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Lynas Rare Earths (ASX: LYC)

3Q24 Trading Update Analysis – 24th April 2024

Lynas Rare Earths (ASX: LYC) announced 3Q24 performance results largely in-line with market expectations. Rare earth prices remain low, and as we said in our past coverage, they look to have bottomed out.

As a consequence of low prices, during the quarter, Lynas opted to hold all SEG inventory, as well as approximately 500 tonnes of NdPr. While this has resulted in lower revenue for the period, it should enable Lynas to achieve better value over time, as market prices have started to improve in April. While this reduced sales volumes and revenues, the long-term opportunity is positive.

Lynas’ upstream operations performance was solid – Mt Weld delivered efficient production during the quarter despite an exceptional rain event in early March. This forced the shutdown of concentrate production for several days and the loss of 12 haulage days. Operations are now back on track, supplying concentrate for both the Malaysian Plant (Kuantan) and Kalgoorlie.

During the period, there were excellent production rates, including 1,724 tonnes of NdPr. Total REO (rare earth oxide) production was 3545 tonnes, more than double what we saw in the previous quarter.

In the downstream department, Malaysia delivered an excellent result during the March quarter, managing a much faster than expected ramp-up of the modified plant following the December shutdown. Over 1,700 tonnes of NdPr were delivered, compared to the initially projected 1,500 tonnes for the quarter.

Overall, sales volumes declined 41% to 2,310 tonnes of rare earth oxide as a result of the stockpiling, and gross sales revenues were naturally lower by 25% to $101.2 million. While rare earth prices are still low, we can see in the table below that they have started to pick back up again. Quarter on quarter, the average selling price has increased 25%. Capex decreased from $182 million to $97.7 million, and Lynas ended the period with $616 million in cash.


Source: LYC

Rare Earth prices to likely rebound soon

With production robust, the LYC share price continues to be under pressure by low rare earth prices. While there is no quick lift off, we now have more evidence that prices have likely bottomed out. China is also expected to pull back on expanding output quotas. Research indicates that NdPr oxide is likely to see an 800-metric-ton deficit globally in 2024, flipping from last year’s 6,600-ton surplus. We can thus expect extra supply to be more or less cleared by the end of 2024, as demand catches up with supply through continually increasing electric vehicle sales and wind turbine production.

Rare earth prices are also hampered due to soft demand from green energy infrastructure companies and the automotive sector. There has been reduced demand from several industries, particularly from China’s manufacturing sector, as their recovery has sputtered. However, the latest numbers coming out of China, that is, in Q1 CY2024, show that activity is picking back up and positive sentiment is returning. EV sales have slumped, but earlier this week, Tesla announced that it was ramping up production and had brought forward its timeline for the launch of more affordable Tesla vehicles. The very low likelihood of cheap Chinese EVs being able to enter the US market due to geopolitical tensions and the fact that Tesla is now looking to launch cheaper cars by the end of 2024 or early 2025 is good news for the EV market as it would mean higher production in regions excluding China – spelling good news for rare earth prices. We think this could be a good boost for prices in the near term. The long-term structural demand for rare earths continues to be intact and stronger than ever.

Our outlook and forecast for Lynas remain unchanged from our previous coverage, which can be accessed by clicking here and scrolling down to the 27 February 2024 update.

Lynas’ Growth Projects

Mt Weld Expansion Project on Track

Good news on the Mt Weld Expansion Project! Construction’s going according to plan. Stage 1 (concentrate dewatering) is well underway with structural, mechanical, piping (SMP) and electrical works progressing nicely. Stage 2 (balance of plant) is ramping up with all the big gear like grinding mills and flotation cells already on site. Concrete work’s moving along and they’re expecting to start SMP works by the end of April.

Going Green at Mt Weld

As part of the switch to cleaner energy at Mt Weld, they’re nearly finished negotiating a Power Purchasing Agreement for their new hybrid gas-renewable power station. This will replace the old diesel station and gradually introduce more renewable energy, aiming for up to 70% with a mix of solar, wind and battery storage.

Kalgoorlie Facility Up and Running

Material started flowing from Mt Weld to the Kalgoorlie facility in December 2023, and they’ve been busy commissioning and getting initial production going throughout the quarter. Starting things up has meant some additional tweaks were needed, like upgrading the electrical backup systems after that big blackout in Kalgoorlie back in January. They’ve also done more testing on the loading/unloading systems and the overall process flow. They’re ramping up the Kalgoorlie facility carefully, considering their existing capacity in Malaysia and the expected production boost from Mt Weld with the Stage 1 circuit coming online in the next few months.

Budget Update for Kalgoorlie Facility

Nearly all the construction contractors have left the site now, which means they can finalise payments on those contracts. With construction costs being finalised and the extended commissioning phase, the updated project budget for the Kalgoorlie facility is estimated to be around $800 million. This is up from the $730 million they mentioned in August 2023. Lynas says they can cover this extra cost from their existing cash balance and it still fits within their $600 million capital expenditure forecast for FY24.

US Rare Earths Processing Facility

Over in the US, things are moving forward with detailed engineering, procurement, and getting approvals for their new Rare Earths Processing Facility. In January this year, they got the green light after completing the federal NEPA environmental approval process. They’ve also finished the 30% engineering design review and are now ramping up procurement activities. If all the approvals go through, they expect to start earthworks at the Seadrift site by the end of 2024

Gina Rinehart makes a sizable entrance

Earlier this year, there was M&A interest in Lynas. They confirmed holding confidential discussions with MP Materials Corp (NYSE: MP) regarding a potential transaction. However, the discussions are no longer ongoing. Australia’s richest person, Gina Rinehart, became a substantial shareholder in Lynas Rare Earths in April 2024.

The stake, taken by Rinehart’s privately held Hancock Prospecting, is fuelling speculation about sector consolidation, similar to what happened in the lithium sector with Rinehart’s investment in Liontown.

Gina Rinehart is also an investor and major shareholder in MP Materials. This could prove to be a catalyst for a merger. There could be positive synergies from such a tie-up, with strategic re-orientations and cost savings that would boost profitability in this period of subdued prices. A merged entity would also help solidify a large-scale Western rare earths company with strong ties to the USA and the West, countering China’s dominance.

With the earlier merger talks between Lynas and the next biggest Western rare earths miner, MP Materials, rumours are swirling again about whether we’ll see consolidation in the rare earths sector. Merger or not, Gina Rinehart’s investment should reassure retail investors about Lynas’ long-term potential, making the current subdued share price an attractive opportunity.

Recommendation

In the third quarter of FY24, we saw further evidence of rare earth prices having already bottomed out. Prices have risen in April, and the demand outlook for the latter half of 2024 is fairly positive. A pickup in EV manufacturing and sales, renewable energy projects, and China pulling back on expanding output quotas could be tailwinds. In light of this, Lynas has stockpiled its rare earth production from the quarter to sell at a later date when prices rebound – indicative of the company believing that a rebound is potentially close.

Lynas’ production has remained strong, and its balance sheet is robust. Its growth projects are tracking to plan, and we saw Gina Rinehart becoming a majority shareholder in the company. This opens up the potential for consolidation within the rare earth sector at a time when a depression in commodity prices has put a lid on asset prices. Merger or not, the smart money entering LYC spells that current prices are an opportunity. We retain our “Buy” recommendation up $7.00 and Sell above $10.00.

Technical Update

The main horizontal level to watch is $6.23. It is a significant level that is the current gauge of sentiment. Below $6.23, the price looks bearish. The other big technicals to watch out for are the two channels. The major channel originates from March 2022 and has contained the price with strong downward momentum. Volatility within the channel has been high, and the top to low range of the moves is about $3.50.

The major channel’s dynamic changed on the March 2023 test of $6.23 when we saw a quick false break and subsequent consolidation on the level. That was the first hint that the $6.23 level might halt the downward momentum.

A smaller channel formed from about May 2023 onwards. While the price remains within the broader channel, we now see a subtler price decline. The $6.23 level has acted as both support and resistance since then. The recent move back above the $6.23 is our first chance to ride a potential break of the upper bands of both channels, which are converging on each other and the level.

A break back below $6.23 shows our thesis has failed in the short term. The longer the price holds above $6.23, the more likely we are looking at a test of both channels and a potential upside breakout with a target retracement to $8.57 as the first reaction.

Source: TradingView / Shares in Value

 

 

1H24 Earnings Analysis – 27th February 2024

Prices of rare earths are down across the board, and this is impacting company revenues and profits. However, Lynas Rare Earths’ (ASX: LYC) 1H24 result came in line with expectations as the market had already priced in the impact of low commodity prices. There hasn’t been too much that has changed during the half since our last coverage of Lynas. Our thesis was based on Lynas shares being weighed down by low rare earth prices and the fact that FY24 is a transitional year for Lynas – the company is amidst ramping up production at its Mt Weld mine and at its Kalgoorlie facility. It’s an ambitious growth plan that will see Lynas mine more rare earths and eventually migrate processing from Malaysia to Kalgoorlie, WA. These projects, when complete, will ensure Lynas is well-positioned to take advantage of forecast market growth and any improvement in finished product pricing in 2024.

In 1H24, sales volumes were only 6% less than 1H23 despite lower production volumes due to the temporary shutdown for capacity upgrades to the Lynas Malaysia plant in late November and December. Sales were managed throughout the period by the sale of the inventory, which had been accumulated whilst there was uncertainty surrounding the Malaysian operating license conditions (the amended operating licence is valid until 2 March 2026). Following the receipt of an amended operating licence in October 2023, Lynas said that the inventory was sold to key customers in the December quarter. Inventory has now normalised.

The average China domestic price of NdPr (VAT excluded) decreased from US$60.4/kg in June 2023 to US$56.0/kg in December 2023. The lower average selling price during the period reflected this reduction and a change in the product mix, including a higher-than-usual sales volume of Ce-La based products. Rare earth market prices continued to be subdued due to low demand in China, especially in the appliance sector, which is affected by the construction downturn. China’s economic recovery is seen as the main factor that could trigger a change in price trends.

Highlights from the 1H24 result are as follows:

  • Revenue of $234.8 million, down 37%
  • Earnings before interest and tax (EBIT) down 80% to $31.8 million
  • Net profit after tax down 73.6% to $39.5 million
  • Cash and equivalents balance of $686.1 million

Lynas Malaysia was temporarily shut down from mid-November until the end of December while works were completed to enable a separation capacity of approximately 10,500 tonnes p.a. for the NdPr family (NdPr, Nd, Pr) and improve the reliability of the cracking and leaching plant. Half-year NdPr production of 2,427 tonnes reflects a good performance in line with current nameplate capacity during the 4.5-month period prior to the temporary shutdown starting in mid-November. The plant restarted as planned on 1 January 2024.

Operating cash flows decreased significantly in 2H23 as a result of the reduction in sales and lower market prices for rare earths. There were $10.6m of outflows relating to payments in relation to the settlement of rehabilitation liabilities associated with the PDF in Malaysia. During the period, Lynas invested $347m in capital projects, primarily related to the Lynas Kalgoorlie and Mt Weld expansion projects, and ended the period with a strong cash balance of $686.1m.

Mt Weld Expansion Going to Plan

Lynas Rare Earths continues to develop the Mt Weld resource to meet forecast demand growth. This includes ongoing exploration, production of mixed rare earths concentrate, and an expansion project to increase concentrate feedstock production to support 12,000 tonnes per annum of finished NdPr oxide.

In 1H24, Mt Weld maintained steady operations above 80% of nameplate capacity for the period, with a strong focus on unit cost optimisation and recoveries. In 2H24, Lynas said Mt Weld will return to maximum production rates to support both Lynas Malaysia and the Kalgoorlie Rare Earth Processing Facility with the required feedstock.

The Expansion Project remains on track, with construction activities progressing as planned during the period. Stage 1 works focused on the construction and commissioning of the dewatering circuit under existing approvals. When complete, this circuit will support a step up in Mt Weld production. This is expected to be delivered in mid-2024, with other elements of the project on track for staged completion and commissioning throughout 2024 and early 2025.

There is also an exploratory drilling program that is in the works at Mt Weld. It was successfully completed during the half, and Lynas has said that the results from the drilling program will be used to update the resource model later in the calendar year.

Malaysian Plant to see increase in capacity

The amended operating licence (which we have looked at in our earlier coverage of Lynas) is valid until 2 March 2026. Under this operating licence, Lynas Malaysia will increase its existing R&D investment in Malaysia from 0.5% to 1% of Lynas Malaysia’s gross sales. The R&D program will be directed towards developing methods for the removal of naturally occurring radioactive material (NORM) from residues and will be overseen by the Malaysian Atomic Energy Licensing Board (AELB). This should give Lynas a lot of data and insights that should help optimise its downstream operations in the long term.

During the temporary shutdown in 1H24, Lynas has undertaken works to enable a separation capacity of approximately 10,500 tonnes p.a. for the NdPr family and also works to improve the reliability of the cracking and leaching plant. The upgrade works completed during the shutdown were the biggest changes to the facility since the initial construction of the Lynas Malaysia plant.

Kalgoorlie Facility received First Feedstock

During the period, construction activities for the Kalgoorlie Rare Earths Processing Facility were largely complete. Following the completion of the kiln heating and other commissioning activities, the first feed of material from Mt Weld was introduced into the Kalgoorlie facility in December 2023. A significant number of Lynas Malaysia team members who were mobilised to Kalgoorlie to assist in the final stages of commissioning are now supporting the production ramp-up at the Kalgoorlie Facility.

Mixed Rare Earth Carbonate (MREC) from the Kalgoorlie Facility is expected to be progressively introduced to the Lynas Malaysia plant, commencing late in the March quarter 2024. In the future, the Kalgoorlie facility is expected to also feed MREC to the new Lynas Seadrift Facility in Texas.

Lynas USA

In August 2023, Lynas USA signed a follow-up contract with the United States Department of Defense (DoD) for the construction of the Heavy Rare Earths component of the Lynas U.S. Rare Earths Processing Facility in Texas. The updated contract is an expenditure-based contract under which all of Lynas’ properly allocable construction costs will be reimbursed. A contribution by the U.S. Government of approximately US$258 million is currently allocated to the project. This is an increase from the approximately US$120 million announced in June 2022. The updated contract followed detailed design work and cost updates since the original design was completed.

Detailed engineering, planning and approvals work continued for the U.S. Rare Earths Processing Facility throughout the period. This included supporting the DoD’s National Environmental Policy Act (NEPA) approval process for the proposed U.S. Rare Earths Processing Facility in Seadrift, Texas. In January 2024, Lynas made a submission to a DoD solicitation process for a new Prototype OTA process for the development of an additional source for the domestic Light Rare Earth Elements (LREE) industrial base. Lynas said that its submission has been assessed as meeting the requirements of the solicitation process and has progressed to the next stage.

More information on this can be viewed in our earlier report, found here.


Source: LYC

Outlook & Valuation

Now that the Malaysia license has been extended, Lynas is no longer under pressure to ramp up Kalgoorlie and migrate its operations. Production is increasing as Lynas’ growth plans are coming into effect – both at the upstream and downstream levels.

So, all the focus is now on commodity prices. This is a significant weight that has been placed on the LYC share price. However, due to their cyclical nature, the time to invest in commodity stocks is when prices are low. While the long-term structural demand for rare earths is still intact, rare earth prices continue to be weak, primarily due to soft demand from green energy infrastructure companies and the automotive sector. The short-term expectation is for rare earth prices to remain low due to reduced demand from several industries, particularly from China’s manufacturing sector.

But rare earth prices have likely bottomed out and are poised to rise in late 2024/early 2025 when demand picks up. China is also expected to pull back on expanding output quotas. Research indicates that NdPr oxide is likely to see an 800-metric-ton deficit globally in 2024, flipping from last year’s 6,600-ton surplus. We can thus expect extra supply to be more or less cleared by the end of 2024, as demand catches up with supply through continually increasing electric vehicle sales and wind turbine production.

China, which accounts for 70% of rare earths mining and 90% of refined output, according to the United States Geological Survey, has controlled its supply of the strategic resource through the quota system since 2006. Last year, China issued a third batch of rare earth output quotas, the first time it issued a third set of quotas in a year since 2006, with the total quota for the year at a record high of 255,000 tons, up 21.4% from a year earlier. However, China’s quotas are expected to increase at a slower rate this year, between 10% to 15%. This sets up the second half of 2024 positively for rare earth prices and Lynas.


Source: LYC

To cater to the long-term NdPr structural demand, the current supply needs to grow by 81% by 2035. Therefore, the rebound in rare earth prices is a matter of ‘when’ and not ‘if.’

This favourable development will benefit Lynas, the largest producer outside of China. Operations at Mt Weld, Malaysia, and Kalgoorlie are expected to go as planned and stick to the timeline. Lynas did not provide FY24 guidance, and markets have priced in modest expectations.

Revenues and earnings growth expectations for FY24 are negative as commodity prices are expected to remain under pressure. In FY25, markets expect rare earth prices to recover and Kalgoorlie production to ramp up. Current expectations are for revenues to be around $600 million and EPS to come in at $0.13 – a decline of 18% and 68%, respectively. These are extremely low expectations, and there is significant room for outperformance if rare earth prices begin to rebound or production edges higher. Any upbeat performance will likely result in share price gains.

FY25 is when the Lynas growth story comes into fruition following a few years of growth capital injection. This will lead to an increase in revenues and earnings even at the current low rare earth prices. However, the medium to long-term outlook for rare earth prices remains bullish, given the supply-demand imbalance and their critical nature.

For FY25, consensus expectations are for revenues to breach the billion-dollar mark and EPS to come in at $0.44 a share. Based on this, LYC shares are trading at a forward FY25 P/E of just 13.4x. We think it significantly undervalues Lynas’ proposition. It is the only producer of scale outside China and will play a central role in shaping the rare earth market of the Western world. Their relationship with the USA will see more than a 20% boost to downstream production, which we do not think the market is recognising at this point in time. In the last 5-years, LYC shares have traded at a P/E of 22x on average. During the 2021 and 2022 periods, when rare earth prices were higher, LYC shares consistently traded above 20x P/E. Now, Lynas is bigger and a much stronger company. We think the share price will, therefore, correct itself when the cycle turns for rare earths, and the only way to take advantage of that is to be positioned right now.

There was also M&A interest for Lynas as they confirmed that it had held confidential discussions with MP Materials Corp (NYSE: MP) regarding a potential transaction. However, these discussions are not ongoing. But we cannot rule out M&As now that the door has been opened.

Recommendation

Lynas’ 1H24 result saw lower production due to planned maintenance and upgrades. This, coupled with weak rare earth prices, meant that the overall result was soft. The company’s FY25 growth vision is going to plan, where we will see Lynas’s upstream capacity at Mt Weld and downstream capacity at the Malaysia and Kalgoorlie plants increase significantly. LYC also has access to low-cost government financing from the US due to its strategic relationships.

As for rare earth prices, the long-term structural demand is as strong as ever and global production needs to ramp up. The expectation is for rare earth prices to rebound later in the year as the EV and renewable energy infrastructure industries rebound from their slump. This sets up 2025 to be a massive year for Lynas from a supply and demand standpoint. Valuations are low at current prices, and we recommend a ‘Buy.

Technical Update

An important inflection point in the stock at $6.23 has acted as both support and resistance. This also correlates to the 50% retracement at $6.29 of the last run higher. Price is currently weak around this level and looks set to test the previous support at $5.16, which coincides with the 61.8% retracement at $5.05. Buying in the lower half of this range ($5.16-$5.70) would be very good positioning if it gets there, although watch for signs of the intermediate level at $5.69 holding up price.

If this price squeeze doesn’t play out, we like an entry up to $7.00 per share for a long-term hold. A break above $8 would signal a return to bullishness. Until rare earth prices return to a bull market, we would look to take profit on LYC around the $10 mark.

Source: TradingView / Shares in Value

 

Lynas Rare Earths (ASX: LYC) – Initiation – High Conviction Buys – 21st January 2024

Who is Lynas?

Lynas Rare Earths is a vertically integrated rare earth company that produces these minerals that are crucial for various modern technologies such as EVs, wind turbines, and electronics. It’s the largest producer of rare earth oxides outside China, playing a critical role in the global supply chain. Their core operations span across:

Mt Weld Mine, WA: The world’s largest rare earth mine, supplying over 20% of global NdPr oxide production, a vital element for magnets in electric motors.

Kalgoorlie Processing Plant, WA: Processes the ore from Mt Weld into rare earth concentrates, preparing them for further separation.

Malaysia MCP Plant: This massive plant separates the concentrates into individual rare earth oxides, catering to specific needs in various industries.

Exploration and development: Lynas actively seeks new rare earth deposits in Western Australia and Tanzania, aiming to secure future supplies and diversify its portfolio.

Texas Rare Earths Processing Facility, USA: Under construction with support from the US Department of Defense (DoD), this facility will be the first of its kind outside China for heavy rare earth separation, targeting operation in 2026.

A Vertically Integrated Player Growing on All Fronts

This vertical integration, that is, upstream and downstream processing capacity, gives Lynas a significant cost advantage. Rare earth metals are deemed ‘critical resources’ by Western countries, and Lynas’ unique positioning as the largest producer ex-China gives them a unique MOAT.

Lynas’ Mt Weld is recognised as a world-class source of Light and Heavy Rare Earth minerals. To cater to the forecast demand, Lynas is expanding the mine’s capacity – targeting concentrate feedstock capacity to produce 12,000 tpa (from 7,000 tpa) finished NdPr by the end of 2024.

The new Kalgoorlie facility is targeting MREC feedstock capacity to produce 9,000 tpa NdPr finished product. The first feedstock has been received, and production will commence in January 2024. The proximity of the Kalgoorlie facility to Mt Weld should reduce operational challenges and also prove to be a cost advantage for Lynas over the long term.

Lynas’ growth plan involves having upstream processing close to its resources and downstream processing close to its customers. With the USA being its biggest, the Texas facility is catering to the demand by targeting a capacity to produce ~5,000 tpa of light rare earths and ~3,000 tpa of heavy rare earths. Despite the US Government’s significant investment in the facility, the Texas facility will be a commercial facility serving both the DoD and commercial customers and is targeted to be operational in FY26.

How to Play Lynas Rare Earths?

Given the strategic importance of these minerals, the long-term outlook for rare earths is robust. As the number of technological devices increases, so will the demand for rare earths.

In a scenario that meets the Paris Agreement goals, rare earth demand is expected to increase by 40%. However, rare earth prices have been subdued primarily due to the global economic slowdown and increased supply from China. NdPr prices have now normalised to around US$65 a kilo.

With the commodity price having found a floor, the LYC share price is beginning to look very attractive. As the demand circles back, so will rare earth prices, and Lynas sits in pole position to take advantage. The company is growing on all fronts – upstream and downstream capacity and is well-positioned to take full advantage of the tight market that is expected to last for a long time.

An important inflection point at $6.23 has acted as both support and resistance. Price is currently weak around this level and is providing a great entry point for a long-term hold. A break above $8 would signal a return to bullishness. Buy up to price is $7.00 per share for a long-term hold. Take profit on LYC above $10.

Source: TradingView / Shares in Value

 

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