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Date : 09/05/2023

Lynas Rare Earths

ASX :

LYC

Market Cap : $6.14 Billion

Buy

52 Week Range : $6.02 - $10.30

Share Price : $7.37

Lynas' Malaysia plant license has been renewed until 2024 - firming production anxiety. We recommend a 'Buy.'

Company Analysis

The Global Energy Transition requires $6 trillion worth of metals. This is 5x more than we need today to meet demand over the next 30 years. This is the structural macroeconomic tailwind that Lynas has.

Lynas Rare Earths (ASX: LYC) operated smoothly until February 2023, when they announced license renewal issues in Malaysia. Lynas was bracing for possible supply issues from Malaysia, having received notice from the Department of Atomic Energy that the Atomic Energy Licensing Board (AELB) prohibits importing and processing lanthanide concentrate after 1 July 2023. Malaysia opted to outlaw cracking and leaching of rare earth mined in WA on its shores despite lobbying from Australia, the US, Japan, and the European Union to give Lynas more leeway given the importance of rare earths materials in electrification, electronics and defence applications. However, the fact that the process leaves behind traces of low-level radioactive residue has led Malaysia to take this step.

Lynas was building up inventory ahead of the ban as a complete shift of its Malaysian operations to its Kalgoorlie facility was not possible by July 2023. This headwind resulted in the share price underperforming – down around 16% YTD until yesterday’s announcement.

Our earlier coverage can be viewed by clicking here.

Malaysia Production Ban Lifted until 2024

Lynas announced a variation to the Malaysian operating licence conditions. Lynas Malaysia has been advised that its licence to import and process lanthanide concentrate is now valid until 1 January 2024. This change has been made by the Minister of the Ministry of Science, Technology and Innovation (MOSTI) in response to the appeals filed by Lynas under the Atomic Energy Licence Act 1984.

The licence variation allows the Lynas Malaysia cracking and leaching plant to continue to operate until 1 January 2024. It will remove the requirement for a shutdown at the Lynas Malaysia plant prior to the date. This partial extension of the rare earth production timeline is a positive development that should alleviate the majority of investor concerns.

As a result of this update, we can expect Lynas to upgrade its earnings guidance in the short term, as production expectations are likely to increase. The LYC share price has surged 12% on the back of this announcement – indicating that consensus forecasts for FY23 and FY24 are also being revised.

Lynas’ Kalgoorlie plant continues to be under construction, and this partial extension could allow Lynas to migrate its Malaysian operations to Australia completely. In the long term, this is good news. Bringing operations to Australia means reduced country risk and operating in a much more friendly environment. The short-term downside is a lag in the migration when the Kalgoorlie plant ramps up to full production.

March Quarter shows Lynas continues to Power Through

Operational results in the March quarter were excellent. NdPr production set a new record for Lynas, and Sales Revenue and Sales Receipts increased from the previous quarter. NdPr production of 1,725 tonnes was the highest-ever quarterly production at the Lynas Malaysia plant. This was achieved despite a general shutdown of the Lynas Malaysia plant for over 3 days whilst tie-in works for the mixed rare earth carbonate (MREC) received facility was undertaken.

Total Rare Earth Oxide (REO) production volume was lower at 4,348 tonnes due to a supplier shortage of hydrochloric acid, which led to lower La and Ce production. This shortage did not affect NdPr production, and Lynas could maintain a minimum supply of La and Ce to its key customers.


Source: LYC

The strong NdPr production results from plant efficiency improvements and no significant downtime from external events. Demand for Lynas’ NdPr products from customers outside China remained very strong during the quarter.

Sales revenue increased to $237.1m, and sales receipts increased to $229.2m, despite a decrease in the average selling price. At Mt Weld, Lynas produced sufficient concentrate to feed the Lynas Malaysia plant and, simultaneously build inventory ready for feed-on at the new Kalgoorlie Rare Earths Processing Facility.

The Kalgoorlie Rare Earths Processing Facility (REPF) project has now entered the final phase of major construction activities, and dry commissioning activities have commenced in certain parts of the plant. Lynas retains a target feed-on date for the Kalgoorlie Facility in Q4 FY2023.

The Mt Weld Expansion Project is progressing as planned. Early site activities have commenced. Formal approval of the Minor and Preliminary Works application was received from the Western Australian Environmental Protection Authority (EPA) in March. This allows for early works to be progressed whilst the full approval process is underway.

Additionally, operations in the USA for the Heavy Rare Earths and Light Rare Earths Separation Facility in Texas are also going to plan.

Outlook

It is important to remember that there were 2 reasons for Lynas’ underperformance. While the production hiccup has been temporarily mitigated, the second is that weak rare earth prices continue to persist and are out of Lynas’ control.

While the production jump will cause output to increase, consensus forecasts for FY23 and FY24 earnings will remain subdued due to lower prices. The weakening global economy is the biggest weight that has been placed on EV demand and, as a result, rare earth prices. However, this should begin recovering in the second half of the year as markets begin to pay more attention to the recovery from all the interest rate hikes rather than the damages of the hikes. Hence, there is a potential upside here in the short and medium term. In the long term, Lynas is the largest rare earth stock in the world, excluding China. They have an expanding production profile and a long-term structural tailwind propelling them forward.

Recommendation

The LYC share price jumped over 12% yesterday when the company announced that they have managed to extend the Lynas Malaysia plant’s operating license until 1 January 2024. This means that Lynas’ production will not be disrupted, and they can smoothly migrate their operations to the new Kalgoorlie facility that is under development.

The announcement has given Lynas considerable momentum, and it is now expected to upgrade its guidance. The extent of the upgrade remains to be seen, as we do not know the depth of the ban’s impact. The lack of clarity on this matter has added to the market’s jitters over the LYC share price in recent months.

LYC’s share price has broken above the resistance level of $7.30 (the green line on the chart). From a technical analysis perspective, three consecutive closes above $7.30 will be needed to confirm the break. A confirmed break will then be an indication of bullish sentiment on the stock that can push the price to the next resistance level of $10. Short-term traders can use a confirmed break below $7.30 to stop their losses. A confirmed break below $7.30 will be an indication of bears getting back in control, and it potentially opens the way down to lower levels.

Lynas is the best rare earth stock out there, and in the long-term perspective, these current prices continue to be a very attractive opportunity. With clarity regarding production, the short and medium-term have also become much clearer. Therefore, we maintain our ‘Buy‘ recommendation.

Lynas Rare Earths, Weekly Chart in Semi-log Scale (Source: Metastock)

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