Key points:
- Australia–US rare earths deal aims to strengthen processing capabilities and lessen reliance on China
- Fagan highlights MP Materials’ US government support as a model, changing market risk dynamics
- Lynas (ASX:LYC) faces high capital needs and fluctuating share prices amid sector volatility
- Investors should take a holistic perspective, considering technology and engineering providers alongside miners
Australia’s recent rare earths deal with the US marks a significant industrial and strategic shift, according to Mike Fagan from Openmarkets. Fagan outlines how the agreement aims to transform Australia from a supplier of raw materials into an advanced processing hub, as the country builds a new rare earths industry to counterbalance China’s dominance. Fagan describes the deal as having rapidly influenced market dynamics, with rare earths stocks surging ahead of the announcement, followed by a correction. The example of MP Materials in the US, which secured a lucrative US Defence Department contract including a floor price on its products, signals how government involvement is changing the economics of the sector.
Fagan argues that while Australia possesses substantial rare earth deposits, the focus now shifts to the high-cost, technically challenging processing stage. Government investment is crucial, but Fagan views the economics as complicated by variable ore bodies and potential cost blowouts – as seen with Lynas (ASX:LYC), which recently raised $750 million for its Kalgoorlie facility after extensive Malaysian investment. Fagan notes that while Lynas shares peaked at $24 in July, they have since eased back to $14.50, reflecting long timelines and investor caution.
Long-term, Fagan sees policy risk and international market manipulation, especially from China, as major considerations. A holistic investment approach is advised, with attention to refinery manufacturers, engineering firms, and key technology partners from Japan and Korea, rather than just local miners.