Motley Fool Australia

Read this before you buy Lynas Corporation Limited shares

catch a falling knife

Lynas Corporation Limited (ASX: LYC) shares yesterday closed at an all-time low of just 3.8 cents, continuing the downward share price trajectory since hitting a high of $2.50 in 2011.

The company has suffered years of setbacks and difficulties, with the only tangible outcome for shareholders being an almost complete loss of capital. Lynas has been a source of constant frustration for analysts and investors alike after offering such promise in the late 2000s as a potential major player in the global rare earths market.

What is Lynas?

Lynas is a mining company that mines rare earth minerals (think tiny components, mainly in electronics) from its Mount Weld mine in Western Australia, concentrates it on-site and ships the concentrate to the Lynas Advanced Materials Plant (LAMP) near Kuantan in Pahang, Malaysia.

Sadly Lynas has a long history of delays and cost overruns, although not all of its own making. The two major pieces of infrastructure required are the concentrator (Australia), and the processing plant (Malaysia). In 2010/11, when ex-Chairman Nicholas Curtis forecast high rare earths prices for the next five years, the total cost of the two was estimated at $570 million, however this ended up being around $1 billion under the final cost.

The result? 3.37 billion shares on issue, $225 million of convertible debt securities outstanding, 740 million listed options, $US205 million of debt and a market capitalisation of $121 million.

Cashflow Issues

Lynas’ major problem is its massive cash burn. As my colleague Owen Raskiewicz noted following the March quarter cashflow report, “Contained in the $167 million company’s quarterly cash flow report was a net operating cash outflow of $21.67 million and net decrease in total cash held of $26.6 million.

With cash on hand of $44.4 million at the end of the period, basic arithmetic suggests it mightn’t be too long before the company runs out of money. Moreover, $11.4 million of the $44.4 million figure is “restricted cash”. This means Lynas’ creditors will allow the miner to clawback previous debt repayments if (when) necessary.”

Lessons Learnt

The plight of Lynas is similar to that of many small mining companies in Australia. With China controlling 86% of the global rare earths market, Lynas has no control over the price of the goods it sells and is therefore inherently high risk.

Investors should be prepared to put their hand in their pocket to help fund operations in the near term or risk being highly diluted, however dilution is only important if there are profits to be shared in the future!

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. You can find Andrew on Twitter @andrewmudie

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Related Articles…