Heavy Rare Earth Circuit Will Secure Global Supply Opportunities

Key Takeaways

• Strategic expansion and partnerships position Lynas to capitalize on demand, enhancing future revenue stability and net margins.
  
• Increased capacity and feedstock development promise significant production growth, boosting long-term earnings and sales volume.
  
• Geopolitical and regulatory risks, along with operational challenges and market volatility, threaten Lynas Rare Earths' revenue growth and margin stability.

Catalysts

Engages in the exploration, development, mining, extraction, and processing of rare earth minerals in Australia and Malaysia.

• The commissioning of the new Heavy Rare Earth separation circuit positions Lynas advantageously as a sole producer outside China, allowing it to capitalize on increased demand for heavy rare earths like dysprosium and terbium due to China's export restrictions, potentially enhancing future revenue streams.
  
• The focus on expanding capacity at the Malaysia facility with low additional CapEx could lead to significant increases in output without substantial costs, improving net margins and earnings.
  
• By solidifying direct contracts with global customers including those outside China, Lynas is poised to benefit from price premiums for secure supply, boosting long-term revenue stability and potentially increasing net margins.
  
• Engaging in partnerships with non-Chinese magnet manufacturers provides Lynas an opportunity to secure higher value contracts, which can result in enhanced net margins and a more diversified revenue base.
  
• Exploration and potential development of additional feedstock sources, including in Malaysia, promise to increase production capacity, directly supporting future revenue growth through increased sales volume.

Lynas Rare Earths Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lynas Rare Earths's revenue will grow by 49.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 35.4% in 3 years time.
• Analysts expect earnings to reach A$569.3 million (and earnings per share of A$0.61) by about May 2028, up from A$50.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$804.3 million in earnings, and the most bearish expecting A$239.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, down from 157.8x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 11.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Lynas Rare Earths Future Earnings Per Share Growth

Risks

• The rare earths market is characterized by low-cost competition, concentrated supply chains, and geopolitical factors, which could impact Lynas' revenues and net margins due to potential disruptions and competitive pressures.
  
• Lynas faces challenges in the U.S. project due to cost reviews and permitting issues, which may increase CapEx and delay potential earnings from this venture.
  
• The company is cautious about heavy reliance on market conditions for production ramp-up, which may limit revenue growth if there is insufficient demand to support higher production volumes.
  
• Pricing volatility due to the current restrictions on Chinese exports of heavy rare earths could impact Lynas' earnings if they cannot negotiate favorable terms or if prices decline.
  
• The heavy reliance on the Asian market and specifically Malaysia for processing poses a potential operational risk that could affect revenues if geopolitical or regulatory issues arise in that region.

Valuation

• The analysts have a consensus price target of A$7.92 for Lynas Rare Earths based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.5, and the most bearish reporting a price target of just A$5.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.6 billion, earnings will come to A$569.3 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of A$8.58, the analyst price target of A$7.92 is 8.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.