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Date : 05/09/2022

Lynas Rare Earths

ASX :

LYC

Market Cap : $7.49 Billion

Buy

52 Week Range : $6.21 - $11.59

Share Price : $8.30

The only rare earths producer of scale outside of China. It is expanding and investing to mine more at an accelerated timeline. A maintain a 'Buy'.

Company Analysis

The performance of Lynas Rare Earths (ASX: LYC) since we began coverage has been exemplary. We recommended it at $5.92 and $7.61 in March 2021 and September 2021, respectively. To date, Lynas has returned 40% since we began coverage, and it has been one of the best-performing stocks on the ASX despite the volatility and economic uncertainty looming large.

Supporting its performance are two main factors – Lynas has not put a foot wrong in operations and has been breaking its financial records every reporting season, and it has been a major benefactor from the rising tensions between China and the West, especially given the ‘critical mineral’ tag that has been attached to rare earth metals.

These two factors mean Lynas has macroeconomic and microeconomic tailwinds supporting its rise.


Source: Tradingview.com

Australia’s Critical Minerals Strategy

China alone represents 57% of rare earth production on the planet. Rare earth is also one of the key elements in the development of new technology and in energy storage technology which will be the main catalyst for the transition to green energy. With most current rare earth production being controlled by China, other countries, including the United States and Australia, are looking to build certainty and diversity into their supply chains. Thus, the West, including Australia, have established a list of ‘critical minerals’, of which rare earths are a part of.

Critical and rare earth minerals will underpin the clean energy transition. The global demand for critical minerals is growing. Critical minerals are essential for the energy, transport, aerospace, defence, medical, automotive and telecommunications sectors. They will also be used in further advanced manufacturing applications.

The International Energy Agency’s World Energy Outlook 2021 predicts significantly increased demand for the critical minerals used in solar PV plants, wind farms, electric vehicles, and battery storage. For example, electric vehicles use many critical minerals, and the number of electric vehicles in the world is projected to increase by 30% every year to 2050.

Australia’s 2022 Critical Minerals Strategy will grow our critical minerals sector, expand downstream processing, and help meet future global demand.

As part of the strategy, a $2 billion Critical Minerals Facility is in place to provide loans to the sector. The strategy also provides grants and massively de-risks investment into these industries.

Lynas’ Operations

Lynas Rare Earths was established as an ethical and environmentally responsible producer of rare earth materials and is the world’s only significant producer of separated rare earth materials outside China.

The Lynas Mt Weld mine in Western Australia is one of the world’s premier rare earths deposits. Lynas also operates the world’s largest single rare earths processing plant in Malaysia, where it produces high-quality separated rare earth materials for export to manufacturing markets in Asia, Europe and the United States.

Lynas’ rare earth materials are used in many high-tech and future-facing applications, including electronics, wind turbines and hybrid and electric vehicles. Lynas sits apart from other rare earth manufacturers by offering products with assured provenance from mine to finished products.

Rare earth oxides are mined and initially processed at the Mt Weld Concentration Plant. The materials are then shipped to the 100-hectare advanced materials plant in Gebeng, Malaysia, where the concentrate is separated and processed into high-quality Rare Earth materials.

As part of the firm’s Lynas 2025 growth strategy, the company is expanding its industrial footprint with a planned Rare Earths Processing Facility in Kalgoorlie, Western Australia.

Lynas’ high-quality products include:

  • Neodymium and Praseodymium (NdPr) used in magnets
  • Lanthanum (La)
  • Cerium (Ce) and
  • Mixed Heavy Rare Earths (SEG).


Source: Lynas

Lynas 2025 Growth Vision Plan

Lynas is working toward diversifying its business by 2025. There are 4 key areas for this plan:

  • Ramping up production at Mt Weld, Western Australia, to try and meet the demand growth in rare earth metals.
  • Build a new processing facility in Kalgoorlie.
  • Continue investment in Malaysian facilities to increase processing capabilities, product range, and recycling.
  • Continue its USA operations of providing separation of rare earth and product finishing capabilities.

Company Updates

Lynas has made considerable progress across all its operations. With increased exploration, results have also been robust. It is safe to say that Lynas is working on an accelerated growth plan, which spans across all of its operations – signifying a well-rounded strategy. They plan to produce more rare earth, separate more, and even process more at their facilities.

The Mt Weld Project

Lynas Rare Earths is focused on developing the Mt Weld resource to meet forecast demand growth.

  • Mt Weld is home to high-grade resources.
  • The Tier 1 deposit has a 25+ year life.
  • The mine has been producing higher-grade CZ and LI ore since the beginning.
  • The processing of Duncan ore began in Q1 FY2020.
  • 2,980 kt of Mineral resources contained Total Rare Earth Oxide.
  • 1,648 kt of Ore Reserve contained Total Rare Earth Oxide.

Mining Campaign 4-1

Mt Weld commenced Mining Campaign 4-1 during the year and transitioned from waste mining to waste and ore mining in the final quarter of FY22. Ore mined in this campaign is being transported to the run-of-mine stockpile for future blending. Campaign 3 ores were processed in the mill during the year. Lanthanide concentrate product from Mt Weld was shipped from Fremantle to Lynas Malaysia using commercial and charter shipping.

Very Positive Exploration Results

On 1 March 2022, Lynas announced exploration results from a single deep exploration drill hole into the fresh carbonatite 1 kilometre below the existing Mt Weld pit floor. The Western Australian Government Exploration Incentive Scheme (EIS) partially funded the exploration drilling program.

Analysis of samples obtained from the exploration drill hole revealed:

  • Rare Earth Element (REE) mineralisation was confirmed along the entire 1020m drill hole at an average grade of 2.22% REO, no cut-off grade applied,
  • The weathering process has significantly enriched the REE grade in the weathered saprolite zone due to the relative enrichment of monazite within the Apatite Zones. Apatite Zones at shallower depths show 27m of 7.6% REO (0m to 27m depth below the current pit floor and 65 to 92m below the surface) and 23m of 13.67% REO (42m to 62m depth below the current pit floor and 107 to 127m below the surface),
  • All samples returned REE assay; the highest grade is 21.44% REO from 60m to 62.4m hosted in the apatite zone, and the lowest grade is 0.17% REO in a 4m composite sample from 969m to 973m depth hosted in calcite-rich carbonatite. The results reveal a new exploration target in the fresh carbonatite below the surface weathering zone that is mined within the Life of Mine design.

Mt Weld Expansion will ensure Lynas Produces more, sooner!

On 3 August 2022, Lynas announced an approximately $500m project to expand capacity at the Mt Weld mine and concentration plant beyond the previously announced 10,500 tonnes per annum of NdPr finished product. The expansion is designed to produce sufficient concentrate feedstock to support the production of 12,000 tonnes of finished NdPr oxide per annum. The project has been fully scoped, and the approximately $500m investment for this stage of the project is fully funded from cash flow. This project is based on known technology and includes upscaled processing equipment, efficiency improvements, and enhanced sustainability and will provide a platform for further capacity increases. Two additional stages that offer a pathway to an additional 2,400 tonnes of NdPr oxide finished product per annum are in development.

In addition to this initial expansion project, Lynas plans to implement further sustainability and circular economy activities on the Mt Weld site, including a staged transition from diesel-fuelled power generation to gas and then hybrid renewable power generation, a larger mine and waste rock landforms designed to be progressively rehabilitated, and a surface water management to capture seasonal rain events and divert into managed aquifer/ groundwater recharge that also forms flood protection infrastructure for climate change resilience.

Procurement of long lead equipment items has commenced. Subject to relevant regulatory and stakeholder approvals, construction activities are expected to commence in early 2023, with full operation planned for 2024. Some infrastructure will be brought online to accelerate production growth before the completion date.

The Mt Weld capacity expansion is a brownfield project based on the existing Mt Weld tenure. Comprehensive environmental flora, fauna, and cultural heritage surveys have already been completed on the Mt Weld site and will support environmental approval.


Source: Lynas

Lynas’ Malaysia plant Hits Record Production

Despite ongoing COVID-19, logistics and water supply challenges during the year, Malaysian operations averaged approximately 81% of Lynas NEXT production capacity, sufficient to meet its key customers’ needs.

In the March quarter, a record NdPr production of 1,687 tonnes was achieved, including over 600 tonnes of NdPr production in the month of March for the first time since the pandemic began. An industrial plan has been developed for the Lynas Malaysia plant for capital expenditure over the next two to three years. The planned works include:

  • Ongoing works required for the Lynas Malaysia plant to receive and process the mixed rare earth carbonate (MREC) feedstock from the Kalgoorlie Rare Earths Processing Facility (including facilities for unloading and receiving, sulphate removal and dissolution),
  • the works required in the solvent extraction and product finishing areas to achieve the capacity uplift to 10,500 tpa NdPr finished product;
  • repurposing existing equipment to expand the range of products; and
  • other efficiency initiatives.

During the year, construction commenced on the Malaysian permanent disposal facility (PDF) for WLP residue, and the Malaysian Operating Licence was updated to include a Class G licence for WLP disposal activities in the PDF.

Kalgoorlie facility is a future growth story

The new Rare Earths Processing Facility in Kalgoorlie is a foundation project of the Lynas growth plan. There was continued progress on the facility during the year. Receipt of full approvals for construction of the Kalgoorlie Project was received in February 2022, allowing construction activities at the site to progress.

All five kiln drum sections, the four riding rings, sixteen rollers, two main drives and an auxiliary drive have been lifted into position and assembled. The kiln was rotated under its own power during the final quarter of FY2022.

Work on concrete, foundations and frames for key buildings has progressed rapidly. Tank farm earthworks completed and blinding concrete installed. Waste Gas Plant foundation construction is now underway. The 20,000m3 raw water tank is complete, two 1700m3 water treatment tanks are complete, and the fabrication of two 1300m3 tanks is complete. The key personnel in the Operational and Maintenance Leadership teams have been recruited and commenced work.

Lynas USA is positioning the firm for longevity

In keeping with the Lynas 2025 growth vision to have upstream processing close to the resources and downstream processing close to their customers, Lynas is currently in the planning phase for the proposed U.S. Rare Earths Separation Facility.

Lynas has now received funding grants from the United States Government for:

Construction of a Heavy Rare Earths separation facility in the United States. Following successful completion of the Phase 1 contract (contract announced 27 July 2020), Lynas was awarded a follow-on contract for approximately US$120 million with the U.S. Department of Defense to build a commercial Heavy Rare Earths separation facility in the U.S (announced 14 June 2022). Following completion of the site selection process, the facility is expected to be located within an existing industrial area on the Gulf Coast in Texas. It will house both the Heavy Rare Earths separation facility and the planned Light Rare Earth separation facility (announced on 22 January 2021).

Construction of a commercial Light Rare Earths separation plant in the United States. Lynas was awarded a funding contract with the U.S. Department of Defense or Pentagon for constructing a Light Rare Earths separation facility with funding to be capped at approximately US$30 million, and Lynas contributed a matching amount.

Investment Thesis

Underpinned by record production numbers and high rare earth prices, the 2022 financial year was exceptional for Lynas as the company delivered another record profit. Market conditions were favourable throughout the year, and demand for Lynas’ rare earth materials remained strong. The external environment continued to be challenging due to the COVID-19 pandemic, logistics and the inflationary environment; however, effective solutions were implemented to mitigate these challenges.

Sales revenue rose to $920 million, an increase of 88.1% on FY2021, and a Net Profit After Tax (NPAT) of $540.8 million was achieved, a 244% increase on the FY2021 NPAT. Lynas’ EPS has gone from 18.08 cents in FY21 to 59.95 in FY22.

In the second half of FY2022, in particular, rare earth prices were sustained at high levels, especially the NdPr price, which remained between 70% and 80% higher than at the same time last year. The average China Domestic Price for NdPr during the final quarter of FY2022 was US$120/kg.

Lynas began using a combination of commercial shipping and charter shipping to transport concentrate from Fremantle to Lynas Malaysia during the year, mitigating the risk of unforeseen delays in commercial shipping schedules. As has been reported across the industry, various cost categories have seen significant increases over the past 12 months.

The high commodity prices for rare earths and Lynas’ ever-increasing production numbers have not just offset inflationary costs but have surpassed them by an eye-opening margin.


Source: Lynas

The rare earths market remained strong throughout most of FY22. There was a slight weakening in demand for rare earths for NdFeB magnets inside China during the June quarter due to COVID-19-related lockdowns in several industrial regions in China. However, market prices for rare earths were resilient, especially the NdPr price, which remained between 70% and 80% higher than a year ago.

Lynas continues to receive many approaches from end users seeking to secure their raw material sourcing over the longer term and is engaged in productive discussions with several end users. The NdFeB market continued to record robust growth, despite many downstream industries dealing with a reduced workforce due to the COVID-19 pandemic and the global shortage of semiconductors during the period. This market growth supported the strong demand for Lynas’ NdPr product family and Heavy Rare Earth compound (SEG).

In the longer term, global demand for NdFeB magnets is forecast to grow from 130,000 tonnes of NdFeB magnets in 2020 to 265,000 tonnes in 2030.

Rare Earth Market prices Are Elevated

The average China domestic price of NdPr (VAT excluded) increased from US$64.7/kg in June 2021 to US$124.0/kg in June 2022. Future market price trends continue to depend on end product demand (in particular, in the automotive industry).

Lynas has developed an excellent reputation as a reliable supplier of quality products. Lynas has focused on developing strong customer relationships with strategic customers, primarily outside China. Lynas is the leading supplier of the NdPr family of products to the Japanese market. Demand from key customers has consistently increased over the past few years, with accelerated growth in the last 12 months.

Capex Forecasts show a focus on Growth

While Lynas did not provide guidance, the outlook is extremely robust, given the planned growth strategy. Capital expenditure is expected to be approximately $600 million in FY23 and $600 million in FY24 for sustaining capital and major growth projects. This includes expenditure in respect of:

  • The completion of the Kalgoorlie Rare Earths Processing Facility;
  • The Mt Weld expansion project to increase concentrate feedstock to produce 12,000 tpa NdPr finished product;
  • The Lynas portion, in addition to USG funding for the US Light Rare Earth plant;
  • The construction of the offsite PDF in Malaysia;
  • Works at the Lynas Malaysia plant to receive and process Mixed Rare Earth Carbonate and increase capacity to 10,500 tpa NdPr finished product,
  • Mining development works at Mt Weld;
  • Sustaining capital increases due to increased plant size and preventative maintenance; and
  • Other ongoing operational capital expenditures across all Lynas sites.

Three Reasons Why Lynas is a Solid Growth Stock

  • Lynas has established a well-rounded, accelerated growth plan – Lynas is investing to increase production by mining more and processing and separating more. The Kalgoorlie facility will further boost production numbers.
  • It is the largest producer of scale outside of China – The time for rare earths is right now. The demand has expanded, and the world does not have enough supply. Lynas is currently the only producer of scale that is delivering right away. Lynas has the first-mover advantage.
  • Supportive Geopolitical & Macroeconomic Factors – As an extension to the second point, the first mover advantage has put Lynas on the map among governments. It is now leveraging its position as a scale producer by collaborating with Western governments and defence programs as the ‘critical minerals’ strategy ramps up.

Our earlier report can be viewed by clicking here.

Recommendation

Lynas is the only rare earth producer of scale outside of China. They are leveraging this position to become a strategically important company to Western Governments. It is a rare case of a firm that is materially benefiting from the geopolitical tensions between China and the West. FY22 results have again been record-breaking, and now Lynas is positioned to expand and produce more rare earths at an accelerated timeline. LYC has a very strong investment case, as we have outlined in this report and our previous ones. We continue to maintain a ‘Buy‘ rating.

 

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