Lynas makes progress on rare earths but no one cares--for the very patient it's time to start a position

01/09/2012 3:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Australian rare-earth producer Lynas (LYC.AU in Sydney and LYSDY in New York) announced on January 5 that it had completed its application to the Malaysian Atomic Energy Licensing Board for a temporary license for its rare earth processing plant in Gebeng, Malaysia.

That news, however, hasn’t been enough to offset continued worries about falling demand for rare earth minerals from the technology, power production, and consumer electronics sectors. The shares are down 9% from the January 4 close through the January 9 close in Sydney.

The license application includes a detailed plan—in accordance with the recommendations of the International Atomic Energy Agency—for the disposal of radioactive waste produced by the processing of rare earth ores. That waste has been the major focus of community opposition to the plant that has questioned why a company mining rare earths in Australia wants to process the ore in Malaysia.

The Malaysian Ministry of International Trade has said that the Malaysian Atomic Energy Licensing Board will meet on January 30, 2012 on the temporary license. From there the license goes to the Malaysian cabinet. A temporary license would be good for two years and would allow Lynas to commission the processing plant and to gradually increase production to capacity. Malaysia could issue a permanent license to Lynas during the initial two-year period.

A couple of years ago this news would have made Lynas shares pop from the current $1.06 share price to something like the $3.00 52-week high. But right now a big step like this toward production of processed rare earth minerals seems relatively unimportant to investors focused on a short-term decline in demand for rare earth minerals that has sent prices plunging by 46% on average for the 17 different rare earth minerals in the fourth quarter of 2011. The eight rare earths found at Lynas’s Mount Weld mine sold for $193.21 a kilogram in the third quarter, according to Lynas. That’s a big increase from the $31.50 price in 2010 but prices have dropped back to $103.76 a kilogram currently.

In 2010 the worry was that China, which produces more than 90% of the world’s supply of rare earth minerals, was slapping on stringent export quotas that would force the world’s high technology companies to either move to China or find a non-Chinese source of supply. The tight 2010 quotas produced huge friction between China and rare earth consuming countries such as Japan and the United States. This year, however, with demand down, China has announced that it will keep export quotas unchanged for 2012 after exporters used only half of the allotted quotas for 2011.

I’m not looking for a quick rebound in demand for rare earth minerals. Any rebound depends on the global economy picking up speed in either the second half of 2012 (optimistic) or 2013 or 2014 (pessimistic.) But the fact remains that there just aren’t very many rare earth miners outside of China and even fewer rare earth processors. Buying Lynas at today’s price is a cheap option on a return to growth in the auto, wind turbine, digital display, and other sectors that will lead global growth when global resumes.

I don’t think you need to load up the truck today because the timing of any global economic recovery is so uncertain. But I think today’s price is a good place to begin building a long-term position.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares in Lynas as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

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