Update rare-earth miner Lynas (LYSDY) in my long-term Jubak's Picks portfolio

06/07/2012 2:32 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The rare-earth processing plant that Lynas (LY.AU in Sydney or LYSDY in New York) has been building in Malaysia is about 98% through Phase One construction. The facility, which would process rare earth ore mined at the company’s Mt. Weld operation in Australia, got approval for a temporary operating license in February from the Atomic Energy Licensing Board of Malaysia.

But the company hasn’t yet actually received the license and I don’t think that the processing plant, already delayed by protests for 8 months, has a chance of getting the license or going into operation before the Malaysian general elections expected in mid-year. The plant has become a political lightening rod with local protesters asking, quite reasonably in my opinion, why an Australian company wants to site a plant that will produce mildly radioactive waste in Malaysia rather than near its mine in Australia. Poll ratings for Malaysian Prime Minister Najib Razak have slipped in recent months to 65% in May from 69% in March. That wouldn’t seem to put the Prime Minister in any political danger but four years ago his National Front coalition lost its two-thirds majority in parliament and one goal in this election is to reverse that defeat. It’s unlikely then that the Prime Minister wants to rock the boat and add to protests around the plant before any vote.

The government isn’t showing any signs that its support for the plant is waning. On May, 13 for example, Minister for International Trade and Industry Datuk Seri Mustapa Mohamed, said the plant “paves the way for potentially more jobs and bigger economic growth.” The country is “looking at spin-off activities and downstream development such as wind turbines, batteries, and hybrid cars,” the minister continued. Rare earths are key raw materials for technologies from wind turbines to hybrids. China controls about 90% of global rare earth production (95% for rarer heavy rare earths) and has used export controls to “encourage” technology companies to move production to China so they would be assured of adequate supplies.

In Sydney shares of Lynas traded as high as $1.59 on February 2, 2012 before plunging to 87 cents on May 23, 2012. They’ve recently recovered to $0.99 (Lynas is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com//  )

Part of the reason for the share’s plunge has been weak demand (and therefore low prices) for rare earths as the global economic slowdown reduced demand for the consumer products that use rare earths. That’s a longer-term problem that will get “fixed” when global growth begins to pick up again.

The short-term problem, though, is the uncertainty around the Malaysian processing plant. Will Lynas get the go ahead? And when? (There is speculation in Malaysia that the Prime Minister will delay the vote until after he delivers a new budget in September.)

This kind of uncertainty drives investors crazy because it is just about impossible to calculate a target price for the stock as long as this yes/no decision hangs over the plant.

I continue to think that Lynas will get its operating permit—after the election. That would make the company one of the few rare earth miners, in or outside of China, to own a mine and to operate a processing plant. But I’d certainly have to call this a very speculative investment as long as the political question remains unanswered.

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 March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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