With the downside limited and strong upside potential, Lynas Corporation (ASX: LYC) shares might be worth a punt. But buyer beware.
Lynas shares jumped 7% to 70 cents on Wednesday after the controversial rare earths miner announced it had completed phase one construction of its Malaysian materials processing plant, known as LAMP.
Lynas has been developing its rare earth project for over ten years based on their rich deposit in Western Australia.
The $350m LAMP project is controversial in that local Malaysian residents fear there will be a radiation threat from processing the rare earths. Perhaps not surprisingly, although experts have demonstrated the project is safe, the locals are kicking up one hell of a storm.
Politically, it’s unlikely the Malaysian government will approve the LAMP before the next election, due by April 2013 at the latest. The delay — and there is always the chance the delay may turn into a closure — has put a firm lid on the share price, with Lynas shares languishing over 70% off their 2011 high.
In May this year, JP Morgan set a December 2012 share price target of $2 on Lynas, also saying in a scorched-earth scenario — where approval is not granted — it still sees 65 – 70 cents value in the company.
Earlier this month, Foster Stockbroking put out a rare sell call on Lynas, saying the expected delay in approval would have funding implications and cause balance sheet difficulties. The broker did however say it expects the LAMP will eventually receive approval.
An investment in Lynas today is high-risk but high-reward. At 70 cents, the downside does appear limited, and if JP Morgan are correct, the shares could almost triple from here, although that’s now highly unlikely to happen by December.
For the brave, the shares are probably worth a punt, but only with part of the speculative portion (0-10%) of your investing portfolio. Although there are never any guarantees in investing, especially when politics, protest and environment are involved, the odds are in your favour.
Another way to play Lynas is to simply wait for LAMP approval. Sure, if and when that happens, the share price will likely have jumped considerably higher, but even then, will likely still offer considerable upside potential.
In the meantime, if you’re looking for an altogether safer home for your investing dollars, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.
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Motley Fool General Manager Bruce Jackson already owns shares in Lynas, and is already sitting on a loss, proving although the downside may be limited, there is still a downside to any investment.
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