Thursday, 27 March 2014

No respite in sight as Lynas bleeds - Part 2 (By Soo Jin Hou)

Lynas has released its half year interim financial report for the period ending 31/12/13 on 11/3/14. On the cover page, Lynas warned investors of an imminent cash crunch and that it will need to raise fresh funds via additional equity, additional debt or some refinancing or restructure of the Group's debt facilities over the next 12 months. Subsequently, investors punished its shares through a 11% decline in price over the next 2 days, extending the 11% loss of the previous 2 days.

This paper is written to document various information that may not be immediately apparent to the lay investor which suggests that its predicament may be worse than it seems.

Average Selling Price (ASP)

The average selling price is USD 22.70/kg and USD 21.48/kg for quarters ending 30/9/13 and 31/12/13 respectively. What is certain now is that Lynas can only command prices closer to the China domestic price instead of the higher FOB (Freight on Board) China price (see Table 1). This may be a huge disappointment to many Lynas investors who continue to use FOB China price to justify a comfortable profit margin. The lower pricing is most likely due to its products being rare earths composites instead of the 99% pure rare earth elements from which the basket prices are derived from.

                                                        Quarter ended 31/9/13    Quarter ended 31/12/13
 
Average selling price                                22.70 USD/kg                21.48 USD/kg
Mt Weld basket price (China domestic)   21.80 USD/kg                22.62 USD/kg

Mt Weld basket price (FOB China)         29.80 USD/kg                29.30 USD/kg

Table 1: Comparison of average selling price vs Mt Weld basket prices

However, as low as the ASP may seem, it might be even lower if not because Lynas chose to stockpile its lanthanum instead of selling at a loss. As of 6/3/14, prices of lanthanum and cerium oxides remain below USD 6/kg [1], well below Lynas' optimal production cost of USD 15/kg [2]. To prop up the ASP, Lynas announced in January it will not accept new orders for lanthanum at prices below USD 15/kg [3]. It is unclear what is the actual ASP if the unsold lanthanum is included, but it will definitely be lower. After all, Lynas has admitted that the slight drop in ASP in the December quarter is due to a higher proportion of cerium than the prior quarter.

In the half year interim report, Lynas revealed that it had produced 994 tons but sold only 627 tons of rare earths oxides (REO). Similarly, inventory for finished goods also climbed from AUD 0.53 to AUD 4.42 million (m). These evidences are consistent with window dressing, although Lynas attributes the sales gap to timing.

Production Cost

Prices of lanthanum and cerium, which constitute 72% of Lynas' products, are much lower than Lynas' optimal production cost of $14-$15/kg if the plant is to run at the maximum capacity of 22,000 tons per annum (tpa) [2]. However, Lynas will only attempt to achieve half that by June quarter for fear of causing a collapse in rare earths price if it floods the market with excess supply. At half capacity, Lynas has claimed to be able to achieve production cost in the high teens [4].

In the comments section of the first part of this article [2], a Lynas investor has said that "Lynas has estimated (that) phase 1 capacity (11,000 tpa) cost of production will be US$19/kg". In view of the absence of any direct estimate from Lynas in any of its official documents, it is regrettable that the author has no choice but to adopt the data given by the investor.

Profit excluding Depreciation and Amortization

Assuming an ASP of USD 22/kg, gross profit margin is 13.6%. Assuming USD 19/kg is the all-in cost, encompassing even Nick Curtis' and Eric Noyrez' FY2013 remuneration of AUD 3.64m, at 11,000 tpa, annual gross profit is USD 33m (AUD 35.7m). Assuming the same net financial expense as FY2013's, profit before tax is AUD 23.1m. Assuming the profit split between Australia and Malaysia is 30:70 [5], Lynas will have to pay AUD 2.1m in taxes and net profit is AUD 21.0m. Table 2 summarizes the profit estimate.


Gross profit                       AUD 35.7 million 
Net financial expense        AUD 12.6 million
Tax expense                      AUD 2.1 million

Net profit                         AUD 21.0 million

Table 2: Projected profit

Free Cash Flow

Unfortunately, even if Lynas manages to eke out a slim profit, its free cash flow is negative after accounting for depreciation and amortization. After subtracting the annualized amount of AUD 24.5m (half year FY2014 is AUD 12.2m), free cash flow is negative AUD 3.5m. Free cash flow is a measure of a company's excess cash after spending to maintain its asset base. Having a negative free cash flow, even when the ideal conditions above are met, means that Lynas will not even be able to maintain its "state-of-the-art" plant. If Lynas scrimp on safety, more industrial mishaps may occur in the future.

The conditions assumed are ideal because it has not taken into account the following:

a) the potentially lower ASP if unsold stockpile is included

b) net financial expense is likely higher as interest income from cash deposit dwindles with depleting cash pile

c) potential cost from meeting its obligation to build a permanent disposal facility or sending the waste overseas

d) interest payment for the Sojitz loan facility is partly tied to LIBOR rate and will likely increase in a rising interest rate environment

e) higher production cost due to partial withdrawal of subsidy for petrol (since September '13) and electricity (since January '14) as well as the implementation of the Fuel Cost Past Through mechanism this year

f) allocation for R&D expense from 1% of revenue as recommended by the Parliamentary Select Committee [6]

g) execution risk in bringing down production and labor cash burn rate of AUD 51/kg in the December quarter

h) execution risk in meeting production target from 2,964 tpa in the December quarter to 11,000 tpa by June quarter.

Financial Obligations

With negative free cash flow, Lynas will have no money to maintain its plant let alone meet its financial obligations. Lynas has 2 major creditors. The Sojitz loan facility has a principal repayment schedule as shown in Table 3.

30 September 2014        USD 35 million
31 March 2015               USD 45 million
30 September 2015        USD 45 million
31 March 2016               USD 90 million

Total:                               USD 215 million

Table 3: Sojitz loan facility repayment schedule

In addition, the principal of Mt Kellet convertible bonds amounting to USD 225m is payable in full on 25 July 2016. In short, Lynas will need to fork out a total of USD 440m by 2016. Without a doubt, Lynas will default on its borrowings unless it is able to raise fresh funds.

Interestingly, the Mt Kellet convertible bonds come with conditions that restrict Lynas from issuing new shares until Lynas can achieve at least 70% nameplate capacity of Phase 1 over 6 consecutive months [7]. Therefore, unless Mt Kellet relents, debt financing or debt restructuring are Lynas' only options.

Balance Sheet

Lynas is significantly leveraged with gearing (borrowings/equity) of 0.87, which means, Lynas has almost as much borrowings as it has its own funds. While it is still possible to borrow, it is unlikely Lynas will get favorable terms in view of its poor profitability and prospect. To make the matter worse, the Sojitz loan facility comes with a condition that 50% of any new debt raised must be used for partial repayment [7]. Therefore, even if Lynas is able to swap new debt with old, it will probably service the new debt with even higher interest than that of the old.

To add to Lynas' woes, as of 31/12/13, it has 5 times more trade payables than it has receivables (AUD 38.2m vs AUD 7.6m). Therefore, Lynas may burn cash even faster in the subsequent quarter.

Lynas' net asset per share is AUD 0.28. At the closing price of AUD 0.225 on 27/3/14, it is still trading at a price to book ratio of 0.8. That is quite a lofty valuation even though it has already shed more than 90% of its peak value. The author expects more room for the price to fall should Lynas fail to turnaround its business.

In conclusion, Lynas will fail. It is not a matter of if, but a matter of when. Will the existing creditors throw in the towel? Or will they continue to throw good money after bad? The next few quarters will be crucial for Lynas' survival, and the concerned people of Malaysia wait with bated breath.

Soo Jin Hou

Stop Lynas Coalition


[1] http://www.arafuraresources.com.au/rare-earths/pricing.html

[2] Soo Jin Hou, 4/12/2013, No respite in sight as Lynas bleeds, http://www.themalaysianinsider.com/sideviews/article/no-respite-in-sight-as-lynas-bleeds-soo-jin-hou

[3] Quarterly Activities Report for period ending 31/12/2013.

[4] This information is hearsay from Lynas' investors who tuned in to the Investors Call held on 19/4/13. Unfortunately, the audio recording of that call does not include the Q&A section which is purportedly where the production cost for Phase 1 is revealed. These information are obtained from Topstocks forum under the thread "Lynas Quarter Report Investor relations Call" started on the same date.

[5] JP Morgan, 24/6/2010, Lynas Corporation Limited - A rare opportunity.

[6] Laporan Jawatankuasa Pilihan Khas Mengenai Projek Lynas Advanced Materials Plant (LAMP) "Parliamentary Select Committee Report on the Lynas Advanced Materials Plant (LAMP) Project", 2012, http://www.aelb.gov.my/aelb/malay/dokumen/lynas/LAMP/Laporan%20Jawatankuasa_red.pdf

[7] Annual financial report and Sojitz/JOGMEC loan facility deferral of completion of phase 2 test and related matters, 16/9/13.

9 comments:

  1. Thank you for posting this. Very insightful

    ReplyDelete
  2. Attention:

    Do you need cash to settle you debts and solve other financial problems? search no more because we are currently giving out loan to individuals and companies at 2% interest rate...Reply back to us so that we can furnish you with more information on getting a loan.

    NOTE: All Responses should be forwarded to: ( lim.koh56@yahoo.com ) for quick processing,even if you have bad credit your loan will still be 100% approved.

    Thanks and God bless you.

    Regards,
    Lim Financial Services...

    ReplyDelete
  3. I am Mrs.Sandra Bents from Germny, God has bless me with two kids and a loving husband, I promise to share this Testimony because of God favor in my life,2months ago I was in desperate need of money so I thought of having a loan then I ran into wrong hands who claimed to be a loan lender not knowing he was a scam. he collected 2,000USD from me and refuse to email me since. then I was confuse, but God came to my rescue, one faithful day I went to Court after the Case of my friend I share idea with a friend and she introduce me to ERIVAN LOAN COMPANY, she said she was given 50,000USD by MR ERIVAN , THE MANAGING DIRECTOR OF ERIVAN LOAN COMPANY . so I collected his email Address ,he told me the roles and regulation and I followed, then after processing of the Documents, he gave me my loan of 30,000POUNDS .you can contact him on via email : (erivanloancompany@yahoo.com) I am sure he will help you.

    ReplyDelete
  4. Good Day !!

    I am Hwa Jurong, a Reputable, Legitimate & an accredited money
    Lender. I want to use this medium to inform you that i render reliable beneficiary
    assistance as I'll be glad to offer you a loan at 2% interest rate to
    reliable individuals.

    Services Rendered include:

    *Home Improvement
    *Inventor Loans
    *Car Loans
    *Debt Consolidation Loan
    *Line of Credit
    *Second Loan
    *Business Loans
    *Personal Loans
    *International Loans.

    Please write back if interested.
    Upon Response, you'll be mailed a Loan application form to fill. (No social
    security and no credit check, 100% Guaranteed!) I Look forward permitting me to
    be of service to you. You can contact me via e-mail: hwa_jurong@yahoo.com.sg or hwajurong12@gmail.com
    Yours Sincerely,

    Hwa Jurong(MD).

    ReplyDelete
  5. Dear Sir/Madam,
    My name is Mr. Steve Brown CEO of Steve Brown Loan Company, We give out legitimate loans to serious Individual and Companies that are in need of loans, we offer all kinds of loans at 2% interest rate without stress, apply with us and get your loan transfer to you within 2 days, interest person or company should contact us via E-mail: stevebrownloan4@hotmail.com, and stevebrown012@gmail.com

    We offer all kind of categories of loan they

    Short term loan 5_10years
    Long term loan 20_40
    Media term loan10_20
    We offer loan like
    Home loan.....................
    Business loan.................
    Debt loan .................
    Student loan..............
    Business start up loan
    Business loan ...........
    Car loan ..............
    International loan
    Company loan........etc

    When it comes to financial crisis and loan then Steve Brown loan financial is the place to go please just send us an email and application form will be send back to you below is our Email address stevebrownloan4@hotmail.com (or) stevebrown012@gmail.com


    ReplyDelete
  6. Hello,
    To properly introduce myself, I am MR BOB LEE a private lender i
    give out loan at 2% interest rate. This is a financial opportunity at
    your door step, apply today and get your fast loan. There are
    many out there looking for financial opportunity or assistance all over the
    places and still yet they are unable to get one. But this is a
    financial opportunity at your door step and as such you can’t
    afford to miss this opportunity. This service is render to both
    individuals,companies,business men and women. The loan
    amount available ranges from any amount of your choice For more
    information

    contact us via email: bobleefastglobalfinancecompany@gmail.com
    FIRST INFORMATION NEEDED
    Full Name……….
    Personal Phone Number……….
    Country……….
    Address……….
    State……….
    City/Zip code……….
    Age……….
    Have you applied before?………
    Marital Status……….
    Loan amount needed as loan……….
    Loan Duration……….
    Occupation ……….
    Monthly Income……….
    Send me a scanned copy of your passport
    I gladly await your swift response,

    Warm Regards,
    MR BOB LEE.

    ReplyDelete
  7. This is to notify the general public that Bob Lee Fast Global Finance Company (BLFGFC) has opened an opportunity to everyone in need of financial help. We give out loans to serious minded individuals, Firms and Companies who are in need of financial assistance either for Personal, or for Business purpose at a low interest rate of 2% for a minimum amount of $5,000.00 and a maximum amount of $2.500,000.00. Contact us today with the information below.

    (1) First name:
    (2) Last name:
    (3) Sex:
    (4) Marital Status:
    (5) Date of Birth:
    (6) Next Of Kin:
    (7) Country:
    (8) State/Province:
    (9) Postal / Zip code:
    (10) Occupation:
    (11) Work Address:
    (12) Mobile / Phone:
    (13) House Phone:
    (14) Amount Needed As Loan:
    (15) Purpose of Loan:
    (16) Duration:
    (17) Have you apply for a loan before:
    (18) Monthly Income/Yearly Income:
    (19) Send me a scanned copy of your passport:

    Interested Individuals, Firms And Companies Should Fill And Submit The Application Form Via Email To (bobleefastglobalfinancecompany@gmail.com) For Processing And Release Of Loan Funds Thanks!

    Regards,
    Mr. Bob Lee

    ReplyDelete
  8. Bob Lee Fast Global Finance Company.
    We offer private, commercial and personal loans with very low annual interest rates as low as 2% in one year to 50 years repayment period anywhere in the world. We offer loans ranging from $ 5000 to $ 100 million.
    Our loans are well insured for maximum security is our priority. Are you losing sleep at night worrying how to get a legitimate loan lender? You bite your nails that fast? Instead of beating you, contact Bob Lee Fast Global Finance Company (Loan Services) now, specialists who help stop loans bad credit history to find a solution that victory is our mission.
    Applicants must fill out a loan application form below:
    FORM credit application
    loan applications
    Your full name *
    Your e-mail *
    Your phone *
    Your address *
    Your city *
    State / Province *
    Country *
    Date of birth *
    Do you have an account? *
    Have you applied before? *
    The loan amount is needed *
    The life expectancy *
    The purpose of the loan *
    Send me a scanned copy of your passport: *
    Creditor: Mr. Bob Lee.
    The lender Email:bobleefastglobalfinancecompany@gmail.com

    ReplyDelete
  9. Good Day,

    I am Chua Teo (CEO) of Chua Teo Loans Firm, I'm a Reputable Money Lender who give out loans to Individuals & Companies in need of loan. Do you have a bad credit? Are you in need of money to pay bills or settle other debts? We will be glad to render you a loan service. We offer all kinds of loan at 2% interest rate. We offer loan from $5,000 USD to $50,000,000 USD, duration of 1 to 20 years.

    Apply with us and get approved without stress or delay! We await your response if you are serious and interested, upon response, you'll be mailed a Loan Application Form which you'll have to fill and send back to us. Looking forward to hear from you, you can reach us via....

    Email: chuateo_loansfirm@yahoo.com.sg

    ReplyDelete