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Why the Lynas Corporation Limited share price is soaring

Lynas Corporation Limited (ASX: LYC) has seen its share price jump 17% today to 11.7 cents, and shares have almost doubled in the past month, so what’s going on?

The rare earths miner and producer has had some positive news flow in recent months. In early October, a court challenge to its Malaysian processing facility was dismissed. Then a few days later, the company announced that it had seen positive free cashflow of $1.3 million for the September quarter, despite historic low prices for the rare earths it produces.

The company saw $55.9 million of cash receipts, but a heavy focus on costs saw cash outflows fall $6.1 million below its June forecast to $54.6 million. As a result, the company’s closing cash balance was $56.5 million, $4.5 million above the closing cash balance for the end of June 2015.

That was built on a number of factors.

Higher production, lower production costs and in particular, improved quality of its end products, means the company can now market to clients looking with higher quality demands.

It’s the first time the company has managed to produce positive cash flows and sets a base for operations going forward.

Not only that, but Lynas’ only non-Chinese competitor, Molycorp, filed for bankruptcy and closed its Mountain Pass operations. As an aside, Bloomberg reports that Lynas may be interested in acquiring Molycorp.

Other factors that have helped Lynas include renegotiating a supply contract for its key chemical reagents in July 2015, reducing its take-or-pay fees.

Like most commodities companies, Lynas is heavily reliant on the prices it receives for its products. Rare earths prices have dropped dramatically, and the company estimates that 90% of Chinese producers are unprofitable now. Prices also appear to be heading even lower.

That could see a reduction in output, but iron ore holds a lesson for investors banking on reduced output from higher cost producers.

As the iron ore price fell, large iron ore miners were predicting a base price of between US$100 and US$120 a tonne. At those prices, many producers – mostly Chinese – would be unprofitable. While some output has dropped off, more than expected high-cost producers are still spitting out production.

Debt the key issue

Like the large debt load hanging over Fortescue Metals Group Limited (ASX: FMG), Lynas faces a similar issue. The company has $546 million of debt and has yet to demonstrate its ability to pay any of it off. Despite the potential and soaring share price, Lynas still looks too risky for my liking.

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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

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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