Future Fund Raising Damages Confidence In Lynas

This story features LYNAS RARE EARTHS LIMITED. For more info SHARE ANALYSIS: LYC

-Plagued by under-capacity LAMP
-Funding options look restrictive
 

By Eva Brocklehurst

Another capital raising? It looks that way for Lynas Corp ((LYC)), which confirmed at its interim profit report that additional funding would be required. The company is developing a rare earths project, wholly owned, at Mount Weld, Western Australia. The downstream processing facility, known as the Lynas Advanced Materials Plant (LAMP) is in Malaysia. The road to production at the LAMP has been littered with problems – operational target misses have been frequent amidst machinery breakdowns, while delays were created by legal action over the LAMP licence.

The company's unrestricted cash position stood at $67m at the end of December. Since then, the first US$10m Sojitz repayment has been made. There's a further US$35m due in September. Therefore, in Deutsche Bank's view, it's not surprising that further equity and debt refinancing will be required to better align with a ramp-up in the Malaysian operations that is taking longer than expected. More funds will be needed by the end of FY14 to maintain a level of comfort with the balance sheet. Under the existing debt arrangement the company can source a further US$80m on top of the existing US$450m.

Deutsche Bank forecasts a shortfall of $140m by mid 2015, based on estimated cash outflow. The broker considers that, whilst market risk and balance sheet concerns are in focus, the stock appears fairly valued and a Hold rating is warranted. Upside risks would come from FX movements, price increases for rare earths and lower costs.

JP Morgan wasn't surprised because of the slow ramping up to capacity – phase one is 11,000t of rare earths. The broker retains a Neutral rating – downgraded from Overweight at the beginning of February. The company has indicated the additional funding will be in the form of equity, debt and/or some refinancing or restructuring of the existing facilities. The key is the production rates at the LAMP, in JP Morgan's view. Management expects full phase 1 capacity at some stage in the June quarter. JP Morgan believes Lynas is one of the cheapest stocks under coverage but the market is unlikely to make much of this until the plant is operating at capacity. Lynas is also highly dependent on an increase to rare earths prices.

UBS estimates that, at the 11,000tpa rate that's expected in the June quarter, the company will just break even on a free cash flow basis. UBS has cut FY15 forecast production by 36% to 10,000t and assumes this rate into FY16. The forecast for reaching the phase 2 production rate – 22,000tpa – is pushed back to FY17. Rare earth price forecasts are also brought into line with spot. The broker considers there's little option but to do this, given the company's performance to date. The broker now forecasts an average Mt Weld basket price of US$21/kg over the life of the mine. This means earnings are now reduced to a break even position in FY15 and FY16 and valuation is reduced substantially.

UBS has downgraded to Sell, because of poor visibility on both the rare earth price and production outlook. Also, gearing is increasing and weak fundamentals, as well as the need for additional financing, mean the investment outlook is not positive. The broker is also pessimistic about the funding options, suspecting they may be limited to a deeply discounted equity raising or rights issue, debt refinancing and/or asset sell down. The broker fears there just may not be much left for current equity holders if current conditions persist. Macquarie is also in a holding pattern on the stock, believing that a period of steady production is required to gain confidence in the LAMP.

The FNArena database tells the story. There are four Hold ratings and a Sell. The consensus target is 30c, suggesting 18.8% upside to the last share price. Targets range from 20c to 40c.
 

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