Lynas Corporation (LYC-A) has been developing its massive rare earths project in Western Australia for more than ten years and a decision earlier this month by Malaysia’s Atomic Energy Licensing Board brought the project one step closer to the finishing line.
At the end of August the company completed Phase One construction of the Lynas Advanced Materials Plant (LAMP) near Kuantan in Pahang, Malaysia but it was still waiting for a Temporary Operating Licence (TOL), which would allow Lynas to start transporting rare earths concentrate from its Mount Weld project in Australia to Malaysia and prepare for the first feed to the plant’s kiln.
That licence came on Sept. 5 — a development Lynas Executive Chairman Nicholas Curtis described as a “milestone” for the company. The TOL is good for two years, during which time the Malaysian Atomic Energy Licensing Board (AELB) will monitor the state-of-the-art rare earths processing plant to make sure it complies with safety standards. If all goes smoothly during the first two years of LAMP’s operation, Lynas then will be eligible to get a full operating licence.
Much of the initial concern about LAMP and the reasons for the delays in nailing down the TOL had to do with the storage and management of radioactive waste or residue from the refining process. To address those concerns, Lynas vowed that the material of concern would be removed through conversion into co-products and then exported.
Malaysia was chosen as the site for LAMP due to the country’s industrial infrastructure, including industrial land, sources of gas, water and electricity, re-agents from local suppliers and a port that can manage container, chemical and bulk shipments. In addition the area has a good source of labour and regulatory infrastructure that includes clear legal frameworks, foreign direct investment incentives and accountable regulators, the company says.
Under LAMP’s recently completed Phase I construction, the facility has a production capacity of 11,000 tonnes per year. Under Phase II, that will rise to 22,000 tonnes per year.
While the TOL was good news for Lynas, not all analysts shared the company’s enthusiasm. Jon Hykawy of Bryon Capital Markets in Toronto has a sell rating on the stock. “Based on the fact that our price target of A$0.60 was based on full Phase I production of 11,000 tonnes being monetized in 2012 and that our project rare earth oxide (REO) prices for 2012 have proven high, year-to-date, we will maintain our sell rating and target price,” he explained in a note after news of the TOL was announced. (At presstime in Australia Lynas was trading at A$0.88 per share.)
Hykawy notes that his Lynas model and his previous estimate had been based on essentially no production in 2012 but full Phase II output of 22,000 tonnes of TREO and sale of all produced materials in 2013. “This is not going to be achieved,” he writes, “given the company’s statements that Phase II output levels will only be achieved by the end of 2013, further assuming the TOL imposes no limitations.”
The clean technologies and materials analyst also pointed out that there are still very few details known about the TOL. “Lynas’ boss Nick Curtis is quoted as saying that Lynas will reach 22,000 tonnes per annum production of TREOs by the end of 2013. However the public statements by Malaysian AELB Director-General Raja Datuk Abdul Aziz Raja Adnan seem less optimistic. His statements suggest that the TOL ‘will enable Lynas to conduct trial processing of lanthanide concentrates in stages and in limited quantities under close and continuous surveillance by the authorities. What those stages and limited quantities might mean is unclear…’”
In addition Hykawy argues that the project ramp up has not been de-risked. “We must still wait for the arrival of feedstock to see if the LAMP is capable of producing product in the manner and at the specification required,” he reasons. “We do not know, if any restrictions are placed on quantities of production by the Malaysian AELB, what impact the TOL might have on Lynas’ present off-take agreements.”
Kaiser Research Online editor John Kaiser expressed similar and separate concerns in May — long before the TOL was finally granted. “Although it seems like overcoming political opposition in Malaysia is Mt. Weld’s biggest obstacle, the key upcoming milestone will be a demonstration that the LAMP facility will crack and separate the supergene enriched monazite minerals in the concentrate to which the rare earths report,” the independent analyst wrote in a note to clients on May 2. “Because Lynas has positioned itself as a ‘commodity’ supplier, with much of its projected output already spoken for by off-take agreements, the stock at this stage is largely a fully valued speculation about future cash flow whose upside is fairly well constrained, but which leaves plenty of downside in the event problems arise as they inevitably do in the rare earth sector.”
Mt. Weld is the richest known deposit of rare earths in the world, according to Lynas’ website, and once in production will provide much-needed balance in an industry currently dominated by production from China.
In August, Beijing authorities released rare-earth export quotas for 2012 of 30,996 tonnes. Of those export quotas for companies producing rare earths in China, 27,122 tonnes are for light rare earths and 3,874 tonnes are for medium- to-heavy rare earths, according to figures from Technology Metals Research, a U.S.-based consulting firm. (This year was the first time China split quota allocations into light and medium-to-heavy rare earths.)
The analyst report seems to underestimate the anticipated positive impact of the company’s ability to generate large income once it start production , at any rate it will be generating income rather than burning cash as the situation now.
The $0.60 stock target price is very misleading considering that few months ago- while there was no good news- the stock was traded close to $2.80.
Lynas is a unique project with good management team; it owns secure vast mining resources at its stable mother land Australia.
Lynas will play an important role in breaking the Chinese monopoly on rare earth material, and will render good stock value rewards to its patient investors.