The purpose of this is to explain the VALUE of Lynas a company. Its value is significantly higher than its share price. The difference as of this morning (February 9) is a factor of 103 times! In reading this, realize that raw materials, even if not used, have value. Land in the middle of nowhere can be valuable because of the oil, ore or other resource buried below.
Lynas has ore reserves of 9.7 million tonnes at an average grade of 11.7% REO in the ground, for a total of 1.14 million tonnes of contained REO. That equals 1,140,000,000 kilograms of REO. 1.14 Billion kilograms.
The current kilogram price can be calculated using sales figures from the latest quarterly report. Sales volume for FY15 YTD is 3560 REOt with sales receipts of $78 million dollars. This gives an average sales price of $78,000,000/ (3560 tons * 1,000 kg/ton) = $78,000,000/3,560,000 = $21.91 per kilogram. [This is an approximation and subject to revision based on new/more information from Lynas.]
Assume a profit margin of 40% and the value per kilogram is $21.91 * .6 (60%) = $ 13.146 per kilogram.
$13.146 / kilogram * 1,140,000,000 = $14,986,516,854 for the REO less profit. Add $660,000,000 for Plant and Equipment for a total of $15,646,516,854 (no profit included). At this valuation the per share value is $15,646,516,854/3,370,959,000 shares = $ 4.64 per share!
Remember that the REO prices are low, maybe at their worse. Lynas has used a weighted product price of $51/kg in the past. Let’s assume the $21.91 is two-thirds of what it might be over the next five years. At a 60 % valuation for presales the new value would be 21.91/2 * 3 = $32.87 per kg. At 60% the per kg value is $19.7119 per kilogram.
$19.712 / kilogram * 1,140,000,000 = $22,479,660,000 for the REO processed less profit. Add $660,000,000 for Plant and Equipment and the value of Lynas increases to $ 23,140,000,000 for a per share price of $23,140,000,000/3,370,959,000 = $ 6.87 per share.
As can be seen, share price does not equate to per share value. Lynas’ share price is significantly (grossly) undervalued! Remember that the share price has not P/E value by which to increase the share price. At a conservative P/E of 5 to 8 times the share value rises significantly.
REOs have value when in the ground and are carried at a value less than the finished products. A major problem for Lynas would be how to carry resources on its financials. With ores worth $22 billion dollars what becomes the offset as assets must equal expenses plus shareholder equity. Carrying the REE value would distort the financials so the value is not included. However, not carrying the raw material assets value on the financials does not mean they have no value as they do!
If someone wants to buy Lynas, think in terms of $ 4.65 a share to $ 6.87 or more depending on the future. Anything less and they would be stealing from you! To put it another way, Nick Curtis isn’t sitting on 17,000,000 vested shares [source latest Annual Report] because each is worth $0.045 each! One thing Curtis isn’t is stupid.
Question why the share price is so dramatically different from the per share value.
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