Lynas: an injustice most taxing

The 12-year tax exemption given to Lynas may prove to be the biggest blunder ever. Lynas is projected to make about AUD 6.2 billion in pre-tax profit in 2012 and 2013 and in exchange, we allow them to contaminate our land for free.



By Lee Wee Tak and Soo Jin Hou



Malaysians are no strangers to skewed agreements. From IPP subsidies to guaranteed profits for highway concessionaires, the public has on numerous times endured the consequences of sheer governmental incompetence. Yet, the 12-year tax exemption given to Lynas may prove to be the biggest blunder ever. Lynas is projected to make about AUD 6.2 billion in pre-tax profit in 2012 and 2013 and in exchange, we allow them to contaminate our land for free.



The graph below shows the spectacular rise in rare earth price since Q3 2010. While gold’s bull run has been getting plenty of attention of late, the real star is rare earth, which has taken off to astronomical heights. For Lynas, the price of the rare earths from Mount Weld may increase 15.7 times from JP Morgan’s estimate by the time the Lynas Advanced Materials Plant (LAMP) begins production in 2012.





JP Morgan published their stock analysis on 24 June 2010, just prior to the price break out. They have predicted a ridiculously conservative average price of USD 17.69/kg in 2012. At that price, they have expected Lynas to be breaking even in making AUD 4.8 million in net tax profit in 2012. The price has since shot up to USD 201.35/kg on 22 Aug 2011. Based on linear regression calculated from 3Q10 to 22 August 2011, and extrapolated to 1 January 2012, the price may even surge up to USD278.14.



The following table shows our revised estimates based on JP Morgan’s research. We predict Lynas will make AUD 2.2 billion in 2012 and AUD 4.1 billion in 2013 before tax based on the above linear regression estimation (if the 22 August price of USD 201.35/kg is used, 2012 and 2013 profits would be AUD1.5 billion and AUD 2.9 billion respectively).



No matter what the price would be, Lynas will be able to repay their entire setup cost of AUD 807 million and still be able to make super normal windfall profit within the first year. The profit is expected to double up in 2013 when production from Phase 2 commences.







Certain important assumptions are made in this deduction, and they are:



a) The revenue is directly proportional to the increase in rare earth price.



b) Rare earth prices are able to sustain at an average of USD 278.14.13/kg. This is justified by assuming that the downside risk of new supply sources is balanced by the upside risk of China's continual pull back in production.



c) Production of Phase 2, which will double LAMP's capacity to commence production by 2013. Construction of Phase 2 is scheduled for completion by Q4 2012.



d) In 2012 and 2013, the AUD/USD rates are 0.95 (rate at 25/8/2011) and 0.9 respectively.



e) Exchange rate has impact on revenue (since rare earths are priced in USD) and operating cost (25% of total operating cost to run the Mount Weld concentration plant is denominated in AUD).



JP Morgan has estimated that the internal transfer price of the semi-refined ores from the Mount Weld concentration plant to its Malaysian subsidiary to be approximately 30% of the finished product price. Consequently, from the AUD 6.2 billion pre-tax profit for 2012-2013, only AUD 1.9 billion will be subjected to Australian tax.

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