Security Blanket For Lynas

This story features LYNAS RARE EARTHS LIMITED. For more info SHARE ANALYSIS: LYC

The security of non-China rare earths supply and an above-market view on EV growth has UBS re-initiating on Lynas Rare Earths with a Buy, although not everyone is so enthused.

-Lynas volumes and sales up, prices down
-NdPr price stabilising
-Kalgoorlie processing key
-UBS re-initiates with Buy

By Greg Peel

Lynas Rare Earth’s ((LYC)) September quarter update revealed stronger than expected production and sales but weaker realised prices. This, notes Macquarie, was due to a lower volume of benchmark neodymium/praseodymium (NdPr) in the sales mix.

Aside from NdPr, Lynas produces yttrium, lanthanum, cerium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, and lutetium, in case you were wondering.

The sales mix saw net realised pricing fall quarter on quarter, but due to increased volumes revenue actually grew above expectation.

Lynas had forewarned about a weaker quarter for margins and cash flow due to water outages at its Malaysia processing plant, which have since been sorted. The company is building a water recycling facility and progress on that front provides a catalyst.

Meanwhile over at the Kalgoorlie processing plant, capex guidance has been increased by 15%. While Ord Minnett suggests this is “immaterial”, particularly given the company has a $1bn capital buffer, the plant remains a major stumbling block for the broker.

Ord Minnett remains sceptical that the project is “on time and on budget”. Being “on time” for July 1, 2023, is essential to comply with Malaysian regulations.

A change in the Malaysian government has meant Lynas has been given until that date to shift its processing, and its resultant radioactive waste, to home soil before its licence will be revoked.

Capital Management

Lynas has a development and funding partner in the form of Japan Australia Rare Earths which provided a loan facility that initially came with capital management restrictions – no dividends or buybacks. That restriction has now been lifted, to be replaced by standard financial covenants such as debt-equity and debt service coverage ratios.

Good news for shareholders.

Pricing

The NdPr price is down -31% year to date and has nearly halved from its 2022 high, due to weaker demand and concerns over China’s 25% lift in rare earth production quota.

Macquarie remains bullish on the rare earth pricing outlook, while UBS sees limited further downside risk to NdPr prices and is bullish on the longer term outlook. Ord Minnett agrees NdPr prices appear to have stabilised.

UBS has this week re-initiated coverage of Lynas with a Buy rating, and readily admits to being most positive on the outlook for global EV penetration, forecasting 50% by 2030 against consensus of 35%.

Ord Minnett is more focused on the near term, noting that while the NdPr price is down -31% year to date, Lynas’ share price is only down -19%, despite an historically strong correlation. Valuation currently implies a long term NdPr price of US$100/kg, compared to US$79/kg presently, and the broker’s forecast of US$68/kg.

Hence, Ord Minnett retains a Sell rating. And stands out with a $4.95 target compared to Macquarie’s $9.50 and UBS’ $9.95. Macquarie has an Outperform rating.

Security

China is the world’s leading rare earth producer by a margin. In 2021 China produced 168,000mt, up from 140,000mt in 2020, before a quota was set at 162,000mt. Bizarrely, this led to China having to import rare earths.

But as noted, that quota has since been increased by 25%.

The US produced 43,000mt in 2021 and Australia 22,000mt. In between was Myanmar (26,000mt), but enough said.

The US was slow to realise the importance of rare earths in a new age of not just EVs, but everything from magnets for wind turbines to LED screens on smart phones, as well as military applications. China was the global supplier.

Now there is a sense of urgency for the US to shore up supply of all “strategic” metals. Hence, the Department of Defense has provided Lynas with US$120m in funding to build a Heavy Rare Earth separation facility in Texas.

 

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