Rare earths producer Lynas Corporation Limited (ASX: LYC) emerged from its trading halt with a bang today. In morning trade its shares have rocketed higher by 17% to 6.2 cents after it announced amendments to its two debt facilities.
The company advised that despite the many business improvements it has made, the continued weakness in rare earth prices has left the company operating at a break-even level before financing charges.
In light of this Lynas has proposed amendments which have been agreed with each lender to deliver significant savings in its interest liabilities. As well as this the amendments will introduce a new principal repayment mechanism more suited to current rare earth market conditions.
The key amendments include the extension of its debt facilities by a further two years and a reduction in interest rates on both debt facilities. Its Japan Australia Rare Earths (JARE) facility will see its interest rate reduce from 6% per annum to a new rate of 2.5% per annum. Its convertible bond interest rate will drop from 2.75% to 1.25% per annum.
Management estimates that the proposed new rates will result in total interest savings of approximately $70 million.
Furthermore under the proposed amendments to the JARE facility, the fixed principal repayment schedule will now be replaced with a cash sweep mechanism. This means that unrestricted cash balances above $40 million will be applied as principal repayments.
If the proposed amendments are approved by shareholders management believes it will provide the company with significant savings on its financing costs that will allow it to continue as a going concern.
Furthermore, by extending the maturity of the facilities, Lynas is provided with the time needed to deliver further improvements to operating costs. With rare earth demand forecast to grow, Lynas could finally be in a position to turnaround its ailing performance.
Overall, I would have to say this is a positive development for the company and its shareholders. The convertible bonds are very likely to dilute shareholders in the future, but ultimately without them there may not be a company left to invest in.
I wouldn't choose to invest in Lynas though. If rare earth demand does increase in the near future then it could become a reasonably good investment in the resources sector, but until it does I would suggest investors focus on other miners such as South32 Ltd (ASX: S32).
