Thanks for the calm and thoughtful discussion from all holders....

Thanks for the calm and thoughtful discussion from all holders. May your patience pay off. Thought you might be interested in what Kris at the Daily Reckoning's Small Cap Investigator thinks about our Lyc. They are keeping their buy recommendation on though they believe the risk profile has changed for the worse. Be nice when the shorters have done their work and move on.

F

*** Lynas Corp Suspends Mt Weld Project

Last week I wrote that the suspension of Lynas Corp shares could lead to one of four scenarios. Unfortunately, it was the fourth and worst of the scenarios which has played out.

I won't recover old ground from last week, so if you didn't read last week's update it might be worth getting yourself acquainted with it before you continue reading here.

In a nutshell, since last week Lynas have been advised by Bayerische Hypo und Vereinsbank (BHV) that they would not be releasing the $95 million from the convertible bond that Lynas needs to continue with the Mt Weld project.

Needless to say, for any small cap company, getting finance pulled away when it was within touching distance is an unpleasant experience.

The company announced:

"As a result of the uncertainty concerning the financing structure for the Company's Rare Earths Project, the Company is proposing to suspend work on the project."

"Lynas continues to hold the view that the project is sound, even in the current environment, and that with appropriate funding structures in place, the Company will have an exciting future. The Company continues to be in active dialogue concerning alternative funding structures. Both Rare Earths demand and prices remain robust and the project economics remain solid. The proposed suspension of the project is a result of global constraints on the availability of capital."

Rather than go into all the details of why this has happened, the important thing is to tell you whether we still consider Lynas to be a 'Buy', or whether you should hold or even sell.

Regardless of whether you are an existing shareholder or a prospective shareholder the facts are the same. So what should you do? Well, let's line the facts up as they stand right now.

The demand for rare earths is still strong
Lynas has already undertaken engineering works at Mt Weld and in Malaysia
The resource at Mt Weld has already been proven and mining has commenced
Of course, there are plenty of mining projects around Australia that also have a proven resource and which have still been closed down. However, there is a significant difference with Lynas's project which should still give you room for optimism.

The problem here is nothing to do with the quality of the resource. It has nothing to do with the market price for the ore. And it has nothing to do with demand. In this instance we are looking pure and simple at a contraction in the lending market.

And unlike a lot of companies out there, Lynas is in the fortunate position of having $55 million of cash in the bank. That should be more than enough to keep the business solvent while it pursues other funding options.

Now, there's no prize for guessing what one of those funding options will be. As I pointed out last week, Lynas does have an equity facility with a US investor that enables it to issue shares when it needs to.

In addition to that, it is likely that Lynas will approach the market for additional capital. That will come in the form of a placement or a rights issue. The point to remember is that both of these will dilute your current holding. In that case you need to know what the payback will be.

If we look back to the June 2008 issue of ASI when Lynas was initially recommended, the opportunity for Lynas was for it to be making USD$100 million per annum in sales once production had ramped up. At the moment Lynas has a market capitalisation of less than USD$70 million.

Trying to put a valuation on a company that has just called a halt to its one and only project in a depressed market is hard. But we'll do it anyway. The best thing to do is look at it conservatively by using ratios from the entire materials sector.

As the market stands, materials companies are commanding on average a price to earnings ratio (PE) of 7.7x next year's earnings, and 10.3x next year's sales (PS). So, if we slide those ratios over what we expect Lynas to produce from Mt Weld it would value the company at over $1.5 billion, or fifteen times the current share price of 13 cents.

Naturally these numbers do not factor in any shareholder dilution through the issue of more shares, but in my opinion they are conservative.

I continue to recommend Lynas as a BUY recommendation. However, the risk profile of the company has changed, and you should be prepared to wait longer for a positive return.