Japan strikes a blow with rare earths deal

JAPAN Inc is fighting back against China's stranglehold on the global rare earths market through a financing and supply deal with rare earths project developer Lynas Corporation. The deal has the tacit endorsement of Canberra.

By InvestSMART · 25 Nov 2010

By InvestSMART ·
25 Nov 2010

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In a move to be led by Japanese trading house Sojitz, $US250 million ($A255 million) in Japanese government agency financing will be made available for an accelerated expansion of Lynas's Mount Weld rare earths project near Laverton in Western Australia, and the project's associated processing facilities in Malaysia. The deal is underpinned by a supply agreement under which the Japanese market will be allocated a minimum of 8500 tonnes of rare earths annually for the next 10 years. That represents as much as 25 per cent of Japanese demand.

China's dominance of the rare earths market has come into sharp focus recently, with China suspending/delaying shipments to Japan in an extension of their territorial dispute in the South China Sea.

China controls the world's rare earths industry and likes to think it is to that sector what Saudi Arabia is to oil. Rare earths are increasingly found in high-end applications, including compact fluorescent light bulbs, flat panel displays and iPods.

Japan is the fourth largest consumer of rare earths and the stress of having to rely on Chinese supplies in the wake of Beijing's directive to hold back was an issue in Canberra earlier in the week.

Japanese Foreign Minister Seiji Maehara raised the issue during trade talks, leading Foreign Minister Kevin Rudd to say that Australia "understands the significance of rare earths globally."

"Australia stands ready to be a long-term, secure, reliable supplier of rare earths to the Japanese economy," Mr Rudd said ahead of the Lynas/Sojitz deal.

Somewhat ironically, it was the former Rudd government that blocked a proposal last year for China Non-Ferrous Metal Mining Company to acquire a 51.6 per cent interest in Lynas for what can now be seen as the knockdown price of $252 million.

The Chinese walked away after Canberra said CNMC would not be allowed to have more than 50 per cent of Lynas and would not be allowed to have board control.

Lynas is now a $2.5 billion company, meaning Canberra did Lynas shareholders a favour.

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Frequently Asked Questions about this Article…

What is the Lynas–Sojitz rare earths deal and why does it matter for investors?

The deal is a financing and supply arrangement led by Japanese trading house Sojitz that provides US$250 million (A$255 million) in Japanese government agency financing to accelerate expansion of Lynas Corporation’s Mount Weld rare earths project (Western Australia) and its processing facilities in Malaysia. It includes a supply agreement that allocates at least 8,500 tonnes of rare earths a year to the Japanese market for the next 10 years, making it a strategically important move to diversify supply away from China.

How much financing is involved and who is providing it?

The package involves US$250 million (about A$255 million) of Japanese government agency financing, with the transaction to be led by the Japanese trading house Sojitz. The article describes the financing as backed by Japanese government agencies and tacitly endorsed by the Australian government.

What does the supply agreement mean for Japan’s rare earths security?

Under the agreement Japan will receive a minimum of 8,500 tonnes of rare earths annually for the next 10 years. That quantity could represent as much as 25% of Japanese demand, helping reduce Japan’s dependence on Chinese rare earths supplies and improving supply security for industries that rely on these materials.

Where are Lynas’s operations located, and what will the financing fund?

Lynas’s core deposit is the Mount Weld rare earths project near Laverton in Western Australia, and associated processing facilities are in Malaysia. The financing is intended to accelerate expansion at Mount Weld and support the project’s processing capabilities in Malaysia.

How does China’s control of rare earths factor into this deal?

China currently dominates the global rare earths industry and has previously suspended or delayed shipments to Japan amid territorial disputes. That dominance and recent supply disruptions are a key reason countries like Japan and Australia are supporting alternative supply lines such as the Lynas–Sojitz arrangement.

What happened with the earlier China Non‑Ferrous proposal to buy Lynas?

Last year China Non‑Ferrous Metal Mining Company (CNMC) proposed to acquire a 51.6% interest in Lynas for US$252 million, but the former Australian government blocked the deal, saying CNMC would not be allowed to hold more than 50% or have board control. CNMC walked away from the proposal, and Lynas has since grown to a roughly A$2.5 billion company.

What are rare earths used for and why should everyday investors care?

Rare earths are used in a range of high‑end applications — the article mentions compact fluorescent light bulbs, flat‑panel displays and iPods — and are essential in many modern technologies. For everyday investors, the strategic importance and supply constraints of rare earths can influence the outlook for specialist miners like Lynas and for industries dependent on these materials.

What role did the Australian government play in the Lynas deal?

The article says the Lynas–Sojitz deal has the tacit endorsement of Canberra and quotes then‑Foreign Minister Kevin Rudd saying Australia ‘stands ready to be a long‑term, secure, reliable supplier of rare earths to the Japanese economy.’ The government’s prior decision to block a CNMC takeover of Lynas is also highlighted as having benefited Lynas shareholders.