Lynas Corporation – JPMorgan, raising PT

Lynas Corporation – Elevated RE prices drive valuation uplift, raising PT - LYC announced it has secured a new offtake agreement with "a major Japanese rare earths consumer" for supply from Phase 1 of the Integrated Rare Earths Project (IREP, total output 11ktpa 100% REO). Much of the contract terms are undisclosed due to commercial sensitivities. But, LYC stated that it will sell product to the customer at the prevailing China FOB market price at the time of delivery, plus delivery costs from FOB Kuantan to Japan. We estimate that the contract could be for as much as 1-2ktpa and could involve cerium and lanthanum carbonate products. We also believe the customer could be a large Japanese OEM or automaker. We estimate LYC now has in place offtake agreements and letters of intent covering more than 50% of the Phase 1 REO production and around 50% of the Phase 2 REO production (additional 11ktpa output) from the IREP. Since the start of FY11E, LYC’s rare earths basket price has almost tripled from U$17.42/kg at the end of FY10A to US$50.60/kg as at 27 Sep10. As such, the prevailing average 3QCY10 basket price has increased to US$35.16/kg, well above our previous forecast of US$24.84/kg. In response, we have revised our forecasts to incorporate the 3QCY10 average price. We then inflate prices at CPI and arrive at a basket price of US$39.34/kg at the time of first production (i.e. 22% below current spot). We have also increased our operating cost and currency forecasts (discussed later in this note). The net effect of these changes is a 32% increase in our Group NPV to $1.71/share. Reid https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS-479268-0