Lynas Corporation Reports Maiden Profit; Share Price Declines On Malaysia Inquiry Fears

Political Risk Concern As Speculation Mounts About Malaysia Inquiry

Lynas Corporation reported impressive financial results in the September 6 meeting. Details are contained in the full presentation.  Despite the impressive news, the Lynas Corporation share price moved to lower levels in trading.


href=”https://www.lynascorp.com/Shared%20Documents/Investors%20and%20media/Announcements%20and%20media/2018/180906%20FY18%20Financial%20Report%20Presentation%201841362.pdf” target=”_blank” rel=”noopener”> CLICK HERE FOR LYNAS CORPORATION FY18 REPORT

  • Maiden NPAT of $53.1m as Rare Earths company (FY17: restated loss of $0.5m)
  • EBIT increased to $81.0m (FY17: loss of $14.5m)
  • EBITDA increased to $121.9m (FY17: $29.4m)
  • Revenue grew to $374.1m (FY17: $257.0m)
  • Gross profit grew to $121.1m (FY17: $14.7m)
  • Total REO production of 17,753 tonnes (FY17: 16,003 tonnes)
  • NdPr production of 5,444 tonnes (FY17: 5,223)
  • Positive cash flows from operating activities of $118.5m (FY17: $34.0m)
  • Principal amount of loan facilities reduced to US$165.2m (FY17: US$425.0m)
  • Substantial progress on $35 million Lynas NEXT project

According to the chart below, the share price began to lose support early in the day at the start of trading. As the day continued, investors appear to have liquidated positions in order to lock in profits and eliminate risk; perhaps related to Malaysia.  It would appear there is news in some part of the market that has not made it into the mainstream.

As per this second chart, Lynas Corporation stock is trading near the 1-year low.

The Editor is of the mind that Lynas Corporation is one of the strong global players in the REEs marketplace.  Nevertheless, the Editor believes it is likely that Malaysia could very well seek to extract financial concessions from the upcoming Lynas Corporation.  After all, the present Lynas Corporation business has a market capitalization of roughly A$1.25 billion.  To be clear, Lynas Corporation is moving into the “major” category of REEs businesses with production volume, financial performance and a market capitalization comparable to the “Big 6” SOEs in the China REEs sector.

Before turning to substantive issues relating to the Lynas Corporation FY18 results, it is worthwhile to examine the Company’s historic trading pattern.  Based upon the chart below, it is evident that prior share price levels peaked at levels 13x higher than the closing price today.  In light of the massive outlook for EVs and tight supply forecast for REEs, investors might find value in Lynas Corporation at present levels.  That said, one would be well-served to build some episodic downside protection in expectation for Malaysia.  On the other hand, other than sovereign risk issues, Lynas Corporation might benefit from seeking to negotiate a forward-looking agreement in Malaysia.  This is what some people like to call insurance.

According to the Financial Review (afr.com), Lynas Corporation says it has not been notified of any parliamentary inquiry into its Malaysian processing plant since a change of government in the Asian nation in May, despite recent reports suggesting that two such inquiries were imminent.

Australian broadcaster SBS quoted Malaysian MP and long-time Lynas critic Wong Tack in August saying that both the executive and parliamentary branches of Malaysian government would soon begin inquiries into the environmental impact of Lynas’ advanced materials plant in Malaysia’s Kuantan province.

A target of protests during construction in 2011 and 2012, the Kuantan plant processes ore from Western Australia’s Mt Weld mine and converts it into a range of rare earths products, most notably neodymium and praseodymium (NdPr) for use in industrial magnets.

Speaking on Thursday, Lynas chief executive Amanda Lacaze said the company’s processing plant had not been a major topic of debate in this year’s election campaign, which was won by Mahathir Mohamad’s Pakatan Harapan coalition.

“We have not had any notification from the ministry relating to any review and as I have said here and in other materials we have posted, if there is a review, as a transparent corporation we will fully cooperate. We are confident we meet and exceed our licence,” she told investors.

“This was not an election issue, it was not part of the government’s manifesto and has indeed not been a high profile issue subsequently.”

Ms Lacaze said Lynas would still need to seek approvals from time to time for various things, but was confident it would retain a social licence to operate in Malaysia.

“Lynas has been the subject of several previous reviews, most of which have been independent of government, there are two special missions by the international atomic energy agency and numerous court challenges to Lynas’ operating licence, each of which was dismissed,” she said.

“I am optimistic and enthusiastic about many of the changes that the new government has indicated.”

The new regime in Malaysia has not been the only political influence on Lynas shares in recent months, with most pundits believing the company would be the single biggest winner if the US goes ahead with plans to introduce tariffs on imports of rare earths from China.

Lynas produces about 20 per cent of the world’s NdPr, and is the only major producer outside China, yet its shares have declined by 35 per cent since the Malaysian election.

“The market appears at this stage to have taken a view that that uncertainty is not particularly welcome and we have certainly seen a softness in our share price which I don’t think properly reflects the long-term thesis for the business,” Ms Lacaze said.

Improved prices for rare earths drove a 45 per cent rise in revenue during the year to June 30, despite sales volumes rising by just 21 per cent.

Those factors ensured fiscal 2018 was Lynas’ first year as a profitable rare earths producer, 19 years after it first gained exposure to Mt Weld.

The company reported a $53.1 million profit after tax in what Ms Lacaze described as a “breakthrough” year for the company.

While much improved on last year’s $500,000 loss, the profit was weaker than the $72 million expected by analysts.

The weaker than expected profit appeared to be the major driver of an 8 per cent slide in Lynas shares to a seven month low on Thursday.

Fiscal 2018 may be better remembered as a year of significant balance sheet repair, with debt being reduced from $US425 million to $US165.2 million over the year.

Lynas is restricted from paying dividends under the terms of its debt, and while Ms Lacaze is keen to negotiate a return to dividends, she said those negotiations were not certain to occur in fiscal 2019.

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