Material Substitution Trends And Mt Weld Risks Will Curtail Value

Key Takeaways

• Industry shifts toward alternative materials and new technologies threaten long-term demand growth and future revenue stability for Lynas's core rare earth products.
  
• Heightened operational and regulatory risks, combined with customer concentration and volatile market conditions, may severely impact profitability and predictability of earnings.
  
• Lynas is poised for sustainable growth and margin expansion thanks to strong global demand, unique capabilities outside China, completed investments, and diversified downstream partnerships.

Catalysts

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

• Accelerating global initiatives around material substitution, rare earth recycling, and the development of rare earth-free magnet technologies threaten the long-term growth in demand for Lynas's core products, which could significantly limit future revenue expansion as new customers shift to alternative materials or technologies.
  
• The company's heavy reliance on a single major mining site at Mt Weld exposes it to elevated operational and geopolitical risks, and any significant disruption here could result in sharp revenue declines and increased volatility in earnings, particularly as industry and environmental regulations continue to tighten globally.
  
• Steadily rising capital, regulatory, and compliance burdens-compounded by the complexity of ongoing projects in Malaysia, Australia, and potential U.S. expansions-may result in persistently inflated costs and compressed net margins, derailing expected increases in profitability even as production capacity grows.
  
• Persistent customer concentration, especially in the Japanese and Asian markets, leaves Lynas vulnerable to the loss or renegotiation of major supply contracts at less favorable terms, which could lead to abrupt declines in revenue stability and make future earnings less predictable as competition intensifies and new market entrants emerge.
  
• Ongoing volatility in rare earth prices, driven by potential oversupply, unpredictable Chinese government quota policies, and an influx of new global supply projects, increases the risk of sharp industry-wide profit margin compression and may severely undermine both current and future earnings expectations for Lynas.

Lynas Rare Earths Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Lynas Rare Earths compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Lynas Rare Earths's revenue will grow by 53.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.5% today to 35.9% in 3 years time.
• The bearish analysts expect earnings to reach A$619.9 million (and earnings per share of A$0.66) by about August 2028, up from A$50.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, down from 266.7x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 14.4x.
• 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 6.98%, as per the Simply Wall St company report.

Lynas Rare Earths Future Earnings Per Share Growth

Risks

• Sustained global demand for rare earths, driven by secular trends in decarbonization, the energy transition, and expansion of electric vehicles and wind turbines, may result in robust long-term revenue growth and counter downward share price pressure.
  
• Lynas' successful ramp-up of heavy rare earth separation-especially separated dysprosium and terbium oxide-outside China gives it a significant competitive edge and access to high-value market segments, supporting stronger pricing power and higher margins.
  
• The company's extensive investment cycle has largely concluded, with major projects at Mt Weld and Kalgoorlie complete, positioning Lynas for margin expansion and increased free cash flow as capital intensity declines and operational efficiencies improve.
  
• Diversification into new downstream partnerships, such as the JS Link magnet project in Korea, opens additional end-markets and may secure premium offtake agreements, improving revenue stability and reducing earnings volatility over time.
  
• Strengthened supply agreements with strategic customers, flexibility in pricing arrangements, and being the only scale producer of both light and heavy rare earths outside China may underpin consistent earnings and mitigate future pricing or demand shocks.

Valuation

• The assumed bearish price target for Lynas Rare Earths is A$5.85, which represents two standard deviations below the consensus price target of A$10.25. This valuation is based on what can be assumed as the expectations of Lynas Rare Earths's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$13.25, and the most bearish reporting a price target of just A$5.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$1.7 billion, earnings will come to A$619.9 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of A$14.49, the bearish analyst price target of A$5.85 is 147.7% 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.