Can a soufflé rise twice? Ex-Prime Minister Paul Keating once made that comment about a former leader of the Liberal Party, Andrew Peacock. The same sentiment can be applied to former stock market darling Lynas Corporation (ASX: LYC).
This company's stock soared from 7.5 cents in February 2009 to $2.70 in April 2011, only to flounder at approximately 20 cents today. The company has had its share of problems but has shown tremendous tenacity in overcoming them.
Only a few economic rare earth deposits are scattered through the world. China has most of the known reserves and a virtual monopoly on supply. However, the relatively rich deposit at Mt Weld, 35 km south of Laverton, Western Australia, held by Lynas, could possibly change all that.
There are several Australian companies striving to build reserves but Lynas is the only one already in production. In 2012, Atlas Iron (ASX: AGO) purchased the Trigg Hill prospect in the Pilbara from Gondwana Resources (ASX: GDA). The two local companies closest to production are Alkane Resources (ASX: ALK) at Dubbo, New South Wales, and Arafura Resources (ASX: ARU) at Nolan's Bore, Northern Territory. Greenland Minerals and Energy (ASX: GGG) has a potentially very large rare earth deposit in Greenland but production seems many years away.
Branding
Lynas Corporation is intent on becoming a global rare earths producer and supplier through its focus on RED (Rare Earths Direct) branding. Lynas' RED brand presents three key value propositions: building a fully integrated supply system from mine to customer, producing rare earths that meet the world's environmental standards, and marketing an international brand of guaranteed quality. All the company's production will be sold through this brand and the aim is to make it the global benchmark.
Advanced Materials Plant (LAMP)
Lynas operates a processing plant called the Lynas Advanced Materials Plant (LAMP) near Kuantan in Pahang, Malaysia, under a temporary operating licence. The ore from Mt Weld is sent to Malaysia for processing at the LAMP. The plant's initial capacity is designed at 916 tonnes Rare Earths Oxide (REO) per month, with subsequent expansion to double that amount.
Rare Earth demand is expected to grow along with the high tech, hybrid automotive and electronics industries. With known massive resources, Mt Weld could represent 20% of world supply in a rapidly growing but small market.
Foolish takeaway
In an announcement yesterday, Lynas CEO Eric Noyrez said: "The LAMP has now demonstrated growth in production and sales volumes for four consecutive quarters…. This improved performance reflects greater consistency and reliability of materials flow through the plant, and we are now building considerable production momentum…. I am also very pleased to note that a favourable product mix has resulted in the average selling price realised by Lynas representing a premium to the market price."
Significantly, the report indicated that positive cash flow would be achieved once production went above 750 tonnes REO per month. At a curent throughput of at 575 tonnes REO per month, considerable improvement is required to reach profitability. When, and if, that happens the share price should rise again, subject to sovereign and commodity risk. I shall wait and watch progress with interest, before buying Lynas.
