Rare earths prices are “depressed” but brokers still believe Lynas is a BUY

Rare earths. A term which no doubt sparks both optimism and despair among many Aussie investors!

Optimism? Well, that would be due to the reams of bottom left-top right charts of forecast supply deficits out to 20-whatever due to the impending global EV revolution, espoused by dozens of rare earths hopefuls trying to inspire investors to buy shares in their companies.

Between 2020 and 2022, plenty did.

Despair? Well, that would be the share price performances of said companies since, many of which probably weren’t in the business of exploring for rare earths five minutes before printing said charts!

One company has endured the boom and bust in the rare earths price cycle, Lynas Rare Earths (ASX: LYC). The company remains the preeminent rare earths producer on the ASX and has been for over a decade, having commenced production at its Mt Weld project in Western Australia in 2012.

Lynas Rare Earths' share price has been on a rollercoaster ride since it listed back in the early 90’s

The Lynas share price chart demonstrates the bitter-sweet nature of the commodity price cycle. It has seen plenty of boom-and-bust cycles in its long tenure on the ASX, and the current bust-part of the cycle is taking a substantial toll on both its profitability and its share price.

Lynas released its first half FY24 results on Monday, and so far, the market response has been underwhelming. Still, several brokers have decided to keep the faith in the bigger picture outlook for rare earths demand, and continue to rate Lynas as a BUY.

Here’s a recap of Lynas’ first half results as well as the accompanying broker reaction, along with a consensus rating and price target.

H1 FY24 Results

Key numbers

• Revenue $234.8M vs $370M previous corresponding period (PCP) and $243.6M consensus estimate

• EBITDA $62.6M vs $189.0M PCP and $41.7M consensus estimate

• Free cash flow (FCF) -$316M vs -$42M and -$330M consensus estimate

• Net debt $514M vs $746M and $505M consensus estimate

• Dividend nil vs nil consensus estimate

Key takeaways

• Production ramp up saw neodymium praseodymium (NdPr) production double to approximately 9 ktpa, no slow down despite weaker market pricing

• Mt Weld plant expansion is progressing with dewatering processing to be completed by mid-2024

• Output from the Mixed Rare Earth Carbonate (MREC) facility at Kalgoorlie will reach the expanded Lynas Advanced Materials Plant (LAMP) in Malaysia in the June quarter (later than planned due to electrical power issues)

• Environmental approvals received for US refinery in Texas with construction expected to commence by the end 2024, commissioning planned in FY26

Company Commentary

• Despite current weak pricing for NdPr, management reminds investors Lynas continues to be a low-cost producer and would remain profitable at even lower prices

• The market for rare earths should rebalance in the medium term as demand from EVs increases, as well a general recovery in industrial activity including a modest improvement in China

• Management is considering all M&A opportunities, including explorers, developers and producers

Broker response

Citi Rating NEUTRAL; Price Target increased to $6.70

• The broker has made “minor” changes to earnings per share (EPS) forecasts due to lower operating costs, versus lower expected NdPr volumes in FY25

• EPS estimates changes: FY24 +6%, FY25 -1%, FY26 -1%

Macquarie: Rating OUTPERFORM; Price Target $7.00

• “management has a strong focus on continued cost reduction, against a backdrop of current subdued NdPr prices.”

• EPS estimate change: FY24 +19%

• “LYC’s 1HFY24 result was strong, with beats in EBITDA, EBIT and underlying earnings…Cost performance in a low price environment a key focus area in the near term.”

Macquarie: “Free cash outflow could last longer at spot prices”. Source LYC, Bloomberg, Macquarie Research, February 2024

Goldman Sachs: Rating BUY; Price Target $7.40 from $7.20

• Lynas is undervalued considering its trading at 0.8 times net asset value (NAV), and given the broker’s 2024 NdPr estimate of US$60/kg and long term estimate of US$83/kg vs spot price US$53/kg

• Sees NdPr market “balanced over medium term but deficits over long run”

• Notes resource upside and confidence in planned production ramp up

Bell Potter: Rating BUY; Price Target $7.20 from $7.60

• “Rare earth prices maintain depressed levels (NdPr US$52/kg) as demand from traditional sectors (consumer electronics etc) remains depressed…further growth initiatives may be questioned should rare earth prices remain where they are.”

• “LYC remains a high-quality business, and a key supplier of separated rare earths to Western economies.”

•  “LYC remains in a strong position at this point in time, however we continue to monitor the impact of depressed demand.”

• EPS estimates changes: FY24 -33% FY25 -5% FY26 -3%

JP Morgan: Rating NEUTRAL from OVERWEIGHT; Price Target $6.90 from 7.40

Consensus

Considering these broker reactions, Lynas’ average rating is “BUY/ OUTPERFORM/ OVERWEIGHT”, and its average price target is $7.04 – a modest 2% reduction from the average price target prior to the first half FY24 results. On a positive note, the brokers’ consensus price target implies a whopping 26% upside compared to Lynas’ last trading price of $5.68.

It appears that if investors are to believe the brokers’ consensus target and associated upside, they will have to take a substantial leap of faith with respect to the medium term outlook for rare earths prices, as well as Lynas’ ability to progress the current production ramp up across its Australian and Malaysian assets.

*Consensus View rating is calculated by assigning a value of 1 to any rating better than neutral, 0 to a neutral rating, and -1 to any rating worse than neutral. The average of the numerical ratings is calculated and a value of 0.5 or greater is considered a consensus BUY/ OUTPERFORM/ OVERWEIGHT rating, a value of less than -0.5 is considered a consensus SELL/ UNDERPERFORM/ UNDERWEIGHT rating, and a value in between is considered a consensus NEUTRAL/ HOLD/ EQUAL-WEIGHT rating.