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Jack Lifton is an Independent consultant and commentator, focusing on the market fundamentals and future end use trends of the rare metals. He specializes in the sourcing of nonferrous strategic metals and on due diligence studies of businesses in that space. His work includes exploration,... More
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  • Rare Earths, Reality, and High Finance 10 comments
    Jul 26, 2011 12:58 PM | about stocks: , MS, LYSCF
     

    Mitsubishi(OTCPK:MSBHY) and Lynas(OTCPK:LYSCF), A Love Affair or a Divorce from the dollar?

     

    This morning my Google filter caught the following story abstract from Industrial Minerals, which can be found at http://www.indmin.com/Article/2871816/Channel/19557/Mitsubishi-takes-stake-in-rare-earths-group-Lynas.html. I am not a subscriber to IM, so I have only the above abstract, but I am intrigued by what I believe it really implies, and I am really intrigued by the fact that the story abstract does not mention some very real implications here. It seems to me that:

    1.       Mitsubishi would right now rather have a bundle of securities, 25% of which is in Lynas shares, than a claim on US Dollars, and

    2.       Morgan Stanley (NYSE:MS) would rather let go of a substantial stake in Lynas than give up cash

    What I see here as a logical consequence of my view of these actions is that Morgan Stanley believes it can get no further added value from its Lynas sate, and that Mitsubishi would rather have securities than a right to a fixed amount of American currency.

    Either the author of the IM article or I may be guilty of the logical fallacy called post hoc propter hoc, which is Latin for “After this, (therefore) on account of this.” It means that you cannot assume that an event that follows another event in time is necessarily caused by that prior event.

    I think it just as likely that Mitsubishi and Morgan Stanley have the views I expressed above as it is that this transaction was driven by a desire for Mitsubishi to acquire shares in Lynas.

    No matter what however I’d like to know why Morgan Stanley did what they did. Mitsubishi, it seems to me, got the best of the deal, unless Morgan Stanley knows something we don’t.

    Please, if anyone has read the IM article fully tell me if I am off track here.

    Themes: rare earths, dollar Stocks: , MS, LYSCF
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Comments (10)
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  • Mayascribe
    , contributor
    Comments (9597) | Send Message
     
    I agree with your sentiment, Jack. Why would Morgan Stanley want dollars when they are being devalued by the FED, when they can hold, or should have held onto a shares of a company that's soaring in valuation?

     

    Methinks there's something afoot with Morgan Stanley in their raising cash, or rather, taking the obvious wrong side of this transaction. Of course, the euro is expected to come even with the dollar sometime in the not-to-distant future. So maybe Morgan Stanley is raising cash to invest in European companies, just as In-Bev bought Budweiser when the dollar was cheap relative to the euro.

     

    A little sneaky fact I stumbled into, and that garnered little if any MSM attention, was that the big banks were forced to up their reserves about two months ago.

     

    A tie in? Who knows.

     

    (Loved your recent Great Western piece, especially in how you wrote with wit and humor about the legal theatrics endured, and conquered.)
    26 Jul 2011, 01:34 PM Reply Like
  • Jack Lifton
    , contributor
    Comments (407) | Send Message
     
    Author’s reply » Mayascribe,

     

    Thank you. I actually enjoyed the David and Goliath thing with these arrogant asses who think that if they surround themselves with yes-drones they are safe from criticism. In my case I think that I was pointing out that the emperor's wardrobes had malfunctioned badly, and they got scared of catching a cold wind you know where.

     

    Jack
    26 Jul 2011, 01:46 PM Reply Like
  • tripleblack
    , contributor
    Comments (13440) | Send Message
     
    This may be a very subtle situation involving some very quiet horse-trading occurring between the giant Japanese business groups (keiretsu, or earlier "zaibatsu") which dominate Japan.

     

    Mitsubishi is one of the strongest, but also one very dependent upon a steady supply of rare earths. Many of their major components use them: Mitlsubishi Electric, Mitsubishi Precision, Mitsubishi Motors, Mitsubishi Heavy Industries, Mitsubishi Fuso, Nikon, Mitsubishi Chemical, Mitsubishi Gas Chemical, Mitsubishi Rayon Co., Mitsubishi Materials, Mitsubishi Plastics, Asahi Glass, Nippon Sythetic Chem., and Mitsubishi Steel.

     

    Mistubishi is in direct competition with the other Keiretsu, but it is not unknown for them to forge alliances of convenience.

     

    Sumitomo (which has a large and intricate involvement with MCP) has relatively little direct exposure to the REE supply problem, and is NOT (unlike Mitsubishi) a major chemical player, so its positioning importing large quantities of REE supplies means that it is establishing itself as a major middle-man in Japan.

     

    Sumitomo also has a close alliance with another large keiretsu, Mitsui, who does consume large quantities of rare earths, and who is in direct competition for these markets with Mitsubishi.

     

    Does Mitsubishi gain a potential advantage from this unusual deal with JPM via the Lynas stock?

     

    We may never know what transpires at such a high level in the shadowy realm of the keiretsu/zaibatsu lords, but I believe there are few coincidences in these things.

     

    JPM's motives could involve any number of exchanges of favors or business relationships which will appear to be "off-camera", involving the mammoth keiretsu organizations and their dozens of major company/members, and the hundreds of moderate-sized subordinates.

     

    Perhaps we will learn more at some later date, when Sumitomo begins receiving rare earth shipments, and it might become known how they will be apportioned out across the various potential customers.

     

    Hitachi just announced their intent to move 20% of their magnet manufacturing to China. This does not bode well for their deal with MolyCorp, it seems to me, nor does their membership in the DKB keiretsu, which may be the single largest consumer of rare earths in Japan. I have always felt that their deal with MCP was both representing their own legitimate magnet business, but also as a "representative" of the DKB.

     

    I won't claim to understand the ins and outs of these intricate ilnks between the various keiretsu, but I would not be surprised to subsequently learn that there is much more than meets the eye with the JPM/Mitsubishi affair.
    26 Jul 2011, 02:31 PM Reply Like
  • optionsgirl
    , contributor
    Comments (5045) | Send Message
     
    Triple, I don't understand your comment. What has JPM to do with this deal? It's Morgan Stanley that was involved. Are you referencing something else? I am missing something here. Please, explain.
    26 Jul 2011, 02:36 PM Reply Like
  • tripleblack
    , contributor
    Comments (13440) | Send Message
     
    Oops. I transpose JPM and MS. My error is all, MS is what I should have written. I have JPM on the brain, it seems.
    26 Jul 2011, 09:44 PM Reply Like
  • Mayascribe
    , contributor
    Comments (9597) | Send Message
     
    Thanks TB. You had my eggs scrambled. Great catch OG!
    26 Jul 2011, 09:54 PM Reply Like
  • tripleblack
    , contributor
    Comments (13440) | Send Message
     
    Meant to add, Sojitz (Japanese firm funding much of Lynas buildout) is part of the DKB (Hitachi) keiretsu.
    26 Jul 2011, 02:46 PM Reply Like
  • Jack Lifton
    , contributor
    Comments (407) | Send Message
     
    Author’s reply » Tripleblack,

     

    Thank you. Your remarks are fascinating as well as a peek at the world of Japanese corporate inter-relationships. I'm sure that there are wheels within wheels of Japanese industrial intrigue going on here, and I'm sure we will never really know why this transaction occurred. I am sure however that Japanese companies are most interested in their own welfare and survival and care little about what happens to American competitors. I doubt very much if its a mystery in a deal between Hitachi and MCP as to "who's on top."

     

    Jack
    26 Jul 2011, 05:22 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1464) | Send Message
     
    I interpret these transactions differently.

     

    First, it's important to understand that there are additional facts not mentioned in the abstract. Most importantly, Japan will get access to a reliable source of rare earth elements by providing Lynas with financing for it's second phase of construction which will double the capacity of it's mining and finishing plants.

     

    Although ensuring access to future supplies of rare earth elements produced by Lynas' expanded facilities is beneficial to Japan, to further compensate them for providing Lynas with low cost financing to complete construction of their second stage facilities, it was agreed that Mitsubishi would also be permitted to acquire a 10% equity stake in Lynas. Rather than issuing additional Lynas shares, which would have been dilutive to Lynas shareholders, Mitsubishi exercised it's right to convert the Morgan Stanley convertible bonds that it already owned into shares of Morgan Stanley. Since Morgan Stanley is a large holder of Lynas shares, this effectively gave Mitsubishi the 9.9% stake in Lynas that it desired.

     

    Since Mitsubishi already owned MS convertible bonds, the right to convert these bonds into shares of MS belonged to Mitsubishi. The decision to convert was therefore made by Mitsubishi pursuant to the terms of the convertible bonds that were likely favorable to Mitsubishi. As such, MS would have no say in Mitsubishi's decision to go forward with the conversion of the convertible bonds that Mitsubishi was entitled to convert. If this understanding is correct, then it is irrelevant to speculate as to what Morgan Stanley would prefer to own, e.g., cash or Lynas shares.

     

    It is an unusual way for Mitsubishi to go about acquiring a stake in Lynas, however. To understand why Mitsubishi chose this path, I would suggest that attention be directed toward the terms under which they were able to convert their MS convertible bonds into MS shares. Given the difficulties MS and other US investment banks had in attracting capital during the 2008 financial crisis, And the subsequent rebound in the price of MS shares, I suspect that Mitsubishi was able to convert the MS convertibles into MS shares at very attractive terms.

     

    This unusual turn of events was very fortuitous to Lynas shareholders since the number of Lynas shares outstanding was not increased, so their ownership of Lynas was not diluted. Whoever called these opportunities to the attention of Mitsubishi did both Mitsubishi and Lynas shareholders a big favor.
    29 Jul 2011, 11:29 PM Reply Like
  • tripleblack
    , contributor
    Comments (13440) | Send Message
     
    There may be a dark lining in the silver cloud, however. Much of the angst among the Malaysian demonstrators being leveled against the LAMP derives from their earlier experience with a major Japanese manufacturer's environmental problems in their country...

     

    A company called "Mitsubishi".

     

    With Mitsubishi poised to become a major shareholder in Lynas (even indirectly) this could have political repercussions in Malaysia.

     

    This is NOT to imply that I agree with the luddite movement causing most of the trouble in Malaysia. I distrust their true motivations all down the line. But that they might seize on this as a weapon must be considered.
    30 Jul 2011, 09:51 AM Reply Like
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