Is Lynas Corporation Limited about to raise equity?

Are investors overlooking something?

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Rare earths miner and producer Lynas Corporation Limited (ASX: LYC) has seen its share price soar 20% to 21.5 cents in early trade today, but investors may have got their hopes up over nothing new.

Lynas chairman Nicholas Curtis stated in the announcement that

I wish to assure shareholders that while LAMP (Lynx Advanced Materials Plant) in Malaysia has been slower to ramp up than we would have liked, recent production is beginning to demonstrate sustainable momentum.

The company also noted that commercial production and sales of rare earth oxide products will be both be higher than the December 2013 quarter. That is not new news – the company reported it would be higher at the end of January.

Mr Curtis also confirmed the company was on track to achieve the target of 11,000 tonnes per annum production run rate during the June quarter. This was also nothing new, having previously guided the market to those production rates.

And at the end of the day, higher production and sales really means nothing if the company can’t make a profit from it.  Lynas’ production costs are estimated to be much higher than current rare earth prices, as I noted in this article a few weeks ago – even at maximum production capacity.

A cynical observer might suggest that today’s announcement by Lynas is an effort to prop up the sliding share price, so the company at least has the option of raising capital from shareholders.

Despite $67 million in cash, Lynas is likely to be forced to raise capital in the near future, to sustain its operations while it waits for rare earths prices to recover. The company only has a limited number of options, including processing and stockpiling the rare earth ores, selling them at a loss to generate at least some cash flow, or stopping production entirely until it can operate profitably.

Lynas is in the difficult position that many gold and uranium miners have found themselves in recently. Production costs well above current commodity prices has seen some mines close, while others have been put on care & maintenance, until commodity prices rise to make them at least cash flow positive.

Silver Lake Resources (ASX: SLR) recently placed its high cost Murchison mining operation on care & maintenance until prices recover, while Straits Resources (ASX: SRQ) did the same with its Mt Muro gold mine. Uranium miner Paladin Energy Limited (ASX: PDN) has also followed suit with its loss-making Kayelekera mine, putting it on care & maintenance, until uranium prices rise substantially.

Lynas, with one mine and one production facility, doesn’t really have the option of going into hibernation, until it can either lower production costs or rare earths prices rise.

Foolish takeaway

Lynas is still in a tough situation, and today’s announcement doesn’t alleviate any pressure on the company. Investors may want to sit this one out and watch from the sidelines.

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Motley Fool writer/analyst Mike King owns shares in Silver Lake Resources. You can follow Mike on Twitter @TMFKinga

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