Tuesday, October 11, 2011

Lynas and its impact on the Malaysia Economy

Many people voiced their concern over Lynas' intention of setting up its rare earth processing plant in Kuantan, almost all are looking from the environmental perspective. But I would like to see it from the economic perspective on how Lynas impact our economy.

The following facts were gathered from various online news sources, I must declare that I did not verify the accuracy of such information, neither do I have the ability to ensure that the fact is correct. I would assume that these facts are correct at the time of writing as there's no official clarification thus far.

building of the plant and land acquisition:

1. Leasehold land acquisition RM 97.5 million (from who ??) (source: Lynas Annual report 2010)
2. Plant construction (2007-2011) (includes machinery and equipment) : RM343 million (source: Lynas Annual report 2010)
3. Construction workers max at 2,500 (how many Malaysian, and how much are each workers getting?)

I would make an assumption of 70%/30% on item 2, plant construction, that 70% goes to plant equipment and machinery, and 30% goes to infrastructure cost needed, including building material, construction workers' pay, etc.

This means for RM343 million spent on the plant, only approx RM110 million contributes to domestic economy, i.e. building materials and construction workers.

The ratio of worker's renumeration vs building material can again be assumed at 70/30, where 70% goes to workers, and 30% goes to materials.

Means workers getting approx RM77 million and materials get the rest of RM33 million, over the 4 year period.

Assumed that all 2,500 workers in full force during the 4 year construction period, each worker gets RM641 per month, although not 2500 workers are presence for the entire 4 year period, we may want to assume that only 1250 workers at any one time, this brings the monthly income of the worker on average to RM1,282 per month, which is pretty realistic.

Then the composition of workers, how many are local work force, and how many are foreigners from Indonesia and Bangladesh?

From typical construction site, we can probably tell that there are almost 80% foreign workers, and 20% locals.

thus we further divide the RM77 million per 4 year to 80% goes to foreign worker, and 20% goes to locals.

of the 80% to foreign workers, i.e. RM61.6 million, 50% likely to remit out from the country, leaving 50% within the economy, i.e. RM30.8 million in 4 year period.

This is probably the contribution of Lynas for their plant construction to the economy, RM30.8 million + RM15.4 million to locals, and RM33 million on building materials and other related expenditures, i.e. RM79.2 million for the 4 year period.

So first contribution is land acquisition : RM97.5 million leasehold to unknown party,

second contribution is money channelling back to local economy, i.e. RM19.8 million per annum for the 4 year construction period.


1. Lynas enjoys tax holidays of 12 years; (NY Times 2011/03/09)

2. Expected output is RM5.1 billion per annum, at today's rare earth price; (NY Times 2011/03/09)

3. Corporate tax is assumed at 26% for the next 12 years;

4. No other tax element is included in this calculation such as export duty (if applicable), etc. Which I assumed is waived entirely.

5. Since Lynas is still reporting losses in their latest financial statements, it is difficult to ascertain their margin hence their profit from the production of rare earth, but I would estimate that the entire operation is with a margin of 30%, with a net profit of 10%.

6. Lynas will employ maximum of 450 workers, composition of nationality unknown (how many Australians, assuming that Aussie are going to hold high positions), and we assumed that average pay is RM6,000 per job, this will be a Rm32 million payroll per annum.

this means:
Malaysia is losing collectable tax of RM5.1 billion X 30% X 26% = RM397.8 million per annum.

for the next 12 years, total losses is RM397.8 million X 12 years = RM4.773 billion.

It is unlikely that Lynas will park its profit in Malaysia after the 12 years tax exemption, it is highly possible that the profit to be parked at offshore Labuan if Australian tax is not favorable, means Malaysia is still getting nothing after 12 years.

From the above calculation, which is primitive, Malaysia economy is gaining

Land acquisition, to unknown party RM97.5 million
Construction of plant from 2007 to 2011 RM79.2 million

Annual total payroll (assuming all channel back to local economy) RM32 million

What we are losing:

Potential tax collection of RM 397.8 million per annum for the next 12 years.

So the Government tells you we are gaining with Lynas in Kuantan.

You judge.


  1. Operation wise, mining/extraction factory rarely hire more than 300 workers. And local machinery ? Not until Malaysia serious to groom it up.
    And the plant need clean water to process the earth, who is going to pay for the "REAL" cost of the clean water?

  2. A few things to add:
    1) Lynas got its land from Franky Construction.
    2) You have underestimated their margin. You can get the figure from JP Morgan's analysis, and they put the figure at about AUD135k per annum (including depreciation cost). In fact, JP Morgan expect them to break even at rare earth price of USD17/kg, but it is now USD140/kg already.

    Therefore, the gross margin is in the 90%, not in the low 10%. Incredible isn't it?

    3) You also need to divide the revenue between Aus revenue for their Mt Welt operation, and Malaysian operation.

    I've done some analysis on the financials, but the stuff needs updating. Here's my original analysis:

  3. Thanks JinHo, the assumption of 10% margin is a wild guess, just to show that even with margin of a typical company, Lynas is already fare well above the average due to tax incentives.

    Further, they can choose to park their profit here for the next 12 years.

  4. Chia, yes precisely. In fact, I believe they will keep on reinvesting overseas instead of bringing the profits back to Aus to prevent it from being taxed. Australia is introducing the RSPT I doubt Lynas wants to be share their profits with the Aus gomen. :-)

  5. Besides green party, the only factor I would see Lynas wanted to operate in Malaysia is about tax. Potential profit allowing then to abandon Kuantan plant if situation not permitted in the future, in short, Msia govt funded the entire operation of Lynas and yet the Govt is so proud of so called foreign investments.

  6. And, the most important is, they have $$ going into their pockets (cronies)