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Lynas Corporation Limited soars 114% in past month – is there more to come?

Credit: glyphwalker

Lynas Corporation Limited (ASX: LYC) experienced a well-publicised fall from grace in 2013-2014 as consecutive capital raisings, dwindling rare earth prices and an inability to mine profitably all ate away at the company’ share price.

Shares bottomed out at $0.03, but have experienced a strong upswing in the past month, rising 114% to $0.12. What’s going on?

source: Google Finance

source: Google Finance

Lynas shares have soared after the company posted positive free cash flow in its most recent operating report, having improved the quality of its end product and cut costs throughout the operation. Additionally, its only non-Chinese competitor has filed for bankruptcy which is seen as a potential catalyst to lift rare earth metal prices.

However, one of the features distinguishing Lynas’ operations compared to other minerals (like gold or iron ore) is the lack of transparency regarding demand for the products. It’s relatively easy to see where demand for gold or iron ore is coming from, as well as potential future supply since most miners are listed on global stock exchanges.

This is not the case for rare earth metals, whose uses are myriad and, as a result, it is difficult to keep track of demand (which is reportedly growing) outside of company forecasts. Likewise for supply, since the majority of producers are Chinese and reportedly unprofitable. It is difficult to argue that Lynas is a compelling investment case when you can’t keep track of either supply or demand – after all, Lynas is a commodity producer reliant on a favourable balance between the two.

Factor in a huge load of debt and the company looks quite risky. I’m not saying it’s beyond the ability of well researched and skilled investors to make money, but I definitely believe Lynas is one that the average investor should leave on the shelf.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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