Australia | Nov 17 2011
– Brokers come away impressed from Lynas site visit
– LAMP plant slightly behind schedule but broadly on track
– Granting of permit the main unknown
By Chris Shaw
Last week FNArena noted market coverage on rare earth play Lynas Corporation ((LYC)) was growing (see: Lynas Approaching Blanket Coverage) and interest in the stock remains high following a site visit by brokers to the Lynas Advanced Materials Plant (LAMP) in Malaysia.
While progress on construction of the plant has been impressive to date, the project has fallen a few weeks behind early forecasts. In the view of RBS Australia this is not overly significant, given the scale and complexity of the project.
JP Morgan came away with the view while the magnitude of any further delays is likely to be small, the commissioning schedule to first feed looks tight. This remains reliant on the receipt of a pre-operating licence.
While JP Morgan's view is the public debate over the licence has moved in the favour of Lynas is recent months, it remains possible to forecast when any licence will be issued with any confidence. Any delay much beyond the end of the year could create some cash flow issues for Lynas in the broker's view.
Deutsche Bank agrees, noting while Lynas has a solid cash balance and some funding in place, part of this appears to require the granting of the operating licence before it can be accessed. This means any capex blowouts or production delays could see funds tighten up around the end of 2012.
With respect to the plant itself, Deutsche Bank notes construction is now 85% complete, against 78% as at the end of September. Management at Lynas continues to target mid January for first feed to the kiln, while Deutsche's expectation is this will occur in the middle of February. A subsequent ramp-up of operations should take around 60 days.
As RBS Australia notes, while the licence may not be granted by the end of the year as Lynas hopes, the likelihood of it eventually being granted is still quite high. Given this and the current discount factored into the share price leads RBS to suggest the risk-reward balance is now a lot more appealing.
On RBS's numbers Lynas is trading at a 50% discount to net present value, which equates to a flat rare earth price of US$38 per kilogram. By way of comparison, the current spot basket price is US$125 per kilogram.
The current share price implies a FY13 multiple for Lynas of three times, with RBS estimating the market is currently factoring in a 15-20% discount for permit uncertainty.
What acts in the favour of Lynas with respect to the granting of a permit in the view of JP Morgan is prospective customers are very supportive of the project given the potential for Lynas to help diversify market supply away from China.
Demand for rare earth elements is expected to remain strong, while JP Morgan sees Chinese marginal costs as continuing to rise. Given Lynas has the technical backing of Rhodia, one of the pioneers of the rare earth industry, JP Morgan suggests the company will enjoy a significant advantage relative to peers.
Given the site visit left brokers impressed there have been no changes to Buy ratings for Lynas. Price targets are also unchanged, the consensus target according to the FNArena database standing at $2.24. This implies upside of around 85% relative to the current share price.
Shares in Lynas today are slightly higher and as at 10.55am the stock was up 1c at $1.21. This compares to a trading range over the past 12 months of $0.857 to $2.70.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
