Treasure Chest | Aug 31 2012
By Rudi Filapek-Vandyck, Editor FNArena
Never underestimate the potential for bad news, or so it seems. Australia's future hope for the supply of rare earth minerals, Lynas ((LYC)) has had its fair share of delays and further delays following the decision to build its key processing hub in Malaysia. Now Deutsche Bank has issued a report predicting there's more bad news around the corner through even more delay before the company will (finally) receive the long desired Temporary Operating Licence (TOL).
Deutsche Bank analysts still believe Lynas will be granted the TOL, but it won't happen before the upcoming elections. It is now assumed Lynas will receive the good news in January next year.
This delay, however, has the potential for major ramifications for current shareholders in the company through a bond conversion and a potential capital raising. Nothing's set in stone at this stage, only one thing is certain and that is the risk profile for Lynas equity as an investment has ticked up a few extra notches. Which is why the stockbroker has decided to lower its recommendation to Sell and cut back its price target to $0.50 from $1.25 previously.
Is it still possible that more positive scenarios may unfold? Absolutely. Deutsche Bank analysts are simply playing the odds and right now, in their view, the odds have turned in favour of more bad news first for Lynas shareholders.
The main ingredients that make up the Lynas story in the months ahead include:
– parliamentary elections in Malaysia, likely to take place in November (The 13th Malaysian general election must be held by 27 June 2013 at the very latest)
– on October 15 the outstanding US$225m convertible bond will reset and Deutsche Bank estimates the new price at which these bonds can be exchanged for equity in the company will be circa $0.60 (versus $1.25 now). Lynas has TOL approval but it has not been issued so at this stage the analysts assume the reset goes ahead
– allowing for working capital and for potential cost overruns of the plant ramp up, the analysts believe Lynas' current cash position is insufficient. They estimate an additional $150m will be needed. While debt remains a possibility, the expectation seems to be new equity issued at $0.50 – which has also become the new price target for the shares.
– even if TOL is issued, the analysts maintain the risks attached to the technical ramp up are high. They have delayed future ramp up volumes on top of lower price forecasts for rare earth FOB prices in the years ahead.
On current, revised, forecasts Lynas will report its first profits for shareholders in FY14, but only just (estimated EPS of $0.01) on sales that are projected to exceed $300m that year.
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