May next year be smoother than the last. I've run out of baked beans and my stomach is churning. I'm off to restock, ready for another year of speculation and suspense with an occasional morsel of news.
But first, my conservative predictions for 2014 are that every box will take longer to tick than initially expected:
Phase 1 reaches nameplate by end of first quarter, or at least close enough to nameplate, say 80%. The slurry handling limitations have not yet been demonstrated to be completely overcome and will likely require debottlenecking and optimisation for a while to come. Getting day to day operators to coordinate efficiently for the good of the whole process is a tough challenge.
Byproduct approvals to dribble through over the next 12 months. The first approval will be the most significant and demonstrate that the Malaysian Government has actually grown a pair. It is possible that an approval for export and/or sale for each type of residue will be required before approval for any product to go into Phase 2.
Phase 2 hopefully starts commissioning by end of first quarter, but likely no discernible output until at least 3rd quarter in a ramp-up similar to phase 1 (different excuses but same result). Once Phase 2 is finally approved for commissioning this will be a significant operational de-risking with duplication of most process stages allowing flexibility for less than nameplate throughput, maintenance and unexpected failures.
Remaining Judicial Reviews still have to run their course and I assume to be inconsequential, but they are still an unknown. Once the reviews are complete, by-products for all residues approved for sale and/or export and phase 2 commissioned, the TOL can be extended or become a POL.
Worldwide market to grow inline with expansion, spot market prices will flay around in every direction, but Lynas' realised prices to remain fairly stable.
Lynas' capital position to get very tight, but hopefully, if necessary, a small loan well within currently prescribed limits will be sufficient to tide the company over until it becomes cash flow positive. If a capital raising is required, my gut feel is that there is money out there for this at the current share price. Once the company demonstrates that it can be cash flow positive, that will be the catalyst for the share price to rise IMO.
Current debt will not be paid beck to any significant extent in the next year
Left field hazard analysis: Issues that could throw a spanner in the works over the coming year include;
- Japan-China relations sour again: Short term may be good for prices and sales, but medium term decimates economic growth worldwide. If China tries to block shipping routes, then we enter new territory and the world changes, however I don't see China overstepping that far for a while yet.
- Major plant failure or shutdown: The only critical part of Lynas' operations is the cracking and leaching at the start of the LAMP process in Malaysia. Everything else seems to be under control. If the kiln is going, they can produce product, once there are two operational kilns the plant is de-risked.
- Excess world production: Lynas and Molycorp are both ramping up production, but with different business models. Lynas claims to have pre-sold phase 1 output and will not expand to phase 2 capacity until Sojitz get their shit together. Due to delays, Sojitz may not actually be interested in buying anything from Lynas unless their current supply is unreliable. Molycorp on the other hand, has to create a market for their Mt Pass Ce and La and it looks like they are gaining traction in water treatment across the US. As for their other operations, they appear to be part of the Chinese value add industry. In the next year, the only potential source of unexpected production ramping up is China and they appear to be keeping things in check. Vietnam could revitalise their smuggling routes, but as has been noted by some here on HC, product quality can be suspect. Longer term, India will produce their niche products for Toyota and Russian production will become noticeable. The other Aussie players look like they are just becoming concentrate suppliers for China's processing and value adding.
- Takeover offer: Given the FRB rejecting a Chinese takeover in the past, that probably leaves the current financiers. Sojitz doesn't want to run the company as a Japanese company operating in Malaysia would be subject to more extreme racism than Lynas currently enjoys. Shorting Morgan will try if they see an opportunity to corner the industry. Ideally, they would like to control the majority of Western production (both Molycorp and Lynas). They get their chance if the LAMP phase 1 ramp-up is further delayed and Lynas go cap in hand.
- Cheaper production methods: One day in the future, the RE production methods currently employed by Lynas will be superseded by something cheaper. Batou achieves good economics because the RE is only a by product of a bigger process. A cheaper new process will need to exploit the unique geology of the ore being processed. Alternatively, my gut feel is that accessible RE rich ocean sediment could be a game changer for RE (not for a while yet though), just like fracking has enabled an explosion in gas production.
Hopefully no disasters await us in 2014 and we are shareholders in a viable, profitable company that makes a significant contribution to economic growth worldwide, dragging millions out of poverty, enabling a richer, more sustainable life for all.
LYC Price at posting:
29.5¢ Sentiment: None Disclosure: Held
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