Will Lynas Corporation Limited raise capital or fold?

With just $23 million in the bank, Lynas is on the brink

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Rare earths producer Lynas Corporation Limited (ASX: LYC) is down to its last $23 million, having spent $74.3 million in the last quarter, placing the company in a perilous position.

The big problem for the company is that its production costs far exceed the average price it is currently receiving for its rare earth oxides (REO).

Lynas says the average selling price rose 5% to US$22.63/kg over the previous quarter, and received $21.9 million in revenues as a result. But operational, production and administration costs alone came to $46.1 million. Add in capital expenditure of around $7 million, debt repayments of $11.3 million, interest expenses of $9.2 million and other small expenses for a total of around $74 million, and you can see that the situation is clearly not sustainable.

During the last quarter, Lynas produced 1,089 tonnes, up 47% over the prior quarter, with the month of March alone contributing 575 tonnes. The company is targeting an annual production run rate of 11,000 tonnes and expects to meet that goal this quarter. But the company says it needs to produce double that (22,000 tonnes per annum) to get its cash cost down to $14-$15/kg REO.

And that's just the cash cost and doesn't include many other necessary expenses. It's a bit like a gold miner saying they have cash costs of $600 an ounce, but their all-in-sustaining cost might be as much as $1,100 an ounce.

With just $23 million left in the bank, and US$440 million in debts, Lynas urgently needs to raise capital to stay in business. The company's bankers may be wary of providing further financing, which leaves the possibility of Lynas asking shareholders to cough up some cash as a highly likely prospect.

With shares currently trading at 16.5 cents, the company may have to offer a significantly discounted price to entice investors to part with their hard earned cash. Even that may not be enough to keep the group afloat.

Foolish takeaway

With chairman and major shareholder Nick Curtis offloading a substantial portion of his personal stake in the company, including 10 million shares last month, shareholders may well be wondering if they will be left holding the empty can.

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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