Operational Expansion And New Facilities Will Increase Future Production Capacity

Key Takeaways

• Expanding facilities and overcoming permitting challenges may boost production capacity and profitability through increased revenue and competitive positioning.
  
• Strategic market focus and diversification efforts could enhance demand and revenue as global supply chains shift away from China.
  
• Operational and supply challenges, along with low market prices for key products, could adversely impact Lynas Rare Earths' revenues and net margins.

Catalysts

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

• The opening of the Kalgoorlie facility and its production close to target volumes may lead to increased revenue and improved market competitiveness by providing additional capacity and geographic diversification.
  
• The continued progress and benefits from the Mount Weld expansion, with Phase 1 fully commissioned, could lead to higher production, contributing to revenue growth and potentially improving net margins through economies of scale.
  
• Positive developments in navigating permitting issues at Seadrift and ongoing discussions with the Department of Defense indicate a clearer path for operational expansion, which may enhance future revenues and profitability.
  
• Strategic focus on market development, particularly ex-China, could increase demand for Lynas' products and support revenue growth as global supply chains diversify away from China.
  
• Plans to achieve 10,500 tonnes of NdPr production capacity by the end of fiscal year 2025 demonstrate a focused strategy on throughput and operational efficiency, potentially enhancing earnings through increased sales volumes and reduced downtime costs.

Lynas Rare Earths Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lynas Rare Earths's revenue will grow by 51.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.2% today to 38.1% in 3 years time.
• Analysts expect earnings to reach A$617.0 million (and earnings per share of A$0.66) by about January 2028, up from A$84.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$802.8 million in earnings, and the most bearish expecting A$420.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, down from 69.9x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 12.4x.
• 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 7.02%, as per the Simply Wall St company report.

Lynas Rare Earths Future Earnings Per Share Growth

Risks

• Persistent impurities in the Kalgoorlie mixed rare earth carbonate require additional processing, which increases operational costs and could impact net margins.
  
• Ongoing low prices for NdPr in the market are currently affecting revenues, and continued subdued pricing could further limit earnings growth.
  
• Processing challenges and capacity constraints in Malaysia may cause production shortfalls, impacting overall revenue and potentially increasing costs if not addressed quickly.
  
• The reliance on importing sulfuric acid due to local supply disruptions introduces cost uncertainties that may negatively impact net margins.
  
• Potential delays or increased costs associated with addressing the processing and permitting issues at the U.S. project could affect future earnings and cash flows.

Valuation

• The analysts have a consensus price target of A$7.39 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$617.0 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of A$6.32, the analyst's price target of A$7.39 is 14.5% higher.
• 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.