By Greg Peel

As recent FNArena articles on the subject of the rare earth metals space have noted, the global race to compete with China on rare earth element (REE) production has now come down to a mere handful of names including two stand-outs, and a big chunk of daylight to third. (See, for example: Rare Earths Done And Dusted? No, It's Xeno-Time). Those two companies are Molycorp in the US and Australia's own Lynas Corp ((LYC)). A year ago, it looked like Lynas had moved ahead of Molycorp.

According to research and opinion from REE specialist Hallgarten & Company, that is certainly no longer the case. Indeed, Lynas shareholders may be in some trouble.

Lynas' Mt Weld mine in Western Australia ranks as one of the richest major light REE deposits in the world. Light REEs such as lanthanum, cerium and neodymium are not as valuable as heavy REEs such as dysprosium but with an advanced project and significant scale, Lynas looked set to be a prominent player in the global REE market, with a big jump on the field outside of Molycorp. A few years ago Lynas became somewhat of a test case for sovereign investment in Australia's mining industry when the federal government ruled a Chinese enterprise could not acquire a stake in the company, thus setting the guidelines for future Chinese investment. Not being able to source funds from China was not an issue for Lynas. REE prices began to accelerate into space and funding was thus easy to secure outside of China. Says Hallgarten:

"If there is one thing on which one cannot fault Lynas it is the size and attractiveness of its deposit. The Australian government was very right in ensuring that it didn't fall into Chinese hands."

Source: Hallgarten & Company

Having a REE deposit is one thing, but the real money to be made from REEs is in the processing ? a complex and highly costly business. Lynas could have chosen to build its processing plant in Western Australia, thus providing tax income and jobs and possibly attracting some incentives from the state and/or federal government. But Lynas decided to go offshore to find a cheaper alternative. One alternative would have been to build the plant in low-wage China, but given China controls the global REE market there would be a certain risk. Instead, Lynas chose to build its plant in low-wage Malaysia, where from 1982-1994 Mitsubishi Asian Rare Earths had processed REEs as a by-product of tin mining.

As former prime minister Paul Keating will recall, Australia and Malaysia do not have the rosiest of friendships. And we seem to run into problems when it comes to "offshore processing".

The Lynas Advanced Materials Plant (LAMP) has been under construction in Kuantan, Malaysia, for over two years and is all but completed, with the testing phase having reached 85% completion by the end of the March quarter. It is not clear just how much money Lynas saved by choosing Malaysia over Western Australia, but whatever it was, Hallgarten suggests that benefit has now been more than wiped out by the fall in the LYC share price. Lynas has had to suffer along with all REE hopefuls from the recent bursting of the REE price bubble, but investor ill-will generated when Lynas executive chairman Nick Curtis sold off a prospective niobium asset owned by the company to Forge Group ((FGE)), of which Curtis is also chairman, for a great deal less than Lynas had valued the deposit back in 2007, also impacted heavily on sentiment.

Both of these issues have helped sink the Lynas share price (from $2.60 in April to around 75c now), but weakness is also reflective of the Malaysian government's delay in granting approval for the LAMP start-up.

Was Lynas being too cavalier? Or did the company underestimate Malaysia's famous "recalcitrance".