EDITOR: | July 7th, 2016 | 24 Comments

Lynas gaining market traction with its rare earths story

| July 07, 2016 | 24 Comments
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stockmarketFor a moment there, there was a flash of memories of 2011 when rare earth announcements would spark a big run on a stock. That happened this week in Australia when Lynas Corp (ASX: LYC | OTC: LYSDY) announced it was exceeding production targets and earning interest reductions.

On Tuesday, the day before the announcement, 2.7 million shares went through the Australian Securities Exchange — a normal sort of day in the present market, with the stock closing at A$0.058. But then came the company’s announcement on Wednesday and 40.66 million shares traded, the price finishing the day at A$0.068. (They retreated slightly Thursday but only to A$0.064.)

As I will outline below, until early in 2015 the usual knee-jerk reaction to a Lynas announcement was to sell off the stock; since then, if there have been any sudden movements, they have been upwards — which perhaps says something positive about the change in the market’s perception of Lynas (and possibly of rare earths — if so, it’s about time).

In brief, this week’s announcement was good on two fronts:

  • The company’s production of neodymium-praseodymium (Nd/Pr) – the key magnet rare earth elements – for the 12 months to June 30 exceeded the target of 3,840 tonnes. As Lynas pointed out, this is the second consecutive six-month period in which it has exceeded its Nd/Pr target. This means that interest on the loan facility under the agreement with partners Japan Australian Rare Earths (JARE) will be reduced by 0.5%
  • Lynas last month repaid another $5.74 million; as a result of its recent repayments, the JARE senior loan facility has been reduced by a further 0.3%.

We’ll learn more in the quarterly report due out later this month, but clearly this week’s news was enough to generate some market excitement.

Clearly, too the market is realising that importance of Lynas being the only non-China source of Nd/Pr for magnets. The latest market forecasts suggest that global permanent magnet market is expected to grow from nearly $13.4 billion in 2015 to $20 billion by 2020, at a compound annual growth rate (CAGR) of 8.4%. The neodymium magnet market has been forecast to grow from $7.0 billion in 2015 to $10.7 billion by 2020 with a CAGR of 9.0%

Just look at how sentiment has turned around.

Only as recently as the first half of 2015 saw largely negative announcements regarding Lynas. Typical examples of headlines were “Tough six months for Lynas” and “Another tough quarter for Lynas”.

Then in September 2015 Sydney-based Foster Stockbroking put out a very positive note on Lynas, suggesting that its was optimistic for several reasons:

  • The realization that the company was not going into bankruptcy.
  • Neodymium-praseodymium (NdPr) price potential once Molycorp’s inventories were exhausted sometime in the December quarter;
  • Higher rare earth prices as 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.

One day in the second half 2015 saw the company’s price jump by 13.2% after it reported positive cash flow. There was also a day when volume increased by 280%, an event that provoked a query from the Australian Securities Exchange.

We have also seen a report this year from another Sydney broker, Curran & Co, taking a very positive view of Lynas.

So there seems to be a positive trend developing.


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Comments

  • Jack Lifton

    Robin

    In the former Soviet Union success was measured by production goals being met and exceeded, but there was never any concomitant demand. It was just assumed that demand was infinite, so that the only metric was supply. In the decade following the economic collapse of the Soviet Union base metal prices worldwide were depressed as all of the Soviet Union’s vast excess of production was dumped onto the market. The only headlines on this topic ever carried by Pravda would read something like “Production goals exceeded by Glorious First of October Steel Works in Magnitogorsk.” Small investors and not-so-small institutional investors need to be certain that history is not repeating itself. By the way its not Molycorp inventory (if there still is or ever was any) that’s the problem with supply its surplus Chinese inventory.

    Jack

    July 7, 2016 - 7:16 PM

  • Robin Bromby

    Curran & Co of Sydney put out a note after the Lynas announcement. Its summary:

    ”Lynas’ announcement today in which it reported that the interest rate on the JARE debt facility will reduce by 0.8% to 5.7% due to exceeding production targets, was trumped by news it paid back US$5.74m into the loan facility restricted interest bank accounts ‘from operating cashflows’ in June. These funds were only drawn down in April 2016. This is in line with our view that the company will report record free cashflow for the June Q. We maintain our Buy recommendation and A$0.20ps target price, based on 10x 12-month forward P/FCF.”

    July 7, 2016 - 8:27 PM

  • investor

    When will they start returning the principal. US$ 5.7m is a good start. Long way to go to reach US $0.5 billion.

    July 7, 2016 - 9:53 PM

  • Lok Chong

    Robin, in spite of your relentless positive spins Lynas’ stock price is still stuck at historical low of between 5 and 7 Aussie cents.
    Why not inform readers of Lynas’ total debt? How many years at this rate before it starts making real profit, become debt free, and can even contemplate paying a dividend?
    More importantly make a definitive statement that you have no equitable interest in Lynas, and definitely not being paid or rewarded for doing all the positive spinnings/ heavy lifting?

    July 8, 2016 - 3:30 AM

  • Robin Bromby

    There is no “relentless positive spin”. I am merely reporting (a) what analysts are saying and (b) what is happening on the market.
    On the other hand, you seem relentless in your determination to put the most extreme negative spin on this story. What’s your problem?

    July 8, 2016 - 7:39 AM

  • Aat Oskam

    Maybe LoK Chong’s problem is that he has bought Lynas shares when they were AU$ 2 or more? Lok, so did I and I am still confident it will be okay again in a couple of years.

    July 8, 2016 - 8:25 AM

  • Pennie

    Jack, yet another of your delusional ramblings with an anti Lynas bias. Are you intimating that Lynas is supplying product that they are unable to sell? I wonder who just bought the more than 1100t of NdPr and probably around 2600t Lanthanum and Cerium that has put them in the position of being a minimum of A$8000 cash positive this qtr. And exactly why the lenders (effectively the Japanese government) set targets around NdPr production if they did not foresee concomitant demand. I suppose you would look beyond your nose and take a different view if a US company was portrayed as ‘gaining market traction’

    July 8, 2016 - 9:44 AM

  • Pennie

    Meant A$8 000 000 (A$8m) cash positive.

    July 8, 2016 - 9:47 AM

  • jeff stufsky

    The bigger question seems less about whether there is demand but rather at what price and vs. what all-in cost of production. This indeed must be compared to, in this case, Chinese supply and its associated cost. It does not yet appear that the year-over-year projections of supply shortfalls by many have taken root. Hopefully this comes soon, at least for Lynas; and then they can first start addressing their substantial amount of debt in a meaningful way.

    July 8, 2016 - 10:09 AM

  • Thomas Crown

    “There seems to be a positive trend developing in the whole REE-market.” After PM, copper, zinc and others, the turn-around in REE will steadily raise the likes of Lynas, NioCorp and Commerce Resources to new highs. The days of the chinese monopoly are out-numbered and new mine developments in Canada (Plan Nord and Plan 2018 to become independent in REE) and the U.S. will support the geo-political strategy of the western alliance.

    July 8, 2016 - 11:48 AM

  • Jack Lifton

    Thomas Crown,

    The only way your prediction can come true is if Chinese internationalism destroys the globalization of commodity markets, or, at least, the globalization of technology metals markets. A shoot-from-the-hip American president could indeed bring Chinese deflation exporting to a sudden halt by raising tariff barriers. This would revive the need for domestic self-sufficiency in North America. China is unlikely in the near term to abandon its mercantilism unless and until it is forced to. Most of the world’s wars have been based all or to a large extent in this type of behavior. Since such a war would be the last one for our species I would hope that even the least astute of the candidates for the American presidency would hesitate before engaging in a trade war, but I admit that a segue to a more free trade from today’s managed trade regime by both the US and China might give us some breathing room. The rare earths and niobium supply issues pale in the light of this overwhelming issue.

    Jack

    July 8, 2016 - 2:56 PM

  • Lok Chong

    Robin, my big trade in Lynas was right before the last Malaysian general election on Friday before polling (knowing that the opposition led by Anwar Ibrahim had no chance of winning despite all the fear) for AUD0.50 and selling them the next week (T+3) for AUD0.60 for 20% gain in 4 days. It has never seen $.60 since and losing traction/trajectory ever since.
    The volatile stock has been perfect for trading, meaning buying on the low or when there was a spell of no news and selling them on positive spins.
    No need for fundalmental analysis but only timing to sell them when Robin or Amanda and a few others talk it up. I must be thanking you guys Robin for shouting from the roof.

    Robin I can prove my crude inverse analysis correct.

    July 9, 2016 - 2:30 AM

  • Robin Bromby

    For goodness sake:
    1. I have no interest in your trades in LYC. Those comments were made by someone else in this thread. Get your facts straight.
    2. I am not “shouting from the roofs” For crying out loud, all I did was report on the trend in LYC trading, that is, that the shares tended to go down at one stage with each announcement, now they tend to go up. Why is that any mention of LYC tends to get people all riled up?
    Bottom line: I have no stake in LYC, I have been covering the company since 1999 when, as Lynas Gold, it acquired Mt Weld. I am a disinterested observer: to impute anything else is insulting.
    Get a life!

    July 9, 2016 - 4:04 AM

  • Lok Chong

    Read your headline. You are far from being a disinterested observer over the period, Why emphasised what other equity analysts are calling?
    They have been wealth destroyer, and readers should not be unduly encouraged to catch a falling knife.

    July 9, 2016 - 5:31 AM

  • Edmund Metcalfe

    It is obvious you are upset for losing money on Lynas and are venting, Lok Chong. There was NO undue encouragement here by Mr. Bromby.

    And surely it can be considered quite positive that Lynas:
    (1) successfully started a new LAMP processing circuit which will add 25% output; note also that failure would have meant missing the target, so kudos for team execution of complicated task
    (2) The upgraded LAMP beat the preset production target…
    (3) … and earned them a 0.5% interest rate reduction
    (4) They also apparently sold all their production …
    (5) … which enabled them to repay an $8M loan per agreement,…
    (6) …thus earning another 0.3% interest rate reduction
    So they now have interest rate of 5.7%, IIUC, which is pretty darn good!
    BUY LYNAS NOW!!!! heh-heh

    July 9, 2016 - 8:37 AM

  • Lok Chong

    Never lost a trade with Lynas. Take profit SELL at today’s hype, buy at next ebb for an inevitable next hype. There is market liquidity with Lynas which is great for riding the wave.
    Do not ride Humpty Dumpty for the long haul as Lynas Gold’s much hyped business model is flawed from the start. Reverting to being the last Western world’s super hero against the Chinese is a fool’s emotional hype and cannot be embedded into any sustainable business model.

    July 9, 2016 - 10:41 AM

  • K Vd Cruyce

    Lok, you made your point. We all know the story of Lynas.
    But when you continue to write the way you do, I might start thinking you belong to those wanting Lynas to fail. And perhaps you want this ?!
    As of that point you made yourself “quantité négligeable”.

    Time wil tell. Robin thank you for keeping us informed.

    July 9, 2016 - 3:21 PM

  • investor

    K Vd, Why being personal rather than commenting on the actual points addressed and finding faults in them. If the points are correct than accept that first and than go on…

    July 10, 2016 - 7:36 AM

  • K Vd Cruyce

    For a start:

    As said ‘We all know the story of Lynas’:
    1/ almost bankrupt, bad performance, wrong focus … before Amanda took over
    2/ after this moment situation improved – I think we can agree on this. Can we?
    3/ the essential comment was given by Jeff – producing as much as you want isn’t relevant if market prices are lower than total cost.
    4/ Japanese will support Lynas since they don’t want Chinese to control production again. And from a free-market perspective we can all support that unless you don’t want Lynas to succeed. Can we agree?
    5/ when Lynas situation would be hopeless, the curtains would have fallen already (I think). Why giving money to a company when you’ll never recover it.
    6/ situation in June quarter looks promising based on announcement (for me at least) – end of July report will confirm / contradict. Until then no-one can say anything serious … no-one. Agreed?

    Regarding Lok. Very simple.
    1/ he finds Lynas a bad company. I find many companies not worth commenting on for various reasons. So I don’t write on it. Why would I?
    2/ he made profit on Lynas and the reason is that he buys low and sells higher (as he mentioned himself: after the spinning of people like Robin). For me, this means he should embrace Robin or does he want the stock price to go lower first?

    Or am I missing something?

    July 11, 2016 - 1:30 PM

  • Freddy Curtis

    you miss the fact that many Chinese out there have an agenda. perhaps the Anti Lynas Chinese group in Malaysia wanting the sector all to themselves, and feel very threatened that Lynas will succeed eventually ripping the heart out of a Chinese monopoly. it very seriously reeks of fear of the inevitable, and some are desperately trying to fire the final down ramping salvo from a leaky, sinking sampan. god luck bok choy.

    July 12, 2016 - 2:53 AM

  • peter colin

    Hi Jack ,
    ah initiating a trade war , what the hell are you talking about ?

    Not sure if you have noticed , but the bulk of the western world has been engaged in a trade war with firstly japan , then korea and lastly china since the 1960’s .

    And i will give you the tip , we have lost big time !

    Japan ,korea and lastly china have rebuilt their countries and gotten wealthy on our money .
    Speak to any western executive on how hard it is to export anything to any of those 3 countries .
    The tariffs or protective barriers are incredible and very time consuming and costly .
    Yet we make it easy for them to destroy our markets .

    Take the European and south korean free trade deal .
    What a disaster for European companies .

    South korea will aim for say 10% of 400 million people while europe in theory might get 10% of 60 million in korea
    Who do you think has gotten the better of that deal ?
    And i can assure you of one thing , the koreans will never let the Europeans get a foothold in any of their strategic
    Home markets .

    These countries are so rigged , that korea has no share of The japanese car market, and the Japanese have no share of the korean market .
    Yet they both have managed huge shares in everyone else’s car markets .

    So those 3 countries are not frightened by a trade war that they have created , yet we should be if we even try to level the playing field ?

    I can assure you of one thing , if the west does not stop the trade war that the asians have created , there will be a hot war started by the west as all of our country’s will be broke with a very angry middle class .

    July 12, 2016 - 2:54 AM

  • JJBeswick

    Peter, if you care to check Lynas has been exporting RE to China; Jack L’s Ice to the Eskimos at the time. of course their main market is Japan…

    July 12, 2016 - 11:55 AM

  • K Vd Cruyce

    @Freddy, you are absolutely right. I didn’t miss that point but didn’t want to put it as direct as you.

    So indeed the question is how long this may last. If Lynas makes profit, how much longer will Chinese lower their prices so Lynas has no other option than to stop OR will be taken over by their Japanese customers. Japanese have the key into their hands. On the other hand Chinese can continue to lower the prices, even to 0, since they control the entire value chain of Rare Earts – from digging it up to the fabrication of the end-product.

    Or when it takes too long, will China accept a competitor. Or China wants to keep the prices low so other projects have no chance and they can buy them cheap. … Bottomline, who knows what the real agenda is of China.

    But like Peter said: hope the West shows his teeth to China. China needs us more then the opposite.

    But lets await the results of this quarter …

    July 14, 2016 - 1:35 PM

  • Tracy

    Thank you for your feedback — and of course, Robin; thank you for keeping us updated on Lynas. Please note that I will be interviewing Amanda next week, so send me your questions at info@investorintel.com and we hope to have this published by the end of next week.

    July 14, 2016 - 2:37 PM

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