Thursday 27 September 2012

Lynas faces cash-flow risk with delays to plant start-up

A general view of the Lynas plant in Gebeng, Kuantan.

KUALA LUMPUR, Sept 27 — Delays in starting Australian rare earth giant Lynas Corporation’s Malaysian plant in Kuantan is a reminder that foreign companies face huge financial risks setting up shop in emerging markets with further hold-ups threatening the miner’s cash flow, the Wall Street Journal (WSJ) has reported.

“With an election in Malaysia looming early next year, political risk there will only intensify. Foreign companies in a sensitive industry can’t be complacent,” the international business newspaper warned yesterday in an article published in its column “Heard on the street”.

Pointing to the Sydney-based company, WSJ noted that Lynas’ business had been hurt by the multiple court cases raised by local environmental groups and political opponents — the latest being a suspension of its activity at the plant pending a hearing on October 4.

Despite securing recently a two-year temporary operating licence (TOL) from the Malaysian Atomic Energy Licensing Board (AELB) enabling it to fire-up the plant, Lynas has been thwarted from doing so at almost every turn, forcing the company to renegotiate its contract with a Japanese lender last Tuesday.

Several grassroots groups have applied for an injunction to block the TOL but are pushing to stop the plant from ever firing up.

Unprecedented public anger against the Lynas plant has been fertilising Malaysia’s green movement and could affect voter sentiment ahead of national polls that must be called by April next year.

“The possibility of an injunction is serious. A major delay in operating the plant could hurt cash flow,” WSJ said.

Several financial institutions estimate that Lynas will incur bigger debts to finance its operations.

The Deutsche Bank estimated earlier this month that Lynas needs about US$120 million (RM372 million) more in working-capital financing to see it through the months ahead, but the reworked contracts cap the amount the Australian miner can borrow in the short term to US$80 million, WSJ reported.

Citing Hong Kong-based financial house CLSA, WSJ reported that Lynas may be forced to sell its stock to raise funds next year if the plant is not operational in the next three months.

Lynas had said in April that delays in obtaining the licence for its facility, which was initially approved in January, may have “very serious consequences” for the RM80 billion worth of rare earth orders already received as it is “sold out for the next 10 years.”

However, Lynas remains upbeat it will be able to operate its RM2.5 billion plant on schedule in October.

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