31 Jan LYNAS – A REMARKABLE TURNAROUND STORY
The rare-earths producer is back on predictable ground
When Lynas chief executive Amanda Lacaze hosted a conference call this week for analysts and investors about the company’s quarterly cash flow, almost 100 people were on the line.
“I think we have almost cracked the ton,” the straighttalking Lacaze says from her office in Kuantan on Malaysia’s east coast.
Questions by many analysts were prefaced by congratulations for a job well done, with one enthusiastic US retail investor suggesting she was the kind of woman who should work for President Donald Trump.
Lynas shareholders have been on a rollercoaster ride over the past few years.
The company has gone from being a speculators’ darling when its shares hit $24 in April 2011, at the height of the rare-earths boom, before it had even started production, to a penny dreadful when the market for rare earths collapsed, sending the price down to just over 36c in July 2015.
Since then it has been slowly working its way back to market credibility under the leadership of Lacaze, a former Telstra executive, with its price closing this week at $2.12.
Interviewed by The Weekend Australian this week, Lacaze, who has been running Lynas for 3½ years, argues that her company is now well past the turnaround phase and on its way to becoming a more predictable industrial company.
“I don’t call us a turnaround business at all,” she says. “We are a good solid company with predictable products and predictable revenue lines. Maybe not as much as we would like to have but we generate cash and we have a solid customer base.”
Lacaze is proud of the fact that Lynas — the second-largest rareearths-producing company in the world — has just regained its slot as a top ASX 200 company with a market capitalisation of more than $1.2 billion.
Under her tenure, Lynas’s net losses have fallen from $118.6 million in the financial year to June 30, 2015, to $94.1m in the year to June 30, 2016, to $35.6m in the year to June 30, 2017.
The latest figures, released this week, show it generated more than $55m in cash from operations in the six months to the end of December.
Over the past year the company has used cash flow from operations to reduce its debt from $US425m to $US266.5m.
Rare earths are important inputs into a range of industrial products — from magnets to mobile phones, electric cars and wind turbines.
Since taking over Lynas, Lacaze has cut costs, boosted production at the Malaysian plant, turned the company from cash flow-negative to cash flow-positive, steadily paid down debt and has just negotiated a long-term contact with German engineering and automotive company Bosch that is not linked to the volatile spot market for rare-earths products.
“She’s brought it back from the brink,” stockbroker Michael Evans, director of Sydney-based Curran and Co, told The Weekend Australian.
Evans has been following Lynas since the heady days of 2011, when speculators were eager to get a share of the rare-earths business, particularly a company outside China, which has dominated the market.
“The company’s share price got caught up in the hype and was trading in some lofty valuations even before it started building its operations, let alone producing anything,” Evans says.
“Amanda has had a tremendously positive impact on the company. She took over when rare earths were at multi-year lows, the company wasn’t generating any positive cash flow and had crippling debt levels.
“At one point I’m sure many observers were waiting for it to go under. In the eyes of most of our clients the company has gone from uninvestible to investible.”
While Lacaze can do little about the rare-earths market, which is subject to some volatile price movements — partly driven by the degree of illegal mining for the product in China — she has steadily worked to put Lynas’s operations on a much steadier footing.
The company mines its rare earths at Mount Weld in Western Australia and ships them to its plant in Malaysia for processing.
She is boosting production at the plant of its major rare-earths product, NdPr, from about 400 tonnes a month a year ago to a rate of 500 tonnes a month by April this year.
Under the Lynas NEXT project, she is investing about $35m in capital expenditure to increase production to 600 tonnes a month by early next year.
This will take it closer to the production levels of the world’s largest producer of rare earths, the Mongolia-based China Northern Rare Earth, which produces between 700 and 800 tonnes a month of NdPr.
With the Chinese company using a lot of the rare earths for its own manufacturing, Lynas is boosting its role in the market as the world’s largest independent producer of rare earths.
It’s an important claim as big industrial clients such as Bosch want to be assured of both a significant and a steady long-term supply of the product.
Lacaze has gone a long way towards addressing one of the early concerns of Lynas’s investors — the political issues within Malaysia over the plant.
Michael Evans changed his view as a result of a visit to the plant last year.
“The people of Malaysia’s perception has gone from one of mistrust — or at best, scepticism
— to a much more positive perception,” he says. “The Kuantan locals are now not embarrassed to wear their Lynas uniforms outside work, but proud.”
One of Lacaze’s goals has been to insulate the company from the volatility of the spot market for rare earths by negotiating long-term contacts with major customers.
While none of its contacts are spot price contracts, Lynas recently had a breakthrough with its contact with Bosch. which is on a long-term price basis.
While Lacaze won’t reveal details of the Bosch contract, it is clearly a template for the deals it wants to do with other major customers.
“We think it’s an important flag in the market,” Lacaze says.
“We are very close to striking a deal with a second major user and well progressed on a third. The contracts for various stages of the supply chain give us reliability of demand over time. We are on a strong path to be able to create a business where we have much more resilience in our price as a result of the contracts we are concluding with key customers.”
A crackdown by the Chinese government on polluting illegal rare-earths mining has helped steady prices for the product in the past year. But the market is still subject to major price movements, mainly driven by production shifts in China.
“Our investment proposition is about building a business which is not dependent on those swings and roundabouts,” Lacaze says.
Lacaze says the large number of participants on the call this week, which went for more than an hour, are a reflection of increased investor interest in the company, particularly among institutional investors, as the company becomes more credible.
“That’s a good thing,” she says. “In the past, there have been a lot of day traders, which has resulted in volatility in the market.”
But she also says there is more interest in the market for rareearth products, given the growth of industries such as electric cars, which are big users of the product.
“The segments in which we are operating are intensely interesting,” Lacaze says. “Everyone wants to talk about the electrification of vehicles, which makes us an interesting business for many.”
Lacaze says her goal is to move from ramping up production to creating more value in the deals it is able to do with customers.
There is also more work to do, she says, in paying down debt.
“We expect to continue to improve the robustness of our balance sheet over time.”
Asked to sum up where she sees the company, Lacaze told investors this week: “We continue to look forward with cautious optimism about our ability to improve the business.”
Meanwhile, Lacaze is set to remain at the helm of Lynas for “at least the next two years”.
She has another goal.
“I want to continue to grow the valuation of the business. I want to see Lynas in the ASX 100, which is where it was in its very early years before it produced anything.”
It’s a goal Lynas’s long-suffering shareholders, who are feeling a lot better these days, would certainly endorse.