Rare earth prices: Are we at rock bottom?

UBS says rare earths prices have likely bottomed but investors shouldn’t get complacent and rule out further downside. 

“Our base case for now is that the seasonal inventory build ahead of the Spring Festival closures will help prices stabilise into year-end but a lot hinges on consumer confidence and the broader economic recovery in the interim,” UBS analysts Levi Spry and Dim Ariyasinghe said in a note last week.

“While industry feedback tells us that some cost support is coming in at these levels, we need to build conviction on this given history showing sustained periods of price below US$50/kg.”

Neodymium and praseodymium (NdPr) prices are down 35% year-to-date to US$60/kg as a result of higher-than-expected output from China, excessive inventory from 2022 and a weak outlook.

Lynas Rare Earths: “Production on, price off”

UBS maintained a BUY rating with a $8.60 target price for Lynas (ASX: LYC).

“We are wary that the market has not fully priced in a lower NdPr outlook (down 35% YTD vs. LYC -3%),” the analysts said, noting that the company’s regulatory updates as the key driver in share price performance.

Lynas target price sensitivity to long-term NdPr prices (Source: UBS)

Lynas shares have been buoyed by two positive announcements in recent weeks:

1. March Quarter Update (21 April) –  Lynas recorded its highest ever quarterly NdPr production of 1,725 tonnes. Revenue and sales receipts also increased from the previous quarter

2. Malaysian Operating Licence Update (8 May) – The Malaysian Government extended the company’s operating licence to 1 January 2024

Lynas’ Kalgoorlie Rare Earths Processing Facility is expected to hit production status in the fourth quarter of 2023 and ramp up to 200,000 tonnes per annum by 2025. 

“This extension is welcome news as it allows more time for the Kal ramp. While our estimate of FY23 production remains largely unchanged, we increase FY24 production 92% to 5.65kt,” the analysts said. 

Lynas 12-month price chart (Source: Market Index)