What a wild ride it has been for investors and speculators alike in rare earths producer Lynas (ASX: LYC). It's hard to see it getting smoother, but recent developments are giving rise to more optimism, despite a heavily crunched share price recently.
Lynas is definitely at the speculative end of the scale. It's made some good returns for day traders and speculators over its 27-year history, but it's always been a stock whose good news seems just around the corner and not quite in sight.
With some regulatory, jurisdictional and production hurdles now out of the way, whether investors think the company is finally close to streamlined production, steady profits and consistent share price growth rests still with the future of the global economy and, more particularly, the market prices for the rare earths it produces. It's the magnetic properties of rare earths that make them so useful in information technology manufacturing. China utterly dominates the world's market, and in the 1990s was undercutting prices to pressure its minnow competitors.
Lynas hopes to meet one-third of the world's demand with processing at its refinery at the Malaysian east coast industrial port of Kuantan, shipping its ore from its Western Australian Mount Weld mine out of Fremantle. The company issued an upbeat production report a month ago and has been trying hard to assuage environmental concerns that had led to unrest. On June 18 it said it would discontinue defamation action against the Save Malaysia Stop Lynas protest group, saying:
"The actual emission monitoring results … available from the websites of the Malaysian Department of Environment (DoE) and the Atomic Energy Licensing Board (AELB … prove to everyone that our products and processes are safe for people and safe for the environment."
Lynas might feel it's close to being able to get on with the job, but it has to contend with a fickle market too. It also said in its operations update that although rare earths prices had continued to fall in the calendar year, it could see signs of stabilisation emerging. And in any case, in "response to the macro environment" it had a program to reduce operating costs and optimise production.
It needs all the macro economic help it can get. The company's fortunes seemed to have changed with the recent Malaysian election, which seemed to assure its plants licensing and operation. The share price peaked at $0.70 on May 13, but has since fallen right away to close Monday at $0.375. In the heady days of optimism about the global economy after the GFC and booming sales of the information technology that relies on rare earths, like smart phones and tablets, Lynas hit a rather unrealistic $2.70. That was just a little over two years ago. On the year to date it's down almost 35%.
Foolish takeaway
Lynas has been an exciting story so far, but it's the world economy and buoyant rare earths prices that will determine whether there's a happy ending. It's not a stock for the feint-hearted or those looking for income (there's no dividend), just those confident enough of a long term capital gain. That's by no means impossible though.
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Motley Fool contributor Andrew Ballard owns shares of Lynas.
