Lynas Rare Earths Stock: The Storm Is Not Over, Yet

Back in March 2023, I published an article on Australian rare earth miner Lynas Rare Earths Ltd (OTCPK: LYSCF)(ASX:LYC). Back then, Lynas’ shares were being raked over the coals after Tesla Inc. (NASDAQ:TSLA) announced plans to open a $5 billion gigafactory in Mexico and, among other things, redesign its PM motor to exclude rare earths. I pointed out that Tesla’s move would only have a minor effect on the NdFeB market, limited to not more than 3% of Lynas’ revenue even if Tesla was to eliminate NdFeB motors across its entire fleet. However, in that piece, I did not address the much bigger elephant in the room: the ongoing rare earths price crash. Lynas shares have tumbled 16.6% since that publication.

Lynas Rare Earths reported its Q3 FY 2024 results on Wednesday, which were disappointing, to say the least. FQ3 revenues fell 58.3% Y/Y to A$101.2M (~US$65.6M) from A$242.8M in the year-earlier quarter. That number came in well below the Wall Street consensus estimate of A$146.3M, largely due to the low average NdPr price (US$47/kg ex VAT). Sales volumes during the quarter declined to 2,310 REOt, good for a 53% Y/Y decline because the company opted to hold all its inventory of SEG, as well as ~500 tonnes of NdPr thanks to low rare earth prices across the board. NdPr is the acronym for Neodymium-Praseodymium while SEG represents mixed rare earths. To get an idea of how much inventory the company held back, Lynas reported that ready for sale production volume clocked in at 3,545 REOt, implying the company only sold 65% of what it produced during the quarter.

Here’s the alarming part: the downtrend in rare earth prices is so far showing little signs of moderating. According to Lynas, last quarter, NdPr oxide prices fell 47% Y/Y; Dysprosium prices fell 20% while Terbium prices were down 52%. More worryingly, in the current year, prices for all three rare earths have continued to slide as the months roll on.

All these belong to the group of 15 lanthanide elements. NdPr is used to produce the world’s most powerful and efficient magnets, key inputs to electrification and advanced technologies including electric vehicles, wind turbines, and various electronic devices. Dysprosium’s is used to make alloys for neodymium-based magnets, used in EVs and wind power motors or generators due to its high resistance to demagnetization at high temperatures. Terbium is used to dope calcium fluoride, calcium tungstate and strontium molybdate, all used in solid-state devices.

“The market continues to be less than kind to us and to anybody else in the rare earths sector,” CEO Amanda Lacaze said on Lynas’ earnings conference call. Lacaze noted a “slight improvement in price, but not at a significantly accelerated rate.”

In the light of low product prices, Lynas announced it will not accelerate production at its Malaysian operations but will instead aim to maintain inventories as it looks forward to a price recovery. Still, the company raised the capital budget for its Kalgoorlie project to A$800M from A$730M it forecast six months ago.

On a more positive note, the company announced that work at its Mt Weld Expansion Project in Western Australia is on track, with construction activities progressing as planned. The project will expand the plant’s capacity to produce the feedstock concentrate required for 12,000 tonnes per annum of NdPr finished product in 2024. The company unveiled the $500m capacity expansion project back in 2022, at the height of the rare earths boom, in anticipation of accelerated market demand, which is, obviously, yet to materialize.

The company is also on track to commence earth works at a U.S. processing plant it is building in Texas by the end of the year. Last year, Lynas signed an updated contract worth $258 million, a more than double increase from the $120 million initially announced in June 2022, with the U.S. Department of Defence (DoD) to construct a heavy rare earths processing facility in Seadrift, Texas. The funding is not linked to the Inflation Reduction Act (IRA), but rather Mr Biden’s executive order 14017 that seeks to secure supply of rare earths for U.S. manufacturers.

Progress in the U.S. remains very positive as well. U.S. government as I think nobody would be surprised is very focused on ensuring that this project moves forward and moves forward as quickly as possible. We’ve received the NEPA, National Environmental Protection Authority approval during the period,’’ Lacaze said during the earnings call.

Lynas’ Texas plant will supply the U.S defense industrial base and commercial manufacturers, thus help to develop a domestic supply of rare earths for the country. The facility will process mixed rare earths sourced from the company’s mine in Western Australia and pre-processed prior to shipping to the U.S. The plant will also process third-party material, with the company working to identify and qualify suitable rare earth inputs as third-party projects come online (implying an additional revenue stream). Then 149-acre industrial site was purchased from Union Carbide Corporation, a wholly owned subsidiary of Dow Chemical Company. Lynas expects the facility to become operational between July 2025 and June 2026 (Fiscal Year 2026).

Lynas does not disclose revenue by geographic regions, so I have no idea what percentage comes from the U.S. market. However, this looks like a win-win for the company and the U.S., although the generous subsidies by the Biden administration definitely played a part in the company’s decision to build a processing plant stateside. Lynas has previously discussed the potential for further downstream manufacturing, with the DoD saying it plans to develop a “circular mine to magnet supply chain”. And, these are not trivial amounts of REE we are talking about here: According to the DoD, the F-35 requires more than 900 pounds of rare earth elements, a single Arleigh Burke DDG-51 missile destroyer requires 5,200 pounds while each Virginia class submarine needs 9,200 pounds.

A Rare Earths Rebound

As is usually the case with most other commodities, an abundance of rare earths is the biggest reason for the current price crash. Rare earth prices surged to their highest level in a decade in 2022, only to reverse course last year on increased production in China as well as slower-than-expected demand growth compounded by the country’s patchy post-pandemic economic recovery. According to data by the

Shanghai Metals Market (SMM), the price in China of praseodymium oxide fell 34% in 2023, while terbium oxide and neodymium oxide have now tumbled to their lowest levels since late 2020.

But China is not the sole culprit here. According to a U.S. Geological Survey study, global rare earths production climbed 10% in 2023, surpassing demand growth. Furthermore, industrial demand continues to be weak thanks to the global economic downturn.

Thankfully, further downside for rare earths is likely to be limited at this juncture, particularly for NdPr oxide, with SMM analyst Yang Jiawen noting that prices are close to the production cost level. Back in February, Guolian Securities predicted a rare earths rebound in H2 2024 with NdPr oxide posting a 800-metric-ton deficit globally in 2024, flipping from last year’s 6,600-ton surplus. Further, China’s rare earths production growth is expected to slow down. Last year, Beijing’s quota issuance for rare earths production clocked in at a record high of 255,000 tons, up 21.4% Y/Y. China accounts for 70% of rare earths mining and 90% of refined output.

“We do expect another increase in production quota for both mining and separation … but not to the extent we have seen last year,” said analyst Ross Embleton at Wood Mackenzie.

During the earnings call, Lacaze agreed with the bullish sentiment regarding Chinese supply:

The Chinese government got out in front of its skis last year with the quotas. So if you will recall, there were three quotas last year. And definitely, those quotas resulted in there being surplus material in the Chinese market. I think that what we’re seeing now is that we’re seeing some tightening of that. And as that continues, we will expect to see some continued firming of the price. But I do think that in this instance, we are seeing some supply side dynamics here and indeed our decision to hold inventory is to ensure that it’s partly also to ensure that we don’t put further pressure in terms of that supply side dynamic.’’

Shares of Lynas Rare Earth have tumbled ~50% from their 2022 highs, roughly in-line with the decline in REE prices, company revenues and cash flows over the period. Lynas’ management as well as several analysts have talked about market tightening with Beijing becoming less aggressive with production quotas. With prices around the pre-2022 boom levels, I agree that prices of key rare earths such as praseodymium oxide, terbium oxide and neodymium oxide could be close to a bottom.

Lynas shares have slipped 1.5% since the Q3 report came out, suggesting the REE price headwinds could be fully baked in. However, there’s no guarantee the shares will not fall further considering their fair value calculated using the more straightforward Peter Lynch formula (Earnings Growth Rate x TTM EPS ) is around $3.50 per share, suggesting 13.0% downside. I reiterate my Hold rating for Lynas, while looking forward to a rare earths rebound.

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.