EDITOR: | March 12th, 2014 | 7 Comments

Lynas suffers more losses and needs to secure liquidity

| March 12, 2014 | 7 Comments
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Australian rare earth producer Lynas Corp has suffered a new loss in the first half of the financial year 2013/14. Lynas needs more capital.

lynas tennisLynas Corp. (ASX: LYC) reported a loss of AUD$ 59.29 million in the first half of the 2013/14 financial year. In the same period of last year, Lynas reported a loss of AUD$ 56.58 million – though it barely started production at its processing facility in Malaysia. Nevertheless, Lynas’s sales have increased to AUD$ 14.6 million – though the previous year had no sales. The problem is that while production and sales have gotten underway, Lynas’s expenditures have increased 32%, reaching AUD$ 7.5 million. The Company has attributed these costs to the start-up of the Lynas Advanced Materials Plant (LAMP) facility in Malaysia. Higher staff salaries – by AUD$ 2.5 million – than expected have also taken away from the bottom line. Lynas will now have to use the next twelve months to find additional capital in order to finance its debt and its planned – and needed – production increase. Lynas has few options in this regard. It could re-capitalize, borrow more or restructure its existing debt; whatever, it decides to do, the market has not been kind. Lynas’s shares dropped 8.5% in Sydney trading on Tuesday, closing at AUD$ 0.27/share, though reaching a level not seen since April 2009 as the stock reached a low of AUD$ 0.245/share.

It should be noted that Lynas has to find a solution to resolving its financial issues; yet, it is not as urgent as some of the press has made it appear. Lynas can keep running for at least 12 months according to Alan Jury, ‎Executive Vice President Corporate Affairs. Mr. Jury also suggested that Lynas is open to any solution; without specifying, this implies any range of measures beyond purely re-financing or re-capitalization approaches. This raises an interesting speculation into what some of the solutions might be. Lynas could even agree to make a deal with a Chinese rare earth company in the same way that some of its fellow Australian rare earth competitors have already done.

In September 2013, Arafura Resources (ASX: ARU) executed a Memorandum of Understanding with China’s Shenghe Resources Holding (SHA: 600392) to help develop its Nolans Rare Earths Project in the Northern Territory in order to reduce capital and operating costs. Sound impossible? As ironic as it sounds, this may be one of the solutions for Lynas. The Chinese would benefit from Lynas’s highly advanced and environmentally superior processing facility. Nevertheless, there are hurdles. Even if a Chinese party interested in investing in Lynas is found – rumors suggest that state-owned Chinese conglomerate China Nonferrous Metal Mining aspires to acquire a large stake of Lynas, Australian politics might get in the way. The Australian Foreign Investment Review Board would need to approve such an acquisition, not so certain given that it would give China even more market power in the rare earths space.

In 2009, in fact, in a similar situation involving Lynas Corp from expanding its operations at Mt. Weld, the Australian government blocked China Non-Ferrous Metal Mining from acquiring a majority stake in Lynas in order to preserve resources. Short of a very convincing argument, bankers may not be all that receptive to Lynas’s requests, leaving the sole option of securing a partner with cash. Meanwhile, Lynas continues to endure opposition from self styled environmental groups who are still challenging the presence of LAMP. They insist that Lynas’ license to operate is temporary and take advantage of even the most ludicrous opportunity to find fault with the Company. For instance, last December an engineer died at the plant. He suffered a heart attack resulting from purely personal medical causes entirely unrelated to LAMP, which the anti-Lynas crowd tried to exploit as evidence of the plant’s alleged dangers. The anti-Lynas movement must be losing support if it has to resort to such ludicrous tactics.

Lynas began test production at LAMP in November 2012 and made ​​the first shipment of 144 tons of rare earth oxide equivalent in the second quarter of 2013. In June 2013, Lynas announced that it would reduce output at the Mt. Weld mine – due to the difficult demand and low prices – to 11,000 tons per year. In contrast to the Lynas – or also because of its problems perhaps – Lynas’s competitor Molycorp (NYSE: MCP) has been increasing production and market capitalization, reaching in the order of USD$ 1.15 billion. Molycorp’s CEO suggested that insofar as Light rare Earths are concerned, world demand is such that Molycorp, Lynas and maybe just another small producer outside of China would be sufficient. Molycorp Inc. (NYSE:MCP) recently announced its financial and operating results for the fourth quarter of 2013 as well as for the year as a whole, commenting that for the entirety of 2013, its sales volume rose 42% and that net revenue for 2013 was $554.4 million, or 5% percent higher than in 2012.

Lynas does have a few cards in its favor. The LAMP facility is ready to reach its full – if limited due to demand expectations – production volume of 11,000 tons/year in April.  Last November, JP Morgan analysts said that Lynas was obtaining premium prices for its products. Finally, Lynas’s main competition and customers are in China, which is continuing to regulate industry, leaving mostly the higher end suppliers and eliminating some of the lowest cost regulation-averse producers that undercut the competition.


Editor:


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Comments

  • Tracy Weslosky

    Thanks for pulling off the Band-Aid on the Lynas discussion, and suggesting a perfect remedy — China. I think this goes back to the point of our initial discussion on sustainability and whether or not, anyone can afford it.

    Spoke with Jack Lifton last night and he gave me some insight on various political positions on Lynas and certainly this ‘movie’ has not gone the way we would like. As a fervent follower and investor in the rare earth sector, we need Lynas to succeed…and Molycorp…and many others.

    March 12, 2014 - 9:48 AM

  • Dan

    Hi Tracy, are you going to give us any insight into Jack’s insight on the political postions regarding Lynas?

    March 12, 2014 - 10:01 AM

    • Tracy Weslosky

      We will be publishing Jack’s commentary on Lynas and his recent meetings in Malaysia on InvestorIntelReport.com in the morning. I will post a note or two here as well. Thanks for asking.

      March 12, 2014 - 5:22 PM

  • Dr. Copper

    Could Molycorp make a bid for Lynas in all this ?

    March 12, 2014 - 10:35 PM

  • Tim Ainsworth

    Alessandro, Jack Lifton wrote some time back re the inherent dangers in scaling RE production to the extent that both Lynas & Moly have attempted, well beyond what has been achieved in China previously. As an investor in Lynas I did take note but considered that with Lynas’s technical agreement with Rhodia & Moly’s 60 year experience with Mt Pass that any issues would be resolved relatively quickly.
    Even a low level review of production operations at both companies would suggest Jack was totally correct in his warning, RE processing is obviously a very complex business in practice, and perhaps each operation has its own steep learning curve, only learnt in practice.
    Lynas had a slow first 6 months, possibly due to regulatory constraints, then flow & wearing issues. Once resolved it appears chemical balance issues, secondary impacts from local flooding and then an electrical outage combined for a disappointing 12 months or so. The current month’s production numbers will be a critical indicator as to whether they finally have production issues under control, and no doubt also an influence on the ability to raise finance ahead of a broader restructure. Despite the production issues Lynas have managed to achieve a Q4 Average Sale Price of US$21.48/kg.
    An honest peer comparison to Moly would restrict itself to the Resources Segment which solely contains the Mt Pass operations and in that context I’d suggest your “increasing production” comment is misleading at best.
    Q1 Volume 763t ASP $23kg Op Loss (56.1)
    Q2 Volume 1049t ASP $17kg Op Loss (40.4)
    Q3 Volume 1080t ASP $13kg Op Loss (55.5)
    Q4 Volume 1034t ASP $11kg Op Loss (87.6)
    First point would be that after the Q2 volume increase “production” numbers have in fact been static.
    Second, a steadily declining ASP, particularly Q3 & Q4 where we might have expected to see some increase after RE prices bottomed Q2. Despite static production operating losses have more than doubled from Q2 (40.4) to Q4 (87.6). Perhaps a broad brush comparison but with an average Q cash burn of (USD59.9) Moly would appear to be chewing thru more than twice Lynas’s (AUD59.9) H1 loss.
    The conundrum of course is how can Moly be producing a steadily declining ASP (half Lynas’s Q4) in an environment where we have seen at least some price recovery?
    Does the answer perhaps lie with increasing shipments of LREC, Light Rare Earth Concentrate, AWAY from the Mt Pass separation facility for processing at Silmet? While an intercompany transfer it would still have a much lower value than separated RE. Based on back of the envelop calcs using the decline in ASP at 1000t it is not hard to make a case that perhaps 30/40% of “production” could in fact be unseparated concentrate.
    Quite frankly the main takeaway ATM is that Jack’s question remains unanswered, and any peer comparison is fairly meaningless until a good deal more hard data is available.

    March 13, 2014 - 11:39 AM

  • Tim Ainsworth

    And I guess the third obvious one would be given Rhodia’s tech assist & Moly’s experience at Mt Pass how high are the barriers to entry for the long list of Jorcs? And that’s just the simple LRE stuff.

    March 13, 2014 - 11:46 AM

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