update

As I've said for a couple of months, the 'big picture' or long term outlook for LYC is looking strong. With chinese RE stockpiling now underway, a significant and permanent reduction in black market production/sales, and a modest (but still growing) uptick in global RE demand, I think RE pricing going forward will be sufficient for the big established players to make money, but not high enough to encourage much new supply. This means that LYC, as an established and relatively low cost producer (once phase II is up and running), will eventually find itself in a sweet spot whereby it is one of perhaps only 3 or 4 non-chinese suppliers in an industry with extremely high barriers for entry. Looking forward 24 months, LYC should easily able to shift 22ktpa at solidly profitable prices (in the region of $30-40/kg).

Having said that, the company has made some blunders which have caused and will continue to cause some short term pain for shareholders. Predictably, the low cost piping used throughout much of LAMP has proved to be a disaster; while much of the cost of replacing this piping with higher grade/ceramic lined pipes is covered by warranty, the company has missed out on 10s of millions of dollars in revenue as a result. (keeping in mind that the customer qualification process for high-priced NdPr is still not complete – so the opportunity cost for the delay, while real and painful, is not as great as some might imagine).

The flow on effect of the long delay in phase I ramp up to name plate is that LYC's balance sheet is starting to look vulnerable. While the company said in its last quarterly that it had no plans for new debt or equity, it made that statement before it renegotiated the Sojitz debt facility. I suspect it can no longer maintain this no new debt/equity stance. According to the recent announcement, LYC must pay Sojitz US$10mill in jan 14 and an additional US$35mill in sept 14. Additionally, LYC is still paying LIBOR + 5.25% on the $225mill debt facility. Most analysts are predicting that LYC will have only A$30-50mill in unrestricted cash by the end of FY14 (i.e., july next year) (they are assuming this low cash balance because they are assuming that phase I ramp up will continue to be slow and that realized prices for the modest tonnages sold are well below published FOB prices, indeed, closer to domestic prices). So, absent an announcement in the next week or so to the effect that phase I is running at nameplate and that LYC is *realizing* prices well north of $30kg, it is hard to see how a prudent board will risk letting its unrestricted cash fall much further without a top up.

My guess is that LYC will make an announcement that the piping issue has been fixed and that phase I is ramping up to name plate in the next couple of months, but soon after making that announcement it will then hit the market with a debt or equity raising in the region of $80-$100mill. I'm guessing the debt/equity, should it occur, will priced at roughly a 20% discount to post-pipe-fix-share price.

Because of the above, I rate LYC a hold until they either sort out their balance sheet or unambiguously confirm to the market that their phase I production quantities and realized prices are such that they don't need to take on further debt or undertake another capital raising. Once these issues are sorted out, I think LYC is solid long term buy for reasons outlined above and in recent posts.