Shares of Lynas Corporation [ASX:LYC] rose by 13.33% on Tuesday, closing at $0.17. The company has risen 54% since last Wednesday.
China Daily, one of China’s leading newspapers, reported last Wednesday that several ministries ‘are discussing heavier taxes on rare earth producers’. These taxes could be implemented in the second half of this year.
In my opinion, this is nothing new.
China has been talking about taxing its rare earth producers for a couple of years. It wants to see higher rare earth prices and curb illegal exports. Nonetheless, impacting supply conditions could potentially see its monopoly affected as it was in 2012.
2012 was a year that marked the rare earth’s bubble. China temporarily put a freeze on rare earth exports, causing the western world to react by opening additional rare earth mines.
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This was the last time Lynas shareholder’s had something to celebrate.
Known global rare earth resources are abundant, enough to dig up and last for over 285 years. And China controls over 92% of this market. Because of its monopoly, China has the power to control prices.
Lynas shareholder confidence is low after a series of environmental protests at its Malaysian rare earths plant, production delays, and capital raisings.
The issue lately has to do with the company’s balance sheet. The company is currently raising $40 million dollars to repay debt — this isn’t a good sign. After this debt has been repaid and restructured, there will still be US$440 million due for repayment by mid-2016.
Shareholders are starting to view Lynas as an extremely high risk play; it would be difficult to blame them.
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$22.63 per kilogram. This is roughly the company’s cost of production.
As Lynas is producing at roughly its breakeven price, it can’t afford to pay for additional capital expenditure, administration fees or even its debt repayments. It must continue to raise equity to pay for these necessary expenses.
Lynas can continue to increase its production and it will still struggle based on its current fundamentals. The more rare earths Lynas processes at current prices, the more unprofitable it will be for them.
Looking forward, if China goes ahead and bans rare earth exports or implements a tax, rare earth prices may increase. Nonetheless, China doesn’t want to encourage new mines opening around the world again which could further hinder the rare earths’ price in the long term.
In this case, as I have been for the past couple of years, I’m cautious about these Chinese rumours.
Jason Stevenson+
Resources Analyst, Diggers and Drillers