Australia | Sep 06 2012
– Lynas receives Temporary Operating Licence in Malaysia
– Technical issues for LAMP project now the main issue
– Ramp-up of LAMP should ease cash flow and working capital concerns
By Chris Shaw
Last week FNArena noted Deutsche Bank recommended selling Lynas Corporation ((LYC)), partly given the view potential cost overruns for the ramp-up of the Lynas Applied Materials Plant (LAMP) project in Malaysia implied an insufficient cash position for the group. While Lynas had received supposed approval to begin operating the plant, the Malaysian government had not yet issued an actual licence and did not appear in any hurry to do so.
But with Lynas finally receiving a Temporary Operating Licence (TOL) from the Malaysian Atomic Energy Licensing Board yesterday, Deutsche suggests the game has now changed. This is because the granting of the licence means a reset event on a convertible bond position that would have occurred in October will now not take place.
As well, Deutsche suggests Lynas is now in a better position to negotiate its funding needs, to the extent $120 million in debt will likely be secured for the LAMP project rather than the previous assumption of $150 million in equity funding.
Factoring this into its model sees Deutsche adjust earnings forecasts for Lynas, the result being price target increases to $0.85 from $0.50. The broker's rating has also been upgraded, Deutsche moving to a Hold recommendation from Sell previously.
The granting of the licence doesn't remove all the questions with respect to the LAMP project, Macquarie suggesting risks have simply shifted from political to technical. Deutsche agrees, pointing out the plant will be a technically complex operation, so offering potential for timing and cost overruns.
The other issue for Macquarie is the delay to Phase 1 production, due to the TOL grant delay, will delay sales, meaning lower forecast cash flows available for working capital during the start up of Phase 2 for the plant.
Management at Lynas has indicated potentially $50-$70 million may be needed for Phase 2 working capital, though Macquarie notes if this is required Lynas is likely to have access to bank debt.
Given declines in recent weeks, JP Morgan has also factored more conservative forecasts for rare earth prices into its model for Lynas. This sees cuts to earnings per share (EPS) forecasts, the broker now expecting a loss of 4.9c this year and a loss of 3.6c in FY13.
Macquarie has similarly lowered its earnings forecasts for Lynas to reflect delays to production. Consensus EPS forecasts for Lynas according to the FNArena database now stand at minus 1.8c this year and 1.8c in FY13, though updates from all brokers have not yet been forthoming.
The changes to its numbers see JP Morgan lower its price target on Lynas to $1.50 from $2.00, which compares to a consensus target according to the FNArena database of $1.21. Targets range from Deutsche Bank at $0.85 to JP Morgan at $1.50.
With news of the TOL being granted JP Morgan expects a positive response in terms of the Lynas share price, particularly given a large short position in the stock. For the week ending August 29 Lynas was in the top 10 short positions in the Australian market.
The anticipated positive response is not enough for JP Morgan to shift from a Neutral rating, as the broker expects in the current economic environment the market is not likely to ascribe full value to companies with development risk and balance sheet leverage.
Macquarie remains more positive, rating Lynas as Outperform. This in part reflects significant upside relative to the broker's revised price target of $1.20, down from $1.70 previously, as well as an expected easing of investor concerns with respect to working capital and cash flow for Lynas if commissioning is successful.
In a stronger market shares in Lynas today are higher as JP Morgan had expected and as at 11.30am the stock was 19c or more than 30% higher at $0.785. Over the past year the stock has traded in a range of $0.56 to $1.805, the current share price implying upside of a little under 40% relative to the consensus price target in the FNArena database.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
