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Lynas reports first production and heavy losses

This is the year that Lynas Corporation (ASX: LYC), an explorer and developer of rare earths minerals, finally became a producer of the materials that most people don’t know about, but are found in our cars, mobile phones and energy-efficient light bulbs.

Receiving its first temporary operating licence for refining and producing the sought after materials in September 2012 was the turning point for its advanced materials plant in Malaysia to process the ore from its Mt Weld mine in WA. However, getting there hasn’t been easy or cheap.

In its 2013 full-year report, earnings were a net loss of $143.56 million, $59.79 million worse than the $87.77 loss in 2012.  A maiden revenue of $900,000 was achieved, but with associated pre-costs, the reported total revenue was effectively zero.

The company attributed part of the loss to a planned shutdown of its Mt Weld operations, its sole source of rare earths ore currently, to control stock levels, as well as increased employee costs as it ramps up operations to become a materials producer. Depreciation levels were also higher than usual.

Such a reported loss would usually have sent the share price plummeting, but the stock rose 6.7% from $0.405 to $0.43 in trading on the day of the report release because along with it was the announcement that the US$225 million loan facility created in 2011 with a Japanese business venture would be extended to the end of March 2015 instead of the mid-January 2014 expiry.

Until the company can get into full production and generate much needed revenues, this loan facility is supporting it, so investors jumped back in slightly on the news. Japanese industries most likely would cheer this also because the rare earths market is 95% controlled by China, and with their recent relations frosty of late, Japan wants to support any non-Chinese rare earth materials development.

China tried to squeeze this product market in 2010, reducing export levels by almost half. Before the squeeze, rare earth spot prices were $10-$20/kg, yet the sudden drop in supply and speculative trading drove the price to over $200/kg, peaking in July 2011.

The extreme prices blunted demand, and have even led to the start of research into creating alternative materials. The spot price reacted fiercely downward and currently is around $25-$30/kg. Other Australian explorers exist — Arafura Resources (ASX: ARU), Peak Resources (ASX: PEK) and Metallica Minerals (ASX: MLM) — yet only Lynas Corporation is a producer.

Foolish takeaway

While there may be great potential once the company is in full production, its Malaysian processing plant still has to wait about another two years before its temporary production licence is converted into a permanent one. Its emissions are being monitored by the Malaysian government, and several legal proceedings have been brought forward, though none at this time are impeding or stopping operations there.

Speculators may want to take a punt at this, but value investors will want to see clear and steady revenues and returns to truly measure the prospects and future earnings, so now is not the time to stick your toes in.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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