Lynas Corp Strikes $505M China Deal: Did The Actions Of Goldman Sachs Facilitate This Move Or Fail To Prevent It?

China today produces at least 95% of the world’s supply of rare earth elements (REEs) from its domestic mines primarily in Inner Mongolia. At the beginning of 2008, two very large Australian REE mines were well on the way to coming into production. Either one of them would eventually have been the largest single-point mine for REEs in the world. One of the Australian companies was also beginning construction of a REE refinery in Malaysia, which would have been the largest in the world outside of China.

Control of the shares of both of the Australian companies is now coming into hands of state-owned, aggressive Chinese mining and trading entities. It has been predicted that Chinese domestic demand for REEs will exceed its domestic production in the next 2-4 years. That is precisely how long it will take for the two Australian mines and the Malaysian refinery to be brought into production. Three significant REE mining possibilities, only, now remain out of Chinese control.

Two months ago. GoldmanSachs, which had last year underwritten a bond issue for Australia’s Lynas Corp to fund the construction of a Malaysian-sited REE refinery, which was supposed to give Lynas more than enough capacity to process 20,000 metric tons of REEs per year, suddenly withdrew the funds thus effectively stopping not only the refinery. but also the opening of Lynas’ Mount Weld REE mine in Australia. This move left Lynas in limbo, and it has been scrambling to find replacement funding ever since.

Earlier in 2009, Australia’s Arafura Resources became the object of an interest by a Chinese state-owned mining company, which resulted in an announcement on April 20, that Arafura had signed a letter of intent with Jiangsu Eastern China Nonferrous Metals Investment Holding Co. Ltd., to establish a joint venture to explore the Jervois iron and vanadium project in Australia’s Northern Territory. Arafura already had an agreement with East China Exploration to allow the Chinese company to acquire 25% of Arafura. The Chinese company was particularly interested in Arafura’s Nolan’s project, Arafura’s primary focus, to develop a very large REE, phosphate, uranium, and, interestingly, thorium deposit there.

Today’s announcement that Lynas will receive funding and Chinese bank guarantees for A$505 million, enabled through a purchase of 51% of its shares by China Nonferrous Mining Company (CNMC) – a state-owned entity that already owns shares in other non-Chinese producers of strategic and critical metals, such as Canada’s North American Tungsten – is a dramatic reinforcement of China’s strategy to insure that its domestic supplies of REEs are not interrupted by its domestic demand exceeding its domestic production.

Foolish Western financiers and industrialists who ignore the significance of these moves, are under the illusion that the object of the Chinese state-owned entities in purchasing non-Chinese sources of natural resources, is to make money in the free market. In fact the object of these moves is, as I said above, to ensure against supply interruption. If, and only if, there are surpluses of the metals produced, will Chinese shareholders vote to sell them into the open market.

A question that should be answered by Goldman Sachs is whether or not it facilitated the sale of control of Lynas, to a Chinese state-owned company, by placing Lynas into a financial crisis so that its share price would crash – making it into a bargain for the Chinese, and, at the same time, eliminating the threat of a large modern REE refinery outside of China and not controlled by China.

There is nothing illegal or unethical about such a move by Goldman Sachs, if it in fact did “torpedo” Lynas. But if this were done at the behest of a Chinese client of Goldman Sachs, or in exchange for favorable treatment in the Chinese market, then I think this should be disclosed now, or after the Lynas deal closes, so that in the future, the US government can take such actions into account when it is determining its own investment and bailout priorities, to ensure that the American taxpayer’s best interests are protected.

Let’s see now what happens with Molycorp Minerals’ plan to reopen the Mountain Pass REE mine in San Bernadino County, California. Until the 1990s this was the world’s largest REE mine. It was shut down by price competition from China! Recently Molycorp was sold to a consortium financed by Goldman Sachs, but its re-opening has been stalled by environmental issues with California regulators. China does not want Mountain Pass re-opened. Has this already caused Goldman-Sachs’ interest in the project to wane?

Another American REE and thorium site is in Idaho, and is owned by Thorium Energy, a private closely-held company. The resources and reserves of REEs there are perhaps the largest undeveloped REE ore body in the world.

Finally, Canada has two companies actively working on developing rare earth ore bodies. One, Great Western Mineals Group, is in financial distress and has signed a letter of intent to sell control to Molycorp. The other, Avalon Rare Metals, is well along in the development of its deposits of REEs and has enough money on hand to continue operations. The Avalon deposits are unusually rich in the heavy REEs, which are critical to battery and magnet appications for extreme temperature swings, such as electrified vehicles and wind generators.

Are the Chinese companies that were so successful in Australia, looking towards North America? Is Goldman Sachs providing the capital for Molycorp to reopen the mine and rebuild its onsite REE refinery? If not, why not?

Keep watching, and remember, by the way, that the phosphors for your color television display are critically based on REEs. Red, for example, is from europium, the metal the demand for which gave the impetus for the original development of the Mountain Pass mine. Isn’t it ironic that there is a Chinese anthem the title of which is “The East is Red.”?