An interview with SMSL Chairperson, Mr. Tan Bun Teet with Mr. Fabian Biasio from Luzern on the issue of Lynas
http://vimeo.com/112395919
Thursday, 29 January 2015
Will Lynas survive its financial crisis?
Lynas’ financial status prior to 30th September 2014
In late September 2014, Lynas was due to repay Sojitz USD$35 millions. Besides that it has to set aside funds to cover the operating losses in the current quarter of no less than USD$ 10 millions. Given the cash in hand it has no way of meeting the obligations. The threat of a loan repayment default and a possible foreclosure loomed high in the horizon! Should their senior creditor Sojitz refuse to agree to a DEBT REPAYMENT RESTRUCTURING, they would have to consider stopping the operations in LAMP! Though Lynas had engaged the service of Nomura bank of Japan to negotiate with Sojitz, they failed to broker a deal with Sojitz. Sojitz later agreed to a new schedule of repayments at the last minute but extracted an additional 7% interest on the amounts payable.
Desperate moves to raise funds
Meanwhile Lynas commissioned Patterson Securities of Australia to underwrite the following new issues as a way out of their financial straits:
1. Underwrite 150 million new shares at AUD $ 0.080 to pay the USD$ 10 millions due to Sojitz.
2. Issue renounceable rights shares at the ratio of 15:4 to all existing shareholders at AUD$0.080 per share to raise another AUD$71 millions as operating expenses. This exercise is again underwritten by Patterson Securities. The total number of shares added came to 887,500,000 shares. Only a third of the total shares issued were taken up by the shareholders.
3. Lynas was keenly aware that it might not be able to borrow or raise funds through issuance of new shares in the coming months thus an underwriters’ rights option was included in the September 2014 offer at the ratio of 2:1 at AUD$0.090 per share exercisable before the 15th September 2015. This is expected to bring in another AUD $66 millions by adding another 740,226,191 shares to the total. The current total shares in trading stands at 3,370,955,034(3.3billion). Should the underwriters’ rights options be fully subscribed, it will eventually expand the total shares to 4,111,181,225! The practice of unrestricted issuance of shares to raise funds by corporate companies like Lynas has drastically diluted the worth of the current shareholders. It has also affected the interest and confidence of potential investors! This perhaps, helps to explain why the current share price of Lynas remained low. This week’s share price closed at 5.5 cents.
Current status at the end of 3rd quarter 2014
At the end of the 3rd quarter 2014, Lynas managed to raise AUD$83 millions to defray expenses on repayment of loan and maintain adequate funds for operating expenditures in subsequent quarters.
The 3rd quarter’s financial report by the management saw a reduction in operating losses narrowed down to AUD$ 10 millions compared to the preceding quarter of 30 millions. Whether the report was skewed in any way to paint a good picture for the company as well as shoring up shareholders’ confidence on the new CEO, the investment community will be the better judge of it and let’s wait for their 4th quarterly report before we make any further comments.
The crucial factor that will determine Lynas’ survival rests on the REO market price. Lynas has admitted that the current market price does not favour a full capacity production. Under the current market conditions, Lynas is only able to make a thin profit through sale of NdPr (Neodymium and Praseodymium) while sustaining losses in other types of RE they processed. Given an annual production of 22,500 tons, NdPr only account for a total of 2,800 tons. This works out to only 12.7% of the total volume of REO Lynas produced each year. The profits from the sale of this 12.7% will be used to subsidize the losses incurred through the sale of the other REOs.
What this means is the funds they have in hand will be depleted much more quickly following each month they are in operation. Their promise to supply an annual volume of 8,500 tonnes of REO to Sojitz seems plausible judging from the production volume of the September quarter. However this will also mean they would have to set aside a larger sum of funds to cover their enlarged losses. How much is this quantum is yet to be revealed. We will only be able to catch a glimpse of it when they publish their fourth quarterly report for 2014.
How long can the funds in hand last?
With the renewal of the 2-year TOL, Lynas has to pay AELB USD$ 7.79 millions. This is approximately equivalent to AUD$ 8 millions. This will reduce the total funds remaining to AUD$63 millions.
Lynas has hinted obliquely in their past reports to ASX and shareholders that they have to set aside funds to repair the cracking and leaching as well as the finishing areas of LAMP. The fact that they have to sell off 190 tonnes of semi-finished NdPr in Chloride form and suffered a revenue reduction of USD$2 millions to the total demonstrated the urgency to get the units up and running in the ensuing quarter. The December report will reveal how much has been spent to get the units up and running. The statement that they are able to produce their final products close to 99.9% of the specifications their client demanded is ambiguous. Even Molycorp has to send its products (the heavy REE) to China for final finishing!
The operating losses (if any) for the December quarter is still unknown. Only a close scrutiny of their report will reveal how the remaining funds in their hands will be used in the coming months, not forgetting that they have senior debt obligations to fulfill every three months starting March 2015. One conclusion seems to be obvious is that they expect the current funds will last till or before the underwriters’ rights option expires on 15th September 2015.
Circumstances under which LAMP will be forced to close
We have to be realisitic in our evaluation on the circumstances under which LAMP will probably stop its operations. Let us take a sober look at all the possible scenarios:
1. Lynas’ cash in hand runs out and they have no choice but to default on their loan repayments to Sojitz.
Sojitz took out a court order to liquidate Lynas’ current assets. LAMP will be included in the list and it has to stop operating while waiting for the court to appoint a liquidator.
2. Lynas is ordered by the Malaysian Government to fulfill the condition of locating a PDF.
Lynas would then have to allocate a certain sum to locate a suitable PDF and no one can be sure how much this will be. It will eat into the cash reserves they have in hand. Plus the interests on both their loans ,whatever is left may not see them last till end of June 2015 perhaps.
(This is not likely to happen for Lynas has proposed to recycle the WLP into road base aggregates (RB4) and the proposal was accepted by AELB in mid June last year. ( This can be found in their June 2014 quarterly report) Currently it has received proposals from third parties to recycle the other two streams of solid wastes. By agreeing to Lynas’ proposal for the WLP usage, it will exempt Lynas from finding a PDF.
Should our Government close both eyes to the timeline when it will be put into practice, Lynas will not need to spend any money on dealing with its WLP wastes. All its remaining cash can then be used fully to keep the loss making operations running.)
3. Our Judicial Review's (JR’s) prayers were answered.
This will mean the TOL will be revoked and LAMP has to stop operating. However Lynas will appeal and before the case is heard in appellate court it can continue its operations.
4. Should Lynas be forced to stop operating due to cash shortage, some lender(s) of last resort may lend them the money to carry on while hoping that the REE market will turn round.
This is a highly risky adventure for any private financial organization. Only a foreign government like Japan might be interested in injecting the necessary funds into Lynas to keep it running just to break China’s stranglehold on the RE market.
Confronting the reality we have a serious problem of how to get Lynas and our government to act on the safe disposal of the radioactive waste.
This is something all have to think about. By waiting for the market to ‘kill’ Lynas, we still have to come up with a proposal that will ensure the waste left behind will not pollute our environment permanently.
Lynas’ financial status prior to 30th September 2014
In late September 2014, Lynas was due to repay Sojitz USD$35 millions. Besides that it has to set aside funds to cover the operating losses in the current quarter of no less than USD$ 10 millions. Given the cash in hand it has no way of meeting the obligations. The threat of a loan repayment default and a possible foreclosure loomed high in the horizon! Should their senior creditor Sojitz refuse to agree to a DEBT REPAYMENT RESTRUCTURING, they would have to consider stopping the operations in LAMP! Though Lynas had engaged the service of Nomura bank of Japan to negotiate with Sojitz, they failed to broker a deal with Sojitz. Sojitz later agreed to a new schedule of repayments at the last minute but extracted an additional 7% interest on the amounts payable.
Desperate moves to raise funds
Meanwhile Lynas commissioned Patterson Securities of Australia to underwrite the following new issues as a way out of their financial straits:
1. Underwrite 150 million new shares at AUD $ 0.080 to pay the USD$ 10 millions due to Sojitz.
2. Issue renounceable rights shares at the ratio of 15:4 to all existing shareholders at AUD$0.080 per share to raise another AUD$71 millions as operating expenses. This exercise is again underwritten by Patterson Securities. The total number of shares added came to 887,500,000 shares. Only a third of the total shares issued were taken up by the shareholders.
3. Lynas was keenly aware that it might not be able to borrow or raise funds through issuance of new shares in the coming months thus an underwriters’ rights option was included in the September 2014 offer at the ratio of 2:1 at AUD$0.090 per share exercisable before the 15th September 2015. This is expected to bring in another AUD $66 millions by adding another 740,226,191 shares to the total. The current total shares in trading stands at 3,370,955,034(3.3billion). Should the underwriters’ rights options be fully subscribed, it will eventually expand the total shares to 4,111,181,225! The practice of unrestricted issuance of shares to raise funds by corporate companies like Lynas has drastically diluted the worth of the current shareholders. It has also affected the interest and confidence of potential investors! This perhaps, helps to explain why the current share price of Lynas remained low. This week’s share price closed at 5.5 cents.
Current status at the end of 3rd quarter 2014
At the end of the 3rd quarter 2014, Lynas managed to raise AUD$83 millions to defray expenses on repayment of loan and maintain adequate funds for operating expenditures in subsequent quarters.
The 3rd quarter’s financial report by the management saw a reduction in operating losses narrowed down to AUD$ 10 millions compared to the preceding quarter of 30 millions. Whether the report was skewed in any way to paint a good picture for the company as well as shoring up shareholders’ confidence on the new CEO, the investment community will be the better judge of it and let’s wait for their 4th quarterly report before we make any further comments.
The crucial factor that will determine Lynas’ survival rests on the REO market price. Lynas has admitted that the current market price does not favour a full capacity production. Under the current market conditions, Lynas is only able to make a thin profit through sale of NdPr (Neodymium and Praseodymium) while sustaining losses in other types of RE they processed. Given an annual production of 22,500 tons, NdPr only account for a total of 2,800 tons. This works out to only 12.7% of the total volume of REO Lynas produced each year. The profits from the sale of this 12.7% will be used to subsidize the losses incurred through the sale of the other REOs.
What this means is the funds they have in hand will be depleted much more quickly following each month they are in operation. Their promise to supply an annual volume of 8,500 tonnes of REO to Sojitz seems plausible judging from the production volume of the September quarter. However this will also mean they would have to set aside a larger sum of funds to cover their enlarged losses. How much is this quantum is yet to be revealed. We will only be able to catch a glimpse of it when they publish their fourth quarterly report for 2014.
How long can the funds in hand last?
With the renewal of the 2-year TOL, Lynas has to pay AELB USD$ 7.79 millions. This is approximately equivalent to AUD$ 8 millions. This will reduce the total funds remaining to AUD$63 millions.
Lynas has hinted obliquely in their past reports to ASX and shareholders that they have to set aside funds to repair the cracking and leaching as well as the finishing areas of LAMP. The fact that they have to sell off 190 tonnes of semi-finished NdPr in Chloride form and suffered a revenue reduction of USD$2 millions to the total demonstrated the urgency to get the units up and running in the ensuing quarter. The December report will reveal how much has been spent to get the units up and running. The statement that they are able to produce their final products close to 99.9% of the specifications their client demanded is ambiguous. Even Molycorp has to send its products (the heavy REE) to China for final finishing!
The operating losses (if any) for the December quarter is still unknown. Only a close scrutiny of their report will reveal how the remaining funds in their hands will be used in the coming months, not forgetting that they have senior debt obligations to fulfill every three months starting March 2015. One conclusion seems to be obvious is that they expect the current funds will last till or before the underwriters’ rights option expires on 15th September 2015.
Circumstances under which LAMP will be forced to close
We have to be realisitic in our evaluation on the circumstances under which LAMP will probably stop its operations. Let us take a sober look at all the possible scenarios:
1. Lynas’ cash in hand runs out and they have no choice but to default on their loan repayments to Sojitz.
Sojitz took out a court order to liquidate Lynas’ current assets. LAMP will be included in the list and it has to stop operating while waiting for the court to appoint a liquidator.
2. Lynas is ordered by the Malaysian Government to fulfill the condition of locating a PDF.
Lynas would then have to allocate a certain sum to locate a suitable PDF and no one can be sure how much this will be. It will eat into the cash reserves they have in hand. Plus the interests on both their loans ,whatever is left may not see them last till end of June 2015 perhaps.
(This is not likely to happen for Lynas has proposed to recycle the WLP into road base aggregates (RB4) and the proposal was accepted by AELB in mid June last year. ( This can be found in their June 2014 quarterly report) Currently it has received proposals from third parties to recycle the other two streams of solid wastes. By agreeing to Lynas’ proposal for the WLP usage, it will exempt Lynas from finding a PDF.
Should our Government close both eyes to the timeline when it will be put into practice, Lynas will not need to spend any money on dealing with its WLP wastes. All its remaining cash can then be used fully to keep the loss making operations running.)
3. Our Judicial Review's (JR’s) prayers were answered.
This will mean the TOL will be revoked and LAMP has to stop operating. However Lynas will appeal and before the case is heard in appellate court it can continue its operations.
4. Should Lynas be forced to stop operating due to cash shortage, some lender(s) of last resort may lend them the money to carry on while hoping that the REE market will turn round.
This is a highly risky adventure for any private financial organization. Only a foreign government like Japan might be interested in injecting the necessary funds into Lynas to keep it running just to break China’s stranglehold on the RE market.
Confronting the reality we have a serious problem of how to get Lynas and our government to act on the safe disposal of the radioactive waste.
This is something all have to think about. By waiting for the market to ‘kill’ Lynas, we still have to come up with a proposal that will ensure the waste left behind will not pollute our environment permanently.
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