Share Consolidation is coming, page-97

On the basis of management doing well so far, I have no reason to find fault with them now so with the share consolidation, I’ll vote “Yes”. As for further justification:

It is probably best to get the share consolidation out of the way now rather than later as I suspect that a consolidation may assist with a capital raising/ rights issue further down the line. However, the company will wish to see maximum share price appreciation before any capital raising – requiring less shares for issue for the same amount of cash. Share price appreciation will be assisted when LYC is included in the ASX 200/ becomes investment grade so that (official) coverage by mainstream brokers resumes – this is not far away. Assuming that REE prices are maintained or increase, that appears likely, the share price will continue its upward trend regardless of so-called dilution (Bond/ warrant exercises).

Lynas is in a unique global situation in terms of supply and demand metrics and is in a position to expand more efficiently and in a timelier manner and with less risk than any new ex-China start up. Lynas must capitalize on its expertise and REE production experience gained over the last few years to maximize shareholder returns. Lynas will be abundantly clear about this.

Some expansion is possible from organic growth but the hinted “to build another Lynas” would involve a major capital raising, JV or other commercial arrangement and/or additional debt. (Note: a certain amount of debt is healthy: being “debt free” is not healthy and should not be a target because balance sheet flexibility would be retarded. However, the current debt structure should be improved).

The current JARE arrangements include a requirement to provide up to 3,600 tons NdPr per year at market prices. (This requirement expires in about 3 years’ time – although it is probably not a significantly disadvantageous arrangement anyway) There may be some smoothing mechanisms in pricing but in the medium term it will average out. Note also that the annual report points out premium prices for tailored supply that Lynas provides hinting at abover average pricing for Lynas. Lynas’ estimated production for NdPr is 6,000 tons per year (ref Newgate report) and with internal growth through self-generated reinvestment and efficiencies (increased output unspecified) there is much room for further advantageous off take deals in a seller’s market.

It seems that in the short term, a step change expansion is high risk - supply and demand levels and pricing must stabilize properly first. Management will not be inclined for an immediate rush and won’t wish to overextend themselves should there be some sort of adverse occurrence – namely unexpectedly lower REE prices, even though this may be unlikely. The share price consolidation (And small parcel clean up) are merely house-keeping preparations required for any future expansion plans and shouldn’t be agonized over.

A pipeline of positive surprises probably commencing with the quarterly reports due within a couple of weeks and subsequent quarterly reports and efficiency and productivity improvements should see progressive share price upside – but only then, a step change in expansion.

The above consists rightly or wrongly of my own opinions and is not investment advice: Please do your own due diligence and form your own opinion.