Wesfarmers sends bullish message to mining investors with bid for Lynas

Rare earths made headlines this week thanks to a controversial takeover bid for Lynas Corporation
29th March 2019
Tim Treadgold

Rare earths made headlines this week thanks to a controversial takeover bid for Lynas Corporation, but whether the offer from Wesfarmers succeeds or not, the important message is that one of Australia’s biggest industrial companies has decided it’s time to invest in mining.

More specifically, the move on Lynas is fresh evidence that the electric car revolution is more than a passing fad, reinforcing the case for the broad family of metals needed in electric motors, either as fuel (lithium) or in other applications such as high-strength magnets (rare earths).

Lynas shares soared after Wesfarmers lobbed its $2.25 a share bid and despite the target adding 48c (30%) to $2.10, it is significant that the market price is well below the bid price, a sign that the investors expect a drawn-out battle or eventual withdrawal of the offer.

Other stocks exposed to rare earths moved up modestly thanks to the spotlight being applied to their industry.

Alkane, which has spent almost 20 years trying to develop the Dubbo zirconia and rare earths project in NSW, rose by 2c to 24c. Northern Minerals which is mining rare earths in the north of WA, added 1c to 8.3c. Peak Resources, which owns the Ngualla rare earth deposit in Tanzania, moved up by 0.4c to 3c, and Hastings Technology Metals gained 2c to 20c, as well as copping a “pleased explain” from regulators over recent announcements

Before a more detailed look at the Lynas situation a snapshot of other events on the Australian market this week included:

  • Gold stocks having a mixed week with fresh share price highs for Doray, Gold Road, Newcrest, Perseus and Ramelius offset by a hefty fall from St Barbara and a fresh share-price low for Kin.
  • Zinc led the way among the base metals rising to a six-month high.
  • Iron ore remained elevated at $US85 a tonne thanks to Brazil’s ongoing production problems and improving demand in China.
  • UBS, an investment bank, said after a five-day tour of industrial centres that business conditions in China were improving thanks to government stimulus of the local economy, and
  • Macquarie Bank told clients that nickel, gold, silver and platinum were its preferred metals for the next 12 months – cobalt, lithium, manganese and coal were the least preferred.

One reason the Wesfarmers bid for Lynas might fail is that the Lynas Advanced Materials Plant (LAMP) in eastern Malaysia is a red-hot political potato.

After processing ore mined at Mt Weld in WA to produce a mix of praseodymium and neodymium, two of the 27 rare earths, its leaves a difficult residue, some of which is radioactive.

Local activists, as well as some members of the Malaysian Government, are annoyed that Australian-originated radioactive waste is being stored in their backyard.

Wesfarmers, which has a deep chemical-processing history in producing fertiliser, cyanide and the explosives used in mining, as well as historic ties to Mt Weld, reckons it can solve the waste problem and become a globally important provider of metals essential in the mobile electrification revolution.

But once you cut through the uncertainties of the Lynas situation, the key message for investors is that a top-10 Australian company has clearly signalled that it wants to boost its mining exposure after selling out of coal – and its preference is for new-technology metals.

Other market-linked reports which might help investors pick a winner, or dodge a loser, included:

  • Citi, an investment bank, told clients that the best way to “play” the palladium boom was to buy platinum because car makers would soon start switching away from over-priced palladium and start using more platinum in their engine exhaust systems.
  • Macquarie named Northern Star, Newcrest and Evolution as the best big goldminers and Resolute, Dacian and Bellevue as the best of the small to emerging miners – with a special mention for Pilbara as its preferred lithium stock, and
  • Panmure Gordon, a London-based merchant bank, warned that diamond prices remained under pressure, but a shortage of gems was on the horizon as old mines, such as Rio Tinto’s Argyle project in WA, reached their close-by dates. Top diamond pick from Panmure Gordon was Perth-based Lucapa.

Overall, the metals sector of the Australian market firmed modestly despite a lack of direction from commodity markets with gold easing slightly, along with copper and nickel, leaving zinc as the only base metal winner thanks to its rise of US4c a pound to $US1.32/lb.

A selection of other news of interest featured:

  • Dacian Gold added a more-than-handy 45c to $2.50 after announcing that productivity issues experienced in the current quarter could be overcome in the three months to June 30 when output is forecast to be between 50,000-and-55,000 ounces at an all-in cost of between $A1050/oz and $A1150/oz.
  • Independence Group slipped 3c lower to $4.85 despite announcing the development of its 30% owned Boston Shaker underground mine at the Tropicana project in WA. Investors welcome the gold expansion but were spooked by reports that Independence might sell out of the project to focus on “clean-energy minerals”.
  • Peel Mining enjoyed a rise on Thursday of 3c to 45c after reporting additional encouraging base metal assays from its Southern Night project in NSW. Best hit in the latest round of drilling was 23.1 metres at 22.54% zinc, plus 12% lead and 0.25% copper. Despite the one-day lift, Peel closed down 1c for the week.
  • St Barbara dropped by 39c to $3.43 after announcing than a feasibility study into slurry pumping ore from the depths of its Gwalia goldmine in WA had failed to deliver an expected cost reduction, forcing the company to stick with trucking.
  • Lucapa lost 1c to 18c despite winning a “best of breed” competition conducted by the London merchant bank Panmure Gordon of small diamond producers. The bank likes Lucapa’s high-grade gems, which will remain in strong demand even as smaller goods continue their price slide in crowded diamond market.
  • Moho Resources was heavily sold off after investors reacted negatively to the latest drilling news from the company’s Silver Swan North nickel project in WA. Assays are pending but the stock fell a sharp 5c to 10c before recovering on Thursday to 12c.
  • Pilbara Minerals added 8c to 80c after reporting positive developments at its flagship Pilgangoora lithium project in WA, including a third-stage scoping study which supported long-term growth.
  • Potash twins Kalium Lakes and Salt Lake Potash generated investment bank interest during the week on reports of offtake sales agreements and site works. Macquarie reckons Kalium Lakes is heading for a target share price of 82c, up 32c on the stock’s latest price of 50c, while Canaccord Genuity has a $1.19 target on Salt Lake, almost double the latest on-market trades at 60c, and
  • Strandline added half-a-cent to 9.2c after reporting additional thick and rich titanium minerals assays from its Tajiri project in Tanzania with a best intersection of 66m at 8.1% heavy minerals, starting at the surface.

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