Top Gainer: Lynas Corporation (LYC)
After falling 15% in a day just a few weeks ago to $1.75 on a string of bad news, rare earths supplier Lynas (LYC) has made up lost ground and then some, as it has rallied to $2.15 – a 23% gain in three weeks. On Friday it was in the winner’s circle again, taking out the top gainer’s spot for the second time this week in a market that tumbled 0.9% on continuing US default fears.
When it comes to commodity investing, most of us are familiar with the different types of commodities that we can invest in. Popular choices are energy commodities, such as oil and natural gas, or the agricultural or “soft” commodities like corn, wheat and cotton. Metals are also popular investments, and many people use gold as a type of currency in times of economic uncertainty. Another group of less recognisable metals has also joined the investment conversation as the latest hot commodities – the rare earth metals (REM). Lynas is one of Australia’s leading rare earths producer, and as such it is in a strong position to capitalise on the current boom.
The rare earths story embraces potentially big windfalls laced with plenty of risk. Listed Australian rare earths companies aren’t for conservative investors, as explorers without earnings dominate the landscape. Nevertheless, that doesn’t stop share prices rockting as the market looks forward, factoring in what tomorrow can potentially bring in an industry dominated by China.
The share price of Lynas Corporation, which is among the best known Australian rare earths companies, soared from 37.5 cents in early May last year to a 12-month high of $2.70 on April 12, 2011. However until the surge over the past month shares had been steadily sliding as the company denied reports that a planned Malaysian plant could be delayed by one to two years.
The denials followed a favourable report from the International Atomic Energy Agency (IAEA) about the company’s controversial proposed rare earth refinery in Kuantan after public protests had been growing about the risk of radioactive waste from the planned plant in eastern Malaysia. The IAEA report found that the plant was safe and fully compliant with international standards, however it said that Lynas should provide a long-term waste management plan and improve its communication about the plant with the Malaysian community before a pre-operational licence was granted.
Lynas released two statements on the back of this report from teh IAEA, denying media reports that the project would be delayed and that engineers were worried about construction problems at the Lynas Advanced Materials Plant. “We have received confirmation from the Malaysian government that no spokesperson for the government stated a one to two-year delay as quoted by some media articles,” Lynas said in a statement. “Neither Lynas, nor our construction team, are facing any unusual construction difficulties. We acknowledge that not enough has been done to engage with the community and we will correct that now.”
Despite Lynas’s statement, the media reports spooked investors, sending the company’s share price tumbling. It appears the message has sunk in, with investors jumping back into the stock despite the weakness in the broader market..
Mine Life senior resources analyst Gavin Wendt resources consultant said the market was surprised and concerned about the prospect of delays in Malaysia. “When you’re talking about environmental considerations and local populations, these things can drag on,” Wendt said. “The market wasn’t expecting this delay, that’s why the market is right to be concerned about the timing.”
A few weeks ago saw some better news, with Lynas announcing that it had teamed up with German giant Siemens to produce magnets for use at wind farms. The two companies have signed a letter of intent to establish a joint venture to produce neodymium-based rare earths magnets for Siemens’ energy-efficient drive applications and wind-turbine generators.
Siemens views the joint venture as providing security of supply for the rare earths they require. “This planned joint venture would be an important strategic pillar for us to pursue a long-term and stable supply with high performance magnets,” said Ralf-Michael Franke, chief executive at Siemens drive technologies division. The companies have not said if the magnets would be produced at Lynas’s controversial proposed rare earth refinery in Malaysia.
Patersons Securities analyst James Georges has a buy on the rare earths supplier. “Lynas will be the next rare earths oxide supplier outside China…record rare earths prices add to this company’s appeal,” says Georges. He notes that the company is fully funded to achieve forthcoming milestones and it has $220 million in cash plus further funds raised through a combination of issuing equity and debt. “Our valuation has risen and we have a price target of $2.95 a share.”
Deutsche Bank also has a buy on LYC, albeit with a lower price target of $2.60.
Goldman Sachs recently sold its LYC holdings from its Resources Fund, saying that LYC was sold out of the portfolio after a period of strong performance driven by the significant rise in the price of rare earth elements.
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Chart: Share price over the year to 29/07/2011 versus ASX200 (XJO)
Stock code: LYC
Charts: Lynas Rare Earths Limited
More news: Lynas Rare Earths Limited
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