LYC Lynas Rare Earths Limited

A plan to break China's dominance over rare-earth metals suffered a setback as Malaysia's government put restrictions on a plant due to start producing thousands of tons of the materials within months.

The 700 million ringgit, or roughly $230 million, processing plant under construction by Australia's Lynas Corp. (LYC.AU, LYSDY) is intended to produce about a sixth of the world's supply of rare-earth elements when it hits full production, which is expected for as early as next year.

Rare-earth metals are used in a range of industrial and technology applications. China has 90% of global production and has been limiting its exports, which has raised global concerns about potential shortfalls in supply and over reliance on a single source.

The potential setback comes as rivals of Lynas are rushing to market new rare-earth products. The 17 elements are favored for a host of niche applications because of their unusual characteristics. Magnets made with the rare-earth minerals neodymium and praseodymium are uniquely strong, making them valuable components in wind turbines and computer hard drives. Rare-earth phosphors such as europium and yttrium are in demand to tweak the color of compact fluorescent light bulbs and LED displays.

But Malaysia's government forbid Lynas from importing raw materials and starting operations at the plant's Gebeng industrial site until the company complies with recommendations in a report commissioned by the International Atomic Energy Agency. The IAEA review, conducted by an international team of experts and concluded in June, identified 10 issues to be addressed before the plant could start up.

Many Malaysian residents are concerned that the operation could cause lasting environmental damage, although the IAEA mostly supported Lynas's contention that the plant will be safe. Gebeng is on the fringes of Kuantan, a port city of around 500,000 on the steamy east coast of the Malaysian peninsula.

"The government reiterates its position that public safety remains its highest priority and [the government] will do whatever is necessary to ensure this is not compromised," Rebecca Fatima Sta Maria, secretary-general of the Ministry of International Trade and Industry, said in a prepared statement.

Lynas said Thursday it still will be able to meet targets to start operations at the site as soon as September, although analysts expressed doubt about that timetable.

"The start-up was always pretty ambitious and I'd be very surprised if this news doesn't delay that. You would have to think it's going to be a minimum of six months' delay and probably 12 months," said Michael Evans, an analyst at CLSA in Sydney.

Lynas Chief Executive Nicholas Curtis said the plant remains on track to start deliveries of rare earths next year. "We expect to deliver some product in the first half of 2012 and we'll be fully operational by the second half," he said at a Kuala Lumpur news conference.

Among its recommendations, the IAEA said Lynas should be required to submit a plan for managing waste from the plant once it closes, and to establish a fund for decommissioning the site and bringing it back to normal use.

Lynas has said it expects its main deposit at Mount Weld in Western Australia, which has started producing materials to feed the Gebeng plant, will be in production for at least 20 years.

Curtis said a "considerable body of work" must be completed to fulfill the IAEA's requirements but that it can be done well in advance of the company's timetable.

At the heart of the dispute is iron phosphogypsum, a crumbly, off-white waste product. When Gebeng hits full capacity it will produce 20,000 tons of rare-earth materials and 64,000 tons of phosphogypsum every year--enough to cover a one-hectare site to a depth of five stories. Around 106 tons of thorium, a radioactive element formerly used in gaslight mantles and currently being investigated as a fuel for certain nuclear reactors incapable of producing plutonium, would be distributed throughout the waste.

Lynas has outlined tentative plans to recycle the waste as a building material or for building artificial reefs. The IAEA report found that the thorium waste would be at "relatively low concentrations," with radioactivity at a low enough level that the agency wouldn't consider it a radioactive material when being transported.

But Fuziah Salleh, the representation for Kuantan in Malaysia's Parliament and an opponent of the project, said the waste still would be too risky for use in the country and suggested it be kept in a nuclear-style storage facility. "The waste must not be recycled. It could be sold back to Malaysians by irresponsible vendors," she said.

China has been tightening controls on exports from its mines since last year by raising the threshold for entry, imposing stricter environmental standards and slashing export quotas. That has driven the price of the elements up: The basket price for rare-earth materials in Australia's Mount Weld deposit hit $204.85 a ton on Monday, up from $10.32 a ton in 2009.

Denver-based Molycorp Inc. (MCP) has said it expects to start producing 19,050 tons a year of rare-earth materials from its Mountain Pass mine in California next year. And the arrival of other new producers seeking to profit from price increases has led some analysts to predict that the world will have an oversupply of the most common rare-earth materials by 2015. Total global production last year was 114,800 metric tons.

-David Fickling, Dow Jones Newswires; david.fickling@dowjones.com

-Ankur Relia, Dow Jones Newswires; ankur.relia@dowjones.com

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