earths producer Lynas Corporation Ltd (ASX: LYC) have shed over 40% of their value. But could the US trade tussle with China, as well as some recent favourable news out of Malaysia, mean the company is poised for a turnaround in its fortunes?
First, we need to understand what exactly it is that Lynas produces, and why the Trump administration’s position on Chinese trade could wind up being good news for this under-the-radar Aussie miner.
The name “rare earths” is given to a collection of elements highly sought after for their unique physical, magnetic and chemical properties. They are used in a number of different technologies including smart phones, hybrid cars, wind turbines and energy efficient lightbulbs. As the global demand for these types of digital and environmentally friendly technologies continues to grow, so too does the demand for rare earths.
Despite the name, rare earths aren’t actually particularly rare. They do tend to be quite dispersed throughout the earth’s crust, however, which makes finding a deposit concentrated enough to be profitably mined quite difficult. Consequently, most of the world’s supply of rare earths is fed from a limited number of sources.
According to a 2018 report by the US Geological Survey, China accounted for almost 81% of global rare earth production in 2017. Australia was next highest on the list, contributing a little over 15% of the global supply. The same report also stated that the US imported $150 million worth of rare earths in 2017, a steep rise on the $118 million imported in 2016.
A sign of just how dependent the US is on Chinese rare earths is that they were left off the list of imports the Trump administration is taxing in its increasing trade war with China. Rare earths are particularly important for the US due to their use in military aircraft.
All this is to say that, given the current global political and economic climate, the US could be in need of new trading partners in rare earth minerals. And although Australia places a distant second to China in terms of production, Lynas could still be poised to take advantage.
Lynas shares have been seesawing for weeks due to uncertainty around a review of its Malaysian operations by the new coalition government there. Lynas currently mines rare earths at its Mt Weld mine, located north of Kalgoorlie in Western Australia, but refines them at its plant in Malaysia. The previous Malaysian government awarded Lynas a 12-year tax exemption due to its investment in the nation, but this tax break is now coming under review as the government searches for more sources of revenue.
However, last Friday it was revealed that a particularly harsh critic of Lynas from within the Malaysian government would not be participating in the review. Shares in Lynas surged almost 10% higher on the news.
Prior to the uncertainty caused by the Malaysian government, Lynas had been having a breakout year. In FY18 the company posted its first ever full year profit. For the year ended 30 June 2018, Lynas recorded NPAT of $53.1 million against revenues of $374.1 million. Reported EBITDA was up over 300% to $121.9 million.
This makes it by far the most bankable rare earths miner in Australia, easily fending off small cap rivals like Alkane Resources Limited (ASX: ALK), Greenland Minerals and Energy Limited (ASX: GGG) and Hastings Technology Metals Ltd (ASX: HAS), none of which are currently profitable.
With demand for rare earths set to increase in coming years due to their use in green technologies like electric cars and wind turbines, as well as smartphones, Lynas could be in for a period of growth. As one of the only profitable rare earths producers on the ASX, Lynas may be the one company that could really take some of the global market share away from China.
There is some risk due to the looming Malaysian government review, but even that is less threatening now that friendlier politicians will be heading it up. Still, it should be noted that the company may incur significant relocation costs if it is forced to move its refinery back onshore.
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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.