What happened to the Lynas Corporation Share Price?
Shares of Lynas Corporation [ASX:LYC] rose by 7.69% on Tuesday, closing at $0.14.
Why did this happen to the Lynas Corporation Share Price?
Punters are buying in ahead of Lynas’ operational update, which is due this week. The previous update showed improvements in the company’s basket sales price. It also showed that production is on track to hit its magic 11,000 tonnes per year run rate target this quarter.
This comes at a time when rumours are floating around suggesting that several Chinese ministries ‘are discussing heavier taxes on rare earth producers’. These taxes could be implemented in the second half of this year.
I wouldn’t hold my breath.
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 see its monopoly affected, as it was in 2012.
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2012 was the year of the rare earths bubble. China put a temporary freeze on rare earth exports, causing the Western world to react by opening additional rare earth mines.
This was the last time Lynas shareholders 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, giving it power to control prices.
What now for Lynas?
Lynas shareholder confidence is low after production delays and capital raisings, as well as a series of environmental protests at its Malaysian rare earths plant.
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 additional capital expenditure, administration fees or even 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 — this will be good news for Lynas.
Saying this, I remain cautious about these Chinese rumours.
Jason Stevenson+
Resources Analyst, Diggers and Drillers
