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Wesfarmers makes A$1.5B bid for Lynas

Rare earths producer Lynas Corp. Ltd.'s ASX shares were up more than 31% during morning Asia trading hours on West Australian diversified major Wesfarmers Ltd.'s A$1.5 billion cash bid for it.

On March 26, Wesfarmers announced its nonbinding indicative proposal to acquire Lynas for A$2.25 per share, a 44.7% premium to the target's last closing price of A$1.55 and a 36.4% premium to Lynas' 60-day weighted average to March 25.

For Wesfarmers, it is a move back into mining. It exited coal when it sold its last interest, a 40% stake in the Bengalla thermal coal mine in New South Wales, Australia, to joint venture partner New Hope Corp. Ltd. for A$860 million in August 2018.

Lynas has thus far only said the bid was unsolicited and "highly conditional," that its shareholders need not take any action yet, and that it would release a more detailed response as soon as possible.

Wesfarmers said it is "uniquely placed" to support Lynas' future through further capital investment to support downstream processing assets and realize the West Australian Mount Weld ore body's full potential. It also noted its own complementary mining and chemical processing expertise and a track record of working with government and stakeholders to support local communities, possibly in reference to regulatory hurdles Lynas is facing at the Gebeng rare earths plant in Malaysia.

Lynas said in March it may close the Gebeng plant in six months given "material uncertainty" over its ability to continue as a going concern, after Malaysia outlined conditions for the future renewal of Lynas' license to operate, which included an action plan for radioactive residue removal.

Chinese-owned broker CLSA said in a same-day note that the bid was opportunistic as Lynas' stock price is depressed on political risk.

CLSA believes that the bid is too cheap in pricing in just US$50 per kilogram for neodymium and praseodymium against CLSA's own long-term price of US$68 per kilogram and the US$37-per-kilogram spot price.

Wesfarmers' offered price is "far too low and other bidders will likely pay more for it," and Lynas' production is of a "highly strategic nature," the brokerage firm said.

CLSA resources analyst Dylan Kelly said any further bid would need to come from a "friendly" country aligned with the interests of the U.S., Japan and the EU, particularly given Australia's Foreign Investment Review Board, or FIRB, knocked back China Northern Rare Earth (Group) High-Tech Co. Ltd.'s bid in 2009 for a 51.6% stake in Lynas.

FIRB said at the time that it could not exclude the possibility that Lynas' production could be controlled to the detriment of non-Chinese customers.

Kelly said in an interview that it would be "logical" for Japanese or South Korean trading houses such as Japan Oil Gas & Metals Natl or Toyota Tsusho Corp., or even the likes of Glencore PLC or other western trading houses, to come to the table.

M&A complexities

"The reality is that there is no natural or easy fit for this business," Kelly said. "[Lynas is] not really a mining company but a chemical and industrial stock, so Wesfarmers does make a certain degree of sense as it has chemicals and fertilizers businesses."

Wesfarmers said the bid requires a process deed to govern its own due diligence and a binding implementation agreement for approval by both its own board and Lynas'.

The offer also needs Lynas' shareholders' approval and a court approval, which relates to Lynas' current licensing arrangements with the Malaysian government needing to be renewed by Sept. 2, it is understood. This will take into account the government's requirements to remove the water leached purification residue produced from the Gebeng plant to Australia or elsewhere.

FIRB approval will not be required as Wesfarmers is not a foreign acquirer.

Morgans mining analyst Tom Sartor said that while Wesfarmers could help Lynas navigate the regulatory and technical issues in Malaysia as a bigger company, he warned that rare earths being a set of minor metals are also "more volatile to forecast, so the forecast returns on investment are a lot less certain than in coal."

Though Wesfarmers' exit from coal was understandable given fossil fuels are becoming harder for corporates to justify, "it's a curious re-entry into a different but equally tricky industry" as it would have to become acquainted with the intricacies of radioactive waste disposal involved in processing rare earths.