Spread: 8% (to the rejected offer)
This is a bit more in depth overview of the situation that the one in my previous article.
Wesfarmers (OTCPK:WFAFF) have presented an indicative non-binding offer to acquire rare earths miner Lynas (OTCPK:LYSCF). The consideration stands at A$2.25 and although it brings 45% premium to the pre-announcement and 37% to 60 day-average prices, is quite opportunistic given that it comes at a problematic time for Lynas (problems with Malaysian government). The offer was rejected and Lynas decided to cope with their problems on their own. Given the buyer’s motivation it is quite likely that the bid can be increased. The main risk is here is further Malaysian regulatory actions, which are difficult to predict, especially that it is a third world country we’re talking about. This can also be a shorting case as if raising doesn't happen, Lynas is left in a very tight spot as reportedly they will be unable to fulfill Malaysian regulatory conditions in time. Again the questions here is how likely that the deadline can be extended.
Lynas mines and produces rare earths, which are heavily used in electronics, high powered magnets, wind turbines, oil cracking, hybrid vehicles etc. Reportedly, most of the industry (85%) is controlled by China, while Lynas with 10% stands as the biggest non-chinese player (although Lynas calls themselves as the only rare earths producer outside China). 77% of Lynas assets are located in Malaysia in Kuantan’s processing plant LAMP (Lynas Advanced Materials Plant), but they also have a high grade plant in Australia (Mt Weld) and a project in Malawi (currently put on hold due to a dispute with Malawi’s government). So rare earths are mined in Australia and then are getting shipped to Malaysia for processing.
One of the residues that LAMP produces (WLP) is naturally radioactive and is classified as a low level radioactive material, that has to be managed according to a certain license that was granted by Malaysian government in 2014, renewed in 2016 and now has to be renewed once again this year. License agreement states that the radioactive waste must be recycled or stored in a permanent disposal facility. Till now Lynas stores it in their own storage facilities (not permanent), which are approved by the Malaysian government and overall LAMP’s operations have been rated as “intrinsically low risk” so far.
Three main Lynas shareholders are:
and it is quite interesting that in this problematic time during (4 months) the lows, all three of them have increased their ownership. Greencape - from 8.23% to 9.27%, Challenger - from 8.24% to 9.28% and FIL - from 6.23% to 7.32% and then to 8.37%.
Malaysian government has been reviewing Lynas business for some time already and was pushing for Lynas to build a permanent disposal facility (instead of the current storage). Lynas has also planned to build PDF for several years now and its framework as well as the potential site for the construction has been already approved by the government in 2014. Moreover, Lynas has also deposited $34m to the government in form of bonds for taking care of the waste in the future. So, it is understandable that the recent conditions on license renewal came as a surprise and initially Lynas has even considered a legal action against the regulators. The conditions are:
To export all of the radioactive waste (WLP) before the 2nd of September 2019.
To come up with the action plan to dispose another waste (NUF), which is not radioactive.
Estimated amount of waste that has to be disposed is 450k tonnes. This situation is quite serious and the report made by LYC auditors state that the company will not be able to fulfill them in the given time and the risk to the business is high: “These conditions indicate the existence of a material uncertainty that may cast significant doubt about the consolidated entity’s ability to continue as a going concern,”.
Then a few weeks after the regulatory review, Lynas has received an offer from Wesfarmers at A$2.25/share. Despite bringing 45% premium to the last-close price and 36% to 60 day average the offer is priced exactly at the price that Lynas has closed the day before new conditions were announced. Alongside the offer Wesfarmers has proposed A$38bn plan to build their own facility in West Australia and in the future process the waste there instead of doing it in Malaysia. This has been criticized as a very risky plan as the building costs can get out of hand very easily as it happened before with Molycorp. Just a few days ago Lynas has rejected Wesfarmers bid as it undervalued its “intellectual property” and further commented that they are confident to be able to create better value for the shareholders alone. Currently Lynas is looking at five potential sites for a new facility.
The way Wesfarmers act in this whole situation is very interesting also. Although they don’t own any shares of the target company and their offer is still only indicative, it has secretly held meetings with Malaysian government about their proposal to not only export the waste out of the country, but also to process them elsewhere in the future. It is also interesting, that these talks were held before the Malaysian regulators announced that future processing outside Malaysia will also be required. So no wonder that there are speculations that Wesfarmers is working with Malaysian government behind the scenes on this. By the way, last year Wesfarmers have tried to enter into a joint venture with Lynas, but the discussions were fruitless. So overall, the buyers definitely seems very motivated.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.