Ferrets Stock to Watch: LYNAS CORPORATION LTD 09:27, Tuesday, July 31, 2007
A RARE EARTH COMPANY NOW MINING AT MT WELD IN WA
Sydney - Tuesday - July 31: (RWE Aust Business News) ****************************************************
OVERVIEW ********
The Ferret always gets a kick out of seeing a stock pointed out to investors as a potential winner and succeeding in its objective, achieving recognition for it in the share price.
Last December Lynas Corporation (ASX:LYC) attracted attention for its dedication in exploring rare earth potential.
But in addition, Nick Curtis, a mining entrepreneur who originally honed his skills with Macquarie Bank, went down the track with a new project which could be equally successful as his involvement with Sino Gold in China.
Some years ago the Ferret picked Sino Gold as a Stock to Watch a bit over $3 and today the shares are more than $5.
Nick has for some time been concentrating all his management skills on the small miner Lynas Corporation, of which he is chairman.
He has realised the potential of rare earths, which are a group of fifteen metallic elements that have unique properties which make them indispensable for many technological applications.
Rare earths already play a critical role in the electronics, automotive, environmental protection and petrochemical sectors.
As these industries grow and as research around the world continues to develop applications for rare earths, demand for these materials is expected to increase.
The rare earths are not actually rare, but very few can be mined with safety due to the radiation factor.
The more abundant cerium and lanthanum are as common as copper, whereas others, such as terbium, are not particularly abundant.
Last Friday, Lynas Corporation released its quarterly report for the period to June 30, with the front cover of the report showing the mobilisation of mining contractor, Roche Mining, with the first truck arriving at the company's Mt Weld tenement near Laverton in Western Australia.
The highlights for the quarter have been impressive.
* Commencement of mining operations at Mt Weld;
* Signing of the first supply contract with a significant rare earths customer;
* Receipt of definitive capital cost estimate for the planned Malaysian processing plant of $220 million including a 10 per cent contingency;
* Acceptance of an offer to provide a convertible note facility for up to $115 million;
* Acceptance of a banking debt facility for $US105 million;
* Commencement of detailed engineering for the Kemaman processing plant; and
* Increase of Mt Weld rare earths composition average quarterly price to $US11.39/kg from $US8.93/kg, a 28 per cent increase over the quarter.
Mining now well underway is a special milestone for the company.
An equally important milestone, as the company moves towards operations, is the signing of the first supply contract with a significant rare earths customer for the supply of Mt Weld rare earths to be produced from the company's processing plant in Kemaman, Malaysia.
Lynas has offered a long-term contract as the Mt Weld rare earths mine and planned Malaysian processing plant are not restricted by the production or export quotas that are associated with the current industry supply sources.
The five-year contract represents a new benchmark for the security of supply in the rare earths market and is welcomed by customers at a time when demand is increasingly strong but supply is restricted and ever more uncertain.
The definitive capital cost estimate for the Malaysian processing plant of $220 million incorporates $44 million for additional infrastructure costs during the initial construction period to allow for a rapid expansion from a 10,500-tonne REO (rare earths oxide) to a 21,000-tonne REO operation.
Detailed engineering for the Kemaman processing plant commenced this quarter.
On July 6 the company announced the acceptance of an offer to provide a convertible note facility to Lynas for up to $115 million from Indus Capital Partners LLC, which provided the foundation for funding of the capital costs associated with the construction of the Malaysian processing plant.
The key terms of the convertible notes include:
* Subordinated debt with a five-year term;
* Conversion price of $1.55 into Lynas fully paid ordinary shares, being a 34 per cent premium to the 30-day VWAP at the time of acceptance;
* 6.85 per cent coupon paid quarterly in arrears with interest capitalised for the first two years; and
* Interest payable in cash or in equity at a 5 per cent discount to the 30-day VWAP prior to the interest payment date, at Lynas's option.
With the convertible note facility in place, and after the end of the quarter, Lynas has been able to secure a commitment from Bayerische Hypo und Vereinsbank AG (HVB) to underwrite a debt facility of $US105 million.
The key terms of this facility include:
* Senior debt facility for $US80 million and mezzanine facility for $US10 million with repayments commencing December 2009 and ending December 2013;
* Working capital facility redrawable until December 2012 with a repayment in June and December 2013; and
* The margin for all components of the facility is 2.5 per cent over the USD SIBOR reference rate after construction is complete and 3.0 per cent during construction.
Draw down of this facility is subject to standard banking due diligence, all facility documentation in place, all necessary authorisations, consents and approvals in place, and completion of a convertible note for a minimum of $US50 million.
This convertible note will be provided by the Indus Capital Partners LLC facility.
SHARE PRICE MOVEMENTS *********************
Shares of Lynas yesterday slipped 2.5c to $1.26, compared with 42c when the company was reviewed last December. Rolling high for the year is $1.59c and low 29c. The company has 507.8 million shares on issue with a market cap of $639.9 million.
On the financial scene, the company opened the June quarter with $65.93 million of available cash and closed the quarter with a balance of $64.04 million.
In Australian operations covering the Mt Weld mine development, the last stage of the mining approvals process was completed on May 21 when the project management plan, which is a safety and health management plan for all site personnel, was approved by the Western Australian Department of Consumer and Employee Protection.
This followed final environmental approvals from both the Department of Industry and Resources and the Department of Conservation and Environment.
Following Board approval of the mining contract with Roche Mining (now Downer EDI Mining), an initial machinery fleet including a bulldozer, grader, front-end-loader and water trucks were mobilised and commenced clearing and site establishment.
By the end of the quarter, the 10km access road was cleared, formed up, and progressively improved with watering, grading and rolling.
The basic administration, workshop, fuel storage and power and water infrastructure was constructed, pre-existing bore-field power lines and pipelines were relocated away from the mine area, and a water standpipe was set up for filling water trucks for dust suppression.
The company plans to complete the following target milestones during the current quarter:
* Achieve 50 per cent of overburden removal at the Mt Weld rare earths mine;
* Award EPCM contract for the Malaysian processing plant;
* Receipt of AELB siting and construction licence for the Malaysian processing plant;
* Award early works civil package for Malaysian processing plant;
* Complete funding package for the total capital costs of rare earths project;
Lynas Corporation joined the Australian Stock Exchange list on September 11, 1986.
The history of rare earth element production can be divided into four distinct periods.
From the beginning of the use of rare earths in the 1880s to the 1960s, the rare earth supply came mainly from monazite (and xenotime, which is rich in the yttric elements) derived from beach sands from Brazil, Australia, India, and Malaysia.
The second period began when the Mountain Pass carbonatite of California was opened in 1965, with additional material supplied from existing monazite sources.
The third, transitional period lasted between the mid 1980s to the mid 1990s when production in China increased as production of monazite virtually ceased due to concerns of radioactivity.
In addition, production from Mountain Pass decreased due to environmental concerns and low-cost competition from China.
The fourth period is now, the time of Chinese dominance in production.
In 2005, global production of rare earths was estimated at 103,000 tonnes REO.
Of this, 98,000 tonnes was produced in China, or 95 per cent of the total production.
More than half of the Chinese production came from bastnasite in the Baotou area in Inner Mongolia with the remainder from mines in Sichuan and Jiangxi (where the ion-adsorption clays are mined).
China exported 55,300 tons REO to 74 countries and regions in 2005 with a value of $US552 million.
The cause of this shift can be attributed to the lower fixed costs and historically less stringent environmental requirements in China. However, since many of the products that use rare earths are now manufactured in Asia, supply is now geographically closer to demand.
In addition, the growth in income for the Chinese population results in an increase in domestic consumption of rare earths.
However, recent events indicate China's total dominance is not sustainable as rare earth demand grows.
The Mt Weld mine can fill part of the gap created by reduced Chinese supply and increasing demand.
The Mount Weld carbonatite complex is located 35km south of Laverton.
The main deposits lie in sheets within the soil horizon that covers the carbonatite, making surface mining relatively easy.
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