Brief Event-Driven: MYOB (MYO AU): Head for the Exit and more

In this briefing:

1. MYOB (MYO AU): Head for the Exit
2. Lynas: Between a Hard Place and Just Rock
3. Bristol Myers Squib & Celgene–Starboard Objections Addressed Today- Successful Deal Closure Probable
4. Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P

1. MYOB (MYO AU): Head for the Exit

On 5 March 2019, Manikay Partners, an 11% shareholder, wrote to MYOB Group Ltd (MYO AU) chairman Justin Milne to reveal that it believed that KKR & Co Inc (KKR US)’s recommended offer of $3.40 cash per share was too low due to the significant market rally and normalisation of financing markets.

2. Lynas: Between a Hard Place and Just Rock

Lynas Corp Ltd (LYC AU) has been in the news of late for all the wrong reasons.

The change in Malaysia’s government last May appears to have caught up with Lynas’ rare earth processing plant in Kuantan – or Lynas Advanced Materials Plant (LAMP) – a facility that has faced persistent environmental opposition since its initial proposal in 2006.

The LAMP’s licence stipulates that residue/waste should be recycled, and if that does not occur, then stored in a permanent disposal facility (PDF). Removing/Exporting the residue was the last resort. Lynas is still in the first phase of the licensing guidelines, having submitted a plan to build the PDF but Lynas has not received specific instructions where to build this facility. 

Events reached a head on the 4th December 2018 with two pre-conditions imposed by the Minister for Energy, Science, Technology, Environment and Climate to rolling over the processing licence by September this year:

By some accounts, there is 500k+ tonnes of WLP, conceivably requiring in excess of three years to export. This resulted in Ernst & Young concluding (page 15) in the interim results (released last week) there is a material uncertainty for Lynas to continue to operate on a going concern basis.

Irrespective of whether the licence was provided to Lynas without adequate due process (as has been speculated) or whether the LAMP is indeed an environmental concern; the fact remains the Malaysian government has reneged on the previously agreed-upon three-step licence process, and that is wrong.

This is a binary outcome: either Lynas re-negotiates on the residue management and LAMP’s ongoing operations; or Lynas ceases operation in Malaysia and its rare earth deposit is just a bunch of rocks – until an alternative processing facility is established.

A Brief Timeline of Events

The Residues of LAMP

The LAMP produces two solid residues, the Neutralization Underflow Residue (NUF) and the Water Leached Purification Residue (WLP). 

• The NUF is a magnesium-rich gypsum and is non-toxic, non-carcinogenic, non-ecotoxic, and non-radioactive.  NUF can be used to “condition poor agricultural soil, and to rejuvenate and rehabilitate unproductive and depleted land“.
• The WLP residue is classified as a radioactive material and has the same radioactivity level as the feedstock material used in the LAMP process (about 6 Bq/g of Th). This material is classified as low-level radioactive material. The LAMP operation does not enhance or alter this natural radioactivity. 

The Terms of the Licence

WLP is managed under the terms of the Full Operating Stage Licence (FOSL), first granted in 2014. The terms of FOSL state that WLP residue should be recycled, and if that fails, then it should be stored in a Permanent Disposal Facility (PDF). Exporting WLP is only to be considered in the event neither recycling nor PDF are possible.

• The WLP is currently stored in temporary storage facilities on site (temporary residue storage facility (RSF)) and in accordance with the current licence. The RSF is designed and constructed and is managed to meet the requirement of a PDF within the LAMP.
• Lynas’ PDF Planning Framework and Site Protection Plan were approved by the Atomic Energy Licensing Board (AELB) on February 25, 2014. The Pahang State Government has given its consent to the location of the PDF in Pahang, should it be required. AELB is holding a US$34mn bond on behalf of Lynas to build the PDF. 
• Occupational and health exposures monitored since 2012 have shown that risks to employees from radiation and chemicals are well within the permissible limits.

The Details of the 4th December Reports

Both reports are in bahasa Malaysia. 

• The Review Committee Report found Lynas’ operations are low risk and compliant with applicable laws. However, on page 94 it does state:

  • The Executive Committee found that there was an increase in heavy metal concentrations for nickel, chromium, lead and mercury in-ground waste. Nickel and chromium are carcinogenic substances for human beings.

  • One recommendation by the Committee was to determine the location and build a PDF for the WLP residue, including identifying sites for PDF construction before the renewal of the next licence.
  • The report said to “Be prepared to export WLP residues from Malaysia if the PDF location is not identified or approved.“
  • The review committee comprises six members according to this link.  

• The Minister for Energy, Science, Technology, Environment and Climate Change (MESTECC) reported two new pre-conditions for its licence renewal on 2 September 2019 and future permission renewals in relation to residue management, those being:
  • The export of WLP residue before 2 September 2019; and the submission of an action plan on the disposal of NUF (current approval valid until 15 February 2019).
    • Following consultation with the government and regulators, an agreed pathway for the management of NUF was reached on the 14 Feb.
  • This pre-condition is inconsistent with the Review Committee’s recommendation on the PDF facility for WLP residue. The Review Committee said that Lynas should be prepared to export WLP residues from Malaysia only if the PDF location is not identified or approved.
  • All senior management of MESTECC were appointed following the 2018 general election. The AELB is an agency/department under MESTECC.

On the Political Front

After being elected as a Member of Parliament for Kuantan in 2008, Fusiah Salleh spearheaded the “Stop Lynas Rare earth Refinery” campaign.

• This campaign cause was buoyed by the Mitsubishi  Chemical Corporations incident in Ipoh in the 80s and 90s, together with the 2011 Fukushima nuclear disaster – although the latter is not wholly pertinent.
• Bowing to pressure the AELB conducted a review of LAMP in 2011 and ultimately claimed they were not able to identify any non-compliance with international radiation safety standards at the plant. Environmentalist pointed out this report did not address the long-term waste management nor the possible contamination of surface water and atmosphere by radioactive waste material.
• Despite extensive and ongoing opposition, Lynas was offered a 12-year tax holiday at the onset, and was issued a 2-year full operating licence in 2014. 
• The re-election of Mohammad Mahathir in 2018 provided a more sympathetic ear to the campaign’s voice compared to that under Najib Razak (PM from Apr-09 to May-18), resulting in the Review Committee to conduct the environmental impact assessment of LAMP. 
  • Indeed, projects and investments made by Najib are being reviewed such as LAMP and Belt & Road proposals.
• Fusiah Salleh was appointed the chair of this Committee, although she withdrew her position in October to “prevent Lynas from shifting the focus from the real issue“.  She is currently the deputy minister in the PM’s department.

Just How Radioactive?

It’s low but it’s not nothing – there is no such thing as zero harm. One issue, to me, is a decent layman’s overview of the radiation. In previous slides issued by Lynas it mentioned the limits for members of the public to be 1.0 mSv (milisievert) per year, while Lynas’ residue radioactive content is 6 Bq (becquerels)/g Th-232. 

Converting becquerels to sieverts is easier said than done. Conversions in the table via this link provide some context; it also shows Thorium 232 to have the second highest half-life, and the highest inhalation dose.

Arguably the radiation of this waste is low – and further backed up in this IAEA report (page 20) – but the reality is, if so low, why not process in Australia in the first place? And why are rare metal processing plants generally thin on ground worldwide?

Where Can It Be Exported?

Lynas has an estimated 500,000+ tonnes of WLP stored on site. Even filling one FEU (40-foot container, carrying 40 tonnes) every two hours around the clock, would take at least three years to clear the backlog – not factoring into account new residue being created. A price tag for the export of the residue has been estimated at A$60mn.

But who would (or can) accept this waste?

• This report is a little over two years old, but on page 18, to the exception of Malaysia, rare metal processing only incurs in China (the world leader), Estonia, and India (marginal production). There appears to be some purification/separation/refining in Kazakhstan and Russia, but there is limited data. 
• Australia’s Arafura Resources (ARU AU) is expected to build its own rare earth separation plant in Australia, having previously touted the idea of building such a plant in South Korea. 
  • Sending the waste back to Australia appears to be the go-to response from various quarters in Malaysia. But this is a heavily regulated space.
  • Legislation should not be captured under this Nuclear Waste Storage and Transportation (Prohibition) Act 1999 as the residue is not derived from a nuclear plant. 
  • It may be captured under the Hazardous Waste Act, based on the definitions under the Basel Convention. Here is also a list of Basel Convention members. 
  • A 7-year old article mentions that “National legislation stipulates that Australia will not accept responsibility for any waste product produced from offshore processing of resources purchased in Australia such as iron ore, mineral sands and the rare earth produced by Lynas Corporation.” I have yet to sight this legislation.
  • According to the AFR (paywalled), Robin Chapple, a Greens member in the Western Australian Legislative Council, said the safest place for the radioactive waste would be Western Australia, where it was originally located. Which makes a degree of sense, assuming the waste is in dry form, not liquid, which could then potentially leach into the water table. Of interest, Chapple has been a vocal critic of Lynas in the past.
  • The Australian government may make an exception to such an import in that the radiation is understood to be exactly the same as when it left Australia. And the expected approval of the Arafura plant may suggest an openness to importing this waste. 
• China won’t accept this waste – it has its own environmental issues to deal with after years of rare earth production. 

Establishing a Plant in Australia

Arafuna has secured Northern Territory (NT) and Australian government environmental approvals for its project in Australia. However, mining regulations in Australia are state/territory based – what is approved in NT does not necessarily translate to approval in WA, where Mt Weld is located; but it should help.

CEO Amanda Lacaze was quoted (paywalled) in the FT saying: 

We could reorganise our assets with time in a way that would allow us to continue to serve our customers. Short term we may need to partner in China; longer term we would re-establish our operations outside of China. Australia is a pretty good place.

“Re-establish” potentially includes disassembling/re-assembling LAMP, but this is not stipulated. Lynas’ PPE has a net book value of ~A$600mn, including rotary kilns, centrifuges, solvent extractors and pumps, most of which presumably could be shipped and railed to Mt Weld, or in close proximity, fast tracking the construction time. Assuming necessary approvals are in place. 

A Show of Support

Since rumours of the Review Committee surfaced, Greencape Capital has increased its stake in Lynas to 9.27% from 6.13%; while FIL has increased its holding to 7.32% from 5.01%. Both shareholders increased their stake after the 4th December reports.

3. Bristol Myers Squib & Celgene–Starboard Objections Addressed Today- Successful Deal Closure Probable

The proposed Bristol Myers Squibb Co (BMY US) & Celgene Corp (CELG US) transaction announced in the first week of 2019, garnered many sceptical comments. Starboard Value jumped in the fray by writing a letter denouncing the transaction while one of the largest holders of BMY, Wellington Management Group, holding about 7.7% of the stock expressed a desire to vote against the transaction. BMY’s response to Starboard’s half-baked objections is credible, and in our view, increases the likelihood of a successful closure manifold. We are bullish on the transaction.

4. Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P

• Local street began to speculate on this story since early last year when Lee Jae-yong got released from prison. NXP was widely considered as Lee’s first M&A attempt since his release. This could make sense both symbolically and business fundamentally. He needed something big to justify to general public about him being back in Samsung’s top position. Business wise, NXP would be a home-run in terms of fulfilling the three goals for non-memory business.
• Korea’s local street began to speculate on this since early last year when Lee Jae-yong got released from prison. This story was reignited earlier this year when the news broke that Samsung’s M&A head Sohn Young-kwon privately met NXP CEO Rick Clemmer. This morning Invest Chosun reported that Samsung may make a big announcement in the pretty near future.
• I suggested going long 1P/short Common last week on the grounds that falling memory prices would be pressing down Common more harshly. Now we are hearing a more elaborate story about NXP acquisition. Circumstantially, I don’t think this NXP takeover story will go unnoticed by the market. This should be more of a Common price pusher than Pref. I’d wrap my current position at this point.