lynas probability weighted valuation

A lot of people are of the view that Lynas is trading cheap to fair value at the moment. However if you analyse the election probabilities there is a strong case to argue that the shares are trading at a premium to fair value.

To summarize a lot of commentators are calling the Malaysian election outcome this weekend as a 50:50 event. If the opposition wins then conservatively Lynas probably trades to 25 cents (-50%), given at a minimum the opposition will cause a number of delays and a likely capital raising will be required to bridge the cash flow gap. If however the standing government win then Lynas as a best guess trades to 60 cents (+20%).

25 cents * 50% probability = 12.5 cents
60 cents * 50% probability = 30 cents
Total probability weighted valuation = 42.5 cents

Therefore there is a strong argument that even at the current 50 cent levels, the Lynas share price is trading at an approx. +18% premium to fair value.