In my opinion, Lynas (OTCQX:LYSDY) is a worthy buy right now, especially for a portfolio which seeks to take long-term strategic risks across asset classes.
Don't let the pink-sheet ticker fool you; we're talking about a billion-dollar market-cap company followed closely by the big-name financial institutions. It is a supplier of rare earth (high-tech) metals, which are necessary for a wide range of today's consumer, producer, and military electronics. Lynas and Molycorp (NYSE:MCP) represent the two biggest mining players in rare earths outside of China.
Rare earths have real demand and scarcity, but there was a bit of a hype storm for the last couple years which inflated valuations. The hype has calmed down for now. Anyway this consideration is secondary for Lynas, as it is trading primarily based on political risk in Malaysia.
If one buys Lynas now, one is betting against a political risk: Malaysia may cancel Lynas' mine processing based on environmental protest. This political risk is of a unique nature, as I will explain below. So from a diversified allocation perspective, Lynas allows one to deploy capital into two categories: unique political risk, and rare earths.
Okay, here's what happened in Malaysia. Lynas built a huge rare earths mine which is supposed to start shipping to customers in less than a year. You can read more details here. Very conservative back-of-the envelope calculations suggest the Malaysian processing plant will generate between $.5-1BB annually. Rare earths are a growth area over the next decade, so anticipating a price/sales of 4 seems reasonable. And Lynas has other projects. The immediate upside was established in 2011, when the market cap breached 4 billion. But recently an environmental protest combined with social media and an election have delayed and imperiled the Malaysian ruling coalition's ability to continue protecting Lynas' project.
One of the smartest people I know, whose family one would rarely want to bet against, told me about Lynas.
my relatives think [Lynas] will go to 10. It is a rare metals manufacturing plant in Malaysia, if it gets approved then it will shoot up since they have 10 years of back orders. But the Malaysians are protesting it. No one knows what will happen.
News in Malaysia is owned by the ruling coalition, which is allied with Lynas. Normally this would make things difficult for protesters. However, this protest has skillfully used social media like Facebook (NASDAQ:FB) and Blogspot (NASDAQ:GOOG) in tandem with participation from opposition politicians. The stock market has been caught off guard by this because it was pricing the politics as a safe bet. But does Lynas really deserve to be singled out for "social media risk"?
I asked Ryan Holiday, social media manipulator and bestselling author of Trust Me, I'm Lying, for his perspective.
Political causes aren't what I specialize in, but if we back it up a bit, I think you can see that the problems facing this mining company presage what a lot of publicly traded companies are going to find themselves blindsided by in the future. Look at Overstock.com--in 2011 they had to put social media as a going concern in their 10-K. Notice they didn't say: 'we're doing all this bad stuff and we're worried someone will find out and our public perception will suffer.' What they are saying is that the information on social media while often inaccurate is immediate in its impact. So it doesn't really matter if it's true, if the protestors are representative or if the scandal will impact business. What matters is that you can be crucified or redefined in an INSTANT by the web--by the efforts of bad actors or by the system manipulating itself.
Look at Apple. They lost $4 BILLION off their market cap because of a bad report by Engadget a few years ago. That is really scary. And it's a kind of black swan that I think investors need to be aware could happen.
Every company is at least partially exposed to this online shakedown in some way. Blogs produce content cheaply and externalize the costs onto other people--often the people they are writing about. Their posts are inexpensive to produce but expensive to be the subject if they are wrong.
[Lynas CEO Nicholas Curtis] said he didn't recognize the power of social media to make an issue out of something. That's got to change. We've seen it happen enough times now that there is no excuse for ignorance. It's scary but it's real. I've personally seen blogs misreport about bogus lawsuits filed against companies I rep and those reports costs 10s of millions of dollars. You can never full protect yourself but if companies don't have a crises management team in place they are really fucked .
It is my opinion that the Malaysia project may be delayed, but that it will ultimately move forward. I think this stock is pricing in a social media risk that the vast majority of assets are not pricing in--and I think this is a market inefficiency worth exploiting.
In much of Southeast Asia, foreign miners bribe politicians and extract resources without regard for the environment. I know of villagers who drowned at their beach--a ship came and sucked out their black sand, deepening the floor that they were relying upon. Whereas, Lynas devotes a considerable amount of resources to safety and documentation. It is not perfect, but neither are the Chinese supply chains that made your smartphone.
Why not get some rare earths exposure as a hedge against inflation? You're probably already exposed as a consumer.
The risk is already priced in. Social media's protest of Lynas is unprecedented in Malaysia and not to be underestimated, however as Ryan's book demonstrates: social media can mess things up for companies in any country. The guerrilla artists caught management by surprise, but it shouldn't be too hard to clean up their mess in Malaysia.