Rare Earths MMI: Japanese Investors Save Lynas Corp.

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Two weeks ago, Japanese lenders and a hedge fund struck a deal to save Australia’s Lynas Corp., the only major rare earths producer outside China, from collapse. In doing so, they cut its interest costs and gave Lynas nearly four years breathing room to pay off its debt.

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State-owned Japan Oil, Gas and Metals National Corp. (JOGMEC) and Sojitz Corp. did so to ensure a supply of rare earths from outside China, the world’s biggest producer of the elements. Japan’s interest is understandable. It’s the nation that Chinese producers unceremoniously boycotted in 2011 back when rare earths prices were flying high. Even though that’s not the case today, Japanese manufacturers have no interest in ever being dependent on China’s rare earths industry again. After the collapse of Molycorp, JOGMEC even agreed to slash the interest on its loan to Lynas to 2.5% from 6%.

Rare-Earths_Chart_November-2016_FNL

Lynas will not have to make any fixed repayments on the $203 million it owes to Sojitz and JOGMEC until 2020. It previously faced staged repayments up to 2018.

Our Rare Earths MMI held at 17 for the fourth straight month, the textbook example of a stagnant market with flat demand and more than enough supply.

The one bright spot in the sub-index continues to be the permanent magnets used in electric motors for wind turbines and other products. These elements include neodymium and samarium.

Research and Markets recently published its “Permanent Rare Earth Magnets Market – Drivers, Opportunities, Trends & Forecasts: 2015-2022” report. It said that the global permanent rare earth magnets market is expected to grow at a CAGR of 13.2% during the forecast period 2016-2022 to reach $41.41 billion by 2022.

For Lynas, and the companies that have invested in it, this market offers hope of salvation but we would exercise caution as always. China is attempting to consolidate its rare earths industry the same way it is attempting to do so with steel. The problem is that Beijing still exerts relatively little control over small, provincial mines that fly under the rardar of national mining standards.

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Permanent magnet demand has always been strong but it will need to grow by quite a bit to exhaust current Chinese production and, just like with steel, the consolidation process is slow and sure to be manipulated by the economic growth needs of the People’s Republic.

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