Back of the envelope calculations indicate that, with recent price rises reported on metal pages, LYC's basket price right now is in the region of $29. This is a meaningful price hike, and all the technical and fundamental/research indicators suggest that prices are heading higher still because structural repricing is now occurring. While I estimate that $29 will allow LYC to operate at roughly break even, a medium term move to around $35 should allow to LYC to be profitable in FY14. At current levels, LYC is priced to book heavy losses for years to come, so market expectations of even modest profit in FY14-15 will result in a significant re-rating.
While LYC have released guidance of a cash operating costs in the region of US$15/kg once ramp up to 22ktpa has been achieved, because of start up costs, and because phase II is presently standing idle, LYC's operating costs at present are significantly higher than what we can expect over the long term. LYC have not said how high; but my best guess (as I've said in previous posts) is around $25/kg for 'all in' cash costs (which includes corporate office costs, interest costs etc). DB think the 'all in' cash cost could be as high as $33/kg. Whatever the short term cash costs end up being, however, the key point i think, is that $29= roughly break even and $35=profit for FY14 only; in FY15 and beyond, $29=profit, and $35=serious profit.
Re the quarterly, LYC has sent signals to the market that it has started to ship some product, but have not specified how much. My guess is that it is modest, perhaps only in the region of 500 tonnes. Prices have been low during the quarter (realised FOB basket prices probably in the region of $20-$25/kg), so 500 tonnes may have only generated revenue in the region of $10mill. (Although keep in mind that LYC has been trying to negotiate prices above the spot price with customers in exchange for long term price stability). Allowing for the billing cycle, it remains to be seen if LYC has actually received payment for product shipped thus far. The quarterly reports cashflow, so even if meaningful product has been shipped, cashflow may not show up until next quarterly report. Given LYC's current valuation and low expectations, I think confirmation of ANY revenue will be a bullish sign.
For the current quarter, I think LYC is likely to ship close to 2kt. Given the very recent structural moves re prices, and assuming these moves are maintained, it would not be unrealistic to expect LYC to be EPS positive during the current quarter. In sum, I have relatively modest expectations for the quarter reporting on Wednesday, but bullish expectations for the current quarter. Interesting times ahead.
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Price($) | Vol. | No. |
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