Wesfarmers eyes rare earths market with $1.5b takeover bid for Lynas Corp

Wesfarmers Limited (ASX: WES) has made a surprise $1.5 billion grab for rare earths miner Lynas Corporation (ASX: LYC), offering Lynas shareholders a cash price of $2.25 per Lynas share, representing a premium of 44.7% on Monday’s price at close of trade.

The move comes at a time when Perth-based Lynas is feeling the pinch of discord with the Malaysian government over toxic waste management at the $1 billion Lynas Advanced Materials Plant (LAMP) at Kuantan, on the peninsular’s east coast.

LAMP is one of the world’s largest rare earths refineries and handles processing duties for Lynas’ Australian operations before selling the end product to buyers in Japan, Europe, China and North America.

Radioactive controversy

Six-year-old LAMP has been embroiled in controversy since Malaysian authorities voiced concern last year over the growing amount of accumulated low-level radioactive residue at Lynas’ open landfill temporary site.

The government believes the residue could be hit by major flooding or other natural disasters, thereby posing a significant risk to surrounding communities and the environment.

In December, it slapped two additional waste management conditions onto the licence renewals process for Lynas ahead of the expiry of two of the company’s licences this year.

Lynas now has the choice of recycling its residues or sorting them into a permanent disposal facility.

LAMP may face closure if the miner cannot adequately resolve the issues.

In January, Lynas chief executive officer Amanda Lacaze said the company’s “preferred course of action” was to achieve resolution via ongoing discussions with the Malaysian government.

A condition of Wesfarmers’ takeover bid is that Lynas’ relevant operating licences in Malaysia are in force and will remain in force for a “satisfactory period following completion of the transaction”.

High-growth space

The Wesfarmers bid will call on cash resources amassed when the Coles Group was spun-off last year as a new ASX-listed entity, and the Bengalla coal project and Kmart Tyre & Auto chain were divested.

The coal divestment alone put almost $900 million into Wesfarmers’ coffers, while the Kmart sale to German automotive manufacturer Continental AG brought home another $350 million.

The bid has some experts suggesting it may be the conglomerate’s way of securing a seat at the table of high-growth, high-technology industries such as electric vehicles and wind turbines.

Rare earths are used in the manufacturing process of high-technology goods such as electric and hybrid vehicles with neodymium-praseodymium (NdPr) in particular, being a critical component in the manufacture of powerful magnets for electric motors and generators.

Lynas is the world’s second largest producer of NdPr and the leading supplier of both elements to the free market, from its Mt Weld central lanthanide deposit – one of the world’s richest sources of rare earths.

The deposit was upgraded last year to a new mineral resources estimate of 55.4 million tonnes at an average grade of 5.4% total rare earth oxide for 3Mt of contained TREO.

“Demand for rare earths continues to grow and this update confirms our ability to maintain 25-plus year ore reserves at a higher output … with potential for replenishment and further growth,” Ms Lacaze said at the time.

Significant producer

CLD ore mined at Mt Weld is processed onsite to produce a rare earth concentrate which is then is sent to LAMP for further refining.

The plant churns out more than 20,000t a year of specialty rare earths materials – a figure Lynas said could easily expand to meet increased market demand.

That means if the takeover attempt succeeds, Wesfarmers could become the new owner of the most significant rare earths producer outside of current global powerhouse China.

In 2017, China’s mining industry output a whopping 105,000Mt of mined rare earths and exported 39,800t of rare earth materials.

But by 2020, the nation is poised to limit its rare earth production volumes to just 140,000t per year, freeing up space for other companies to become involved in the coveted industry.

Conditional offer

Wesfarmers’ takeover proposal is conditional on, among other things, entry into a process deed to govern its due diligence activities and the negotiation of a binding implementation agreement with Lynas.

Wesfarmers managing director Rob Scott said the company is “uniquely placed” to support Lynas’ future through further capital investment to support downstream processing assets and realise the full potential of the Mt Weld ore body.

“An investment in Lynas leverages our unique assets and capabilities, including [those] in chemical processing, and will deliver Lynas’ shareholders with an attractive premium and certain cash return,” he said.