Patersons have downgraded their assessment of Lynas from Hold to...

Patersons have downgraded their assessment of Lynas from Hold to Sell.

Event

• LYC released its June Q report. Production was 1,882 tonnes of REO equivalent for the period, which is still well short (c68%) of its target rate of 11ktpa.
• Sales were 1,630 tonnes with an average selling price of US$18.25/kg (down 19.4% on the March Q) versus an average basket price of US$20.35/kg (down 4.1% on March Q).
• Operating cashflow for the Q was a deficit of $23.8m, exclusive of interest costs. Free cashflow was similar as there was no material capital expenditure incurred during the period.
• Cash as at 30 June 2014 was A$38.1m (after an equity raising during the Q that added $40.0m) and debt stands at US$440m.
• Application for a Full Operating Stage Licence for the LAMP in Malaysia has been submitted.

Impact

• Another Q of production falling short of the mark. In early May, LYC stated that output in April was 709t and that “management is confident of achieving the targeted production run rate of11ktpa REO on a sustainable basis during the June Q” and that “cashflow neutral is likely to be reached at the 750t/mth rate”.
• Production for the remaining months of May and June averaged less (587t/mth) than April. This result, combined with an average selling price c10% lower than the average basket price (US$18.25 vs US$20.35/kg), suggests there are still operational issues with the LAMP.
• There was a brief statement in the report that “significant progress was made” on the potential restructure of its existing financing facilities with further due diligence and documentation required
• We are disappointed but not entirely surprised that LYC has failed to achieve its stated production goals for the Q.
• LYC stock has risen strongly over the past week or so and we fail to identify any justification for such an improvement in the June Q report.
• Accordingly, we downgrade our recommendation to SELL.