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 Thu Jul 7, 2011
Index Member Comment: Lynas attracts attention of Mitsubishi and Siemens
    Publisher: Kaiser Research Online
    Author: Copyright 2011 John A Kaiser

Lynas Corporation Ltd (LYC-ASX: $1.84)


Index Member Comment - July 7, 2011: Lynas attracts attention of Mitsubishi and Siemens

Lynas Corp has attracted a new shareholder whose identity may not help it quell protests about its LAMP facility. On July 4 Mitsubishi UFJ Financial Group Inc filed a notice that on June 30 it became a "substantial shareholder", even though Lynas was halted that day to allow a response to the IAEA report on the rare earth processing facility in Kuantan, Malaysia. This report was requested by the Malaysian government in response to growing criticism about risks associated with the LAMP facility, criticisms that appear to be fueled by bad memories about the toxic waste left behind by Mitsubishi Chemical in 1992 when it processed tin mining slags for rare earths. It thus seems quite spooky that Mitsubishi should crop up as a 9.99% "shareholder" just as Lynas is welcoming the IAEA's recommendations and dismissing NYT reporter Keith Bradsher's article about construction problems as much ado about nothing. But these are perceptions for conspiracy theorists. Mitsubishi Financial and Mitsubishi Chemical are separate divisions of the Mitsubishi conglomerate. Furthermore, it appears that the only reason Mitsubishi had to file an initial substantial shareholder report is that it has more than 20% voting power over Morgan Stanley which owns 165,368,239 shares. The timing smells of compliance officers plodding through data and mechanically filing paperwork without any thought to political context. It is not even clear if Morgan Stanley owns these shares on a proprietary basis or through funds that it manages on behalf of clients. Morgan Stanley and rival JP Morgan have been the principal backers of Lynas since 2009, and their goal would ultimately be to unload their Lynas paper by tendering it to a direct takeover bid, not be the proxy for indirect control by a Japanese conglomerate. Mitsubishi Financial owns only 4,753,828 shares directly, though it did appear to buy 3,942,336 shares during the last week of May within a price range of AUD $2.22-$2.31, managing to get close to the market top. Lynas traded 135.7 million shares on May 31 amid news that Sojitz and JOGMEC had come through with a $250 million loan. But the Mitsubishi name does keep cropping up in a rare earth context. On July 21, 2009 Mitsubishi Corp, the general trading company of the conglomerate, entered a deal with Neo Material Technologies Inc to fund test work on recovering rare earths from the tailings at the Pitinga Mine in Brazil in exchange for 20% offtake rights. Neo Material is now overdue on reporting the outcome of its studies, so it does seem curious that another Mitsubishi entity materializes as a stakeholder in a rare earth junior that does appear to have near term supply queued up. But it does simply look a lot like bad timing and coincidence, bad timing in the sense that protestors are trying to link Lynas to past Mitsubishi sins, and news that Mitsubishi's tentacles appear to have ensnared Lynas is not going to calm the opposition. This development should also not be construed as bullish in the sense that an "end-user" has stepped into the open market to establish an equity beachhead for what might eventually be a takeover bid. Yes, we desperately need this to happen to put some fear into the shorts, but this I do not believe achieves this goal.

Much more significant is the July 7 announcement that the German giant Siemens has signed a letter of intent with Lynas to form a 55:45 joint venture to create the "mine to magnet" segment of Siemens' supply chain for the production of energy-efficient drive applications and wind-turbine generators. The terms of the deal were not disclosed, though it appears that Lynas' contribution will be the supply of neodymium-praseodymium metal for magnet production. Japanese end-users have already tentatively reached out to Lynas and Molycorp for "security of supply" relationships; now the Europeans are starting to bite the bullet and seek out relationships with rare earth supply contenders. The Siemens deal is interesting because the magnet production is a joint venture, not just an offtake rights for financing deal. I interpret Siemen's attention as a bullish sign that the end-users are not going to spend the supply crisis sitting on a pot hoping that speculative capital will deliver the goods while they shit on the prospect of this happening by "threatening" substitution, recycling and seabed mining as alternatives to putting non-Chinese rare earth mines into production. And it is high time that they proceed beyond denial and anger to adapting to the new reality. China is currently digesting the WTO ruling handed down on July 5, and an early indication of what China thinks about it showed up on July 7 when Metal-Pages posted new rare earth oxide prices. Nothing interesting on the domestic price side, but in the case of the heavies dysprosium, terbium and europium, whose FOB prices had ended up lower than domestic prices in recent weeks, these underwent huge jumps. FOB lanthanum, cerium and yttrium prices also increased after being stagnant for more than a month while domestic prices crept higher. Take a peek at our Rare Earth Resource Center to see what a Chinese "FU2" response might start to look like.


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