http://hotcopper.com.au/threads/ben-kramer-miller.2784673/pBK: “Lynas experienced growing pains as it is once again losing money.”
Factually correct but does not explain the fact that Lynas was commissioning and startup of the final SX5 production train during the March 16 quarter. This commissioning was completed ahead of plan. Production form Train 4 is continuing to ramp up: “By the end of the quarter, production rates had stabilised at about 80% of capacity and are continuing to ramp up now.” This commissioning required the retention of at least 80t of NdPr as seeding materials for SX5 and “up to 150 tonnes of off spec material produced.”
Alongside the capacity expansion Lynas, together with its lenders, invested in “quality improvement initiatives” for the La and Ce products. With hi spec La & Ce realizing +$3kg more than the basic material I fail to understand how you can describe this investment as not in the SH’s best interests.
BK: As you can see on the company’s cash flow statement, it lost A$9.1m in Q1. Furthermore, note the * which shows the company’s A$7.2m in “deferred sales”, which suggests that the company’s numbers would have been considerably worse had it not received this money in advance.
The actual net operating cash flow deficit for the March qtr was A$7,372. This amount included investment in fixed assets of A$3,017 plus the annual payment of insurance premium of A$3m. The revenue foregone from NdPr seeding for SX5 plus production of off spec materials would be in the region of A$8,200. Adding these items together suggests that Lynas may actually have broken even from a cash flow perspective for Q1 on a constant run rate basis. We do not know sufficient about the “deferred sales” to make informed comment. My take on this would be that customers have ordered and prepaid for product to guarantee delivery of Lynas hi purity materials, probably NdPr. If you have been monitoring Lynas cash flow for the last 12 months you would have seen this is a common feature of their cash flow. While Lynas has clarified this position by disclosing in Q1, I believe it is highly likely, based on my analysis, that this A$7.2m receipt for deferred sales is part of a continuing process, with the likely impact on Q1 receipts being negligible. The other explanation could be that goods are being accumulated for an economic shipment quantity, and to protect supply, customers are prepaying to secure record low prices and supply. Equally possible the actual production costs have been incurred and recorded in payments for production. I read this as a huge positive for Lynas, and not a negative as described in your analysis. I do not believe you can make the statement “which suggests that the company’s numbers would have been significantly worse if it had not received this money in advance” without asking the question of the company whether a similar amount was received against deferred sales in the preceding Qtrs.
BK: “The first is that this protection from bankruptcy might be transient as JOGMEG and Sojitz will not be willing to forgive Lynas’ debt indefinitely.”
Firstly there are two primary lenders, JARE (JOGMEC and Sojitz JV) and Mt Kellet. None of these parties are end users of rare earths, they are purely financiers.
BK: “The second is that it is appearing more and more as if Lynas is being run for the benefit of its REE-hungry creditors than for the benefit of its shareholders, and at some point, management will be forced to make decisions (if it has not already done so) that are not in the best financial interest of the company, but which are in the best financial interest of Japanese REE consumers.
I take the contrary view. It is possible Lynas did not have a choice but to expand production bringing the full productive capacity of the LAMP up to 22k p.a. as quickly as possible. Admittedly there is a short term cash cost to this action, which was evidenced by the Q1 cash flow, and the CEO statement “the operating cost impact from most of the one-time costs associated with the start-up of SX5 Train 4 will be primarily in the June quarter”. If however we look at Q2 cash flow projections, production is disclosed at A$45,000k. If we assume the LAMP is ramping up and running at near to capacity towards the end of Q2, it is likely the increased throughput will be sufficient to reduce actual cash COP to circa A$11/kg. The September quarter costs are required to actually prove this figure. This seems to me use of its economies of scale is the only way Lynas can actually survive with current REE pricing. If my analysis is correct, Lynas will be generating a cash contribution from their output basket of circa A$3.50-$4.00 for each kg of material sold at full production. This was seemingly not possible without use of the additional productive capacity with cash COP marginally lower than market prices. With this lower COP it then only takes small increases in REE prices for Lynas to be strongly cash flow positive. I see the support of Lynas financiers as being part of a strategic business relationship. Both parties are reportedly working very closely together with a common objective. This supportive relationship would be expected to ultimately be to the benefit of all stakeholders, including shareholders.
Chinese removal of substantial quantities of REE from the market courtesy of their stockpiling program should ensure an improvement in REE pricing if normal economic theory is applicable to the REE market. In fact there is firm evidence the first rounds of commercial stockpiling have had an initial impact with NdPr currently priced at 268.3 yuan which is the highest level since early July 2015:
http://www.repe.com.cn/web/trend/pno.htmlI note that in your haste to build a conspiracy theory you chose to totally ignore what should be very positive news to all RE investors, the continued strong recovery in ROW demand:
“NdPr remained in high demand from magnet makers in Japan where we maintain over 50% share and in China with selected customers. These customers have been very supportive as we have started up Train 4 including accommodating our need to place some of the early production off spec material.
Cerium sales benefitted from the strong business performance of our key customers in the Autocat and UV cut segments.
Demand for our Lanthanum remained strong, supported by customers in both the Fuel Catalytic Cracking and Ferrite Magnet sectors. These are the two major applications using Lanthanum, both of which are enjoying continuous growth outside China.”
The possibility Lynas and its lenders might be investing in capacity & quality to further support ROW demand recovery obviously doesn’t suit your predetermined agenda.
My analysis suggests from an investment standpoint, contrary to your views, investment in Lynas has been substantially derisked by the expansionary efforts. Subsequent Q’s will clearly demonstrate the benefits of a 30% lift in production + hi spec LaCe, particularly with current prices already higher than at any point H2 2015, and frankly, demonstrate the total lack of objectivity in your commentary.
With just 2900t actioned to date of the projected 21,000t REO to be stockpiled in China (incl 30% of annual NdPr production) it is not unreasonable to suggest that Lynas, together with its lenders have chosen to invest significantly in the business at the very bottom of the price cycle.
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schrieb am 05.06.16 23:08:41
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