Lessons from Lynas’ near-death experience
Australian Financail Review
16 October 2017, by Michael Smith
Amanda Lacaze calls it her first “champagne quarter”. The stars have aligned for Lynas Corp five years after its near-death experience when China flooded the rare earths market and almost sent the Australian company bust.
There will always be risks for a company heavily leveraged to China, which controls most of the world’s rare earth industry, but at the moment Beijing’s policies clamping down on companies breaching environmental regulations is working in its favour. This is putting some of Lacaze’s rivals out of business at a time when demand for rare earths used in electric motor vehicles and wind turbines is booming.
But while an increase in benchmark pricing is driving the improved results, a major factor underpinning the company’s share price surge is the work Lacaze has done around efficiencies at the company’s Malaysian processing plant and converting the company’s debt to equity in an orderly fashion.
About 16 of the company’s top 20 shareholders are now large institutions; this provides much-needed stability on the company’s share register, which was previously dominated by retail investors. The next phase is to consolidate the company’s 5 billion-plus shares. The proposed 10-for-one consolidation will be put to shareholders at the next annual general meeting.
Lacaze, who is based in Kuantan in Malaysia where the company has its processing plant, was made chief executive in 2014 and immediately tackled inefficiencies at the plant and went on to broker a deal with the company’s major bondholders for a debt-to-equity conversion last year.
The company’s market capitalisation jumped from $386 million to $1.018 billion in the September quarter. Lynas on Monday reported a 108 per cent increase in sales revenue for the quarter. The company was worth more than $4 billion before the rare earth crisis, which saw China flooding the market, in 2011.
Fall in debt
Cashflow increased to $25 million from $15.8 million in the previous quarter and NdPr production rose 22.6 per cent on the prior year to 1442 tonnes. Patersons analyst Cathay Moises points to the company’s fall in debt, increased production, costs cuts maintained and a substantial increase in price received.
Lacaze says the world’s only rare earths supplier outside of China is in a good place after some tough years. The primary markets for its products are motor vehicles, wind turbines and electronics. The rare earth price most closely linked to Lynas’s performance is NdPr Oxide, which encompasses Neodymium and Praseodymium.
There has been a steady increase in the benchmark NdPr price since November, which accelerated sharply at the end of of July. Lynas says demand is being helped by magnet makers building stocks as a hedge against further price increases, a crackdown by Chinese authorities on rare-earth metals plants not complying with environmental rules, and rumours of strategic stockpiling by Beijing. This is a contrast to five years ago when Chinese suppliers flooded the market and prices plunged.
The company is not like a traditional miner because every customer has particular specifications for its product. Lacaze says because of this tailor-made approach, Lynas’s performance will not be directly tied to the market benchmark index in the future.
The straight-talking Lacaze says she has observed many businesses that botched up a recovery because they “mixed up getting lucky with getting smart. Right now a bit of what is happening in the market is serendipitous for us but if we had not got smart running the business we could not benefit from it.
“The next trap is believing the market will look like it does now forever.”
Lynas hopes to differentiate itself from its Chinese competitors by offering long-term contracts, which makes sense for electric vehicle companies which are making decisions about the technology they will use in cars in 2025. About 90 per cent of the company’s product is sold into China and Japan, but Lacaze also wants to work directly with the secondary customers such as the wind turbine and electronics manufacturers.
The company now hopes to achieve a sustained production of NdPr at 500 tonnes per month by the end of the March quarter next year.