Lynas Shares Grow
Lynas shares (ASX:LYC) continued to grow yesterday after opening 7.5% higher on $2.43/share, matching the performance of the previous day.
Leading supplier of rare earth
Lynas Corporation Limited is a rare earths mining company based in Western Australia. Its main base of operation is located at Mt Weld. One peculiarity about the mine is the low level of thorium that is present in its deposits, leading to an unusually high grade of its rare earth quarry. The combination of low radioactive contamination and high grade materials has helped to cement Lynas as one of the leading sources of rare earths in the world. As the only major rare earths mining and processing firm based outside China, Lynas is in fact the second largest producer in the world. Apart from its mining plant at Mt Weld, Lynas also operates a refining facility based in Kuantan, Malaysia.
Investor’s Day Presentation
Lynas held an investor’s day presentation on the 21st of May, which reiterated many of its half yearly results. Performance was all round average, with key financial metrics all on the rise. Production volume maintained its growth from the previous years. Sales, EBITDA and bottom line NPAT were all somewhat lower than half year figures for 2018, with regulatory and market difficulties being cited as the contributory reason. These figures however were still in line with the general growth trend.
The report also mentions the rise of electric vehicles as a future driver of growth. Developers of electric vehicles (EV) are increasingly looking to rare earth technology in a bid to reduce the costs in building batteries, which costs up to 50% of the whole electric vehicle. Lynas projects that demand for the key component neodymium and praseodymium oxide (NdPr) will skyrocket with the release of new EV models in 2021. A trading halt was issued by the ASX shortly after the presentation, as Lynas has been requested to provide clarification on its rare earths reserves. Nothing significant arose of this incident, and trading has resumed. Otherwise, the investors day presentation did not contain any new price sensitive information.
Reasons for price surge
Nevertheless, the share price still rose to a 1 year record high of $2.43/share. Wesfarmers earlier pitched a takeover offer at $2.25/share to acquire Lynas, a deal which was rejected. Hence, it comes as a surprise to many how share prices rose above the perceived fair price of $2.25.
Investors were certainly impressed by Chief executive Amanda Lacaze, and the others from senior management who presented that day. Fund managers reportedly were given confidence over the management of the company, and were comforted by the fact that Lynas could execute its expansion plans without raising equity. Said expansion plans of upstream and downstream facilities are projected to nearly double the output of NdPr by the end of the year.
Another reason for the price jump can be attributed to its plan on how to resolve licencing issues in Malaysia. The Malaysian government was allegedly unhappy with the amount of radioactive waste that was accumulated at the Kuantan refinery, and there were fears that the whole operation in Malaysia could be shut down.
Fears were allayed after it was revealed that Lynas would be given the right to continue operation, albeit under new conditions. Radioactive waste will no longer be accumulated at its Kuantan refinery hub; instead, Lynas will build a processing plant near its Mt Weld mine to remove the radiation before sending the quarry downstream to Malaysia.
Trade war also to thank for
As a rare earth mining firm, Lynas sees its share performance strongly tied to the global economic outlook.
There is increasing speculation that the supply of rare earth will be affected by the intensification of the trade war between the US and China. President Xi Jinping earlier on Monday made a visit to the rare earth metal firm JL Mag Rare Earth based in Jiangxi, China. Many see this as a precursor to a ban on the supply of rare earths. Such a move comes off the back of Trump’s decision to raise tariffs and blacklist telecom firm Huawei.
A ban could see a repeat of 2009, when prices of rare earths sharply rose after Beijing cut supplies to Japan. Prices of NdPr have already risen to $40/kg as speculative buyers entered the market. The US currently imports about 80 % of its rare earths from China, and a ban could be particularly devastating as rare earths also see military use in jet engines, satellites and lasers. Lynas may in the future play a greater role in filling the supply gap, as it is the only major source of rare earths outside China. Reports of the disruption come just after Lynas announced that it would be building a processing plant in Texas with Blue Line Corp.
Other firms such as Arafura Resources (ASX:ARU) and Alkane Resources (ASX:ALK) have also been a beneficiary of this news. Amid the speculation, Lynas has told investors to calm down and downplayed the significance of Xi Jinping’s visit. In the end, Lynas will certainly be a beneficiary of the worsening relations between the US and China.
By Oliver Ju
Click here for a one month free trial to our Lotus Blue Portal.