CHINA SEEKS INVESTMENT IN STRATEGIC RARE EARTHS

UNCLAS CANBERRA 000733

SENSITIVE
SIPDIS

DEPARTMENT FOR EEB/ESC/IEC

E.O. 12958: N/A
TAGS: EMIN ECON AS
SUBJECT: CHINA SEEKS INVESTMENT IN STRATEGIC RARE EARTHS


1. (SBU) SUMMARY: State-owned company China Non-Ferrous Metal
Mining Corporation is seeking to buy a controlling stake in
Australian rare earth company Lynas, which manages one of only two
globally significant projects outside of China. The Foreign
Investment Review Board extended its review of the proposal, given
that China already controls 97% of global rare earths supply. END
SUMMARY.

INVESTMENT PROPOSAL BY CHINA NON-FERROUS MINING


2. (SBU) China Non-Ferrous Metal Mining (CNMC),a state-owned
company, is proposing to spend A$500 million for a majority stake in
the Australian rare earth company Lynas, which operates one of only
a few globally significant advanced projects outside of China
(others are in California, the CIS and Brazil). Its Mount Weld rare
earth project is one of Western Australia's biggest new mining
developments and includes a processing plant in Malaysia.


3. (SBU) Lynas was positioning itself as an alternative supplier to
Chinese companies before the global financial crisis. But financing
difficulties forced the company to turn to foreign investors for
funding in order to complete construction of the Mount Weld project.
CNMC plans to invest an initial A$252 million to bring the mine
into production by 2010. The financing plan involves Chinese banks
and would give CNMC a 51.6% stake in Lynas. Lynas' existing 5-year
contracts cover 75% of its first-stage output and 25% of its
second-stage output with customers in the US, Europe and Japan. A
change in ownership, however, could affect the direction of future
sales.


STRATEGIC SIGNIFICANCE OF THE PROPOSAL


4. (SBU) About 97% of global production of a collection of elements
called rare earths -- essential ingredients in advanced weaponry,
fighter jets and radar equipment -- takes place in China. Chinese
control of the global supply of rare earths means that the Chinese
government could influence access to supply. Concerns in the U.S.
over security for the supply of these minerals prompted the filing
of a WTO case against China in June 2009 for imposing export quotas
on rare earths, as well as a bill currently before Congress, which
would require a report, to be completed by next year, on the
strategic significance of the minerals for the U.S.

FOREIGN INVESTMENT REVIEW BOARD REQUESTS DELAY


5. (U) In early July 2009 Australia's Foreign Investment Review
Board (FIRB) asked CNMC to withdraw and resubmit its application,
starting a new 30-day review process. If approved by the FIRB,
Lynas would convene a shareholder meeting in September 2009 to
approve the CNMC transaction. In the local press, academic and
mining industry experts have warned recently about the danger of
facilitating even more control over rare earths to China.


6. (SBU) COMMENT: Earlier this year the FIRB allowed another
Chinese company to buy a 25% stake in a less advanced rare earths
explorer, Arafura Resources. Yet Treasurer Swan blocked a China
Minmetals-proposed acquisition of Australian OZ Minerals' Prominent
Hill mine on national security grounds, making the likelihood of
approval of CNMC's proposal by the FIRB uncertain. The possibility
of increased tensions between China and Australia over the detention
of a Rio Tinto executive in Shanghai could add to the uncertainty.
If approval by the FIRB is given, significant conditions are likely
QIf approval by the FIRB is given, significant conditions are likely
to be imposed given the strategic interests at stake. END COMMENT.

CLUNE