This is a copy of an article I wrote for a US blog... Hopefully this will serve as a source of information to potential investors, feel free to cut and paste when the opportunity allows...
Lynas a Rare Earth Giant
Introduction…
To say Lynas is the rare earth giant in the rare earth industry is no stretch of the imagination. The rare earth industry is about as obscure in most people’s minds as the names of the key products such as neodymium and praseodymium but they will soon be at the forefront as time goes on. Lynas is a clear first mover in the rare earth industry and they maintain a significant advantage over the closest competition in an emerging industry where product demand is growing strongly.
The rare earth mine in Australia is where the story begins. Lynas owns 100% of its very high grade rare earth deposit which it mines, then ships to their massive processing facility in Kuantan, Malaysia. The actual individual rare earths are separated at this facility, finished and sold on the open market in powder form as oxides and carbonates or after further toll processing in a metal form.
Recently I was able to tour the Kuantan facility in Malaysia, Lynas has been building and fine tuning the processing facility for nearly ten years. I was able to follow the processes from the initial crushing and cracking to final product bagging and shipping. During the visit I had a chance to spend some time with the Lynas CEO along with her senior staff and we discussed a broad range of topics including expansion plans and the rare earth market.
The Story…
Exactly what are rare earths? Rare earths are a group of 17 elements found in the lanthanide series on the periodic chart. They are used in an ever growing list of applications including many high tech-military applications. At the present the primary use of rare earths is to build magnets that have many times the strength of a comparable sized, conventional magnet.
These high power magnets are used in many green applications such as wind turbines and quite a few everyday items such as the electric windows on most cars or the main drive motor in electric vehicles. For the purpose of the article I will focus on two of these metals which have the largest demand. The first is Neodymium (Nd) and the second is Praseodymium (Pr) and these two metals are combined to achieve some of the most powerful Nd/Pr permanent magnets currently available on the market. Nd/Pr is by far the most lucrative product in the Lynas product line however other metals are also separated such as Cerium (Ce) and Lanthanum (La) which are sold at a lower price.
The Lynas story is nothing short of amazing. The founder of the company had a vision to be the world's (China excepted) dominant rare earth producer which would mine the company’s very high grade rare earth deposit. The reserves are located internally in Australia where they are mined, concentrated and railed to Fremantle on the Southwestern coast. The concentrated ore is then shipped by sea to a processing facility in Malaysia where the magic begins. Since all 17 rare earths tend to be found together closely intertwined in the host ore body, Lynas employs processes at its Malaysian plant to separate the individual elements in the rare earths powders are sold globally.
Global rare earth supply is approximately 85% Chinese and 15% in the rest of the world (ROW), the majority of ROW being Lynas. Lynas has committed a significant portion of its production to Japan and hold's very close ties with manufacturers in Japan and other key markets. As a result Lynas aims to somewhat insulate itself from market volatility while still allowing for potential rare earth price increases. Global demand is growing strongly as everything from electric vehicles to the massive wind turbines use significant amounts of permanent magnet motors that include Nd/Pr.
Lynas is currently a profitable company surviving many challenges along the way from design to production. In talking to Amanda Lacaze, CEO, she recalls the difficult times from 2014-16. During these years Lynas has improved their process by upgrading and eliminating bottlenecks and is now producing in excess of 500 metric tons of Nd/Pr per month.
A financial snapshot shows the company recently reported quarterly operating cash flow after interest of Au$20m on revenues of Au$98m. As this is the fourth quarter of the fiscal year, the operating cash flow after interest was reported at Au$87m on revenues of Au$383m. It is clear that Lynas is not a small startup as its market cap is roughly Au$1.5b and the outstanding shares are ~700m on a fully diluted basis. The balance sheet has also improved dramatically and the forecast for next quarter is quite optimistic as Lynas held some of their product back from the market to take advantage of better pricing.
Additionally there was a seasonal water shortage in May that cost the company a fair amount of production reflected in the Q4 numbers. Lynas is mitigating the issue and both of these factors are expected to have a positive effect on earnings in the first half of the 2019 fiscal year.
In terms of debt, Lynas is a relatively new company and as I mentioned they went through some hard times. Until recently, debt levels were high – a short time ago Lynas had US425m of debt some of which still remains on the balance sheet. The good news is the debt is on its way to being extinguished within a couple of years or less. Actual debt is now somewhere around US$165m, and it should be noted that
Lynas made a non-required payment of US$20m very recently indicating a strong cash position.
There is a political issue to consider. A couple of months ago there was a change of government in Malaysia and the new governmental appointments, and the policies of the new government on a range of issues including Lynas, are still being finalized. The new government has formed a number of review committees across government and there is some media reporting that suggests that Lynas may be one of the areas to be reviewed.
Expansion plans for Lynas mostly include improvements to the existing facility including optimizing of the recovery rate of rare earths from the ore. Along with improving the recovery rate will be the elimination of bottlenecks improving the throughput along with the yield.
Lacaze spent time discussing the importance of approvals and the approval process. She made it clear that the approval process is dynamic meaning that there is virtually always some form of approvals taking place at any time. Lynas does not receive a blanket permanent operating approval, the actual approval process is ongoing and is constantly being modified as the situation requires.
The bottom line is that the pieces of the original Lynas vision have come together and the company is rapidly emerging as the dominant leader in rare earths (outside of China). I am not a numbers guy, so I will leave the task of any financial analysis to the analysts' but I am very optimistic about the big picture.
I was having breakfast with a particular Australian analyst and as we went over the facts, opinions and circumstances surrounding Lynas as an investment and were both having a hard time trying to reconcile the current share price with the actual potential of Lynas as company. It hit both of us that the current valuation can’t possibly include the first mover advantage, the IP, the assets of the LAMP, the Mt. Weld mine, and the barriers of entry for competition making Lynas a solid investment. The company is profitable and earnings are accelerating along with market demand…
Lacaze seems confident in the future of Lynas and the rare earth industry and considers the business well established and de-risked. Here is her comment from the latest quarterly report released a couple of weeks ago…
“So our belief in the long-term thesis is strong. And we're very confident about the actions that we've taken within our own business to prepare it so that we are able to optimize the returns in that higher-growth environment.”
Excellent management has taken a company from being on the ropes to a company that has rapidly emerged as the leader (ROW) in the rare earth industry. As has been proven many times, it is much better to have a mediocre company with excellent management than it is to have a great company with mediocre company management. It is somewhat a rare occurrence but it appears that Lynas has attained both…
Lynas Corp is traded in Australia as LYC
Lynas is traded in the US as a direct ADR as LYSDY
Lynas is also traded in the US as LYSCF
The Lynas website is: www.Lynascorp.com
LYC Price at posting:
$2.19 Sentiment: Buy Disclosure: Held
(20min delay)