Shares in Value Logo
Product Review Img Vertical

Date : 15/09/2021

Lynas Rare Earths

ASX :

LYC

Market Cap : $6.40 Billion

Buy

52 Week Range : $2.27 - $7.82

Share Price : $7.61

Lynas is the largest producer of Rare Earths outside of China and is thus a monopoly for the highly sought after metals. We recommend a "Buy" again.

Company Analysis

Rare earth exploration and development is one of the hot topics in the markets. Thus, we have covered this subject, multiple times during the year, presenting different opportunities you can seize to grow your investment along with this nascent market. One of the companies we really like is Lynas Rare Earths (ASX: LYC). We recommended this stock a few months ago, in March, while it was priced at $5.92 per share. Since then, the LYC shares have progressed well. At the time of writing, Lynas is trading at $7.61 per share, an appreciation of 28.5%.

The reason we like Lynas is that it is the leading and the largest rare earth company outside of China. Prior to diving into the details of the potential that this business can offer, let us discuss why the rare earth industry matters, and what are the factors that drive this highly expanding market.

word image 7
Source: Tradingview.com

Lynas, a critical global producer and contributor for a highly expanding market

To understand Lynas, we need to first understand rare earth metals. Rare earth is a commodity, and its price is determined by supply and demand forces. Rare Earths are a group of 15 elements in the periodic table known as the Lanthanide series, plus Yttrium and Scandium. These minerals are used in the manufacture of many things we use every day – from smartphones to cars, electrical appliances, medical equipment, and importantly, hybrid and electric vehicles. Appliances in military and defence and military jets are also another area where rare earth is used. They are often called the vitamins of the modern industry as they improve technologies. For instance, a single smartphone contains 8 different rare earth materials. An electric vehicle contains an average of one kilo of rare earth metals.

It goes without saying that rare earth is a key resource for the development of technology for various applications. We have identified two major catalysts that could massively support Lynas to remain in the long run the world’s leader in the production and distribution of rare earth minerals, (1) Geopolitics, (2) growth in demand and in consumption.

  1. Geopolitics: We are all aware that there are latent tensions in the geopolitical scene which has been particularly exacerbated from the recent trade tension between the West and China. It is worth noting that 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 now looking to build certainty and diversity into their supply chains. This includes promoting domestic production, particularly for the valuable Neodymium and Praseodymium rare earth, which are widely used in permanent magnets such as for EVs and wind turbines for instance. Another aspect of the cruciality to control rare earth metals is due to defence applications. The control of the rare earth’s market provides China with a potent political and strategic weapon. Hence, China may have the ability to leverage its position in the future with increasing geopolitical tensions. More importantly, it has been recently reported that China is now looking again to restrict production and exports of finished products. In late September 2020, President Trump signed an Executive Order declaring a national emergency in the mining industry with a special mention to rare earth and scandium. This order was intended to bring more control over the supply chain and generate domestic production. Therefore, the US provides an obvious jurisdiction to set up critical mineral operations. More recently, the US return to the Paris Accord by the Biden administration should also drive US growth in the take up of “green” technologies. Furthermore, most likely, western countries will be following the same path as the US to secure access to these precious minerals and limit their exposure to China’s rare earth. Overall, this should benefit Lynas to remain at least the second-largest rare earth producer in the world. We strongly believe that Lynas will continue to be the only “producer of scale” of these commodities outside of China. Since 2019, Lynas owns 15% of the global Neodymium-Praseodymium rare earth (NdPr) market after China which massively holds more than 80%.

word image 8

  1. A resource in high demand: The green application of rare earth metals for their magnetic properties is underpinning the demand and long-term growth. The magnet rare earth oxide demand is estimated to grow at a CAGR of 9.7%. The value of these commodities is estimated to reach US$16 billion by 2030. During this time, the price of these magnet rare earth oxides is estimated to grow at about 6% CAGR. Magnet applications are expected to contribute over 40% of the total demand for rare earth by 2030. There is an expected under-supply of rare-earth metals, and this is estimated to cause global shortages at current levels of production. Electric vehicles will really trigger a substantial increase in rare earth prices. They believe that prices could double from $50 per kilogram to $100 per kilogram in 2024 and to meet the rare earth demand in EVs, it will require about five times as many rare materials as we vehicles with a combustion engine and it is estimated. Research suggests that the shortage will be approximately 3 times the annual output of Lynas.

FY22 onward Outlook: Growth plan to meet accelerating market demand

Lynas in a nutshell, is a company with operations in Malaysia, the United States along with mining in Australia. Lynas has operated for over eight years in Malaysia, where the company extracts and produces the finished products. The raw material that is treated in Malaysia is imported from Australia, where the company is exploiting the Mt Weld mine. This mining facility is located in Western Australia and has been in operation for a decade already. It is a Tier 1 deposit mine and concentration plant. Lynas is currently leveraging its capabilities to continue the exploration and development of this site. More recently, the company is expanding and has established a rare earth processing platform for LRE/HRE separation and speciality materials with initial contracts for financial support signed with the US DoD during FY21.

  1. Mt Weld further exploration: The firm has also been very active and has progressed well on its “Lynas 2025 growth initiative”. During FY21, Lynas has achieved a few milestones, including further exploration of its Mt Weld resource. Likewise, Lynas has established two new exploration drill holes below the current Mt Weld pit floor. These areas have been identified with significant and continuous intersections of rare earth minerals below the current life of mine. Not long ago, in June, Lynas successfully completed a one-kilometre-deep exploration drilling at Mt Weld. The results will expand the ore body knowledge of the Mt Weld rare earth elements deposit and will assist in planning for future resource expansion drilling into the fresh carbonatite.
  2. Kalgoorlie Rare Earths Processing Facility: Lynas’ Kalgoorlie Rare Earths Processing Facility project achieved several milestones during the year. These comprise the placement of orders for all long lead time items and 60% of total equipment requirements. In March 2021, the WA Environmental Protection Authority (EPA) approved minor and preliminary works on site. These works established an access road, site office and a pad suitable for the delivery of equipment such as the steel tanks that were fabricated in Perth. The EPA commenced the four-week public review of the Environmental Review Document for the Kalgoorlie Rare Earth Processing Facility in early June and Lynas established a community Pop-up Information Point in Kalgoorlie. This allowed community members to visit the shopfront and discuss plans for the project with Lynas team members.
  3. Downstream and rare earth separation facility in the US: In line with its 2025 growth plans, whose objective is to move downstream processing closer to its customers, Lynas continues to advance on its proposed US Rare Earths Separation Facility. Lynas signed contracts for two separate funding grants from the US Government during the year, one for Phase one work for a Heavy Rare Earths separation facility and another for the development of a commercial Light Rare Earths separation plant in the United States. During the June quarter, the American project team submitted detailed engineering and design work for the Heavy Rare Earths facility to the US Government in line with the Department of Defence for its Phase one milestones. The US authorities are now conducting a merit evaluation of this submission.

diagram description automatically generated

Source: LYC

In our view, Lynas exhibits operational excellence and is well on track towards diversifying its business by 2025 via four key areas on time to cater to accelerated global demand for rare earth minerals. Onward FY22, Lynas will continue to focus on:

  • 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 operations in the American continent by providing separation of rare earth and product finishing capabilities.

These initiatives are being taken with a vision to become the supplier of choice to strategic customers and target a Neodymium-Praseodymium rare earth production capacity of 10,500 tonnes annually by the year 2025.

Lynas exhibits a good foundation for revenue growth. EBITDA to accelerate onward FY22

So far, we have established that rare earth metals are essential for the future across several industries. Thus, the prices of rare earth will continue to increase given the imbalance in demand and supply. This imbalance is forging an opportunity for Lynas and other players in this space. However, Lynas with its Tier 1 deposit and already established facilities has the first-mover advantage and thus is expected to remain the dominant player outside of China.

Lynas dominant position has been well reflected in its FY21 results through record profit and increased sales revenue. Furthermore, what we also like about this company is its superiority in its operating capabilities, hence, Lynas had perfectly scaled its business through solid cost control. Numbers speak for themselves; the company has just recorded $302.2 million in cost of sales for a net profit of $157.1 million in FY21 compared to FY20 cost of sales of $257.3 million for a net profit of only $19.4 million. This strong result is a testimony that Lynas is on the right track, and we are pleased to see that they have delivered a record profit despite the challenging economic environment caused by the pandemic.

Sales revenue increased to $489 million. Strong cost controls were maintained as Lynas benefited as well from increased demand for rare earth materials.

Moreover, Lynas exhibits a strong Balance Sheet enhanced via an equity raise of $425 million to fund its Lynas 2025 foundation projects – primarily for its Kalgoorlie Rare Earths Processing plant and the associated upgrades at the Lynas Malaysia plant.

a picture containing graphical user interface des

Considering all these parameters, we have conservatively projected Lynas’ revenue growth to stay on track at a compound annual growth rate of 1.53% from FY22 to the end of FY24. This will raise Lynas’ EBITDA to nearly $295 million for FY24, up by 25.5% vis-à-vis FY21’s EBITDA of $235 million. But one of the major improvements that we have spotted is a projected consistent growth in EBITDA margin from 48% to 57% from FY21 to FY24. Considering current share price of $7.6 and the accelerated demand for rare earth elements, we believe that Lynas could appreciate significantly in the medium to long-term.

Our earlier report can be viewed by clicking here.

Recommendation

Lynas is the second-largest producer of separated Rare Earths in the world and has a proven track record. Lynas’ 2025 growth plan reveals a long-term strategic mindset with ambitious targets. With Rare Earth metals and the necessity to have a producer outside of China is becoming extremely important. Indeed, Lynas stands to benefit and remain a leader in this space. The need from western countries to secure and develop the security of supply is also underpinned by the forecast increase in demand, largely due to the adoption of green technologies. These technologies require a large quantity of rare earth. As there is virtually no competition outside of China and given the outlook Lynas has in the USA and, we continue to issue a “Buy” recommendation.

 

Scroll to Top

Login

By submitting this form, I agree to the TERMS AND CONDITIONS and PRIVATE POLICY