What's to blame for Lynas Corporation Limited (ASX: LYC) sliding down 23.3% this week?
The rare earths mineral developer and processor did have a victory at the start of September, with the approval of a full operating licence for its advanced materials plant in Malaysia. After that announcement, the stock jumped 9.68% to $0.17 a share. Fast forward to Monday, 15 Sept and the opposite happened.
This week's fall is over financing concerns
The company stated that it would stop talks about debt facility restructuring it was having with a lender, Nomura. It would carry on with alternatives such as other lenders and debt options. The concern the market has about the company's funding sent investors towards the exits and the stock down 13.3% in one day.
It kept sliding from there, ending up a total 23% down to $0.115 by Thursday.
What's the problem?
The debt issue is not the sole problem for the company. Even with the new licence to increase rare earths minerals processing, the spot prices for the various mineral materials it processes have fallen off dramatically within the past three years.
China has almost total control of the rare earths market. Previously around 2010 it cut back on exports, which drove rare earths minerals through the roof, up around 4,000% in about a year. That looked great for companies like Lynas if they could produce the materials.
Glut and squeeze
However, now China has moved the opposite way and increased exports greatly. Spot prices fell to levels at which now it may cost more to produce for Lynas than what they could sell for.
Just like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) flooding the market with extra iron ore supply, China's move could squeeze out high cost producers like Lynas Corporation. Stock prices can get slammed for needing to raise capital in the face of high production costs and low sale prices and this has happened to Lynas.
Share price
In April 2011, Lynas' stock was around $2.55. Now it is less than 5% of that. The fall in spot prices and its share price are very similar.
Though they are rare earths, they are still commodities. Supply and demand drives pricing, making fortunes…or losses. It would be best for investors to avoid trying to pick the bottom and hoping for a quick profit. There is no reason to take on that much potential risk.
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