lynas patersons buy rec

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 1

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility

or liability on any account whatsoever on the part of this firm or any member or employee thereof.

RESEARCH NOTE

LYNAS CORPORATION LIMITED

Phase2 nearing completion

Lynas Corp. (LYC) has reported its first half accounts with the main item being the loss for the period ending 31-Dec-12 of $56.6m compared to the $38.5m loss in the previous corresponding period. This is larger than we had anticipated but reflects the ongoing ramp-up work for Phase1 at the Lynas Advanced Materials Plant (LAMP). We expect that first product will be in the coming week and that LYC will be reporting revenues in the June 2013 Quarter.

At 31-December, Phase2 was 90% complete. We expect that since then it has reached even closer to practical completion and the Company will be ramping-up Phase2 during the course of 2013. The workforce is starting to decline as construction work is nearing conclusion. We expect that by the end of 2013, the LAMP will be operating at the full design capacity of 22ktpa rate.

Cash on hand is $226m, of which $37m is restricted for the completion of Phase2. There is $90m of spending planned for the March quarter, of which the main items are $27m for Phase2 construction, $40m for the ramp-up of Phase1, and $7m for interest payments.

The series of legal challenges brought by the SLSM protest group have all been rejected so far. There is one remaining before the courts against the Ministry of Science, which was due to be heard in February but has now been postponed. We believe the strength and number of legal precedents will stand up well for LYC.

Rare Earth Prices have flat-lined at around $37.50/kg over the past couple of months. This is well below the levels of over $100 from last year but will still provide very healthy margins for LYC, which we expect to have operating costs of about $24/kg in the ramp-up stage and gradually declining to around $12/kg in steady state.

At the current market cap, investors are paying for the build cost of the plants at Mt Weld and Kuantan and almost getting for free one of the world’s largest and richest rare earth deposits. Further, there is little value being factored in for the future earnings that are imminent. LYC is trading at 5x and 2x PE on FY14 and FY15 earnings. It is trading at 1x EV/EBITDA on FY15. Accordingly, we retain a Buy recommendation with a price target or $2.08/share.

24 February 2013

12mth Rating BUY

Price A$ 0.57

Target Price A$ 2.08

12m Total Return % 264.2

RIC: LYC.AX BBG: LYC AU

Shares o/s m 1960.8

Free Float % 90.0

Market Cap. A$m 1117.7

Net Debt (Cash) A$m 172.8

Net Debt/Equity % 78.1

3m Av. D. T’over A$m 16.91

52wk High/Low A$ 1.25/0.55

2yr adj. beta 1.92

Valuation:

Methodology DCF

Value per share A$ 2.08

Analyst: Andrew Harrington

Phone: (+61 2) 8238 6214

Email: [email protected]

12 Month Share Price Performance

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On the cusp of Rare Earth Sales

Year End June 30 2012A 2013F 2014F 2015F

Reported NPAT ($m) (87.8) (76.2) 227.1 578.0

Recurrent NPAT ($m) (71.8) (76.2) 227.1 578.0

Recurrent EPS (cents) (3.9) (3.7) 11.1 28.2

EPS Growth (%) na na na 154.5

PER (x) (14.6) (15.3) 5.1 2.0

EBITDA ($m) (66.8) (63.1) 257.3 617.6

EV/EBITDA (x) (18.6) (22.9) 4.8 1.1

Capex ($m) 350.9 205.0 36.6 35.3

Free Cashflow (420.4) (250.4) 201.0 563.3

FCFPS (cents) (22.8) (12.2) 9.8 27.5

PFCF (x) (2.5) (4.7) 5.8 2.1

DPS (cents) 0.0 0.0 0.0 0.0

24 February 2013 Lynas Corporation Limited




Below is a summary of the key points from a recent Lynas company presentation to analysts (plus some additional background information in response to some of the regular questions we receive). The presentation included Nick Curtis, Executive Chairman, Eric Noyrez, President & COO, and Luisa Catanzaro, the new CFO.

Mt Weld: Still the largest and richest Rare Earth deposit anywhere. The concentration plant has been idled since May 2012 as it has built up more than enough ore and stockpiled concentrate. It has 15.2kt of concentrate at 35% REO, which is about 6 months of supply for the Phase1 plant in Malaysia. It has been shipping material since November 2012. The Phase2 expansion of the Mt Weld mine and concentrator plant is about 70% complete and is expected to be finished by April-13 in order to match the expansion of the LAMP to full capacity.

At full capacity the LAMP will only require the mining of about 250ktpa and the production of 65-70ktpa of concentrate. So it is a very small scale mining operation. LYC plans to mine in short campaigns of approximately 750kt, which will then be concentrated over a three-year period for shipping to Malaysia. Concentrate is placed in 2t bulker bags and transported in shipping containers to Fremantle, then shipped to Kuantan in Malaysia.

Figure 1: Mt Weld Flotation Cells Figure 2: Mt Weld Thickener Area

Source: LYC Source: LYC

Lynas Advanced Materials Plant (LAMP): Phase1 is complete and producing. It is ramping up to design capacity of 11ktpa of REO products. First deliveries to clients are anticipated late February/early March. Revenues next quarter with, shipping times, customer qualification, and invoice terms pushing the first paycheck to after the end of March.

Phase2 is more than 90% complete and will be ramped up in parallel but behind Phase1 during 2013. The remaining capex to complete everything is $37m. There is no more capex after this. The plant is all completed in this fiscal year ending June-13 and it is likely that by the end of this year LYC will be producing at the full nameplate rate of 22ktpa.

The Company has been testing both the Mt Weld plant and the LAMP with consistent feedstock and with high/low grades in order to find the tolerances.

The Temporary Operating Licence (TOL): All of LYC’s approvals are for the full capacity of 22ktpa so there is no new process required in Malaysia for the expansion. It was LYC’s own decision to construct the plant in 2 phases.

All new licences in Malaysia are “temporary”. If the plant operates safely and within its licence conditions for the first 2 years then the licence just becomes a regular operating licence.





There is no condition requiring LYC to export waste. The licence condition requires that a permanent disposal facility (PDF) be identified this year for storing all of the solid wastes. The Company has already made the first of 5 $10m payments for the expected cost of the PDF. Alongside this, LYC has made a voluntary undertaking to reprocess the waste and sell the material as roadbase/construction material. The original plan was for long term storage at site which would have lasted several decades but, because of the sensitivity from local community, LYC has made its undertaking to reprocess and export and is actively discussing with potential customers.

The Company will be holding an analyst site visit at the LAMP on 19 March.

Figure 3: LAMP Waste Gas Treatment Plant and Rotary Kilns Figure 4: LAMP Leaching, Extraction and Product Finishing

Source: LYC Source: LYC

Why LYC chose to set up in Malaysia: The key reasons are 1) lower cost of construction and labour, 2) the government actively lobbied to have the plant located there and granted LYC a 12-year tax holiday as an incentive, and 3) the location has many existing chemical and petrochemical plants that can supply cheap energy, water, and consumables for the rare earth process.

Other Matters: The government recently approved another project, at Bukit Merah, whose operation has much higher radiation than the LAMP.

The most interesting anecdote from the presentation was that Nick Curtis attended the World Economic Forum and had a positive meeting with the Malaysian Prime Minster and Minister for Science while in Switzerland.

Production from Phase1 is 90% contracted. Prices will be on a “China plus” basis which will be roughly in line with the published China FOB prices, ie roughly 50% more than the Chinese domestic price. LYC readily admits though, that it is a new supplier and it will be a price taker for its products. Even though it does not sell only individual Oxides, market pricing is based on the oxide equivalent of the finished product from the LAMP. We calculate using the published individual REO pricing and multiply by the individual REO proportions in the LYC resource to achieve the average pricing for the basket per kilo. Our long run price assumption is $40/kg.

The total quota of REO exports from China (the world’s largest producer) for CY13 is expected to be only 31kt, which makes LYC a very important supplier outside China.





Lynas Corporation Ltd (LYC) 0.57 Year End June 30Valuation A$m A$/sh Commodity Assumptions 2012A 2013F 2014F 2015F 2016F

Mt Weld 4554 $2.23 A$:US$ 1.03 1.04 1.01 0.98 0.95Crown Polymetallic 25 $0.01 Mt Weld REO suite (US$/t) 118648 43110 40705 41525 42362Kangankunde- Malawi 60 $0.03 Mt Weld REO suite (US$/kg) 118.65 43.11 40.70 41.53 42.36NTU Shares 2 $0.00 Lanthanum (US$/kg) 62.77 17.56 26.11 26.64 27.17Exploration 50 $0.02 Cerium (US$/kg) 60.17 15.15 13.06 13.32 13.59Forwards 0 $0.00 Neodymium (US$/kg) 220.63 88.25 81.24 82.87 84.54Corporate (270) ($0.13) Praseodymium (US$/kg) 210.07 90.63 81.24 82.87 84.54Unpaid Capital 0 $0.00 Samarium (US$/kg) 95.37 34.56 13.78 14.06 14.34

Cash 226 $0.11 Dyprosium (US$/kg) 1686.62 660.84 333.65 340.37 347.23Debt (399) ($0.20) Europium (US$/kg) 3683.99 1740.76 1508.67 1539.07 1570.08NAV 4,248 $2.08 Terbium (US$/kg) 2867.04 1600.95 1740.77 1775.85 1811.63

@ 10% Discount Rate

Price Target (1.0 x NAV) $2.08 Production Summary 2012A 2013F 2014F 2015F 2016F

Sensitivities -10% 0% +10% Lanthanum 0 186 2,704 5,242 5,613

Rare Earth Prices $1.77 $2.08 $2.38 Cerium 0 340 4,956 9,608 10,288Neodymium Price $1.96 $2.08 $2.19 Neodymium 0 135 1,961 3,803 4,072A$ : US$ $2.35 $2.04 $1.79 Praseodymium 0 39 564 1,094 1,171

Samarium 0 17 241 467 500

Valuation Summary of Operating Assets Dyprosium 0 1 13 25 27

Europium 0 3 47 91 98Terbium 0 0 7 14 15Total REO Production (t) 0 728 10,602 20,555 22,012Cash Cost (US$/kg) $86.34 $14.63 $11.89 $12.08

Profit & Loss (A$m) 2012A 2013F 2014F 2015F 2016FSales Revenue 0.0 28.1 431.6 877.1 987.0Other Income 2.8 3.9 3.4 10.0 20.5Operating Costs 38.1 55.1 137.0 228.0 256.4Exploration Exp. 0.0 0.0 0.0 0.0 0.0

REO Production Summary Corporate/Admin 31.6 40.1 40.7 41.5 42.4

EBITDA (66.8) (63.1) 257.3 617.6 708.8Depn & Amort 5.0 5.7 10.6 20.6 22.0EBIT (71.8) (68.9) 246.7 597.0 686.8Interest 10.1 20.3 19.6 19.0 14.7Operating Profit (82.0) (89.1) 227.1 578.0 672.1Tax expense (10.1) (12.9) 0.0 0.0 0.0Minorities 0.0 0.0 0.0 0.0 0.0NPAT (71.8) (76.2) 227.1 578.0 672.1Significant Item gains(losses) (15.9) 0.0 0.0 0.0 0.0Normalised NPAT (87.8) (76.2) 227.1 578.0 672.1

Cash Flow (A$m) 2012A 2013F 2014F 2015F 2016FAdjusted Net Profit (87.8) (76.2) 227.1 578.0 672.1+ Interest/Tax/Expl Exp 0.0 7.4 19.6 19.0 14.7- Interest/Tax/Expl Inc (2.4) 7.4 19.7 19.0 14.7+ Depn/Amort 5.0 5.7 10.6 20.6 22.0

Reserves & Resources +/- Other 0.5 25.2 0.0 0.0 0.0

Reserves Mt Grade (%) REO (kt) Operating Cashflow (79.8) (45.3) 237.7 598.6 694.1Mt Weld 9.7 11.7 1,138 - Capex (+asset sales) 350.9 205.0 36.6 35.3 36.0Resources Mt Grade (%) REO (kt) - Working Capital Increase (10.3) 0.0 0.0 0.0 0.0Mt Weld - CLD 14.9 9.8 1,465 Free Cashflow (420.4) (250.4) 201.0 563.3 658.1Mt Weld - Duncan 9.0 4.8 432 - Dividends (ords & pref) 0.0 0.0 0.0 0.0 0.0Kangankunde- Malawi 2.5 4.2 107 + Equity raised 1.2 169.7 0.0 0.0 0.0Crown Tantalum & Niobium Deposit 37.7 1.2 437 + Debt drawdown (repaid) 190.7 (4.0) 0.0 (50.0) (100.0)Total 64.2 3.8 2,442 Net Change in Cash (228.5) (84.7) 201.0 513.3 558.1

Cash at End Period 205.4 120.7 321.7 835.0 1393.1

Directors Net Cash/(Debt) (197.6) (278.4) (77.3) 486.0 1144.0

Name Position

Nick Curtis Executive Chairman Balance Sheet (A$m) 2012A 2013F 2014F 2015F 2016FDavid Davidson Non Executive Director Cash 205.4 120.7 321.7 835.0 1393.1Jacob Klein, Ziggy Switkowski Non Executive Director Total Assets 1023.7 1081.7 1343.3 1911.2 2507.6Liam Forde, Kathleen Conlon Non Executive Director Total Debt 403.1 399.1 399.1 349.1 249.1Substantial Shareholders Shares (m) % Total Liabilities 460.2 451.9 486.4 476.3 400.6Morgan Stanley 87.6 4.5% Shareholders Funds 563.5 629.8 856.9 1434.9 2107.0Union Investment GM 31.7 1.6%Vanguard Group 20.4 1.0% RatiosVan Eck Associates 17.9 0.9% Net Debt/Equity (%) 35.1 44.2 9.0 na naNick Curtis 16.0 0.8% Interest Cover (x) na na 12.6 31.5 nmJP Morgan Asset Management 15.3 0.8% Return on Equity (%) na na 26.5 40.3 31.9

Gearing (%) (54.7) 26.0 30.7 0.0 0.0Transamerica Investment 8.7 0.4%

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Recommendation History

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Date Type Target Price Share Price Recommendation Return

02 Feb 12 Event Impact Email 2.90 1.34 B

19 Mar 12 Research Note 2.75 1.22 B -8.6%

01 May 12 Event Impact Email 2.75 1.13 B -7.8%

15 May 12 Resources Review 2.12 0.97 B -13.8%

05 Sep 12 Event Impact Email 2.75 0.60 B -38.7%

31 Oct 12 Research Note 2.44 0.73 B 22.7%

08 Nov 12 Event Impact Email 2.44 0.72 B -1.4%

21 Nov 12 Resources Review 2.31 0.66 B -9.0%

30 Nov 12 Event Impact Email 2.31 0.69 B 5.3%

19 Dec 12 Research Note 2.33 0.58 B -15.9%

07 Jan 13 Event Impact Email 2.33 0.63 B 7.8%



06 Feb 13 Event Impact Email 2.33 0.61 B -8.3%

Current Share Price 0.57 -5.8%

Stock recommendations: Investment ratings are a function of Patersons expectation of total return (forecast price appreciation plus dividend yield) within the next 12 months. The investment ratings are Buy (expected total return of 10% or more), Hold (-10% to +10% total return) and Sell (> 10% negative total return). In addition we have a Speculative Buy rating covering higher risk stocks that may not be of investment grade due to low market capitalisation, high debt levels, or significant risks in the business model. Investment ratings are determined at the time of initiation of coverage, or a change in target price. At other times the expected total return may fall outside of these ranges because of price movements and/or volatility. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. This Document is not to be passed on to any third party without our prior written consent.

lynas patersons buy rec

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