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What does Wesfarmers’ A$1.5bn bid for Lynas mean for the rest of the rare earths miners?

Wesfarmers has put the cat amongst the rare earth pigeons
What does Wesfarmers’ A$1.5bn bid for Lynas mean for the rest of the rare earths miners?
Rare earths are increasingly in demand for use in renewable energy projects and electric vehicles

It was an unsolicited bid, and it was swiftly rejected.

But industry watchers and analysts alike are now speculating that Wesfarmers’ A$1.5bn cash offer for Lynas Corporation Ltd (ASX:LYC) could be just the opening round in a full flown bidding war.

That Lynas rejected the offer was perhaps unsurprising, given the company’s commanding position as the world’s largest producer of rare earths outside of China.

On the other hand, the Wesfarmers bid, at A$2.25 per share, was at a 45% premium to the prevailing share price, and more than 35% higher than the weighted average price at which the shares traded over the past sixty days.

If Wesfarmers, a mighty corporate giant in Australian and indeed global terms, is prepared to offer that sort of premium as an opening bid, who’s to say that it, or someone else, won’t go higher.

In its rejection of the offer, Lynas pointed to a series of conditions that are attached to the Wesfarmers offer, including standard due diligence procedures, but the real objection centred around value.

One Australian analyst, quoted in the local press, argued that the company, with its Australian rare earths mine and its Malaysian processing facilities, could be worth as much as A$2.5bn.

And Dylan Kelly, at investment house CLSA, argued that “the offer is far too low and other bidders will likely pay more.”

Prior to the offer, Lynas shares had lost more than 40% of their value over the past 12 months. But the shares jumped by 35% on the day, to A$2.10.

Not everyone was enthusiastic, though.

One analyst, at Bank of America Merrill Lynch, said he was “ambivalent” about the deal. Others pointed out the obvious opportunism in bidding at a period of considerable weakness in the Lynas share price.

That price weakness has largely come about because of regulatory issues with Lynas’s Malaysian facility. Wesfarmers argues that with the greater financial heft it brings, it could be in a better position to square off those issues. On the other hand, one of the many conditions it has attached to the offer relates to getting properly comfortable with the Malaysian situation.

But while these two companies tussle over value, a wider question has now been opened up in the market: what exactly are rare earths assets worth these days?

There is an ongoing assumption that the use of rare earths in electric vehicles is only likely to increase demand over the long-term. On the other hand, it’s no secret that in spite of the name, rare earths aren’t actually that rare.

In the case of the junior explorers and developers it’s always going to be more about the economics than the discovery.

Thus the high-grade at the Gakara project of Rainbow Rare Earths (LON:RBW) ensures the margins necessary to mitigate against the transport costs out of Burundi and against the relatively small scale of the project.

Meanwhile, the likes of Mkango Resources (CVE:MKA)(LON:MKA), Greenland Minerals (ASX:GGG), and Alkane Resources (ASX:ALK) will be watching with interest as they advance their own respective projects in Malawi, Greenland and Australia respectively.  

In London, broker SP Angel said the Wesfarmers bid for Lynas “may help to support interest in Mkango.”

But it’s what happens next that will be really interesting.

Against a backdrop of a forecast 50% rise in the prices of both neodymium and praseodymium, other companies interested in bidding for Lynas may now be flushed out into the open. If a Chinese company were to move into the frame, the rare earths market would go into a frenzy. Such a move would seem unlikely, though if only because the Chinese have already tried to acquire Lynas’s Mt Weld mine in Australia once, and failed.

Instead, the idea that one specific party may be able to lock up the major non-Chinese source of supply is likely to set other miners, private equity houses, and perhaps also end users to thinking.

And in the process, the profiles of the other rare earths companies may well get a significant boost, as the market begins to wake up to the new interest in rare earths. After all, there may be plenty of rare earths around in the earth, but not many companies know how to produce it profitably.

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