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Deal had been pitched for Q1- source

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Talks included plans to drop Aussie listing for New York-source

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Lynas says it is focusing on organic growth

(Adds investor comment in paragraphs 8, 9, details on strategic merit in paragraph 11, share price moves in paragraph 14)

MELBOURNE, Feb 5 (Reuters) - Australia's Lynas Rare Earths, said on Monday confidential talks have ended with U.S.-based MP Materials Corp regarding a potential transaction that industry sources said would have been difficult for both sides to agree on value.

Lynas is the world's biggest producer of rare earths outside of China, and MP is the biggest in the United States. Talks come as Western nations seek to diversify supply chains for the magnetic metals that are used in everything from wind turbines to electric vehicles to missiles.

China is the world's top rare earths consumer and producer, controlling some 87% of global rare earths refining capacity, according to the International Energy Agency. The merger talks come as rare earths prices have sharply dropped due to a slowdown in China's economy.

"Lynas confirms it has held confidential discussions with MP Materials Corp regarding a potential transaction, however, these discussions are not ongoing," it said in a release to Australia's securities exchange.

Lynas has been constructing a processing plant in Western Australia's Kalgoorlie to add to its refining operations in Malaysia and the U.S. where it is building processing facilities in Texas supported by the Department of Defense.

MP processes rock that it extracts from its Mountain Pass mine in California into rare earths concentrate that is shipped to China for refining. It has been struggling to crack the difficult technology to refine its own material for some time.

China in December banned the export of technology to make rare earth magnets adding it to a ban already in place on technology to extract and separate the critical materials. "I wouldn't think there is a whole lot of synergies out of that, just consolidating supply," Argo Investments portfolio manager Andy Foster said of a potential tie-up between Lynas and MP.



"As a shareholder, what's the real benefit? (Lynas) has got one of the best rare earths deposits in the world. I get the consolidation argument but I'm not sure about any strategic value transfer."

SPECULATION

One source with direct knowledge of the proposal said that general contours of a deal would have involved Lynas de-listing in Australia and MP keeping its New York Stock Exchange listing, and that any deal was aimed for the first quarter.

But industry sources questioned what Lynas, which already has a strong customer base in Japan and with highly specialised technology, would get from the deal, making it hard to agree on value. Anti-trust regulation would also be a major hurdle, they said, even as Western countries try to reduce China's dominance.

In the statement, Lynas said it was building its growth organically and looking to build scale. Its second-quarter revenue fell sharply, missing analysts' estimates, hurt by low prices for its main product Neodymium and praseodymium (NdPr).

The rare earth miner has currently market capitalisation of about $3.55 billion, while its New-York listed peer is valued at $3.06 billion. Shares in MP had closed up 6.4% on Friday while Lynas shares traded 1.1% lower on Monday morning. (Reporting by Melanie Burton in Melbourne, Archishma Iyer in Benguluru, Ernest Schedyer in Houston, Eric Onstand in London, Scott Murdoch in Sydney; Editing by Diane Craft, Lisa Shumaker and Lincoln Feast.)