Lynas Not Out Of The Woods

Reported by FN Arena
Wednesday, November 14, 2012
Topics in this article:
Macquarie,Lynas Corporation

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 - Lynas announces capital raising  - Funds for commissioning of LAMP project and a cash buffer  - Commissioning risk and rare earth prices remain concerns

By Chris Shaw

Last week a court in Malaysia rejected an appeal against the granting of a Temporary Operating Licence for Lynas Corporation's LAMP project and while this was a positive JP Morgan was just one broker of the opinion the company still offered too much short-term balance sheet risk.

This concern proved to be well founded, as Lynas subsequently announced a capital raising of $200 million through an institutional placement and a share purchase plan. The amount being raised is more than the $80 million in additional capital Macquarie estimates is required, so giving Lynas a cash buffer as production at LAMP is ramped-up. 

UBS suggests the raising was required in part because the legal delays with respect to the Temporary Operating Licence mean Phases 1 and 2 at LAMP are now being developed concurrently. Lynas now expects Phase 2 to achieve ramp-up to 24,000 tonnes per year by the final quarter of next year.

While the latest High Court decision found in favour of Lynas, Macquarie notes opposition groups continue to appeal against the Temporary Operating Licence. Ultimately the decision should go Lynas's way, but Macquarie sees risk of further disruptions to the start-up of the project.

Setting aside the potential for further legal issues, commissioning risk and rare earth prices are the main issues facing Lynas. As Deutsche Bank notes, rare earth prices for the September quarter for Lynas's composition averaged US$53 per kilogram, but this has since fallen to US$42 per kilogram.

With subdued global growth, ongoing inventory rundown and a preference on the part of buyers to order only when needed, Deutsche suggests prices could yet fall further. Macquarie agrees, the broker having lowered its long-term rare earth basket price assumption to US$37.63 per kilogram from US$40.58 per kilogram previously.

With respect to commissioning, Deutsche Bank continues to adopt cautious expectations, as while management expects full production by the end of next year the broker is forecasting the plant will achieve a full run rate by FY16. 

Such a cautious expectation may be justified, as UBS notes the conversion of concentrate to useable material is a complicated metallurgical process, so these challenges could easily generate delays to Lynas achieving full production capacity. 

To account for the capital raising, brokers have adjusted earnings estimates and valuations for Lynas, with UBS making the most significant change in cutting its price target to $0.80 from $1.00. Other changes to targets were relatively modest and the consensus target for Lynas according to the FNArena database now stands at $0.97, down from $1.02 previously.

Given the range of issues being faced by Lynas, brokers continue to adopt a cautious approach to the company. The FNArena database shows Lynas is rated as Buy once, compared to two Hold and two Sell ratings.   

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