Lynas’ Valuation Key Point Of Contention

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

The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

Lynas Rare Earths' June quarter record production and impressive realised pricing underscore the growing strategic significance of this leading ex-China producer. But have investors become over-enthusiastic?

-Lynas Rare Earths posts record June quarter production
-Japanese demand drives higher realised prices
-Deals with Malaysia, Korea signed
-Analysts divided about current valuation

By Greg Peel

Over the weekend, on the nineteenth in Scotland, Donald Trump signed “the biggest trade deal ever” with the EU, reducing the tariff on imports from Europe to 15% from 30%, subsequent to requirements of EU investment in the US which are, at best, vague.

Despite throwing Trump some red meat, It appears unlikely Australia will strike any deals before this Friday when the pause on “reciprocal” tariffs on the rest of the world and penguins expires.

Meanwhile, the big fish for Trump is China – the pause for which expires on August 12. Critical for China in any trade deal is the lifting of restrictions on the import of US semi-conductors required to progress China’s AI aspirations. Critical for the US is the lifting of restrictions of imports of processed rare earth minerals from China (although some concessions were made as part of the pause).

China produces 90% of the world’s processed rare earth minerals. Included in the other 10% is Australia, and most advanced in that industry is Lynas Rare Earths ((LYC)). If Trump ever gets around to meeting with Albanese, Australia’s rare earth and critical mineral production in general is expected to be an ace up Albo’s sleeve.

Record June Quarter

Lynas’ June quarter NdPr (neodymium/praseodymium) production of 2080t was a record, Ord Minnett notes, well above the March quarter’s 1509t, in addition to the highest received price since July 2022 at $60/kg TREO (total rare earth oxides).

Record production reduced unit costs and allowed a positive cash margin of $16/kg, which was an improvement on the March quarter unit margin of zero. However, the increase in absolute costs of 48% quarter on quarter, driven by a slower than expected ramp-up of the Kalgoorlie processing plant, saw earnings of $30m miss consensus by -35%.

Quarterly production of NdPr exceeded 2kt tonnes for the first time, though it appears the company did not achieve the 10.5ktpa production run-rate in the period as works continued, including process modifications at the Kalgoorlie facility.

Macquarie has now adjusted Its base case to assume under-utilisation of Kalgoorlie as the company focusses on the more cost-efficient LAMP (Lynas Advanced Minerals Plant) facility in Malaysia.

Taking On China

Aside from a record period of production for NdPr, Lynas also achieved the separation of dysprosium and terbium for the first time outside of China in recent history. Rare earths like Dy and Tb are typically found in mixed ore forms, and separation is the complex chemical process of isolating individual rare earth elements from these mixes.

While used in smaller quantities than their light rare earth counterparts, heavy rare earth elements, particularly Dy and Tb, play a critical role in improving the thermal stability and magnetic coercivity of NdFeB (neodymium-iron-boron) magnets.

These properties enable the magnets to maintain their strength even at elevated temperatures, which is vital for applications like electric motors that operate in high-heat environments. Without these heavy rare earths, magnet performance would degrade under thermal stress, compromising the efficiency and durability of advanced systems.

DyTb sales are nonetheless small with respect to volume, and as such Bell Potter does not see these sales as being material to the bottom line at this point. Still, UBS accepts Lynas’ view these additional product offerings will open up new opportunities from a marketing perspective (and better realised pricing outcomes).

Returning to the higher-than-expected TREO realised price of $60/kg, the conference call with analysts noted China’s export restrictions were met with higher magnet output from Japan which lifted Lynas’ sales. New supply chains and pricing agreements are independent of the market index, which is beholden to Chinese pricing.

In May in this year, Lynas announced a memorandum of understanding with the Kelantan State Govt in Malaysia for the supply of mixed rare earth carbonate from the development of ionic clay resources. Little detail has been provided, but management suggested this could provide a potential source of heavy enriched feedstock.

In addition, the company also announced an MoU with Korean company JS Link for the potential development of 3ktpa of NdFeB magnet manufacturing capacity in Malaysia. If this proceeds, it could see Lynas follow the path that US-based MP Materials has taken, Canaccord Genuity suggests. Lynas plans to supply Light/Heavy RE materials to JS Link to support magnet production.

UBS continues to argue we are at the start of the ex-China supply chain story. A recent US Department of Defense deal, while significant, was for 10kt NdFeB versus China’s 250-300kt capacity.

While UBS thinks Lynas is similarly positioned versus its peers in being the surprise recipient for direct potential policy support, the broker argues Lynas is uniquely positioned in that it organically benefits from any ex-China magnet support, given it is the only producer of scale capable of delivering near-term volumes into the downstream sector.

Rarefied Air

In 2023, Lynas signed a deal with the Biden administration to develop the Seadrift RE processing facility in Texas. The project’s costs have surged due to wastewater management complexities, prompting negotiations with the Trump administration for federal support.

Lynas is seeking a larger subsidy, but Ord Minnett believes the “America First” Trump administration has switched its backing to MP Materials in which it will be the major shareholder, and its interests are not served by building a plant for Lynas. Ord Minnett does not expect the grants will be increased.

Also taken into account the CEO’s previous comments, Ord Minnett expects the project will not proceed.

While the potential export to the US of Australian rare earths pre-dates Trump, Trump’s trade war with China has only served to place greater focus on Lynas’ (and other aspiring Australian producers’) capacity to fill the US rare earth void, Australia being (in theory), an ally. A security blanket, if you will. But with such focus comes blind investor enthusiasm.

Ord Minnett continues to consider Lynas’ forward earnings forecasts do not justify a $9.5bn market capitalisation, and once the enthusiasm currently focused on REs shifts to another sector, the share price will slide. Ord Minnett thus retains a Sell recommendation.

While Citi sees the development of an ex-China rare earths market as strategically important and potentially supportive of Lynas’ average selling price, this broker believes the earnings uplift required to justify the current market valuation will remain challenging, and maintains Sell.

Despite Macquarie’s improved production forecast and constructive price outlook, this broker notes Lynas’ recent share price performance has exceeded its increased target price. Lynas is trading with a valuation implying NdPr prices of circa US$100/kg, Macquarie estimates, some 50% above spot. Underperform retained.

While Bell Potter likes the business, asset, and team, this broker echoes significant optimism is already priced into the stock, with investors using it as a hedge on US-China relations. Lynas is well poised, Bell Potter suggests, if or when the tides shift for NdPr, with sufficient installed capacity and leverage. For now, Sell.

By contrast, UBS believes Lynas’ operational footprint looks markedly more stable with Kalgoorlie effectively de-risked and LAMP’s improved standing in Malaysia, an increasingly visible sales outlook with Japan growing and other growth markets taking shape (ie Korea, US, EU, South-East Asia), plus an increasing recognition of Lynas’ strategic value as evidenced by the MP Materials-US Department of Defense deal.

UBS retains Buy. A brief update from Morgan Stanley also sees an Overweight rating retained.

That leaves two Buy or equivalent and four Sell ratings among brokers monitored daily by FNArena covering Lynas Rare Earths. The average target price is $8.86, up from $8.04 prior to the June quarter update, suggesting -17.7% downside from the current traded price.

Target prices nevertheless cover a wide range, from $7.65 (Bell Potter) to $12.20 (UBS).

While Canaccord Genuity also sees the stock as challenged from a fundamental valuation standpoint, evidence of improving market conditions/pricing and high multiples being applied to key peers could continue to support the shares. Canaccord lifts its target to $9.65 from $8.80, downgrading to Hold from Buy.

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