EDITOR: | September 24th, 2015 | 10 Comments

Lynas riding higher on better rare earth prices

| September 24, 2015 | 10 Comments
image_pdfimage_print

LynasAt last, a positive broker report in the rare earth sector. And it is on Lynas Corp (ASX:LYC) which, no doubt, could do with a good word.

Lynas, in Thursday morning trade at the Australian Securities Exchange, was fetching A$0.037. Sydney-based Foster Stockbroking has put a “speculative buy” recommendation on the stock, with a 12 month price target of A$0.15 a share and $0.30 within three years.

The report will be music to the ears at the Lynas headquarters. “LYC is a value investment in the rare earth space, strongly leveraged to any recovery in rare earth prices and strategically critical to non-Chinese rare earth consumers,” writes analyst Mike Harrowell. “As the only investible rare earth producer outside China, it should have considerable option value.”

Harrowell believes the catalysts for the turnaround are:

  1. The realization that the company is not going into bankruptcy;
  2. Neodymium-praseodymium (NdPr) price potential once Molycorp’s inventories are exhausted sometime in the December quarter;
  3. Higher rare earth prices. He says current industry losses are unlikely to be sustainable;
  4. Continuing positive operating news flow as Lynas ramps to 20,000 tonnes a year by the end of 2016.

However, Foster Stockbroking reminds us that Lynas is very sensitive to the NdPr price. That is a risk.

The Lynas story thus far is very familiar to InvestorIntel readers. But, among the new interpretations in this note, one looks at the possible NdPr scenarios. The broker is assuming NdPr prices recover to $47/kg in 2016 and then appreciate by 2.5% above inflation. It sees the Australian dollar dipping to $0.69, then rising back to $0.75 long term.

So here are the NdPr scenarios:

At $30/kg: Lynas generates free cash flow deficit of –A$16.4 million in 2016 and a surplus of A$21 million in 2017. “At this level of prices and cash flow, it does not accumulate cash for interest nor principal debt repayment, but would provide sufficient comfort that lenders would reschedule the debt again rather than shut the business,” says Foster.

At $40/kg: Free cash flow is $22 million in 2016 after repaying A$17.8 million interest. “At this level of prices, the interest is fully serviced and the refunding (refinancing) decision likely to be easier”. Foster expects prices to revert to above $40/kg by early 2016. (Harrowell says he keeps hearing that the Chinese industry needs $40/kg for NdPr to be able to break even.)

At $60/kg: This is an estimate of where prices would revert to in reaction to the present over-sold position in which the market finds itself (that reversion could occur anytime from mid-2016 forward). At this level, free cash flow is a very strong A$115.9 million in 2016 and available cash to repay debt would be around A$300 million at June 2018 assuming A$60 million is retained for working capital.

Foster Stockbroking sees $50/kg as a possible long term price trend and, in this scenario, the Lynas plant had been expanded to 30,000 tonnes a year by spending A$75 million. Financial year 2018 earnings are, in this scenario, A$0.43 a share, implying a share price of over $0.40 and free cash flow of A$207 million a year.

The report also contains a summary of REE prices as at September 11 which InvestorIntel readers may find useful:

Light rare earths (price per kilogram):
Lanthanum               $1.95
Cerium                      $1.83
Praseodymium         $51.00
Neodymium              $36.00
Samarium                  $1.93

Heavy rare earths
Europium                  $147.50
Gadolinium               $9.68
Terbium                    $375.00
Dysprosium              $205.00
Erbium                      $35.50
Yttrium                      $4.65

Then Foster also breaks down the global demand basket, showing what share each element is:

Neodymium              45%
Praseodymium         20%
Dysprosium              11%
Terbium                    6%
Cerium                      5%
Lanthanum               4%
Europium                  3%
Erbium                      2%
Yttrium                      2%
Gadolinium               1%
Holmium-thulium-ytterbium-lutetium      1%


InvestorIntel

Editor:

InvestorIntel is a trusted source of reliable information at the forefront of emerging markets that brings investment opportunities to discerning investors.


Copyright © 2017 InvestorIntel Corp. All rights reserved. More & Disclaimer »


Comments

  • Lok Chong

    I have been followed Lynas for a long time from when it was close to over AUD2.00/share.
    In spite of a falling knife I decided to spend $50,000 to buy at $0.53 the Friday before the last general election in Malaysia firmly believing that the ruling coalition party UMNO will be returned and sold them at AUD0.63 the following week knowing full well it bad business model would arrest its demise.

    A Chinese REE producer will end up picking up a state -of-the-art REE processing plant for less than savage value. The new CEO has literally been bagging for someone to take the still bleeding mess from them in an more less inglorious exit than Molycorp.

    Foster provides investors an opportunity for investor to cut their losses and catch off during a dead cat bounce.

    September 24, 2015 - 6:16 AM

  • Tracy Weslosky

    Thank you for your heartfelt response Lok. Many of us have lost a lot of money in the resource sector, and allow me to redirect you to the column written about this subject by Dr. Richard Spencer today, titled: Has the pendulum swung too far in the Emerging Resource Space? http://bit.ly/1WkSoEr

    I agree with Dr. Spencer that the resource sector is overdue for a turnaround. Thank you for visiting InvestorIntel.

    September 24, 2015 - 11:04 AM

  • asrms

    Regardless of whether we think Lynas has a more positive future or not, I don’t see a Japanese financed LREE company designed as a strategic partner to Japanese industry being sold to a Chinese concern; maybe Japanese, or large multinational commodity wanted a ready made REE situation re. mining to cleint – but Chinese buyer!?

    September 24, 2015 - 11:22 AM

  • Andrew

    For the coming 2016, China policy maker will raise production quota again as their dddemamd will be increasing by 9% every year they said. At the end of 2016, rare earth price will stay at the current level due to supply over demand. 2017 will be the same. No people is buying lynas shares in advance now. There is no speculation for lynas as its market price is not moving anywhere for months.

    September 24, 2015 - 6:54 PM

  • JJBeswick

    Seems to me there are, fundamentally, 2 camps in this debate and Lynas’s fate depends on which is correct.
    1. China’s primary objective is absolute dominance of RE production even if it means all their own producers take medium- to long-term losses. They will deliberately trash the RE price until all ROW competition is out of business.
    2. China like their pre-eminant position in the market but can tolerate, even benefit from, some ROW production. They want much better control of illegal production and they want domestic legal production to be profitable.

    The rhetoric from China would suggest 2 but the current chaos in the RE market leans towards 1.
    My personal view? Option 2.

    September 25, 2015 - 10:52 AM

  • Tim Ainsworth

    Or perhaps a more radical Op 3: China desperately needs a ROW catalyst to reinvigorate the market it disenfranchised with its clumsy manipulation 5 yrs ago.

    Does anyone seriously believe China simply got jelly legs when the big bad WTO came knocking, several years after the event?

    China redirecting to internal consumption but will be still many years until it can support its RE industry unilaterally. In the meantime it has a very jaundiced customer base to deal with.

    September 25, 2015 - 1:40 PM

  • Jeff Thompson

    Can anyone point me to any publicly available information on Lynas’ revenue distribution normalized by element – for example 15% La, 10% Ce, 30% Pr, 35% Nd, 5% Eu, 5% Dy, for recent quarters or prior fiscal year?
    Thanks in advance,
    Jeff Thompson

    October 11, 2015 - 9:34 PM

  • Tim Ainsworth

    Jeff, only revenue breakout is NdPr at 70% of total as at:

    lynascorp.com/Quarterly%20Reports/2014/Quarterly%20Report%20-%2015%20Oct%202014.pdf

    “NdPr accounts for approximately 70% of our sales revenue and it is therefore important that we track it separately”

    You will find some other market data thru the QR’s:

    “ NdPr sales to Japan reached over 630tons, setting Lynas above 60% market share, and further strengthening the partnership built over recent years with Japanese industry.
     80% of our La and Ce products were sold outside China, thanks in particular to strong demand for our Cerium.”

    lynascorp.com/Quarterly%20Reports/2015/Fourth%20Quarter%20report%20FINAL%20170715%201453594.pdf

    October 12, 2015 - 4:27 AM

  • Tim Ainsworth

    ACREI Index up again today, NdO doing the heavy lifting +4.2%:

    ac-rei.org.cn/portal.php?mod=view&aid=4031

    October 12, 2015 - 6:15 AM

  • Jeff Thompson

    Thanks, Tim.

    October 12, 2015 - 8:23 AM

Leave a Reply

Your email address will not be published. Required fields are marked *