Lynas shares oversold: Citi says selloff on Tesla overblown, bullish on rare earth prices

Lynas Rare Earth (ASX: LYC) copped a 22% haircut since March 2 – when Tesla announced plans to produce a rare earth free magnet motor – which was then compounded by Malaysian regulatory concerns and the broader US banking crisis.

Still, there’s no denying that rare earths are an integral part of everyday life with applications in mobile phones, display screens and batteries as well as future facing technologies such as EVs. 

Citi initiated coverage of Lynas on Thursday with a BUY rating and a $8.20 target price. In this piece, we’ll explore why the investment bank believes the Tesla selloff is overblown and what to expect from rare earth markets in the short-to-medium term

A knee jerk reaction to Tesla

“Even if Tesla cracks the code, global NdFeB market stands to lose 3-4% of demand over the long-term, assuming Tesla maintains market leadership and commercialises this powertrain across its entire range,” said Citi.

“It takes time for automotive manufacturers to implement new designs and in such a competitive consumer market, where driving range and performance is often scrutinised, we don’t expect any significant impact on rare earth demand.”

Rare earth prices in 2023: Heavy with limited upside

Rare earth prices were heavy in February due to weaker-than-expected demand from magnet manufacturers who accelerated destocking activities, according to Citi.

“Increased purchasing activity after the February spring festival closure was short-lived. Uncertainty around Covid-19 restrictions and subdued magnet demand see market participants remaining cautious on restocking material at spot.”

The weakness was further exacerbated by weak Chinese EV sales, which fell 48% month-on-month and down 7% year-on-year in January – marking the first year-on-year decline since 2017 (excluding the COVID period).

The sharp decline in EV sales reflected the complete removal of Chinese EV subsidies, which Citi believes will likely impact EV growth rates. However, views this as a deceleration rather than a decline in demand.

Citi says there’s limited scope for upside for rare earth prices in 2023 due to factors such as:

• The 2022 Chinese 25% quota expansion sufficiently supplying the market

• EV China sales starting the year off on a weak note

• Cautious market participants dampen demand for magnet intensive products

Medium-term price outlook: An uplift is expected

Beyond 2023, Citi expects an uplift in NdPr prices due to:

• Governments’ commitment to a green energy transition, with a boost in wind turbine production

• Accelerating EV penetration

• China refined supply quotas increasing moderately

• Ex-China refined supply and recycling supply not ramping up until the back end of the decade 

Citi has a long-term NdPr price forecast of US$105/kg from CY30, with expectations that the market “should remain tight throughout the decade.”

To add some perspective, Citi referenced the price assumptions for several ASX-listed rare earth companies including:

• Iluka Resources (ASX: ILU): Assumes US$106/kg for the life of its Eneabba feedstock from 2025-2033

• Arafura Rare Earths (ASX: ARU): Uses NdPr price of US$130.1/kg FOB for its life of mine