Lynas shares 'stuck in the middle': Rare earth production slumps in June quarter

Downstream rare earths production for Lynas (ASX: LYC) fell -26% quarter-on-quarter due to water supply difficulties for its Malaysian rare earths separation plant. 

Monday has so far been a volatile session for the company's stock, having both rallied and dipped 3%, and now trying to stabilise around breakeven.

Lynas intraday price chart

Let's break down the mixed June quarter result.

Bears: Inflation, rare earth prices and water supply

Inflation: In the past 12 months, freight costs were approximately double due to global shipping cost increases, alongside additional costs for private charter ships and shipment delays. Chemical input costs have increased by approximately 20%, with some products up more than 70%.

Rare earth prices retreat: Lynas noted demand for rare earths magnets inside China weakened due to covid-related lockdowns. NdPr prices eased to US$120/kg in the June quarter, down from all-time highs of US$139/kg in the March quarter.

Water supply issues: June quarter production was -26% to 3,650 tonnes of rare earth oxides compared to the March quarter, which produced 4,956 tonnes.

Bulls: Inflation peaking, elevated prices and water mitigation

Inflation is peaking: Inflationary pressures are beginning to ease and in some cases, prices are retreating from recent highs.

Prices remain elevated: Rare earth prices remain within an arm's reach of all-time highs and up 70-80% compared to a year ago. “Demand for Lynas products, mostly sold in outside China markets, remained very strong during the period,” said Lynas.

Mitigating strategies: Lynas has implemented several strategies to deal with frequent waters supply interruptions including water storage on site, the use of other natural local water sources and a process modification to decrease fresh water consumption by up to 40% at the Malaysia plant. The modification is expected to be implemented in the September quarter.

Lynas has also increased its cash position to $965.6m, up from $680.8m at the beginning of FY22.

Lynas 12-month price chart