Lynas - An investment opportunity in strategic metals

Lynas (LYC:ASX) is a rare earth producer with operations in Malaysia and Australia; most recently in the news for being the target of an opportunistic takeover by the Australian conglomerate Wesfarmers (WES:ASX).

Whilst rare earths, contrary to their name, are not especially rare; they are difficult to produce commercially whilst being of exceptional importance in 'new age' technologies. Specific industries which rely heavily on rare earths include renewable energy, medical devices, electric vehicles among others. Demand is projected to grow strongly over the next 10 years.

The existing supply structure of the rare earths market leaves it extremely vulnerable to shocks caused by geopolitical events and decisions. In 2010, the Chinese government reduced the export quota of rare earths by 40% and unofficially banned exports to Japan; the second largest user of rare earths. This led to a massive surge in spot market prices, with the price of most rare earth elements increasing by 5 times in a short period of time. The recent trade talks between China and the USA have once again highlighted the potential re-occurrence of a similar situation, with much talk in the Chinese media of 'weaponising' it's rare earth endowment by denying the US access to these essential elements. We also note the lack of spot market supply outside of Chinese sources indicated in the graph below.

Independent of these issues Lynas also have some fantastic growth options, including a recent MOU signed with a small US producer who owns an existing site permitted for rare earth production. We anticipate that there will be significant US government support for this project; which may speed the commercialisation of this project. We believe the company's strategy to move into manufacturing higher value, downstream product is a sensible move and will greatly increase the strategic value of the company in the coming years.

We rate the management team led by Amanda Lacaze very highly. Amanda has very ably and astutely led the company from the brink of insolvency at the time of her appointment to its transformation into the world-class rare earth producer it is today.