How to recover from a 98.5pc wipeout
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Tim Treadgold reports from Diggers & Dealers 2017 in Kalgoorlie
Very few companies survive a near-death experience on the stock market and recover to rank as one the best performers on the Australian market, as well as being a world leader in its field.
That, in a nutshell, is the story of Lynas Corporation, a favourite of speculators a decade ago as it won headlines when trying to enter the specialised world of rare earths, before suffering a 98.5 per cent share price wipeout.
The return from that collapse has been slow and painful but over the past 10 months Lynas has enjoyed a 200 per cent share price recovery — admittedly off a low base — but a rise which would have earned good profits for investors prepared to take a fresh look at a fallen star.
The problem for Lynas is that not many investors are yet interested in its return, partly because of the past crisis, and partly because rare earths are seen as yesterday’s boom story, and not as exciting as the latest hot commodities such as lithium, cobalt and graphite.
There is also the problem of Lynas having scorched its original followers when it failed to perform as promised thanks to problems at its Mt Weld mine in WA, even worse problems at a Malaysian mineral processing facility – capped off by a flood of Chinese rare earths.
The net result is that when Kam Leung, vice president of production at Lynas got up to speak this week at the Diggers and Dealers forum in Kalgoorlie it was to a jaded audience, with the lack of attention amplified by the fact that he followed one of the big-name speakers, the chief executive of Fortescue Metals, Nev Power.
Shaking off its past is not proving easy for Lynas, but for anyone prepared to take a fresh look they will find a company that is starting to put runs on the board.
In the June quarter sales of rare earths, an odd family of 17 elements that include unpronounceable material such as praseodymium and neodymium, have surged higher with Lynas reporting record cash flow of $15.8 million from sales totaling $75.5 million.
Rather than being a loss maker in a tough industry Lynas is morphing into a profit maker with the rare attraction for an Australian company of being the biggest outside China and a favourite of Japan’s industrial consumers of rare earths which are essential in the production of high-strength magnets.
Older investors probably remember the rare earth story which made headlines for a while when there was concern that China was restricting exports because of the materials application in military technologies such as guidance systems in high-tech weapons.
For a few years the prices of rare earth elements (which are neither that rare, nor earths) soared, triggering a stampede to find supplies outside China which controlled 90% of production.
It was between 2009 and 2011 that the share price of Lynas rode the rare earth rocket from 12c to $2.55 before China took its foot off the supply chain, and problems producing the complex material clubbed Lynas back down to as low as 3.5c in mid-2015, a drop of 98.5 per cent, more than enough for the description of near-death experience.
It was worse for some other rare earth hopefuls including Molycorp of the US which didn’t survive the price collapse, falling into bankruptcy.
The latest turn of the rare-earth worm can be measured in several ways. There are the growing sales, and the higher prices for the most important elements which are up by almost 50% since early this year to $US45 a kilogram.
Another way of measuring the turn is through Lynas’s share price which is up from 5c last October to 15.7c today, taking the company’s stock-market capitalization of $585 million, roughly the same as the latest lithium star, Pilbara Minerals, which is valued at $572 million.
The reason it is interesting to compare Lynas and Pilbara is that they are both exposed to unconventional minerals which have a market in new technologies. Lynas as provider of rare earths which have multiple uses, including electric vehicles. Pilbara as an emerging producer of lithium for the batteries in electric vehicles.
The difference is that Lynas has survived its baptism of fire. Pilbara might not have the same dreadful experience, but it would be wise for investors to remember that starting a new business is never easy.
Tim Treadgold’s The Explorer column appears weekly in Stockhead.
Tim is a Perth-based finance journalist who has been covering the resources sector for more than 40 years for national and international publications, long enough to know what’s gold and what’s fool’s gold — of which there’s quite a bit in the mining world.