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LYC - Lynas Rare Earths

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I wouldn't be worried about today's minor reversal. I'm surprised there has been such good buying support considering the osprey sell down. There are always plenty of profit takers come in when a share has risen so fast but the trend is there and I'm sure it will continue. This is now a stock for investors rather than the traders.
 
Yea...export quotas due to be released in China after the Chinese New Year

nothing like fresh reminders to purchasers of RE that this is scarce stuff...
 
RE: OTC pink sheets listing....

I talked with my Scottrade broker, who said the only two ways for a co. to be listed is through either a bank or a broker....

we know that very influential banks are financing Lynas, such as GoldmanSachs and JPMorganChase, so it would not be difficult to conclude that one of them has sponsored/initiated the listing through one of their brokers in the US....
 
i find that LYC's sp movements in the OTC and ASX move in a very loosely similar fashion.

but it would be foolish to try to link the 2 markets' movements due to the differential economical and contextual pressures. (learnt this the hard way trying to read into the 2 markets of other dual listed stocks last time).

RSI's showing significantly higher volume from 6 months ago.
 
That makes sense of the sell down by Ospraie management who I believe are an american investment firm and they use or are associated with J P Morgan. I guess the sell down of LYC by ospraie is being made through sales made on pink sheets. I have been discounting the volume of LYC trades allowing for double trading with purchases on the ASX being resold on pinksheets. This is probably not the case and the pinksheet volume is possibly from ospraie.
The SP has rebounded today. If incandescent light bulbs are on the way out then rare earths will be needed all the more.
 
Despite the shakeout, the price of LYC on pinksheets held steady last night. I believe todays fall on the ASX offers a good entry price. The companies plans have not changed and there are no more, or no less, rare earths around today than there were yesterday so there is no reason for lesser value in LYC.
 
Recently I wrote a quick note for someone asking questions about LYC, and I used a portion of Paul Getty’s Ten Questions To Ask When Evaluating A Stock Purchase to dissect LYC. Just thought that I’d copy and paste it here, to see if you guys agree /disagree. Of course it might not be too relevant, the 10 questions as it refers more to established companies having PEs, but still it provided me some brain workout in getting the stock to face up to some questions. As usual, disclaimer : these are only my own thoughts.

let's get the basics out of the way :

THE GOOD
 LYC owns the Mt. Weld mine
LYC has money to build the processing factory in Malaysia and has proceeding
 LYC signed contract with Rhodia (French chemical company) as an 'anchor' customer.
 RE price is expected to inrease.
 RE demand is expected to increase. REs are used in environmentally
friendly products (hybrid cars) and high technology stuff like Ipods,
MP3s, flat panel screens etc, which are all high demand products.
 LYC's mine, Mt Weld, has the highest grade RE in the world
 LYC has strong contacts with China. Nick Curtis the Exec Chairman, founded Sino Gold, which is a Sydney based company doing mining in China.
 major shareholders include Goldman Sachs (15.4%) and JP Morgan (7.2%)
 Production of RE will start in mid 2008.
 China, world’s 90% producer of RE’s, has imposed a quota on RE production to control prices

THE BAD

 RE market is very small.
 Other RE miners are starting to come up (but they are only exploring)
 US has stockpiled RE, just in case China plays too much with the price and it's too expensive to keep buying from China. US has 1 mine which could be brought into production again if prices go too high for the mineral at the moment.
 LYC is 100% RE mining. If a cheaper alternative suddenly appears, the whole RE sector might collapse and LYC goes bankrupt.
 
1. “What is the company’s history: Is it a solid and reputable firm, and does it have able, efficient and seasoned management?”

Prior to LYC, the chairman Nick Curtis founded Sino Gold and headed it for 5 years till end 2005.
Check the Sino Gold (SGX) share price from 2000 – 2005. it soared to a high and then dropped. I tried to get to the bottom of this, to find the reasons. Gold price steadily increased from 2000-05, so that wouldn’t be a factor in the share price drop. I checked the management progress – from 00 – 05, there was strategic and strong expansion, from having a mine in 00, they moved forward to enter into 2 good joint ventures and finally brought SGX into construction of a new mine (Jin Feng).
Huntley’s recommendation for SGX from 2004 – 2005 gradually moved from Avoid to Hold to Accumulate.
SGX started from a dollar stock and is now a strong $7 stock.
Jacob Klein and Ivo Polovineo are still with Sino Gold. Strength of contacts with China might prove decisive in this junior miner, as China dominates this industry, and LYC uses Chinese technology (the new factory in Malaysia is basically the original one designed for China, and staff are sourced from China as there is a shortage of rare earth knowledgeable staff in other countries).
With China having such a strong control of the market, the reins of pricing manipulations / stock supplies could be said to be right in their hands. Knowing the Chinese and their appetite for money, the LYC board members having strong relationships with the Chinese should be counted as a plus point. Still, with China now in WTO, LYC’s RE produce would be somewhat better protected from manipulation by China. Either way, I think LYC has the upper hand.
the gold mining in China was written in 2004 by Huntleys as ‘potentially rewarding’. I gather that the founder Nick Curtis must have some kind of foresight to search for potential and unlock it. Same situation that we have right now in LYC. LYC was recommended by Huntleys early on as ‘Avoid’ and gradually has been upgraded to ‘Hold’ and ‘Accumulate’. History is not a good support to lean on in the share market, but I do wager my bucks on the man Nick Curtis to again see into the future and start the ball rolling.
 
2. “Is the company producing or dealing in goods or services for which there will be a continuing demand in the foreseeable future?”

RE is used in technology of the future. It all might be fine to flip through (actually click through) the glossy brochures in the LYC website, the research done by BCC, BD, Patersons, Austock, Huntleys and so much is said about its demand. But the proof that there will be huge demand for REs would be in the way the world thinks, and subsequently the world market movements. If you scan through the world news, you will notice that there are quiet, but very steady and inexorable moves towards high technology that limit use on unrenewable and polluting resources such as fuel, coal, and also the need for energy conservation.

It’s all around us – new houses in Australia having to submit energy ratings, white good appliances having energy ratings etc..
Here are some news articles :
Australian Gov phasing out standard light bulbs by 2015(high energy wastage); to change to compact fluorescent bulbs (which use RE)
http://www.smh.com.au/news/environm...-bulbs-turnbull/2007/02/20/1171733741221.html

EU bans NiCd batteries beginning 2010 (toxic); to change to NiMh batteries (which use RE):
http://www.planetark.com/avantgo/dailynewsstory.cfm?newsid=36763

Toyota to increase hybrid car (Prius) production 50% in 2007 (in Japan)
http://www.greencarcongress.com/2006/09/report_toyota_t_1.html

Speculation that Aus government leaning towards Green technologies
http://www.theaustralian.news.com.au/story/0,20867,21276402-30417,00.html

Military technology needs RE – countries like US need an alternative source other than China
http://www.gwmg.ca/investor_relations/pdf/RE_Innovation-Silent-Shift-To-China.pdf
http://www.gwmg.ca/investor_relations/pdf/trout_on_china_REE.pdf

BCC has, in its research on the RE market, extrapolated that there would be increase in demand of REs of 10% per annum from 2006 – 2011, and an increase of 40-80% in RE pricing throughout 2006 – 2008.
 
3. “Is the company in a field that is not dangerously overcrowded, and is it in a good competitive position?”

There is an expected 10-30% market share (estimated) when LYC starts output in mid 2008 because the only other supplier of REs, China, has the other 90%. However, hot on its heels are :

GWG:TSX (Hoidas Lake), expected to start mining soon, but I doubt that it would start anytime within 2008-2009 as they only advanced to pre-feasibility stage on July 2006.

ARU : ASX (Nolans Bore), expected to mine/produce in 2010.
Not to rule out Mountain Pass in the US, which could be brought back into production if there be any unruly play on the price by the Chinese.

Competitive pricing of REs – there would be 2 sides of the coin to this one. The Chinese central government has shown that it is capable of stepping in to control prices (by stopping new mining licences in 2003-end 2005, thereby boosting the RE prices). But being a developing economy, there is just that level of risk still prevalent – certain quarters of the market might quietly rebel and not adhere to quotas etc by exporting through the back door, and using a plethora of other black market tactics to profit from RE sales.

As of 2007, the US and also European markets import their RE 100% from China.
 
4. “Are company policies and operations farsighted and aggressive without calling for unjustified and dangerous over expansion?”

Speculative miners need to be fast and aggressive. PDN’s John Borshoff has shown that aggressive expansion and diversification is needed to keep ahead of the competition. Not satisfied with just Namibia, PDN has now moved into Malawi. Market forces play a part here – the uranium bull market will not last forever, 10 more years max and it might peter off. Also, risks involved are large – environmental concerns, alternative energy (bio fuels) etc.

LYC has moved their production factory from China to Malaysia. I would say this move shows some farsightedness – in not allowing the future production to be caught under China’s quota for production. The 10-30% market share LYC is eyeing is only possible if LYC produce outside of China.

I like the fact that Nick Curtis is not only focusing on producing REs, but on doing the ‘whole thing’ of REs – upstream to downstream :
“Lynas in its unique approach will control the entire integrated supply system from mining, through processing, to customer delivery of its own RED (Rare Earths Direct) branding - aiming to be the benchmark for security of supply and world leading quality to an international customer base.” From http://www.minebox.com/story.asp?articleId=4141
 
9. “Has the price of the stock moved up and down over the past few years without violently wide and apparently inexplicable fluctuations?”

1Q03 Low: RE supply was very high as there was unregulated control of the Chinese supply of REs, subsequently RE prices fell and LYC’s sp fell as well.

3Q03 High : China stops issuing new mining licences (03 – 05). Supply down, RE price up, LYC sp up.

4Q05 Low : From the Huntleys 23.8.04 analysis, “A$130m capital cost of project is an onerous ask for a junior in a non-mainstream project”. Their recommendation was Avoid. This time was a period where a junior miner was just starting out and having to raise funds and the hype for RE was very low – unsurprising that the sp was weak.

1Q07 High : Finance, technical aspects of project all sorted out, China’s quotas beginning to trim RE supply, RE prices rising. Huntley’s 15.2.07 analysis is Accumulate. Can only be blue skies for LYC now.

2Q08 ? : Production starts. Chinese Quotas drained supply. RE prices at all time high. I wouldn’t be second guessing LYC’s share price. I would just be sitting on large parcels of the shares. LYC is very sensitive to RE prices.
 
I suppose the crunch question would be to compare LYC to ARU, the other RE miner in Australia.

LYC produces in 2008. ARU in 2010. Time is of the essence. I feel a few years makes a lot of difference. When China suspended mining licences in 2003 – 2005, RE prices shot up and LYC share price subsequently rose strongly. LYC will be the 1st non-Chinese supplier into the market in 2008, and we’ll see how the market responds to this. The ‘perfect storn’ of reduced supply, quotas etc, would lead to a strong price increase, and LYC would be well positioned to take advantage of this. I’d rather be with the first in the door.
 
8. “Is the company well within safe limits insofar as both long- and short-term borrowing are concerned?”

It is hard to define ‘safe limits’ particularly in a bull run when fundamentals tend to get thrown out the window. Was PDN in a safe limit? It was horrendously overpriced, and yet ,it kept moving upwards. We saw a huge correction for PDN during the 1st week of March correction.

LYC is currently on a Debt/Equity ratio of 34.60 ( info dated 23-02-2007 from http://www.ascii-data.com/ )

For argument’s sake, I have compared LYC to a couple of other miners. (the 3rd column is the Debt/Equity ratio). a lot of '0's there...I'm wondering if there is some other explanation to these '0' digits.

ARU 0.72 85327073.28 0.00 0.00 0.00 -2.78 0.00
AUZ 0.08 40001138.84 44.10 0.00 0.00 -0.18 0.00
LYC 0.72 288035616.85 34.60 0.00 0.00 -1.86 0.00
FXR 1.20 151362519.60 30.40 0.00 0.00 -18.11 0.00
LIM 16.78 3672469038.10 29.60 0.00 0.00 -28.11 0.00
GRV 0.87 12505462.65 28.80 0.00 0.00 -2.24 0.00
CDU 3.71 295384894.70 25.70 0.00 0.00 -2.98 0.00
NTU 1.60 32000003.20 0.00 0.00 0.00 -5.80 0.00
SMM 3.95 779888079.00 0.00 0.00 0.00 -0.37 0.00

I’ve included a couple of Uranium hot-shots NTU and SMM as a quick contrast to see what kind of speculative effect the market can give to the share price, without any debt undertaken for advanced progress towards production.

A bit of a useless effort comparing LYC to ARU’s Debt/Equity as ARU is only producing RE’s in 2010, and I suppose wouldn’t be undertaking substantial debt at the moment for production.

LYC recently raised $75mil for financing the project. For a $273 mil market cap (10.3.07), the financing would be about a 27% of its market cap. The Mt Weld mine has a life of 18 years.
 
Osprey managemant continue their selldown and now hold less than 10% of shares. I believe they are a hedge fund and it will be good for all shareholders to see them completely out of the way. The SP has held up during the last few turbulent weeks. I continue to hold with confidence.
 
The business model of mining ore in Australia, and transport it overseas should be copied by other company.
 
mmmmining said:
The business model of mining ore in Australia, and transport it overseas should be copied by other company.
Click to expand...
And retaining ownership as well as retaining the enhansed value of the product. Imagine what BHP could have done with their Iron ore, nickel and coal in the same situation.
 
nioka said:
And retaining ownership as well as retaining the enhansed value of the product.
Click to expand...

Yup...agree. Outsourcing, just like most of the banks have their call centres in India..but I suppose the unions will start their protests if it becomes the norm.

Works well for LYC. Malaysia should be advising LYC soon on their governmental incentives for locating the plant on their shores. Nice.
 
Sales on pink sheets, allowing for an exchange rate of .8, are 10% higher than the ASX last sales. This indicates to me that the shares on the ASX today are 10% underpriced.
 
Nioka sez...
"Sales on pink sheets, allowing for an exchange rate of .8, are 10% higher than the ASX last sales. This indicates to me that the shares on the ASX today are 10% underpriced."

you're an optimist...I ALWAYS just figured I was wuz getting screwed....
the pinks DO trade at a premium to the ASX stock, no doubt about it...
 
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