Buy Lynas in my long-term Jubak's Picks portfolio
01/19/2012 3:47 pm EST
I can think of three reasons to add shares of Australian rare-earth miner Lynas to a long-term portfolio now.
First, the bubble (if there was one) has collapsed in rare earth minerals so investors can buy into Lynas cheap. Way back in 2009 and 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 quotes. With rare earth minerals critical to the manufacture of hybrid cars, wind turbines, flat screen displays, and other fast-growing technology products, the fear was that high technology companies would have to move manufacturing to China to assure a supply of rare earths. That made the stocks of the few rare earth companies outside of China rare and valuable commodities. New York-traded shares of Lynas peaked at $2.57 in April 2011.
But now the global economic slowdown has produced a big drop in the short-term demand for rare earths and has sent prices of rare earth minerals plunging. The average price for the 17 different rare earth minerals fell 46% 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 since dropped back to $103.76 a kilogram currently. For 20112 China has announced that it will keep export quotas unchanged but no one is much riled by that since exporters used only half of the allotted quotas for 2011. New York-traded shares of Lynas are trading near $1.10 today, January 18.
Second, on January 5 Lynas announced 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. 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.
If Lynas gets its license, it will graduate from a miner of rare earth minerals to a miner and processor of rare earths.
Third, on January 18 Lynas reported that on-going exploratory drilling at its Mt. Weld site had increased the company’s estimates for the total rare earth resource there by 37% from the previous estimate. Much of the increase (51% of the increased estimate) comes in the Central Lanthanide Deposit where Lynas is currently conducting mining activity. The rest comes from the Duncan Deposit, where Lynas’s operations are still in the exploratory stage. The ore in the Duncan deposit isn’t as rich in rare earths overall but early indications are that it might contain a higher percentage of heavy rare earth minerals. The heavy rare earths are much scarcer than light and medium rare earths and carry, consequently, much higher prices per kilogram.
I think it will take at least the glimmer of a global economic recovery in demand to move Lynas up significantly. But the time to build long-term positions is when no one wants a piece of a sector, and that’s a pretty good description of rare earth mining right now.
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 of 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/