What Happened to the Lynas Corporation Share Price?
Shares of Lynas Corporation [ASX:LYC] rose 5.06% to $0.083. As I’ve been calling for many months, the share price is finally below 10 cents per share. This was clearly going to happen. The next target is 5 cents per share or less. This target should be hit by the middle of next year.
Invest carefully and read below….
Why Did This Happen to Lynas Corporation?
This is the first time I’ve written about Lynas since its capital raising announcement. I can’t help but point out that I did say this would happen. Dilution is something that I’ve been warning investors about for months.
The company’s debt position outweighs its market capitalisation by 164% — a very high risk venture.
Lynas is raising AU$83 million at eight cents per share. These shares will be attached to an option at nine cents; this is a clever way of raising capital before next year to repay more debt. The options would bring the company in close to $40 million if exercised.
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But there’s still US$440 million due for repayment by mid-2016. US$90 million (AU$103 million) will be required to meet the senior debt facility repayments to the end of 2015. As you will read below, given the company’s revenue and costs, this will be nearly impossible — without another capital raising anyway.
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 say the least, this is a highly 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 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.
Investors should be prepared for more dilution. This company has quality rare earths assets but, in my view, it’s more likely to go under than succeed. Increasing production will send this company quicker into insolvency than to financial success.
Jason Stevenson+
Resources Analyst, Money Morning
The post Why the Lynas Corporation Share Price Fell Today appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
