No. of Recommendations: 6
Lynas Corp (LYC) was the main thrust of my rare earths posts back here.

I’ve put this post in a new thread as it is of interest to anyone who is investing in pretty much any sector.

Since my original post the issue of funding has loomed large at Lynas. As I said in my original post, Lynas had arranged funding through production for the entire first phase of their Rare Earths project at Mount Weld.

Lynas pulled a bit of a blinder in the spring by organising all it’s funding before the world went to hell in a handcart. The funding came in three parts.

1. A senior debt facility secured with HVB for $95m fixed at US SIBOR + 3% prior to completion changing to + 2.5% after.
2. A convertible loan note at 8.25% convertible at US$1.359 per share. Interest is payable in kind at the option of Lynas. Thereby reducing any drain on cash prior to full production.
3. An equity portion in two parts raising $154.5m at $1.15 and $1.26.

I also made the following point

3. The conditions precedent for the release of the money from the bond and the senior debt are still to be fully met. As far as I can see the remaining condition is the completion of sales contracts. To date these are 70% covered. It’s a concern but the investment case here is one of supply constraint so this ought not to be a problem.

In a nutshell the finance is arranged but the money sits in escrow until all the conditions are met. Although Lynas still pays interest.

On the 24th December (yes Christmas eve !!) they released the following statement

..Lynas corp continues to work with its bondholders to satisfy the conditions precedent to release of the US$95 million bond funds (plus interest) from the escrow account……….Lynas remains confident that the conditions precedent will be satisfied before 31 January 2009.

Needless to say the share price cratered and combined with the efforts of a huge institutional seller the shares went to 17cents. They recovered back to over 30cents fairly quickly as investors realized it was little more than an update, albeit on an unusual choice of day. What we do have now is a deadline.

I took that opportunity to remind myself of the conditions being discussed. They are (from the annual report verbatim).

Environmental approvals, which have all been obtained
Finalisation of all engineering reports, which are all now complete
Completion of sales contracts, which are substantially advanced
Demonstration of full funding of the rare earths project
Other customary banking conditions.

Seems fair enough.

On the 13th Jan we got this announcement.

lynas signs 6th customer agreement and satisfies the senior lenders requirements for customer off-take contracts

So we can tick that off.

Then on the 23rd we got this rather suprising announcement.

….Lynas has agreed to accept the offer of an A$30,000,000 facility with … YA Global…

The same YA Global that EMED have a facility with IIRC. A bit of a surprise as they already had all the funding they needed but maybe it was to satisfy the bondholders that they had a sufficient contingency in place. Maybe to satisfy the proof of full funding.

Anyhow, as far as I can tell that only leaves the customary banking conditions. Things like sub-contractor agreements and indemnities. Nothing heavy.

However, the deadline looms large and scary. The SP kind of does nothing between 26 and 30 cents.

On the 29th they go into a standard two day trading halt pending an announcement. During this time they release the quarterly update which shows the project is on time and under budget. All systems go for an on time production start. They also have $71m in the bank so don’t need any cash right now and are far from over a barrel with the lendors.

Yesterday they went into suspension from quotation ..pending release of an announcement by the company concerning its convertible bond facility..

So that’s where we are.

You are probably wondering why this might be of interest to you if you aren’t an investor. If you head back up there you will see the details of the convertible. The conversion price in US$ equates to A$2.15. The current share price is 26cents. It’s fair to say that Lynas got it’s funding at the top of the market and those terms now look a bit pants if you are the bondholder. Particularly as the interest can be paid in further issuance. It seems to me that the bondholder is doing all they can to get out of the deal.

This is an interesting situation and makes investment decisions even harder. A company with all it’s funding arranged can still have the rug pulled out from under it if those providing the funding change their minds. The only safe investment is one where cash is raised via an equity deal and that cash is in the bank. I'm now going back through my holdings and watchlists to see who else may be in this situation. Having funding arranged suddenly seems like a meaningless statement. I suspect a lot of these "arrangments" have plenty of clauses that allow the lenders to change their minds.

Meantime I must wait to find out if they get the cash or not. If they do the SP will probably double overnight, if not it will collapse. Interestingly I am not sure which is the better situation. Lynas has an asset value including $71m in cash that easily exceeds it’s market cap. The resource is strategically important and someone (probably Goldmans) would come up with the money to fund it in a heartbeat. If the current bondholder pulls out Lynas have plenty of money and could take as long as it likes to find a new source for that part of the funding. Things would slow down and be delayed but it's by no means a life or death deal. In the meantime I would get the chance to back the truck up and fill it with shares priced at cents on the dollar. On the other hand, getting the deal done would provide a bit of jam today rather than tomorrow.

We continue to live in interesting times.

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