A rare windfall for Lynas

The perception that China is prepared to use its near-complete dominance of rare earths production for geopolitical and economic advantage appears to have produced a massive windfall for Australian producer Lynas Corp.

Today Lynas confirmed Japanese media reports of a strategic alliance with Japanese trading house, Sojitz Corporation, the largest supplier of rare earths in Japan.

Under the alliance Sojitz would use reasonable endeavours to help Lynas arrange funding of up to $US250 million to accelerate the expansion of its Lynas Rare Earths project at Mount Weld in Western Australia and its processing plant in Malaysia, with a planned doubling of its production to 22,000 tonnes a year by 2012. First production from Mount Weld is expected in the third quarter of next year.

Sojitz has agreed to request financial support from the Japan Oil, Gas and Metals National Corporation (JOGMEC), which is charged with ensuring stability of supply of Japan's energy and commodity requirements. If Lynas secures the funding, it will commit between 8,000 and 9,000 tonnes of its production to Japan for the next decade and jointly market the material in Japan with Sojitz.

The prospective involvement of JOGMEC provides an insight into the deal and Sojitz's motivation for trying to help underwrite the expansion with financing and sales.

Lynas, once Mount Weld is in production, will be the first new producer of rare earths outside China in decades. China produces about 97 per cent of the world's rare earth material. Rare earths are used in a wide range of products, from LCD screens to defence equipment.

China's dominance has always caused some nervousness, particularly in Japan, because as it has industrialised and moved its manufacturing sector up the value chain its own usage of rare earths has risen and its reductions in export quotas for rare earths has generated concern that it could use its dominance for competitive advantage by denying or limiting other countries' manufacturers access to the material.

Those concerns, particularly in Japan, became paranoia in September when two Japanese coast guard vessels and a Chinese fishing trawler collided in an area of the East China Sea that Japan controls but China claims. The Japanese held the captain of the trawler, believing he had rammed their patrol boats, and the Chinese then banned exports of rare earths to Japan.

While the Chinese have tried to put some distance between the two events, the potential for them to use their dominance of rare earths production for geopolitical leverage was spotlighted and caused consternation in Japan, whose industrial base is heavily reliant on access to the material, and in the US, where it is used widely in military applications.

For Lynas, with a stated ambition of becoming a global leader, of course, the demonstration effect of the confrontation was a godsend given that it was the only large near term source of supply outside China.

The events of this year tend to vindicate the Foreign Investment Review Board's decision to impose such stringent conditions on a proposed deal between a then cash-strapped Lynas and China Non-Ferrous Metal Mining Group that CNMC walked away. Had the deal gone through, CNMC, a state-owned entity, would have owned 51.6 per cent of Lynas.

Instead Lynas raised $450 million from the market and was able to retain its independence, which has created – as the very sharp spike in its share price and value today underscores – very significant and tangible strategic value.