Hedge funds undermine Lynas hopesJamie Freed
February 11, 2009
LIKE many struggling miners, Lynas Corp has been forced to place the construction of its flagship project on ice indefinitely. But unlike most, a collapse in the commodity price is not to blame - instead, a group of hedge funds has reneged on a longstanding agreement to provide financing.
The Sydney-based company has been constructing a $532 million rare earths project involving the Mount Weld mine in Western Australia and a processing plant in Malaysia to break China's monopoly on production of the minerals.
Rare earths are a group of elements used in the production of products such as flat-screen televisions, hybrid cars, iPods and energy-efficient lightbulbs.
The rare earths basket price has dropped from $US14.12 ($21.10) a kilogram in September to about $US10.25. But Lynas's operating costs of around $US5.75 a kilogram - and its initial assessment of the project based on a $US10 a kilogram price - mean it remains a robust proposition that HypoVereinsbank is willing to provide with up to $US120 million ($180 million).
As a condition of the secured debt, the German bank required Lynas to finance the rest of the project through equity or other means. Lynas raised $94.5 million in an institutional placement last year and issued a $US95 million convertible note to a group of five hedge funds based in the US, Britain and Switzerland.
Lynas needs access to the convertible note funds and the bank debt to finish the 10 months or so of work left on the project, at a cost of $400 million.
The note funds are sitting unused in an ANZ account and can only be accessed with the consent of Lynas and 82 per cent of the noteholders.
Lynas's executive chairman, Nicholas Curtis, said the hedge funds were withholding access, saying the miner was in breach of some of the conditions.
Lynas disagrees, but it has only weeks to resolve the dispute since it must access the five-year bank facility by March 30 or it will expire.
"Today I wish I'd done [the funding] all by equity," Mr Curtis said.
The conversion price of the notes, at about $2 a share, is way out of the money. Mr Curtis said Lynas was willing to renegotiate terms, but the conditions required by some of the hedge funds were unacceptable.
With no deal in sight, Lynas has halted construction and will have to cut some jobs, despite having $55 million in the bank.
"The global financial crisis has come to Lynas," Mr Curtis said.
Lynas shares fell 10.5c to 16c, down from $1.52 last May.
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