A bounce in rare earth prices lead to a comeback for Lynas and surge for Arafura

The risk-on attitude for equity markets has pumped life back into local rare earth stocks in a rather extraordinary fashion.

Take market darling Lynas (ASX: LYC) for example, which has seen its share price rally almost 25% year-to-date but still around 17% away from its April 2022 all-time highs.

The ASX-listed rare earths space is quite sparse, with only a handful of mid-to-small cap names outside of Lynas. But they too, are on the upswing in 2023.

Dreadnought Resources (ASX: DRE) is up 12%, American Rare Earths (ASX: ARR) has surged 57% and the Gina Rinehart-backed Arafura (ASX: ARU) has rallied 36% into fresh all-time highs.

In this article, I'll outline any recent updates for rare earth prices and a closer look at the more established Lynas and Arafura.

3-month performance for Lynas (Yellow: +8.8%), American Rare Earths (Green: +55%), Arafura (Blue: +108.3%) and Dreadnought (Red: -2.6%)

Rare earth prices bounce in December

On Monday, Lynas' December quarter report observed that "market prices started to increase again from December in anticipation of the late January Lunar New Year holidays and an expected rebound of the consumption in China."

The company notes that "demand from customers for Lynas' NdPr product family remains strong" and how it "continues to receive enquiries from potential new customers for future corporation."

These customers were mainly those from automotive manufacturers and new magnet manufacturing projects outside of China.

Still, Lynas warns that the "future pricing trends will depend on China's economic recovery."

The price chart below shows the almost full circle run for neodymium – up almost 100% between September 2021 and February 2022. Before getting hit by an almost -50% correction between February 2022 and September 2022.

Prices have since bounced around 20% from recent lows and steadily increasing.

Neodymium price (Source: TradingEconomics)

Deeper dive

Lynas Rare Earths: Macquarie's positive but not bullish

Macquarie was impressed by Lynas' December quarter result, some notable comments from the broker include:

• "... NdPr and REO production [was] 6% and 10% higher than we had forecast"

• "The average REO price of A$62.5/kg was 28% higher than we had anticipated"

• "[The result] was strong with higher production and average realised prices offsetting lower than expected sales"

• "We remain constructive on the outlook for rare earth prices."

Despite all the positive commentary, the analysts reaffirmed a Neutral rating with a $9.90 target price.

Separately, my colleague Glenn Freeman interviewed Janus Henderson Investors' Darko Kuzmanovic, who is confident that Lynas is poised to reap big rewards in the coming years.

Lynas share price chart (Source: TradingView)

Arafura: The gift that keeps on giving

Arafura is the only rare earth stock to have marked several fresh all-time highs in recent weeks. Some key details about the company and its flagship Nolans Rare Earth Project include:

• Project post-tax NPV of $2.4bn

• Targeted NdPr Oxide production of 4,440 tonnes per annum

  • Lynas produced 5,880 tonnes in FY22

• Capital cost of $1,394m

• Targeting FID in early 2023 and first production in mid-2025

What's interesting about Arafura is that its initiated two capital raisings since last August (circled in price chart below).

In August, the company raised $41.5m at 26.5 cents per share or a 17.2% discount. It took the stock around one month to recoup the post-raise declines.

The November raise received $121m at 37 cents per share – including a $60m investment from Gina Rinehart's Hancock Prospecting.

Surprisingly, the stock finished 13.1% higher the day it resumed trading. And it's been (mostly) blue skies ever since.

Arafura share price chart (Source: TradingView)