Lynas Corporation: One Step Forward, Two Steps Back

After seemingly never-ending delays, Lynas Corporation (ASX:LYC), a company focused on creating a fully integrated source of rare earths from mine to market, is ready to produce its first product samples.

The announcement was made in the company’s latest quarterly report, despite that fact that Lynas still has to win one more legal battle concerning its Malaysia-based refining facility.

The report notes that for the three months ended December 31, 2012, its Western Australian operations generated 15,200 dry tonnes of concentrate containing 5,410 tonnes of rare earth oxide (REO). This material is now ready for export.

Firing up operations

At the same time, Lynas announced the successful commissioning of the cracking and leaching extraction units at its Lynas Advanced Materials Plant (LAMP) in Malaysia. The report states that, “[t]he process has achieved recovery rates of more than 90% of contained Rare Earths oxides through the cracking units. The mixed Rare Earths sulphate is now being fed into the solvent extraction units for ultimate production of individual Rare Earths products.”

The LAMP facility has been under constant scrutiny as far back as 2007, when the Malaysian government gave Lynas the green light to build in an industrial park near Kuantan. Since then, the firm has come up against constant legal battles and substantial delays, leading some to question whether the company’s project would ever get off the ground.

These concerns have now been sidelined: Lynas anticipates initial commercial product samples to be available later in February, and the ramp up to nominal Phase 1 capacity is expected over the coming months.

Legal battlefield

Lynas has shown confidence leading up to its final legal battle, which will involve a judicial review of its operating license. However, as with so many things related to this project, the process now seems far from simple.

While the hearing was initially scheduled for last week, Lynas’ quarterly report notes that it has once again been postponed to allow the Malaysian court to deal with “preliminary matters” — no new due date has been set. On a brighter note, the Kuantan High Court last week denied Save Malaysia Stop Lynas’ second application for leave to seek a judicial review on the awarding of a temporary operating license (TOL) for the LAMP.

Negative exposure continues

Despite Lynas’ brave front, the LAMP continues to attract negative publicity. Wong Tack, chairman of Himpunan Hijau, an environmental group, said that his organization will burn the facility down if Malaysia’s government fails to shut it following elections later this year.

Wong told The Malaysian Insider that the anti-Lynas group will burn down the refinery out of “anger and frustration” if the ruling Barisan Nasional coalition retains power. The group will also resort to arson if Pakatan Rakyat, another coalition, wrests control, but fails to fulfil its promise of shutting down operations.

Scathing report

Adding to these concerns is a recently published report by Oeko-Institut, a German environmental research group. It criticizes the LAMP facility’s environmental impact and storage of radioactive waste.

Storage of radioactive and toxic waste on site does not prevent leachate from leaving the facility and entering the ground and groundwater, according to the researchers. In fact, the report, conducted on behalf of Save Malaysia Stop Lynas, notes that the site lacks a sustainable concept for long-term disposal of radioactive wastes under acceptable conditions.

Oeko-Institut outlines that while wastes generated in the refining process will be stored in designated facilities on the site, there will be issues related to the pre-drying of wastes that have high thorium content. It goes on to add that the storage areas are only isolated with a 1-millimeter thick plastic layer and a 30-centimeter thick clay layer, which it deems insufficient to reliably enclose several meters of wet waste.

Of even more concern for the Institut is one of the most serious abnormalities surrounding the project: the fact that relevant data is missing from documents and is preventing reliable accounting for all toxic materials introduced.

“The current approach towards ensuring that the necessary funds for facility de-commissioning, cleanup and waste isolation are in place and secured is neither state-of-the-art nor reliable and transparent,” the report concludes.

Pushing forward

Although it is fighting battles on all fronts, Lynas continues to push forward. With its share price hovering just above a one-year low, management is all too aware that nothing short of a surge in production and a notable rally in market prices will do.

A lot needs to happen within the marketplace to justify the project’s current costs, from both a production and legal standpoint. In its quarterly report, Lynas said that compared to the preceding quarter, the average “basket price” for rare earths fell 19 percent in the December quarter, to $US42.92 a kilogram, on a China free on board (FOB) basis. It also noted that the price fell by 15 percent, to $US26.02 per kilogram, on a China domestic basis.

“Prices on both domestic and FOB China basis are down significantly from the same time last year as prices stabilise after a period of high price volatility,” it said.

The forecast total cost for the project remains unchanged, and there has been no alteration to the estimated capital cost of the Phase 2 expansion, according to the company. It believes that its first cash flow from the Malaysian plant will come in the 2014 financial year; however, considering the manner in which this project has proceeded so far, investors should take that prediction with a grain of salt.

 

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.

Related reading: 

Lynas Rare Earth Plant Starts Production

Future of Lynas Rare Earth Project Looking More Positive

Lynas Corporation: The End of the Road?

Lynas Project Delayed Once Again

Lynas Operating License: Potential Game Changer for Rare Earths Market?