objective analysis of today's events

OK, so a lot of us are shocked as to why the share price dropped 11% today. But let's try and carefully analyse what happened. It would appear that there is an inconsistency between what the media have portrayed and what was actually stated by both the IAEA and Malaysian government.

According to the joint media statement released by the Malaysian government:

"6.ii) To move the project forward, Lynas will be required to provide - for AELB's consideration and approval - a comprehensive long-term detailed plan for waste management, including at the decommissioning and remediation level. This must be done before any further licensing approval can be considered. The Government will ensure that Lynas complies fully with this recommendation of the IAEA Report. Until this is done, the status quo remains: there will be no importation of raw materials into the country, and no operational activities will be allowed on site."

The IAEA report's recommendation number 11 states:

"11.
Based on recommendations 1 - 10 above, the Government of Malaysia should prepare an action plan that:
(a)
Indicates how the above-mentioned recommendations are to be addressed;
(b)
Sets out the corresponding time schedule for the actions;
(c)
Is geared to the possibility of an IAEA-organized follow-up mission, which will review the fulfilment of recommendations 1 - 10 above in, say, one to two years time, in line with other IAEA review missions."

Now in several newspaper articles, this information has been construed as implying that Lynas will not be able to begin production and thus begin selling rare earth for another 2 years. For example, in an article in The Australian http://www.theaustralian.com.au/business/breaking-news/lynas-shares-tumble-9pc-as-malaysian-rare-earths-plant-draws-more-fire/story-e6frg90f-1226085552415, there is the following paragraph:

"Anthony Young at Dahlman Rose & Co said Lynas was scheduled to become the first major producer of rare earth oxides outside of China in September, but the move by the Malaysian government would likely push that to 2013."

Clearly anyone reading this article would get the impression that there has been a "delay" of about 2 years.

Lynas's response is as follows:

In reference to paragraph 6.ii) of the Malaysian government's media announcement: "This point reflects recommendations 1 and 2 of the IAEA report. It is this plan that needs to be approved by the AELB prior to receiving the pre-operational licence...

Upon issue of the pre-operational licence, which will allow start up of the plant and ramp-up to name plate capacity, Lynas will still have obligations related to the additional IAEA recommendations and this work will continue during the operational start-up of the LAMP.

We have received confirmation from the Malaysian government that no spokesperson for the government stated a 1 to 2 years delay as quoted by some media articles.

The confusion within the media may be related to the time reference in point 11, which states the IAEA could come back in 1 to 2 years time to review implementation of the recommendations - but this refers to all recommendations - not specifically to recommendations 1 and 2 which are the requirements to receive the pre-operational licence."

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So, based on the FACTS, it would appear that the media have been grossly negligent in reporting the true implications of the reports by both the IAEA and the Malaysian government.

Lynas has further stated that: "The schedule impact of meeting the requirements of this report is estimated to result in commissioning being completed by the end of 2011, with full production capacity of Phase 1 of the LAMP achieved by the start of the second half of 2012. Lynas does not believe the schedule for Phase 2 will be impacted."

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If the pre-operational license was originally planned to be obtained in September of this year, then it would appear that there is now a delay of 3 months, which is SIGNIFICANTLY different to the 2 years which the media have suggested.

Furthermore, a New York Times article has reported that engineers working at Lynas have claimed that the quality of construction at the Malaysian plant has been sub-standard: http://www.nytimes.com/2011/06/30/business/global/30rare.html

Extracts from the article:

"The problems they detail include structural cracks, air pockets and leaks in many of the concrete shells for 70 containment tanks, some of which are larger than double-decker buses...

The engineers also say that almost all of the steel piping ordered for the plant is made from standard steel, which they describe as not suited for the corrosive, abrasive slurry. Rare earth refineries in other countries make heavy use of costlier stainless steel or steel piping with ceramic or rubber liners.

The engineers also say that the concrete tanks were built using conventional concrete, not the much costlier polymer concrete mixed with plastic that is widely used in refineries in the West to reduce the chance of cracks...

"These issues have the potential to cause the plants critical failure in operation," Peter Wan, the general manager of Cradotex, said in a June 20 memo. "More critically the toxic, corrosive and radioactive nature of the materials being leached in these tanks, should they leak, will most definitely create a contamination issue.""

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However, the IAEA report has stated that "The review team was not able to identify any non-compliance with international radiation safety standards."

And Lynas's CEO Nick Curtis has responded to these allegations by saying: "We don't understand the source of the material in the article. We can confirm there are no engineering issues which we believe will be unsafe...

All contracting parties have agreed with us that there are no significant engineering issues that would render us unable to comply with any standards. We know the plant is safe."

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Who should we believe in this situation? The anonymous source as quoted in The New York Times or the independent review by the IAEA? Personally, I am more inclined to believe in what you would expect to be the impartial and professional assessment of the IAEA panel members.

Thus, I think a couple of factors have triggered the massive sell-off in the market today: 1) The misinformed impression by investors that production is to be delayed by 2 years and 2) Serious design flaws in the construction of the Malaysian plant. As I've said before, there's a HUGE difference between a delay of 3 months and a delay of 2 years, and the New York Times allegations are not backed up by any hard evidence and indeed seem to be refuted by the IAEA's report.

So then, with the share price hammered today, it would appear to the rational person that this has been driven largely by fear reinforced through negligent media reporting. Of course, we could be wrong and significant delays may possibly occur through whatever reason, but based on the facts presented to us today, I would say the MEDIA have got it wrong, and of course we all know the power of the media in influencing the markets. If the market got it wrong today, then at a price of $1.75 these shares would certainly appear to be a bargain!