Has Lynas Corporation Limited been thrown a lifeline?

Rare earths producer Lynas Corporation Limited (ASX: LYC) may have saved itself from the chopping block, with an integrated refinancing package expected to be announced by this Friday.

The company went into a trading halt today, and will remain in place until the earlier of the company making the announcement or the commencement of trading on Friday, September 26.

Shareholders may be leaping for joy at that news, but it may not all be great. It’s likely that Lynas has secured debt funding for at least part of existing capital, but there may be a nasty sting in the tail – a discounted equity raising to go along with it. The company’s bankers may well have figured, “if we’re taking a risk, so should shareholders”.

It could also be a case of a large investor being allocated a cornerstone equity shareholding in the company – which could see a huge increase in the number of shares on issue – diluting existing shareholders’ holdings in the rare earths producer.

So the company may have snagged a lifeline, but it might not be good news for shareholders, and it may only be a temporary reprieve. In May this year, the company said it had enough cash to continue operating for 12 months, even before a $40 million capital raising.

Lynas’ biggest issues are production costs that are well above the current prices for rare earth oxides (REO), and prices for REO are at or near multi-year lows. Until the company can scale up production, and reduce its all-in costs to below the current commodity prices it is receiving, investors will likely be on tenterhooks. To do that, Lynas needs to spend cash on production, not on repaying debt.

One of the company’s current debt facilities – for US$225 million, requires six-monthly repayments of principal – with US$35 million due this month. Lynas had been hoping to extend the terms of this facility to one repayment of principal in 2016.

But the principal problem remain – too high production costs and too low REO prices. Lynas only has control over the former – it remains to be seen whether the producer can bring those costs enough below REO prices to generate enough cash flow to repay its debts and survive.

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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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