Lynas Can Get Back to Business

09/05/2012 2:52 pm EST


A licensing victory sent shares of the rare-earth miner shooting up, and there's some more room to run, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

US-traded shares of Australian rare-earths miner Lynas (LYSDY) are up almost 50% today on news that the company has received a temporary operating license for its ore processing plant in Malaysia.

(The Sydney-traded shares (LYC.AU) haven’t moved because the news was announced after the close of that market. Lynas is a member of my Jubak Picks 50 long-term portfolio.)

The temporary operating license had been under review by the Malaysian government for seven months after the company received a go-ahead from the Atomic Energy Licensing Board. Community groups near the Gebeng plant had opposed the plant over concerns that the radiation levels produced by the ore concentrator proposed a health risk.

The temporary license is valid for two years. After that, the company can apply to have the temporary license made permanent.

The company has said that it will immediately begin loading ore at its Mount Weld mine in Australia for shipment to Gebeng. Lynas expects the first load of ore into a kiln at Gebeng by the beginning of October.

No doubt this is a major milestone for Lynas—and its stock. The shares have been depressed by the plunging price of rare-earth minerals in the current global economic slowdown, by worries that the company would not get a license for the plant, and by concerns that licensing delays increased the company’s need to raise new capital that weighed on its balance sheet or resulted in dilution of current investors.

I think last night’s announcement removes some of the worries hanging over the stock. Clearly, the delays now have an end point, and just as clearly the company has secured its temporary operating license.

I think a reasonable short-term target for the shares is $1.00 to $1.20 a share, a big jump from today’s 87.5 cents a share (and even bigger from yesterday’s close at 59 cents.)

Political concerns over the license will continue to dampen the stock’s performance. Some opposition politicians have supported local opponents of the plant, and the fear is that an opposition victory would somehow end the temporary license.

I think that’s unlikely on two fronts—the government is likely to win the next election, and even an opposition government might think twice about taking back a legally granted operating license.

The government has to call elections sometime before April 2013. Judging from the already heated campaigning in Malaysia, I think the election will be held well before that time.

The big overhang on the stock, however, remains depressed prices for rare-earth minerals. Actual operation of the Gebeng plant will lesson some of those worries by giving investors data on costs and output. The mix of rare earths produced by the processor will be extremely important, since the prices of common and rare rare-earth minerals differ hugely.

So, I’d look for a move up to $1 to $1.20 over the next few months, with advances from that level depending on actual results from the plant, and evidence of a turn in prices for rare-earth minerals sometime—maybe—in 2013.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Lynas as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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