Why Lynas Corporation Limited’s shares surged today

On a day when the S&P/ ASX 200 Index (Index: ^ASXO) (ASX: XJO) has climbed more than 1%, rare earth oxides producer Lynas Corporation Limited (ASX: LYC) has seen its shares soar more than 10% in late afternoon trading, currently trading at 12.2 cents.

With no news released that may indicate a reason why, we can only make some assumptions as to why the shares have surged higher. Perhaps it’s institutional investors taking advantage of the low share price, before Lynas issues $10 million worth of shares in a placement – at a 17.5% discount to the average five day trading price.

Lynas is also looking to issue $30 million worth of shares under a share purchase plan (SPP), to shore up its balance sheet. As we mentioned in this article, Lynas was down to its last $23 million, having spent $51.2 million in the last quarter.

Shares plunged more than 8% when the company made the announcement, so perhaps institutional shareholders sold out at the time, and are now buying back in.

But investors shouldn’t expect the share price to soar from here. The rare earths producer still faces multiple headwinds, including high debt levels, low and falling commodity prices for its key rare earth oxides, and high initial production costs as it ramps up its processing facility in Malaysia to full capacity of 22,000 tonnes annually.

Lynas is not a stock we would be interested in, even at such low prices. The extremely high risk of the shares going to zero outweighs any potential upside. For a better alternative, you may want to check out a brand new report below.

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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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