UPDATE 2-Australia's Lynas Rare Earths gets $134 mln funding from Japan to boost output

(Adds quotes from Japanese partners, details)

March 7 (Reuters) - Australia's Lynas Rare Earths Ltd has secured A$200 million ($134 million) in funding from Japan to increase light and heavy rare earth materials output by developing current and planned projects, it said on Tuesday.

The agreement with Japan Australia Rare Earths, jointly owned by state-owned Japan Organization for Metals and Energy Security (JOGMEC) and Sojitz Corp, will also forego historical $11.5 million in interest due under a prior loan.

Rare earths are used in industries including the production of magnets for motors for electric vehicles and wind turbines.

With concerns over China's dominance of key critical minerals such as rare earths, western countries are looking to build their own supply chains.

Under the new deal, Japan will receive priority supply rights over Lynas's growth capacity until 2038 in the event of competing demand from other markets.

Lynas, the world's biggest producer of rare earths metals outside China, will supply up to 7,200 tonnes per annum of neodymium-praseodymium (NdPr) on priority to the Japanese market when its annual output is below 9,600 tonnes.

Once the miner's annual output crosses 9,600 tonnes and demand from Japan exceeds the 7,200 tonnes per-year threshold, the parties will revisit the terms of agreement.

For Japan, the deal is important as Lynas will also supply up to 65% of the dysprosium-terbium (DyTb) produced from Mt. Weld feedstock, JOGMEC and Sojitz said in a separate statement.

These heavy rare earths, only produced in China now, are used to enhance the heat resistance of magnets and the pact will support the stable supply of the materials to Japan, a Sojitz spokesperson said.

After the deal, Japan Australia Rare Earths will own a 3% stake in Lynas, up from 0.3%, he said, adding that Sojitz owns a 10% stake in the Japanese joint company.

The deal comes at a time when Lynas's stock has lost 10% of its value since the start of the month. On March 2, Lynas shares tanked 6.8% after Tesla Inc said its next-generation electric vehicles would not use rare earths.

($1 = 1.4928 Australian dollars) (Reporting by Echha Jain in Bengaluru; Additional reporting by Yuka Obayashi in Tokyo; Editing by Subhranshu Sahu and Ed Osmond)