Have you heard about the hot new Australian resources company that’s going to build a state-of-the-art processing facility abroad and make huge profits for investors?
Recent investors in each might have differing outlooks on life right now though, given Lynas’ shares have plummeted from $2.55 in the autumn of 2011 to 20 cents today, and LNG Ltd has returned serve by seeing its shares rocket from 20 cents this time last year to $3.65 today.
Interestingly Lynas could claim to have a lower operational risk profile, given its production facility is now processing the rare earths materials it sells on market. Whereas LNG Ltd’s proposed Magnolia site in Louisiana, USA, is yet to receive full regulatory approval, let alone commence construction. Indeed, operational start up is estimated to to be around the time of the next soccer World Cup in 2018.
Lynas’ rare earths facility was plagued by regulatory and administrative delays resulting in cost blowouts, operational bottlenecks, more debt and capital raisings. All the while the price for its much trumped rare earth oxides products fell away to create a perfect storm that saw the share price lose around 85% of its value from the peak an excited market drove it to.
Of course a sustained recovery in the market price of the rare earths products Lynas processes may see it rebound yet, but now operating under perilous amounts of debt it remains a high risk proposition with a worrying track record.
LNG Ltd meanwhile will be hoping to show Lynas how it’s done and in liquefied natural gas has a product likely to remain in strong demand long into the future. The relatively high cost of converting gas into a liquid form for transportation has hindered its commercial development in the past, but LNG Ltd hopes its technologically-innovative liquefaction services will be its ticket to big profits.
The trump card appears to be the technology that the Perth-based company says allows it to process natural gas into liquid form in a highly productive and cost efficient manner. Shareholders buying at today’s price of $3.67 will be taking a leap of faith the company is able to deliver on its plans without undue delays.
The key to making money in the resources sector is identifying companies trading on great valuations relative to their risk-adjusted potential, which suggests investors may be best advised to watch how these two progress from the sidelines for now.
Motley Fool contributor Tom Richardson has no financial interest in any company mentioned. You can find him on Twitter @tommyr345
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