Why the Lynas Corporation Share Price Fell Today

Why the Lynas Corporation Share Price Fell Today

What Happened to the Lynas Corporation Share Price?

Shares of Lynas Corporation [ASX:LYC] fell by 13.33% on Monday, closing at $0.13.

Why Did This Happen to Lynas Corporation?

Lynas updated shareholders on its debt position. This is something that I’ve been warning investors about for months. Today the company announced that it failed to negotiate a re-structure of its senior debt facility. Is this the first sign that the writing is on the wall?

Facts speak louder than words. In my view, it won’t be long until Lynas is permanently trading below 10 cents per share.

The recent quarterly result was mixed. Fourth quarter production and sales represent 47.5% and 54.2%, respectively, of FY2014 annual totals. This goes to show that Lynas is delivering on the operational side.

However, although positive, the growing production base is meaningless. The real issue with Lynas stems from the rare earths industry. It’s not feasible for Lynas to continue growing production when its costs exceed its basket sales price.

Known global rare earth resources are abundant enough to dig up and last for over 285 years. But China controls over 92% of this market. Because of its monopoly, China has the power to control prices, as it did in 2012 when it put a freeze on rare earths exports.

In my view, if you buy Lynas today, you’re having a punt on China doing this again. To state the least, this is a very speculative trade.

What Now for Lynas Corporation?

If nothing changes in the industry, things are likely to only get worse for shareholders from here.

The issue lately has to do with the company’s balance sheet. Even though the company has the cash reserves to meet its short term debt obligations, there’s still US$440 million due for repayment by mid-2016 — this is the facility that the company is finding difficult to re-negotiate.

This is a serious concern of mine. And here lies the issue…

As a result of China’s significant influence on the rare earths market, Lynas has seen its average rare earths ‘basket sales price’ fall from above US$200 per kilogram in 2012 to US$18.25 per kilogram. This is down from US$22.63 per kilogram last quarter.

The company’s total cost base is nearly double, on a per unit basis. In this case, operational production and administration costs were double the cash receipts from rare earths.

And as long as production continues to climb, it will likely only get worse. In this case, Lynas will struggle to meet its $440 million debt commitment, due in two years’ time. And if the market crashes, which will be at some point within this time frame, it’s likely to be lights off for Lynas.

In my view, it’s likely that the company will require another equity raising this quarter.

Jason Stevenson
Resources Analyst, Money Morning

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Jason Stevenson
Jason shares his extensive knowledge of Australia’s mining sector as Money Morning’s dedicated resource analyst. Whether it’s iron ore, gold, copper or lithium, you can rely on Jason to give you in-depth analysis of the biggest and most important sector of our economy. Jason provides in-depth research to Resource Speculator, Australia’s premier resource investment advisory. If you’d like to know more about Jason’s financial world view and investing philosophy then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.
Jason Stevenson is Money Morning’s resource analyst. He believes that the best way to make money is, and always has been, to back Australia’s best explorers, miners and refiners.
Before joining the team at Money Morning, Jason worked at boutique firms which advised fund managers and high net wealth clients where to invest. Now he brings that expertise to Money Morning, where he provides readers with his take on the Aussie resource sector. Whether it’s iron ore, oil and gas, gold or lithium, you’re guaranteed in-depth analysis of Australia’s biggest and most important sector. Jason is also the analyst for the leading resource investment advisory Resource Speculator. This is where he shares the best mining prospects and natural resource plays he finds on the ASX. Official websites and financial e-letters Jason writes for:

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