Lynas riding higher on better rare earth prices
At 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:
- The realization that the company is not going into bankruptcy;
- Neodymium-praseodymium (NdPr) price potential once Molycorp’s inventories are exhausted sometime in the December quarter;
- Higher rare earth prices. He says current industry losses are unlikely to be sustainable;
- 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.
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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):
Heavy rare earths
Then Foster also breaks down the global demand basket, showing what share each element is:
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