Shares of Lynas Corporation [ASX:LYC] dropped by 7.69% on Thursday, closing at $0.12. This is the lowest close since 16th March 2009.
Lynas shareholders haven’t had anything to get excited about since the 2012 rare earths bubble.
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 been 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 likely starting to view Lynas as an extremely high risk play; it would be difficult to blame them.
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 — this is exactly what happened to create the 2012 rare earths bubble.
As a result of China’s significant influence, 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 to as high as it wants 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.
The only way I can see Lynas making a comeback is if China bans exports on rare earths as it did in 2012. I see this option being highly unlikely. China doesn’t want to encourage new mines opening around the world which could further hinder the rare earths price in the long term.
Could this be the beginning to the end of Lynas?
Jason Stevenson+
Resources Analyst, Diggers and Drillers