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Is Lynas Corporation Limited peering into the abyss?

Rare earths producer, Lynas Corporation Limited (ASX:  LYC) shares were dumped by investors today, falling more than 7% to just 27 cents in mid-afternoon trading.

This was on the back of the company reporting a $59.3 million loss for the six months to December 2013, higher than the previous period loss of $54.5 million. The company also reported that it needs to secure additional funding, which could result in the hat being passed around and shareholders asked to kick in more funds to support the company.

Lynas says it is in talks with its bankers, but should that not be successful, shareholders may be tapped on the shoulder as next in line.

Sales of rare earths came in at just $14.6 million, after the company produced 994 tonnes of rare earth oxides equivalent, but sold just 627 tonnes. The biggest contributing factor is a slump in rare earths prices, thanks to substantial stockpiles of the materials built up during a rare earths crisis in mid-2011.

Lynas achieved average selling prices of US$21.90 per kilo, but for its two main rare earths, Lanthanum and cerium oxides which reportedly make up more than 70% of its resources, current prices are estimated at less than $6/kg. The problem for Lynas is that price is well below its current production cost, and even below its estimated optimal production costs of $14-$15/kg, when its LAMPS production facility is running at maximum capacity. The company does produce other rare earths that sell at much higher prices, but they obviously make up less of a percentage of the total rare earths resources.

And while Lynas says that it is seeing ‘green shoots’ for some rare earths prices, six-month price charts for its main rare earths oxides don’t look all that positive.

What is also concerning for all rare earths companies is reduced demand for rare earth oxides, thanks to productivity improvements and formulation changes by traditional customers.

That could mean tough times ahead for other Australian rare earths explorers including Arafura Resources (ASX:ARU)Peak Resources (ASX:PEK) and Metallica Minerals (ASX: MLM).

Foolish takeaway

With more than $476 million in debt, there are substantial worries that Lynas can continue as a going concern. The company even acknowledged that fact in the interim report released today, despite $67 million of unencumbered cash. For existing shareholders, 27 cents per share may be the best price they will see in some time.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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