The Motley Fool

Why Lynas Corporation Limited’s shares have climbed 48% in a week

Much has be written about rare earths producer Lynas Corporation Limited (ASX: LYC), including a number of articles by the Motley Fool here and here.

The company has faced more than a few headwinds in recent times, including falling prices for many of the rare earth oxides it produces, environmental opposition to its processing plant in Malaysia, and large debt levels, at the same time as the company is trying to ramp up production to lower its costs of production, and see at least some positive cash flow.

Thanks to a recently completed share purchase plan and placement, Lynas managed to raise $40 million, with new shares issued at a price of 11.3 cents, well below the last closing price of 17 cents. In fact, shares in Lynas have climbed 48% in the last 5 days alone, suggesting investors are much more confident about the company’s future now.

Chairman Nicholas Curtis was delighted with the response from shareholders, with much of the company owned by retail investors – institutional investors having given up on the company long ago.

But given the large discount the new shares have been issued at, and an additional 370 million plus shares to be issued, it’s no surprise that Lynas’s share price has dropped to 14 cents in trading so far today.

The company had maintained that it had sufficient funds to keep operating for 12 months before the capital raising. What the capital raising does is give Lynas breathing room, to renegotiate debt obligations and continue to ramp up production.

Will China makes its move on Lynas?

The company could also find that Chinese companies may now be willing to make an investment in Lynas, to take advantage of its highly advanced new processing plant in Malaysia. China is the world’s largest producer of rare earths oxides, and Chinese companies have been investing heavily in Australian resource projects recently.

As a sign of what may be in the pipeline for Lynas, fellow rare earths miner, Arafura Resources (ASX: ARU) signed a memorandum of understanding with China’s Shenghe Resources back in September 2013 to help develop its Nolans rare earth project in the Northern Territory.

Lynas is not out of the woods yet, but positive signs may be emerging.

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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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