|06 June, 2019

Rare earths expose the trouble with next-gen M&A

The $29bln retail-to-fertilisers conglomerate swooped on a weakened Lynas in March, after selling out of coal and spinning off supermarket chain Coles

Image used for illustrative purpose. A truck passes containers at PSA's Tanjong Pagar container terminal in Singapore January 4, 2016.

Image used for illustrative purpose. A truck passes containers at PSA's Tanjong Pagar container terminal in Singapore January 4, 2016.

Reuters/Edgar Su

SINGAPORE - The next generation of strategic metals is an M&A headache. Beijing's threat to squeeze exports of rare earths has added over a third to the value of $1.3 billion Sydney-listed Lynas Corp, one of few non-Chinese producers. That's a blow for its suitor Wesfarmers. It also underlines just how hard it is for the largest players to invest in the ingredients for a green economy.

The $29 billion retail-to-fertilisers conglomerate swooped on a weakened Lynas in March, after selling out of coal and spinning off supermarket chain Coles. Unfortunately for the Australian heavyweight, the rebuff it received has now been validated by China’s willingness to use its grip on rare-earth production as leverage in its trade war with the United States. Wesfarmers’ A$2.25-per-share offer now compares to a Lynas market price that touched A$3.16 this week, double where it was at the time of the offer.

It’s been tough for old-school miners and behemoths like Wesfarmers to tap the ingredients that will feed the world’s appetite for gadgets, magnets and rechargeable batteries. Chief Executive Rob Scott’s outfit, eager to use its processing nous, has bought lithium producer Kidman Resources for $530 million. But Rio Tinto’s experience is more telling: after setting up a ventures arm some two years ago, it has yet to do a single deal.

First, there is the issue of size. These were for years long-tail opportunities, with a narrow niche of applications: lithium treated bipolar disorder in people before it became a sought-after battery ingredient. So mines and projects are smaller too. Given the type of metals, few opportunities are of the sort that BHP and its peers like: low-cost, expandable, and long-dated. By-products like cobalt, which is almost never mined for itself, are also just too hard to find. Finally, the pricing of many new-tech commodities remains opaque.

Lynas could yet seek out Wesfarmers. The risks it faces, after all, remain: Malaysia, where the rare earth producer owns an $800 million processing plant, said last week it could keep operating amid a dispute over environmental issues. For now, Lynas and the like can soar. Big buyers will sit back and watch.

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CONTEXT NEWS

  • Shares in Lynas Corp have climbed 37% since May 20, when Chinese President Xi Jinping visited a rare-earths plant. The Australian company now has a market value of $1.3 billion.
  • Since March 26, when Wesfarmers said it had made a conditional offer at A$2.25 a share, the price has more than doubled, and touched a five-year high of A$3.16 on June 3. It has since eased, closing on June 5 at A$2.73.
  • Lynas Corp rejected the initial Wesfarmers bid as highly conditional. It argued in April that the offer undervalued its intellectual property, engineering, processing and product development.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Una Galani and Sharon Lam)

© Reuters News 2019

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