What Happened to the Lynas Corporation Share Price?
Shares of Lynas Corporation [ASX:LYC] fell by 6.06% on Monday, closing at $0.155.
Why Did This Happen to Lynas Corporation?
Shareholders are weighing over how much the new Lynas should be worth. In my view, unless the rare earths pricing market picks up significantly, Lynas could be trading at below 10 cents in the not too distant future.
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, like it did in 2012 when it put a freeze on rare earths exports.
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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 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.
In my view, it’s likely that the company will require another equity raising this quarter.
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.
