Shareholders in troubled rare earths producer Lynas Corp might be wiped out unless it boosts its weak cashflow before a heavy round of loan repayments in the year ahead, UBS has warned.
Shares in Lynas Corp dived 19 per cent Tuesday after the company warned that the improvement in cash flow evident in the December quarter would not be sustained. It blamed renewed weakness in market prices stemming from mixed signals emerging from China and ongoing production glitches. In trading Wednesday, the shares were flat at 5c.
Weighing on sentiment is the fact that revenue in the December quarter totalled $45.1 million, which failed to cover the operational and administrative costs of $48.3 million booked in the quarter.
At the same time, Lynas has begun ramping up production at its phase two processing unit, which is also a drag on costs, while restricting revenue.
Lynas is in a scramble to lift cash flow before it must pay $US80 million in loan repayments in the year ahead.
"While production has shown signs of improvement, our concern is that it may be too late for equity holders, as the forecast free cash flow remains weak," UBS told its clients this morning. "However, Lynas's debt holders, namely [Japan's] JOGMEC, have shown a particular willingness to give Lynas further chances to cut costs and lift volume by extending debt repayment terms.
"The next 12 months could see Lynas scrape by if further improvements are made, but still falling short of meeting principal repayments and therefore leading Lynas to potentially refinance, again.
The bugbear is weak cash flow, with UBS estimating Lynas had negative free cash flow of about $9 million in the December quarter. The company is forecasting cash flow to weaken in the March quarter, while uncertainty over Chinese government policy towards rare earths production there is weighing on product prices globally.
Alkane Exploration, which is hoping to develop a rare earths project near Dubbo, in western NSW, told shareholders today Chinese government policy would continue to weigh on rare earths markets.
"At the end of December, the Chinese government announced it would abolish export quotas for rare earths to comply with a WTO ruling," Alkane said.
"However, the 'quota' system is going to be replaced with export 'licences', which are yet to be defined and implemented, but this regime is likely to be restricted to qualified rare earths companies and effectively be a change in name only.
"Removal of export taxes are set to take effect from May 2, 2015, but it is anticipated that China will replace this tax with the introduction of a resources tax of equal measure."
Undermining Lynas's efforts to cover its costs was the continued decline in neodymium and praseodymium (NdPr) prices, which were $US38.4 a kilogram at the end of December, down from $US41.8 at the end of the September quarter. Used together, these two materials are key elements in producing high-powered magnets.
