I think that JARE would not extend the terms of the $150 million remaining when considering the economics that exist. Rare earths are vital to the economic survival of Japan which I feel is self-evident. As was mentioned by others, the JARE was established to insure a stable, non-Chinese source of rare earths for Japan’s automobile and electronics industries.
Japan invaded several countries in the late 1930s to secure oil, gas and ore for its economic survival. China took a beating from the Japanese forces and even now the Chinese refuse to forget and the Japanese for the most part refuse to apologize. Japan, without Lynas, is at the mercy of China and Mr. Xi is an unforgiving leader.
Thus the reason for making a loan to Lynas. It isn’t that Japan liked Curtis or that the Lynas board is a bunch of great people who needed help; it was imperative that Lynas succeed for the security of Japan’s two major industries. Taking control of Lynas on a debt default provides Japanese industries with a Japanese owned source at no new cost to Japan.
It must be remembered that JARE didn’t go all in on helping Lynas. Mt. Kellett also came to the aid of Lynas and it was Mt. Kellett that gave Lynas the financial breather. JARE wants Lynas to function for Japan’s benefit. Without Mt Kellett Lynas might already be Japanese owned.
Lynas most likely will be able to get financing but the cost would be greater than currently negotiated. And with Lynas needing money, it must pay what the market requires. The problem here is that if the terms are more costly to Lynas, then Lynas must use even more after expenses free cash to pay down the debt. This reduces profits of course and most likely will take dividends off the table in the near term. if not forever.
I do not believe the Lynas board should consider increasing shares to get more funds. The share price has basically done nothing since the reverse split. The day before the split Lynas was at $0.215 and yesterday it closed at $2.22. Adjusting the last close before the reverse split, the pricee was $2.15 so that in one year, Lynas share valuation has increased only $0.07 or 3.26%. To issue more shares would just dilute shareholder’s holdings and value.
The problem Lynas now has is while it does have free cash, it must retain a given amount of the cash to insure it has sufficient quarterly cash reserves against unforeseen costs. This reduces the amount of cash that can go to paying down the $25+ million dollars required every quarter. Most likley Lynas will come up short by more that the $11+ million I calculated.
Perhaps the Lynas board intends to refinance the debt and not pay it off until rare earth prices rise. If this is the plan then the board should declare its intentions to the shareholders. With the ASX giving permission for semi-annual only reporting of finances, you’ll have less knowledge of where Lynas stands in the future. There could be as few as two, possibly three financial reports between now and July 1, 2020.
As I originally requested, please ask the board at the annual meeting about this. If a member tells you it can’t be discussed openly you know we have a problem.
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