Mount Weld Expansion Will Improve Efficiency And Reduce Costs

Key Takeaways

• Lynas Rare Earths' expansion efforts and new facilities aim to enhance production, improve efficiency, and boost revenue and net margins.
  
• Growing demand as a non-Chinese supplier positions Lynas to benefit from regulatory changes, increasing pricing power and market share.
  
• Geopolitical tensions and reliance on China heighten uncertainty, impacting Lynas's revenue, margins, and competitive positioning amid market and operational challenges.

Catalysts

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

• Lynas Rare Earths is undertaking significant expansion efforts at Mount Weld, projected to extend the life of the mine beyond 20 years and support an increased production rate of 12,000 tonnes per annum of NdPr oxide, which can drive increased revenue.
  
• The integration and ramp-up of new production facilities, including the new Kalgoorlie cracking and leaching plant and Mount Weld's enhanced circuits, are expected to improve operational efficiency and reduce costs, potentially leading to improved net margins.
  
• Expansion projects such as regrind mills and flotation circuits are anticipated to increase recovery rates and efficiency, supporting cost competitiveness and enabling further revenue growth.
  
• With China's regulation changes on rare earths centralizing control and increasing restrictions on imports, Lynas stands to benefit as a reliable non-Chinese supplier, which could lead to increased demand and pricing power, thereby enhancing earnings.
  
• The development of a more sustainable and modern power solution at Mount Weld, which expects to utilize approximately 70% average renewable energy, may result in cost savings and improved net margins through lower operational costs.

Lynas Rare Earths Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lynas Rare Earths's revenue will grow by 48.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 33.6% in 3 years time.
• Analysts expect earnings to reach A$533.5 million (and earnings per share of A$0.57) by about April 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$827.2 million in earnings, and the most bearish expecting A$239.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, down from 151.0x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 12.1x.
• 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 7.24%, as per the Simply Wall St company report.

Lynas Rare Earths Future Earnings Per Share Growth

Risks

• Ongoing geopolitical tensions and reliance on China for supply can create uncertainty, affecting revenue and market stability.
  
• Fluctuations in foreign exchange rates, particularly the weakening of the Australian dollar, have negatively impacted earnings.
  
• Lower-than-expected growth rates in market demand and significant reductions in rare earth market prices could suppress revenue and margins.
  
• Operational challenges, such as impurities in the production process, can lead to increased costs and affect net margins.
  
• Increasing regulatory controls and centralization of rare earths processing in China could disadvantage Lynas through intensified foreign competition, impacting revenue and competitive positioning.

Valuation

• The analysts have a consensus price target of A$7.56 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$5.1.
• 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$533.5 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 7.2%.
• Given the current share price of A$8.21, the analyst price target of A$7.56 is 8.6% 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.