HC Followers, Patersons beleive the recent sell off in LYC is...

HC Followers,

Patersons beleive the recent sell off in LYC is unjustified. Probably a good short term trade as this bounces.

Lynas Corp (LYC) $1.28
Recommendation: BUY
Analyst: Andrew Harrington Tel: (+61 2) 8238 6214
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Today?s shareprice fall is unjustified
Investment Highlights
? The Lynas (LYC) share price has dropped by 15% this morning. We believe that this is an overreaction to the share price fall in Molycorp (MCP), the only other advanced Rare Earths miner in the world. MCP closed down 22% this morning, Australian time, following a downgrade by a US broker. There may also be some impact from Margin Calls and Stop Losses that may have been triggered.
? Looking at the details of the downgrade, we believe that a large part of the fall in the MCP valuation is due to the decline in the Rare Earth Oxide (REO) spot price which has fallen from a high of $220/kg in mid-year to $157/kg at last trade. We would highlight that our valuation for LYC has used a forecast average of $80/kg for FY12 and then a $40/kg long term real price from FY13 onwards so fluctuations in the current spot price have no bearing on our forecast earnings, and therefore valuation, for Lynas.
? The fundamentals on the ground have changed very little. The company is producing concentrate from the Mt Weld mine and is still planning to refine material at its Malaysian plant by ?the end of 2012?. The company is still waiting for the final approval to process Rare Earths from the Malaysian government after a safety audit was conducted in July by the IAEA, which found that Lynas has complied with standards. The main condition added by the IAEA was that LYC should have a more stringent waste disposal and decommissioning plan and this is the final element being considered. LYC expects the so-called ?pre-production? license by November and sales by 2Q12.
? LYC has signed two significant offtake agreements recently with BASF and Siemens. Both firms have extensive business interests inside Malaysia and a lot of market intelligence regarding the REO market. Furthermore, LYC has organised a site visit for first half November, before the upcoming global Rare Earth Conference, which we infer would only be done if positive events were expected.
? Lynas is now trading at a PE of 6.6x FY13 and 3.3x FY14 earnings on our conservative forecast prices. Using only half of current spot ($80) it becomes 2.7x and 1.4x respectively. Accordingly we retain our BUY recommendation with a price target of $2.90 per share.