Recycling Advances Will Erode Rare Earth Demand Despite Capacity Ramp-Ups

Key Takeaways

• Advancements in recycling, alternative technologies, and increased global supply threaten the long-term demand, pricing power, and market relevance of Lynas's core rare earth products.
  
• Regulatory hurdles, environmental risks, and heavy reliance on a single mine expose Lynas to heightened compliance costs, operational disruptions, and resource concentration risks.
  
• Expanding production capacity, strong government support, and moves further up the value chain position Lynas to strengthen market leadership and achieve higher, more stable margins.

Catalysts

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

• The rapid advancement of rare earths recycling and circular economy initiatives threatens to erode the long-term demand for newly mined materials, directly reducing Lynas's revenues as secondary supply displaces primary production and puts sustained downward pressure on rare earth prices.
  
• There is a significant risk that continued global investment into alternative battery chemistries and green technologies (such as sodium-ion batteries, hydrogen fuel cells, and magnet-free motors) will reduce the reliance on Lynas's core rare earth products, undermining long-term growth and leading to lower sales volumes and diminished market relevance over time.
  
• Persistent and unresolved regulatory and environmental challenges-particularly concerning waste management and licensing in Malaysia-may force Lynas to incur much higher ongoing compliance and capital expenditures, suppressing net margins and limiting the free cash flows available for future investment or shareholder returns.
  
• Heavy dependence on the Mt Weld mine creates material resource concentration risk for Lynas; any operational disruptions, ore grade declines, or failure to successfully convert resources to reserves could materially curtail production and earnings, while expansion into new resources or jurisdictions carries heightened execution uncertainties and possible cost overruns.
  
• Rising global supply from new rare earth mining projects in Africa and the Americas, combined with ongoing cost inflation for labor, energy, and chemicals, could precipitate an industry-wide supply glut and pressure on pricing-directly reducing Lynas's revenue growth potential and further squeezing operating margins as competition intensifies.

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 41.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.4% today to 35.1% in 3 years time.
• The bearish analysts expect earnings to reach A$547.9 million (and earnings per share of A$0.55) by about September 2028, up from A$8.0 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 17.0x 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 15.7x.
• 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

• Robust secular demand tailwinds driven by global electrification, clean energy expansion, and energy storage adoption are likely to support sustained rare earths demand and price growth, which would boost Lynas's revenue trajectory over the long term.
  
• Accelerating efforts from Western governments to develop non-Chinese rare earth supply chains, combined with policy support and possible price backstops or government strategic offtake agreements, may further stabilize demand for Lynas products and improve its earnings predictability.
  
• Lynas's successful capacity expansions at Mt Weld, Kalgoorlie, and especially the ramp-up of downstream heavy rare earth separation in Malaysia position the company to capture a larger share of future market growth, thus increasing sales volumes and strengthening operating margins.
  
• The company's proven ability to move up the value chain by expanding into metals and magnets, and the pursuit of partnerships or joint ventures in this segment, has potential to deliver higher-margin revenue streams and diversify earnings beyond the current commodity cycle.
  
• Secular scarcity of high-quality, mining-permitted rare earth resources outside China alongside Lynas's strong compliance record and deep relationships with customers and governments are likely to reinforce its market leadership, ensuring pricing power and resilience in net profit margins.

Valuation

• The assumed bearish price target for Lynas Rare Earths is A$7.65, which represents the lowest price target estimate amongst analysts. 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$17.5, and the most bearish reporting a price target of just A$7.65.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$1.6 billion, earnings will come to A$547.9 million, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of A$14.31, the bearish analyst price target of A$7.65 is 87.1% 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.