RHJ
Recently, I wrote an article reviewing the VanEck Rare Earth/Strategic Metals ETF (REMX). While rising geopolitical tensions between the U.S. and China could benefit rare earth prices, I noted that the REMX ETF was overly concentrated on lithium miners and developers and did not have much exposure to rare earths. One alternative that I mentioned was a direct investment in Lynas Rare Earths Limited (OTCPK:LYSDY).
Based purely on in-progress growth projects, I can see a 100% upside on Lynas shares as milestones are delivered over the coming year. There is also an upside risk if China were to further tighten export controls on rare earth minerals, as we could see a bonanza pricing environment for Lynas’ non-Chinese production.
In my opinion, I believe Lynas Rare Earths deserves a buy recommendation.
(Financial figures in this article are quoted in Australian $ unless otherwise indicated)
Company Overview
Lynas Rare Earths Limited is an Australian rare earth elements (“REE”) mining and processing company with mining operations in Australia and processing operations in Australia and Malaysia (Figure 1). Lynas is also looking to expand into the U.S. with a processing facility currently under construction.
Figure 1 – Lynas operations (Lynas investor presentation)
The Case For Non-Chinese Rare Earths
Due to their unique physical and magnetic properties, rare earth minerals like neodymium and praseodymium (“NdPr”) are critically important to modern-day technologies, from electric vehicles (“EV”) to wind turbines (Figure 2).
Figure 2 – Rare earth elements are critical to modern technologies (MP Materials investor presentation)
Demand for NdPr has been booming in recent years, with 45% growth between 2019 to 2023 for NdPr on the back of increasing adoption of new technologies like electric vehicles (Figure 3).
Figure 3 – Demand for NdPr is booming (Lynas investor presentation)
However, the supply of rare earth elements is limited for a number of reasons. First, although rare earths are common in the Earth’s crust, they rarely occur in economic concentrations. Furthermore, due to environmental concerns (rare earths are usually radioactive, and processing them safely can be difficult), processing of rare earths has been concentrated in China. Due to rising geopolitical tensions, western countries like the U.S. are at risk of having their supplies disrupted (Figure 4).
Figure 4 – Processing of rare earths is concentrated in China (MP Materials investor presentation)
That is why there is an increasing push by Western governments to develop rare earth supply chains outside of China.
Business Operations Overview
Mining Operations
Lynas’s primary production asset is the Mt. Weld mine, which is rich in rare earth minerals. In fiscal 2023, Mt. Weld recorded record production of ore concentrate that was processed into 6,142 tonnes of finished NdPr and 16,780 tonnes of Rare Earth Oxides (“REO”).
Lynas is currently in the midst of a $500 million expansion program at Mt. Weld that aims to produce enough concentrate feedstock to produce 12,000 tpa of finished NdPr by the end of 2024.
Processing Facilities
In terms of processing, historically, Lynas’ rare earth concentrates were processed at its Malaysian processing plant. This facility employs advanced processing technologies to extract and refine rare earth elements and has been in operation since 2013.
However, the future of Lynas Maylasia is uncertain, as the Malaysian government had been reluctant to renew Lynas’ permit to import radioactive rare earth concentrates due to environmental concerns. Although the import license was ultimately renewed for three years in October, in an era of elevated ‘ESG’ scrutiny, it is unclear whether Lynas will receive another renewal in 2026.
To mitigate some of this operational risk, Lynas has also commissioned a new $730 million rare earths processing facility in Kalgoorlie, Australia (Figure 5). The Kalgoorlie processing facility has nameplate capacity of 9,000 tpa of mixed rare earth carbonate (“MERC”) and is currently in the final stage of commissioning and start-up.
Figure 5 – Lynas has built Kalgoorlie processing facility for anticipated growth and as a backup (Lynas investor presentation)
Finally, Lynas is also set to begin construction on a U.S. processing facility with a production capacity of approximately 5,000 tpa of light rare earth (“LRE”) products, including approximately 1,250 tpa of NdPr (Figure 6).
Figure 6 – Lynas has also secured financing to construct a U.S. processing facility (Lynas investor presentation)
All told, Lynas’ production is set to roughly double over the coming 12 to 18 months
Consistently Profitable Operations…
A lot can be gleaned from Lynas’s historical financials. We can see that Lynas has been consistently profitable, except for a rare down year in 2020 when operations were disrupted due to Covid. Furthermore, margins have been excellent, with operating margins ranging from 15% in 2019 to 57% in 2022. These two points are consistent with the attractive demand growth mentioned earlier in the article.
In the most recent fiscal year, 2023, Lynas recorded $739 million (-19.6% YoY) in revenues and $278 million in operating income (-47% YoY) (Figure 7).
Figure 7 – Lynas has been consistently profitable (tikr.com)
The YoY decrease in operating income in 2023 was primarily due to lower commodity prices, as rare earth prices softened in 2023 from their record levels in 2022. However, production at Lynas was at record highs in fiscal 2023 (Figure 8).
Figure 8 – Price declines led to reduced revenues but production was at record highs (Lynas investor presentation)
…With Attractive Valuations After Factoring In Growth Projects
A high-level look at Lynas’ share valuation suggests the company’s valuation is stretched, with Lynas currently trading at 21.5x trailing P/E and 20.7x trailing EV/EBITDA, both above the Material sector’s median (Figure 9).
Figure 9 – Lynas’ valuation looks stretched at first glanced (Seeking Alpha)
However, I believe the main reason for Lynas’ premium valuation is due to the company’s growth projects being factored into its valuation without showing the proper revenues and earnings yet.
Assuming the Mt. Weld expansion and Kalgoorlie plant ramp-up proceeds smoothly, Lynas has a line of sight to roughly double production, from 6,142 tonnes of NdPr in 2023 to ~12,000 tonnes of NdPr by the end of 2024.
In fact, investment analysts widely expect Lynas’ revenues to roughly double from $650 million in FY2024 to $1.28 billion in FY2025, as growth projects come online over the next year (Figure 10).
Figure 10 – Financial analysts expect production to roughly double in coming year (tikr.com)
This should lead to EPS of AUD$0.93 (US$0.59) / share in F2025, almost triple FY2023’s $0.34 earnings. If we use 2025 estimates, then Lynas’ valuation suddenly looks much more attractive at 7.8x 2025 P/E.
Using sector median valuations of 17.8x Fwd P/E, I see more than 100% upside to Lynas shares as growth comes online and analyst targets roll onto 2025 estimates over the coming year.
Risks To Lynas
As a commodity producer, the biggest short-term risk to Lynas is fluctuations in rare earth prices. For example, strong selling prices in 2022 boosted Lynas’ operating results to all-time highs. As global growth slowed and financing for EV vehicles became scarcer, demand for rare earths has also taken a hit, and commodity prices softened in 2023.
However, given the positive long-term supply/demand outlook for rare earth elements, I believe rare earth prices should generally be supportive of Lynas’ operations for years to come (Figure 11).
Figure 11 – Sharp supply/demand deficit is expected for rare earths (MP Materials investor presentation)
Another risk to Lynas is related to environmental risk in Malaysia. As we mentioned above, Malaysian environmentalists have been raising concerns over the production of radioactive wastes from Lynas’ processing activities. Although Lynas had been compliant with all relevant regulations and the concentrate import/processing permit was extended for three years, there is always a concern that future governments may overturn prior agreements in order to appease their populace.
One only needs to look at First Quantum Minerals (FM:CA) and its recently shut Cobre Panama copper mine to see how governments can renege on prior investment agreements in order to appease environmentalists and win votes.
Finally, on the upside, rising geopolitical tensions between China and the U.S. are leading to China controlling the export of rare earth elements and their related processing technologies. If tensions boil over and China bans the export of rare earths, we could see a sharp spike in rare earth prices, which could be a bonanza for Lynas and its non-Chinese supply.
Conclusion
Lynas Rare Earths is a leading pure-play miner and processor of non-Chinese rare earth elements. Lynas produced over 6,000 tons of NdPr in 2023 and is on track to double production by the end of 2024.
Using 2025 estimates, Lynas looks reasonably valued, trading at just 7.8x Fwd P/E and 9.6x Fwd EV/EBITDA. I believe there is 100%+ upside to Lynas shares as the company’s growth projects come online and analysts roll onto 2025 estimates. There is also an upside risk of a bonanza pricing environment for Lynas’ non-Chinese production, given rising geopolitical tensions between China and the U.S. I rate Lynas a buy.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
