Wesfarmers and Lynas Corporation Limited (ASX: LYC)have recently become the talk of the town with regards to the acquisition proposal made by the supermarket giant for the rare earths’ product company, Lynas Corporation.
Lynas is a metals and mining sector company based out of Kuantan, Malaysia, and together with its subsidiaries is engaged in the exploration, extraction, and processing of rare earth minerals across Australia and Malaysia. The recent development with regards to Lynas’ Malaysian operations wherein additional conditions have been levied on its operating license, has encircled Wesfarmers and it is now being scrutinised for any involvement that may have driven the decision of the Malaysian Government.
Recently, Lynas provided an update on the Wesfarmers’ conditional, non-binding indicative proposal to acquire Lynas for $ 2.25 per share, payable in cash, at a premium of 44.7% to the last closing price and a premium of 36.4 % to the 60-day VWAP price of Lynas to March 25th, 2019. The proposal is conditional to the applicability of the existing relevant operating licences in Malaysia over long term.
But Lynas has been facing significant regulatory and licence uncertainty for years especially when the Malaysian Government announced in December 2018 that further conditions would be applied to any licence renewal beyond September 2nd, 2019.
However, on April 5th, 2019, the Prime Minister of Malaysia declared that Lynas may continue to operate if the cracking and leaching of raw materials were conducted offshore before they enter Malaysia to reduce the WLP waste build-up.
Subsequently, Lynas acknowledged on April 8th, 2019, that it is well-progressing with the planning of various options to geographically diversify processing in line with the latest regulations.
Over some time, the company has been developing detailed plans to grow with the market and deliver long term shareholder value in a way that mitigates risk associated with any regulatory changes in Malaysia. Lynas is considering some valuable prime locations in Western Australia for beginning the alternative cracking and leaching process, with maximum proximity to their resource. Besides, the Malaysian business is performing extremely well, and the company plans to update the market as it develops a concrete growth strategy.
Meanwhile, Wesfarmers has been criticized by market experts for its interference and lobbying with Malaysian Government to perhaps harm the interests of its takeover target.
However, Wesfarmers denies all the allegations. It stated that it has in fact conducted detailed discussions with the Malaysian Government to better understand the licensing and regulatory regime affecting Lynas’ operations in Malaysia, and to present its credentials as a potential acquirer of Lynas.
Also, Wesfarmers perceives the recent announcements as positive progress towards satisfactory licence certainty.
Wesfarmers also stressed on the fact that its takeover proposal is dependant on number of conditions and there is no certainty of materialisation of transaction.
As stated by Wesfarmers MD Rob Scott, the company remains open to further discussions with Lynas for a less conditional proposal.
Currently, Lynas has a market valuation of around AUD 1.41 billion with ~ 665.68 million outstanding shares. At the beginning of the market session on April 9th, 2019, the securities of the company were placed at a trading halt, which was lifted after the update about Lynas’ growth plans was released to the investors. Thereafter, the LYC stock price was trending at AUD 2.130, up 0.472% with 4.75 million shares traded till then.
The company released its half-yearly results for the period ended December 31st, 2018, posting the revenue from ordinary activities at AUD 179.8 million and the net profit after tax at AUD 19.02 million. On an adjusted EBITDA basis, Lynas reported a gain of AUD 53.0 million during the period, representing a strong EBITDA margin of 28.3%. The net cash and cash equivalents amounted to ~ AUD 53. 697 million. The operating activities generated net cash inflows of AUD 41.18 million while the investing and financing activities resulted in cash outflows of AUD 26.32 million and AUD 4.14 million respectively.
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