Lynas Running Out Of Money, Again

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

-Lower rare earth prices
-Production falls short
-What if debt negotiations bog down?
 

By Eva Brocklehurst

Time means money. For no company is this saying more acute than for rare earth metal producer Lynas Corp ((LYC)). Lynas bought some time with a $40m capital raising in May but now the company appears to be running out of money again. Rare earth prices have not come to the party quite as expected.

The company's June quarter production report was broadly in line with broker expectations. Importantly, the LAMP – Lynas Advanced Materials Plant – in Malaysia has ramped up to 70% of phase 1 capacity. The company's realised rare earth basket price declined 19% in the quarter, as spot prices were lower and there was a weaker mix of product in Lynas basket. To brokers lower prices mean one thing – reduced cash flow – and this has heightened expectations for more funding by the end of 2014. Production was 5% below JP Morgan's estimates while sales were 9% above. Realised prices were 3% lower than forecasts.

The actual production numbers make little difference to JP Morgan's FY14 estimates, but lower rare earth price forecasts result in downgrades to FY15 and FY16. JP Morgan has lowered Lynas' realised price forecasts to US$18.4/kg for FY15 and US$23.6/kg for FY16. The broker retains a Neutral rating. Lynas is considered one of the cheapest stocks under coverage and JP Morgan does expect rare earth prices to improve, but risks to the balance sheet have increased with the production delays.

The company made little mention of its debts in the production report and continues to work with existing financiers regarding a potential restructure of facilities. With prices falling, cost savings and debt restructure have become more critical. UBS observes that back in May, Lynas was confident of achieving 11ktpa rates in the June quarter but the average rate of 7.5kpta fell well short. The company did not explain why, but said individual components have operated at targeted capacity. Compounding the problem was the drop in the sales price, 10% below the average of the company's basket price of US$20.35/kg and the result of selling a higher proportion of the lower-value cerium.

UBS calculates that break-even sales volume at spot prices is 13ktpa, which is well above the targeted rate. The company has cash of US$38m and a principal repayment to Sojitz of US$35m is to be made in the September quarter. In the absence of a debt restructure this all adds up to a need for more funding. In UBS' view the company is likely to run out of cash by the end of the year. The company is looking to aggressively cut costs but the broker suspects it may be too late. Moreover, there have been media reports that the company is in dispute with existing lenders over the refinancing arrangements. UBS is concerned that shareholders may end up owning just a fraction of the company, should refinancing plans falter – as happened with the recent Mirabela Nickel restructure. A downgrade is in order and UBS reduces the rating to Sell from Neutral.

There is poor visibility for rare earth prices, given uncertain market demand, and free cash flow has received no support from the rare earths market. Lynas is the major producer of rare earths, from its Mt Weld project in Western Australia, outside of China. Deutsche Bank observes the Malaysian operations are still consuming cash, with $49m in outflow in the first half. Without a resolution on the debt negotiations this broker also expects the cash balance could be further challenged in the next six months. Even assuming the Sojitz repayments are pushed back, the cash position will still fall to $7m at the end of the year on the current production profile. Deutsche Bank believes an extra $40m is required to provide time to ramp up production rates. All the risks add up to a Hold rating in Deutsche Bank's view.

On FNArena's database there are three Hold ratings and one Sell. The consensus target is 20c, suggesting 40.4% upside to the last share price. Targets range from 15c (UBS) to 25c (Macquarie).

See also, Lynas Buys Time With Equity Raising on May 7 2014.
 

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