Overvaluation Will Persist As Western Government Spurs Rare Earth Demand

Key Takeaways

• Market optimism relies on sustained government support, flawless downstream expansion, and ongoing demand from global electrification, projecting strong revenue and earnings growth.
  
• Potential risks like regulatory challenges, limited product diversity, and technological or geopolitical shifts are being underestimated, leaving Lynas exposed to downside surprises.
  
• Lynas is well-positioned for long-term revenue and margin growth due to rising demand, supply chain diversification, policy support, expansion, integration, and strong ESG credentials.

Catalysts

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

• Investors appear to expect sustained above-trend pricing and demand, largely based on the belief that Western governments' ongoing support for supply chain diversification and critical mineral security will continue to provide Lynas with long-term government-backed offtake agreements and pricing floors, driving higher future revenue and valuation multiples.
  
• There is an assumption that the accelerating global electrification transition (EVs, renewables, energy storage) will deliver consistent volume growth and greater pricing power for Lynas's rare earth products, underpinning a long runway of strong top-line and earnings expansion.
  
• The market seems to be pricing in flawless execution of Lynas's aggressive expansion into downstream processing and magnet manufacturing, including successful ramp-up of the new Kalgoorlie and Malaysian facilities, as well as anticipated revenue from potential magnet JV/partnerships, thus projecting significant margin and earnings growth.
  
• Current valuation implies limited risk from emerging technologies (such as rare-earth recycling or magnet substitutes), or geopolitical developments that could reduce Western strategic premiums for non-Chinese supply-leaving revenue, pricing power, and Lynas' competitive advantage vulnerable to downside surprises.
  
• Investors appear to be underestimating potential regulatory, community, and capital expenditure risks from deeper Malaysian expansion and heavy reliance on a relatively narrow set of rare earth products, which could squeeze future free cash flow and operating margins if national or local policy headwinds re-emerge.

Lynas Rare Earths Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lynas Rare Earths's revenue will grow by 50.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 38.9% in 3 years time.
• Analysts expect earnings to reach A$732.6 million (and earnings per share of A$0.74) by about September 2028, up from A$8.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$959.4 million in earnings, and the most bearish expecting A$521.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, down from 1776.8x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 15.5x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Lynas Rare Earths Future Earnings Per Share Growth

Risks

• Global momentum toward electrification and renewable energy (e.g., electric vehicles, wind turbines) suggests persistent, long-run demand growth for rare earth magnets, providing strong tailwinds for Lynas's revenue and pricing power.
  
• Accelerating government support and intervention-such as strategic stockpiles, grants, and potential price floor or offtake agreements (notably from the US, Australia, and Japan)-could secure a stable demand base and premium pricing, enhancing Lynas's top-line visibility and earnings resilience.
  
• Lynas's status as the dominant, integrated non-Chinese rare earth supplier positions the company to benefit from a global push for supply chain diversification, likely leading to long-term customer relationships, potentially higher valuation multiples, and sustained growth in revenue and margins.
  
• Successful capacity expansions (Mt Weld, Kalgoorlie, and Malaysia) and downstream integration into metal and magnet manufacturing may drive volume growth, capture additional value-add, and realize operational efficiencies, leading to expanding revenues and improved operational margins over time.
  
• Ongoing process innovation, environmental leadership, and deep engagement with both local communities and governments could differentiate Lynas amid tightening ESG standards, potentially lowering future compliance costs and supporting access to premium markets and ESG-linked capital, all of which benefit long-term profitability and free cash flow.

Valuation

• The analysts have a consensus price target of A$12.55 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$17.5, and the most bearish reporting a price target of just A$7.65.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.9 billion, earnings will come to A$732.6 million, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of A$14.31, the analyst price target of A$12.55 is 14.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.