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Will 2014 be a better year for Lynas Corporation Limited?

Most investors in mining companies will know something about Lynas Corporation Limited (ASX: LYC). The company produces a range of rare earths from its Mount Weld mine in Western Australia and despite rising over 800% between 2009 and 2011 the company’s share price has only gained 19% over the past five years. Lynas’ share price rose from under 30 cents in 2009 to reach a high of $2.55 in early 2011, as the price of the rare earths it produces spiked with new demand from China. The price spike was short-lived however, market prices quickly corrected and took Lynas’ share price with it.

About Lynas

The company’s shares now trade for around 32 cents but could be poised for a serious rebound in 2014, if everything starts to come together. Lynas mines rare earths from its Mount Weld mine in Western Australia, concentrates it on-site and ships the concentrate to the Lynas Advanced Materials Plant (LAMP) near Kuantan in Pahang, Malaysia.

Delays and cost blowouts

Unfortunately for investors, Lynas has a long history of delays and cost overruns, although not all of its own making. The two major pieces of equipment required are the concentrator (Australia), and the processing plant (Malaysia). In 2010/11, when Chairman Nicholas Curtis forecast high rare earths prices for the next five years, the total cost of the two was estimated at $570 million. By 2013 the investment so far was reported as $1.3 billion.

Making progress

Luckily though, investment in that equipment is now finalised and by April the processing facility should have ramped up to its full-production volume of 11,000 tonnes per annum. While well below their historical peaks, rare earths prices are well above break-even for Lynas and JP Morgan noted recently that Lynas appears to be receiving premium prices for its product, potentially by withholding some product from the market.

Challenges

Challenges remain however, with the continuous threat of further protests from the SMSL (Save Malaysia Stop Lynas) group, and $45 million in debt due by December 2014. Analysts note that the company has around $60 million in cash at the end of 2013, more than enough to handle the debt repayment as long as no further capital expenditure is required.

Competitors

Lynas’ main competitors, and customers, are in China. Chinese companies (legal and illegal) produce over 90% of the global rare earth supply, while China consumes over 50% of supply through production of high-end electronics. Ongoing regulation of Chinese rare earths producers should help to strip some low-cost suppliers out of the system, which should aid Lynas in the long run.

Foolish takeaway

Lynas hasn’t yet shown that it can consistently produce good volumes and cashflow. Until the company can restore investor faith and reduce execution risks the shares will likely remain at subdued levels.

Conversely, when (or if) Lynas produces positive cashflow, the investing community may push the share price up sharply. For now, risks remain in execution and Foolish investors may be wise to sit and wait for further evidence that the worst is over for Lynas.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned

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