Few companies come back from a 99% plunge in their share price, but that's what an Australian rare-earths miner and chemical processor has done-thanks to the electric-car revolution and an environmental cleanup in China.
Lynas Corp. was a highflier six years ago as strong demand and tight supplies lifted prices for the unusual metals it produces, such as praseodymium and neodymium--they're used to make high-strength magnets and other products essential for a range of technologies. But from a market capitalization on the Australian stock exchange of $3 billion in 2011, Lynas' value plunged to $3 million in 2015. It was only a penny stock, worth just 2.3 Australian cents a share. High debt, problems building its processing plant in Malaysia and tumbling prices for rare earths had driven the company to the brink of collapse.
Tightly controlled rare-earths production in China, the world's major source of the odd elements, coupled with export restrictions, had driven prices sharply higher in 2011. But after the price boom came a rare-earths flood and a price crash. The only U.S. rare-earths company, Molycorp, went bankrupt in 2015. Lynas, a former gold miner, somehow survived, and today it's enjoying a rerun of the rare-earths shortage as China's tougher pollution laws and the growing popularity of electric cars are boosting prices.
For Lynas Chief Executive Amanda Lacaze, the road back has been rocky, with her first job being to stabilize the business and satisfy creditors while ensuring that the Malaysia plant was able to meet customers' demanding specifications. She laid off much of the headquarters staff in Sydney and moved the rest and herself to Malaysia. Only in the past 12 months has the mood at Lynas started to reflect the rising prices for rare earths. Indeed, the price of its most basic product, a mix of praseodymium and neodymium that is marketed as NdPr, has risen from around $40 a kilogram in September of last year to more than $90 a kilogram now.
That rise, coupled with record rates of production, enabled Lynas to lift its revenue from $139 million in the 2016 fiscal year to $194 million in the year ended June 30 and cut a $68.5 million loss to $11.2 million. That trend accelerated in the quarter ended in September, with sales reaching a record $88 million, up 108% from the same quarter last year. "It was our first champagne quarter," says Lacaze. "Revenue, production and cash flow from operations all reached record levels. In addition, we recorded significant improvements to our balance sheet."
The straight-talking Melbourne-born Lacaze, 57, who lives with her husband near the company's plant outside of Kuantan in east Malaysia, is quick to advise against seeing Lynas as a miner. "We are a specialty chemical company," she says. "We just happen to mine the raw material we need for the production of a range of unique products."
It's rare for a woman to lead a chemical or mining company--Australia's richest person, iron ore queen Gina Rinehart, is another exception--but it's probably more unusual that Lacaze's background isn't in chemicals or mining. Her career has been spent mostly in marketing with companies such as Nestl? and Australian telecommunications leader Telstra, where she worked as marketing director. It was her marketing and management skills that persuaded Lynas to hire her as CEO in 2014.
Those skills have been instrumental in smoothing relations with the Malaysian government, particularly on the thorny issue of preventing leaks of radioactive waste. Lynas is required to report regularly to the Malaysian Atomic Energy Licensing Board, as well as pay a security deposit.
Lynas' rare earths come from the Mount Weld mine in Western Australia. It's an unusual mine because it does not operate continuously. Instead, roughly two "campaigns" a year lasting a few months each are all that's required to extract enough ore for a year of processing in Malaysia.
Richer in rare earths than most Chinese mines, Mount Weld is a competitive advantage for Lynas, while the modern Malaysia processing plant and its strong customer support, especially from Japanese manufacturers keen to support a non-Chinese source of supply, are also key assets. Because some rare earths have military uses, such as in precision-guided weapons, they have sometimes been at the center of diplomatic disputes. One time was in 2010, when China banned exports to Japan after a Chinese fishing boat was detained by the Japanese coast guard.
Electric cars are the biggest driver for rare earths today, with each requiring 2 kilograms of rare-earths magnets for power steering, power train and chassis components; the small electric motors that operate windows, wipers and seats; and other uses. The average electric car uses ten times more permanent magnets--ones that never lose their magnetism--than a traditional car. Wind turbines generating energy are another significant growth area for rare earths, with a turbine gear box requiring 220 pounds of rare-earths magnets.
Notoriously tricky in every way, the 17 elements that make up the rare-earths family not only have tongue-twister names such as dysprosium, ytterbium and gadolinium, but are neither rare (just hard to produce and pronounce) nor earths (they're minerals).
In addition to their use in long-life, high-strength magnets, rare earths find their way into a wide variety of products, such as oil refining (lanthanum), glass production (cerium), X-ray machines (thulium), naval sonar systems (terbium), aerospace equipment and golf clubs (scandium, as an alloy with other metals). None of the rare earths are required in large quantities, which means that the market can be quickly satisfied. This presents a challenge for achieving a balance between supply and demand, a test made more difficult by the nature of China's centrally planned economy.
Extreme price moves and a very thin market have been a feature of rare earths for decades. A 2006 story in Forbes Asia (before Lynas started mining rare earths) chronicled an earlier surge in demand, when the rare earth europium was expected to be the big profit earner. But demand for europium, which is used in lasers, never developed as expected.
Lacaze acknowledges the importance of Chinese production controls in lifting rare-earths prices and cautions that it would be unwise to assume this will become a permanent feature of the market. "The next trap is believing the market will look like it does now forever," she says.
That view means that Lacaze remains focused on cost controls at the Malaysia plant and in expanding its range of products. In its latest quarter Lynas produced 1,442 metric tons of NdPr, up 99 tons on the previous quarter. Lacaze said in her quarterly report that demand for NdPr was being driven by factors that included magnet makers stocking up as a hedge against future price rises, speculation about China building a strategic stockpile and "intensification" of environmental compliance investigations by Beijing.
More work is required for Lynas to rid itself of the memories of its near-death experience, including the continued retirement of debt and a one-for-ten share swap to shrink a bloated stock register. It's also developing new products, including new grades of cerium. And its lanthanum product has been approved for purchase by two new customers. Commercial shipments are scheduled to start next month.
Source: Forbes Asia