Lynas: is the market telling us something?

Robin Bromby
15 October 2015 

Wednesday on the Australian Securities: Lynas Corp rises by 26.3%. On Thursday it is up another 4.2%. Not an eventuality that anyone was expecting, especially as rare earth prices continue to recede and the industry is beset, as Lynas and others point out, by all the illegal rare earths being shipped by Chinese producers and so depressing the market.

But there it was, the reaction to the release Wednesday of the Lynas quarterly report. And look at the volume: 97 million shares went through on Wednesday, compared to 6.9 million the day before that and 19.95 million on Monday. And then on Thursday close to another 60 million shares are traded.

The numbers were good, but not that spectacular to normally cause such a spike in price and volumes. And you have to keep in mind that rare earth prices have tanked, and we cannot be certain they are going to rise substantially any time soon. That, and Lynas has substantial debt which will weigh it down, until it is either paid down or converted to equity (which will dilute existing shareholders).

I suspect the reason for the share price rise of Wednesday’s magnitude was not so much the results for the three months to September 30 as some of the commentary in the quarterly, commentary that said the sort of things investors expect from a business that can see a way to turn around its whole story. It is not out of the woods, but there now appears a glimmer of hope.

But before we get to that, let’s have a look at those figures.

Despite a bad market for rare earths, the company had positive cash flow of A$1.3 million. Sales for the three months totaled 3,171 tonnes, of which 968 tonnes comprised neodymium/praseodymium – more than the 930 tonnes required to justify the company’s Japanese lenders (and the key to its survival) agreeing to the first interest rate reduction under the rescheduled debt agreement.

(I don’t quite see the point of arguing, as some Lynas critics have, that Lynas would be toast without the Japanese backing. Many companies have problems, and rare earths is a long way from being one of the least complicated and least complex business models to make work. What matters is whether the company comes out the other end, and I suspect that investors are beginning to believe that Lynas’s chances of that have improved. What makes this all the more interesting is that, not only have rare earth prices retreated, but that we are near the bottom of the commodity cycle. I have no view on Lynas prospects, but I can at least point to what is happening on the market that suggests some people do have a view.)
Back to the results, though. Cash outflows were lower than forecast. And cash in the bank was higher than forecast at A$56.5 million. Unit costs were down. Recovery rates were up. (The full quarterly is posted here on InvestorIntel.)

But two passages in the company’s commentary in the quarterly report caught my eye. One was that “we continue to build on relationships with our existing key customers and to establish relationships with new customers”. Well, of course, they would say that, wouldn’t they, but Lynas is trying to make a case that it is building a reputation for being a reliable supplier. Again, that has to be demonstrated on  a continuing basis, but shareholders will no doubt feel reassured.

The other sentence referred to targeting the supply chain to create a clear, differentiated position for Lynas products. Again, that’s a motherhood statement, but it has a degree of reassurance about it. And it shows that the company has a defined strategy.

Many investors tend to stick with companies through their troubled times so long as they have confidence that a company knows where it is heading and has some chance of pulling off the recovery plan. A 26.3% rise in one trading session (albeit from an awfully low base) tends to suggest that this is the feeling in the market.

It’s a damn sight better than a 26% decline!