Lynas (OTCQX:LYSDY) is one of two big, high-tech rare earths metal material players outside China, the other being Molycorp (NYSE:MCP). The funny thing about Lynas is it's the same size as Molycorp, but here in the U.S. there are Molycorp-holding retail investment strategists who think of Lynas as a "pink sheet penny stock."
Institutional investors are front-running mainstream investor demographics in trading the catalyst of Lynas approval in Malaysia. This raises a quick question with a quick answer. Why is Molycorp going down? Because Lynas is ramping up global supply of rare earths through an inceptive Malaysian plant.
Prior to yesterday's news, a temporary suspension order from a Malaysian court was in effect. The temporary order was the result of a political faction, which leveraged social media environmental protest to exploit generalized fears regarding radioactive byproducts.
The order has been lifted and a successful appeal is highly unlikely.
The $800 million (£502 million) facility near the city of Kuantan had been ready to begin operations in May, but protesters successfully gained a suspension order.
The site has faced strong opposition from local residents who are concerned about the risk of radioactive waste.
Click to enlarge images.
Yesterday's news removed a huge portion of Lynas downside risk. Lynas was engaged in a pseudo-environmental-scientific social media political dispute, which I publicized at the share bottom on Sept. 4.
Rally No. 1 occurred with lucky timing the next day, as you can see on the chart. This is the second time news has produced such a rally. However, I believe this Rally No. 2 has more room to run than Rally No. 1 because the recent court decision was more conclusive, and because a Chinese hard landing is less likely -- meaning the Chinese are demanding more of their own rare earths production.
Analysts were arguing about dilution before Approval No. 2 came through without much delay.
'We believe Lynas will need additional funds to get it through to first cash flows given a likely three month minimum commissioning period,' Deutsche analyst Chris Terry said in a note to clients. 'We forecast that Lynas requires A$120 million and, given a debt cap of a further A$80 million, we assume the remaining A$40 million is sourced through equity.'
Not all have been so quick to downgrade their expectations. JPMorgan analyst Mark Busuttil says that, while any substantial delays could have the company seeking alternative financing, 'at this stage the delay seems only modest.'
As such, he said he would take a cautious stance for now, and kept the company on a Neutral rating with a target of A$1.50.
I think the JPMorgan analyst is winning over the Deutsche analyst and shares are headed toward this price target of US$1.56. The political catalyst exacerbating shareholder dilution risk has been satisfactorily, if not completely, quelled.
The market appears to agree with me, but maybe you should just watch it go up first to make sure. As Tyler Durden freaks out about Obama's reelection and pumps gold, consider a high-tech physical inflation hedge that is not a bet against modernity (gold produces nothing and historically loses value over long periods). Unlike gold, which is purchased directly or through ETFs, what is the common way to establish direct exposure to rare earths? Buy the producers.
Disclosure: I am long OTCQX:LYSDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.