lynas, a value investment..., page-9

Hi tdl,

I am really not sure if we are reading the same document from 31 March 2011 so I'll copy the relevant bits of the one I have here:

"Ord Minnett base case valuation - $2.71 per share
Our LYC base case net present value (NPV) of $2.71/share is based on the following assumptions:
? First production from Phase 1 of the Project (11ktpa rare earths oxide (REO, 100% basis)) in 2QFY12E and reaching steady-state by 3QFY12E;
? Phase 2 expansion of production at the Project (additional 11ktpa)commencing in 1QFY13E and reaching steady-state by 4QFY13E;
? The following Mt Weld REO basket price forecast profile (which averages $60+ for the next 6 yrs) - my note.
? Operating costs of between US$13-14/kg over the first five years of
production. We then inflate our operating costs in-line with CPI from this
point;
? We assume total capex of c.$600m on Phase 1 and c.$300m on Phase 2
(excluding working capital requirements). On an ongoing basis, we assume
sustenance capex of $22m p.a.;
? A 15% Group effective tax rate for the period of the Malaysian tax
concession (through to FY24E) and 30% from FY25E onwards; and
? A 15% WACC, which we feel is appropriate given that LYC is yet to reach first production from Phase 1.

Valuation scenario analysis
Two of the key assumptions in our NPV are our rare earths basket price forecasts and WACC assumption. As such, in Table 6 below, we show the results of a sensitivity analysis for our NPV estimate, assuming a range of WACC and rare earths prices. However, the key difference between our base case assumptions and the sensitivity analysis is that we assume a flat nominal rare earths basket price for the life of the project in the sensitivity analysis.

Price target
Our Dec11 price target of $2.71 is based on our NPV valuation (see Table 7). Upside risks to our price target include higher than expected rare earths basket prices, a weaker A$ and successful developments of other prospective rare earths deposits (e.g. Malawi). Downside risks to our PT include significant project delays and cost overruns, weaker than expected rare earths basket prices, a stronger A$ and unexpected geotechnical issues at Mt Weld."

If this is the same info please read it carefully because when I do it says BASE case valuation 2.71 Dec 11 IF they realise Phase 1 production.

You might also like to confirm another fact that is REPEATEDLY misrepresented on this forum and go to the bottom of the page Financial Summary - Key Assumptions and you'll find Weighted Av REO basket price showing $54/2011FY, $61.90/2012FY & $63.49FY. As Dec 11 falls in 2012FY I am going to presume JPM are using $61.90 Basket Price in their calculations and not the mythical $35 that keeps being repeated as fact here.

Now I prefer to use JPM's BASE valuation because as far as I am aware their research is the most bullish of the majors but if you really want to ramp why don't you go to Table 6. Be conservative and stick with JPM's 15% WACC, and then you can really have a rush of blood and play "Pick the SP" based on your choice of basket price. Now don't forget these are estimates of longer term averages and must be realised in actual sales contracts not spot prices, i.e. in the quarterly report last night LYC stated av Quarterly price of $90 as compared to the current spot of $160 so sales last month would have averaged $90. If your comfortable with %90, well bingo, you've just won yourself an SP at $6.10. Fun to play, choices from 2.77 to 11.09 and if you want to be a mega bull wind the WACC down and you can play all the way to 15.98. When playing it is however advised to refer back to "Downside Risks" at least once every few minutes.

More seriously the one I prefer to use is Financial Summary - Group Consolidated P&L which shows 2013FY EPS 46c & DPS 12c. Say, a PE of 10 gets you $4.60 with a 2.5% dividend and a high chance of upside on stronger basket prices. From around $2 current LYC has got to be a screaming buy if your confident of their execution.