Lynas has spent a decade and hundreds of millions of dollars trying to break China's stranglehold on rare-earths supply, but now the Australian miner's shareholders worry that its big bet may have gone sour.
When prices of rare-earth elements used in products like iPads surged three years ago, Lynas's value shot up to around $2 billion on expectations its new mine and Malaysian processing plant would play a big role in meeting a shortfall in global supply.
Now, Lynas is battling to protect profits and put its finances on a more solid footing amid a collapse in rare-earths prices. It is cutting jobs and shifting its headquarters to Kuala Lumpur from Sydney, while seeking new lenders to refinance its debt as hefty repayments loom.
Global mining companies are grappling with slowing demand for commodities ranging from iron ore to coal, but a near-90 per cent pullback in rare-earths prices since the third quarter of 2011 means Lynas has been hit harder than most.
In 2011, China shocked high-technology industries by tightening export controls on a group of 17 elements called rare earths that sent their prices rising as much as tenfold, prompting then-US Secretary of State Hillary Clinton to dub the scare a "wake up call." At the peak of the boom, a kilogram of one rare-earths mineral -- europium -- was worth twice as much as silver.
Like many miners, Lynas scrambled to raise debt and find new investors. Its shares peaked in April 2011 after management agreed to a $US225 million ($240m) loan from Japanese trading house Sojitz and state-owned lender Japan Oil, Gas and Metals National Corp, known as Jogmec.
However, Lynas's plans ran into trouble on several fronts soon after the Sojitz-Jogmec deal. Rare-earths prices began falling sharply, as manufacturers such as General Electric and Toyota tried to reduce their need for these metals and companies such as US-based Molycorp started up mines that offered alternatives to Chinese supply. Europium, for example, is down by two-thirds since it hit a high above $US2,000 a kilo in 2011.
Lynas owns one of the world's highest grade reserves of rare earths -- the Mount Weld mine near the outback town of Laverton in Western Australia state -- but ships its minerals to a processing facility near the port of Kuantan on the east coast of Malaysia.
The wild ride for shareholders has left many pondering the risks of getting involved in companies such as Lynas, which are backed by sovereign entities looking to secure strategic supplies of natural resources. Now that Lynas's mine and plant are completed, and rare-earths shipments beginning to Japan, Jogmec and Sojitz have balked at extending a timetable for the company to repay the $US225m loan, people familiar with the matter say.
"The position of the Japanese is intriguing," Mike Harrowell, a resources analyst at broker BBY, said. "I'd be staggered if the Japanese don't support the company, but their support to date has created short-term balance sheet difficulties for Lynas that appear inconsistent with Japan's need to insure against Chinese rare earth availability."
Lynas needs to make a $US35m repayment of the loan at the end of September, prompting management to intensify efforts to raise cash. In May, Lynas said it was working with Japanese bank Nomura on refinancing its senior debt at the same time as it tapped equity markets for a further $40m to shore up its balance sheet.
But the company's problems are so well known that lenders are insisting on tough terms attached to any new debt, the people said.
Nomura's Loans, Illiquids & Distressed Credit team in Hong Kong, which is negotiating with Lynas, has a reputation for deals that have more in common with hard-ball distressed-debt investing than typical commercial bank lending. Nomura's refinancing offer is conditional on it being repaid ahead of other lenders, including US-based hedge funds Mount Kellett Capital Management, Fortress Investment Group and Och-Ziff Capital Management, should Lynas become insolvent, the people added.
The three hedge funds are owed $US225m via convertible bonds issued by Lynas in 2012 to enable the company to finish building its Malaysian plant.
Covenants on those bonds prohibit Lynas raising any new debt that ranks equal or senior to the bonds without first seeking bondholder approval. However, Nomura's mandate is the "purchase and amendment" of the Sojitz-Jogmec loan, rather than a refinancing with new debt, Lynas said in May.
Lawyers have been engaged by Lynas, Mount Kellett and Nomura, and the dispute is ongoing, people familiar with the situation said.
Whatever the outcome, Lynas's shareholders are likely losers. Any new funding arrangement will likely be at higher interest rates than currently due on the Sojitz-Jogmec loan. Lenders could also swap debt for equity, which would dilute the holdings of existing Lynas shareholders.
Nervous investors may look askance at the fate of another struggling Australian company that owed millions to Nomura's distressed credit team -- oil and gas explorer Nexus Energy.
In November, Nomura and Bank of America-Merrill Lynch bough the senior debt in Nexus from Bank of Scotland International. Soon after, Nomura and Merrill amended the $42.4m facility to require the company pay $5m to the banks if they failed to repay the debt fully by April 2014. Nexus went bankrupt in June after the debt-repayment deadline passed, and shareholders voted down a lowball takeover for the company of 2c a share from Seven Group.
LYC Price at posting:
20.5¢ Sentiment: None Disclosure: Not Held
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