http://www.theaustralian.com.au/bus...-wary-over-lynas/story-e6frg9lo-1226466374365
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By: Criterion
From: The Australian
September 06, 2012 12:21PM
Although palpably relieved, investors have taken a cautious approach to Lynas shares following last night's news the rare-earths producer has won a crucial licence to boot up its contentious Malaysian processing plant.
Lynas (LYC 81.5) shares by late morning had soared 22c, or 37 per cent, but some context is required: they're still lower than the level of mid-July when it was feared the Malaysian government would chicken out of handing over the already-promised paper.
Given the shaky outlook for commodities, the reticence is understandable -- but does this mean Lynas shares are a bargain?
Just to re-cap, the approval allows Lynas to transport concentrate from its Mt Weld mine in Western Australia to the plant at Gebang.
Lynas has already stockpiled 13,000 tonnes of the stuff and plans annual production of 22,000 tonnes over two phases.
Depending on whom you talk to, the Mt Weld output is fetching $US30 to $US50 a kilogram, implying revenue at the midpoint of $US480 million. (Owing to a misplaced zero, our $3.3bn estimate in yesterday's column was a tad overstated, which goes to show that sometimes a zero is worth far more than nothing).
Production won't ramp up overnight and there's still concern about Lynas's thin cash position given the capex requirements in ramp-up stage.
"Our analysis indicates Lynas will have a slim cash buffer through this period -- $20m in the second half of 2013,'' Macquarie Equities says.
"Management has indicated the possible need for $50-$70m in working capital for phase two (and) the company is confident it will have access to bank debt to fund this if required.''
If Lynas is caught short, at least it wields the whip hand which was certainly not the case less then 24 hours ago. The broker analysis we've seen models only modest revenue in 2012-13 -- between $43m-$148m -- and underlying earnings of $20m-$70m.
The year of payback for patient punters is in 2013-14 when Lynas generates underlying earnings $160m to $300m.
Of course, there's more theory in this than a physics textbook, the wildcard being whether the price for these exotic industrial ingredients holds up better than the plunging value of their poor cousin, iron ore.
Criterion last rated Lynas a spec buy at 76c on August 14 on the binary outcome of Lynas either getting the licence - and it was hard to see how the Malaysians could renege without seriously damaging the country's reputation with foreign investors - or not getting it.
The latter may have been fatal for the company.
We'll maintain the spec buy. But we won't go quite as far as Patersons Securities, which believes the "extremely undervalued'' stock should be worth $2.75.
About 10 per cent of Lynas shares have been short sold, which means hedge funds should be scrambling to buy to cover their position ... in theory.
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I've heard thousands and every one of them was wrong incorrect. I've lost on this one every time I thought it turned the corner. The bottom line I reckon is the boys in Malaysia can't be trusted even if you leave a big brown bag at a remote drop off point :lol: