Lynas plans to ship concentrated rare earth from its Mount Weld mine in Western Australia to its $220 million refinery near Kuantan in eastern peninsular Malaysia, for processing.
The approval of the two-year license allows Lynas to begin operations at the facility by the second quarter of this year.
However, it is "subject to a number of conditions and will be suspended or revoked if those conditions are breached, and a reapplication will not be entertained," Malaysia's Atomic Energy Licensing Board and the Science, Technology and Innovation Ministry said in a statement Wednesday.
Those conditions include a $50 million deposit that Lynas must keep with the Malaysian government and a plan for a permanent disposal facility to be submitted within 10 months. Also, the statement says the residue produced at the facility is "the responsibility of the company and if necessary, will be returned to its source," meaning Australia.
The plant has been opposed by environmentalists and community groups, concerned about radioactive waste management at the site.
To process the rare earths, Lynas will use heat and thousands of tons powerful sulfuric acid each year to separate the valuable minerals from dirt and radioactive contaminants, The New York Times reports.
Fuziah Salleh, an opposition-party lawmaker from Kuantan who has also opposed the refinery, said it was unreasonable for AELB to have issued a temporary operating license for the plant before details of Lynas' permanent disposal facility were made known.
The decision "proves that AELB is in cahoots with Lynas to make Kuantan residents as test subjects and 'lab rats' over the next 10 months," she said in a statement published Thursday by the Malaysian Insider newspaper.
Lynas maintains that the plant poses no health threats.
"That's been verified by the International Atomic Energy Agency review," said Lynas Executive Chairman Nick Curtis.
"These are informed scientific-based, fact-based assessments by international experts who understand thoroughly radiology and radiological impact and who understand the difference between naturally occurring radiation material and background radiation levels," Curtis said.
The approval paves the way for Lynas to become a major global supplier of rare earths.
China supplies more than 90 percent of global output of rare earths but has repeatedly slashed its export quotas.
In a report last November, Lynas said the Malaysia plant -- at 22,000 tons capacity per year if the second phase is approved and completed – would become the world's largest refinery of the minerals.
Rare earths are made up of 17 different chemical elements used to manufacture such products as wind turbines, batteries for hybrid and electric cars, flat-screen monitors, missile guidance systems and mobile phones.