Investors over-reacted when they wiped 25 per cent off the value of Lynas Corporation this week, according to analysts who say the company can be profitable without its Malaysian rare earths refinery.
Short-sellers have flocked toward Lynas in the belief it will face headwinds from the recently elected Malaysian government of Dr Mahathir Mohamad, but CLSA analyst Dylan Kelly is standing by his “high-conviction buy” recommendation.
Lynas ships rare earths concentrate from Fremantle to its Malaysian refinery, which turns the concentrate into higher-value products, but the company’s presence in Malaysia has long been controversial amid some local concerns about the health and environmental risks of radiation from the rare earths.
Lynas shares have fallen 45 per cent since Dr Mahathir’s government won power in May, and the stock suffered big falls over the past week when a long-standing critic, Kuantan parliamentarian Fuziah Salleh, announced that she would be leading a government review of the refinery.
Mr Kelly said he was “bewildered” by this week’s sell down, saying Lynas shares were now trading below his valuation of the company under a scenario where it ceased refining in Malaysia and instead just sold rare earths concentrate from Western Australia to third party refiners.
Mr Kelly said there was no shortage of third party refiners that Lynas could sell concentrate from its Mt Weld mine to if it were unable to operate in Malaysia.
“China would gladly accept it almost overnight, as they have a growing supply deficit from domestic sources that increasingly relies on imports to make up for the short fall. A host of juniors are already setting projects based on the same premise,” he said, in reference to ASX listed companies like Alkane Resources and Hastings Technology Metals.
Mr Kelly estimates the sale of unrefined Mt Weld concentrate could generate between $90 million and $230 million of earnings before interest, tax, depreciation and amortisation (EBITDA) per year, depending on the prevailing price of Lynas’ flagship product Neodymium and Praseodymium (NdPr).
The low end of that range is based on the assumption that NdPr fetches $US39 per kilogram; the commodity, which is used in the manufacturing of industrial magnets, was fetching $US46.83 per kilogram in Shanghai on Friday, according to data published by Bloomberg.
Based on Mr Kelly’s long term forecast for NdPr to average $US68 per kilogram, Mt Weld would generate about $200 million of EBITDA, equating to a share price of $2.
Lynas shares were trading at $1.58 on Friday.
‘I see limited further downside risk’
Just 0.28 per cent of Lynas shares were sold short (indicating investors who are betting the share price would fall) on the day of the Malaysian election in early May, but short positions have surged 20 fold since then, and have more than tripled in the past four weeks.
Lynas is the 43rd most shorted stock on the ASX according to Shortman.com.au.
When asked about the surge in short positions, Mr Kelly said he did not expect Lynas shares to continue this week’s slide.
“I see limited further downside risk with the stock trading below fundamentals of Mt Weld alone, in addition to near term commodity price uplift from environmental crackdowns in China commencing after golden week,” he said.
Ms Salleh did not respond to enquiries this week by AFR Weekend.
Lynas said on Monday it had not received any formal notification of a government review, but was expecting more details this week.
Lynas boss Amanda Lacaze was quoted in Malaysia’s The Star Online publication on Friday saying she hoped that if a review did take place, it would be fair and based on science.
“Lynas acknowledges the absolute right of the government to conduct a review, however, our expectation is that any review of our operations should be fair, scientific and adhere to proper process, in keeping with other recent initiatives of the new government,” she was quoted as saying.