Lynas Rare Earths: Upside of Exotic Metals (LYSCF)

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Background

The past 10 years have been a tumultuous time for Lynas Rare Earths (OTCPK:LYSCF). From a fledgling company processing exotic minerals crucial in advanced battery technologies, to the inauguration of its first processing plant in Pahang, Malaysia.

It was not without controversy. A limited knowledge of the community coupled with anot in my gardenThe public reception has plagued the Malaysian start-up of the rare minerals processing business.

But what was initially perceived in the mining community as a cottage industry has grown by leaps and bounds in terms of strategic importance.

China dominates the production of rare minerals. Its growing production currently contributes to medical nanoresearch, advanced weaponry, the green transition and innovation in the digital economy.

Almost by accident, the Australian pioneer of exotic minerals found itself at the crossroads of a geopolitical standoff between China and the West.

BEV sales data

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Battery-electric and hybrid vehicles have exploded in China and Europe. Adoption is still relatively low in the United States.

This neglected niche of global mining is quickly attracting interest. Solvay (OTCQX:SVYSF), the Belgian chemical titan, has just announced a second European site and an upgrade of its La Rochelle plant in western France to process a wider mix of 17 critical rare earths for the production of magnets and wind turbines.

Other rare earth separation projects are emerging. Neo Performance Materials (OTCPK:NOPMF), with a processing plant in Estonia, will try to meet growing demand as the UK touts an upcoming exotic materials separation project through London-listed Pensana.

Our demand for rare earths alone will quintuple by 2030 – European Commissioner Thierry Breton

Interest in the sector seems increasingly insatiable. Therefore, a deeper dive into Lynas Rare Earths seems warranted. My outlook for the Australian processor of mining and exotic materials is positive.

The $8 billion company is at the center of a global push to reduce global reliance on China’s exotic materials supply chain. His US government support for additional projects in Texas, coupled with his mining pedigree in Western Australia, positions him well for the future. Let’s find out more.

Wind farm growth

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Onshore & offshore wind generation should continue to grow with 2023 onshore wind representing 81.4 GW and offshore wind representing 10 GW.

Company presentation

Lynas Rare Earths engages in the exploration, development, extraction and processing of exotic materials for military, scientific, medical and advanced technological applications. Its flagship Mount Weld project will eventually produce 17 exotic lands with its processing plant in Malaysia the cornerstone of its materials processing footprint.

The company was originally founded in 1983, but has recently grown in importance given the growing geopolitical importance of the sector.

Investor Presentation

Lynas Rare Earths

The company’s industrial footprint continues to expand

The Company operates Mount Weld’s flagship mineral resource, including a Tier 1 deposit mine and mill. Exploration and development continues with $500 million invested to increase production of neodymium and praseodymium.

Commonly referred to as NdPr, these are key ingredients in the production of essential electric motors for wind turbines and electric vehicles (EVs).

The mine has long-lived reserves with ore reserve estimates of 18.9 million tonnes (average grade of 8.3% rare earth oxide) and onshore mineral reserve estimates of 55.2 million tonnes with an average grade of 5.3%.

Investor Presentation

Lynas Rare Earths

The Kalgoorlie processing facility is well advanced in its construction phase

The Kalgoorlie rare earths processing plant continues to progress, with the construction phases of the plant well advanced. Maintenance and operations teams have been recruited in anticipation of a short-term commissioning.

The capital investment in its industrial complex in Malaysia will be a central part of the company’s strategy. The repurposing of the approximately 10-year-old plant to enable it to process rare earth carbonate (REMC) mixed feedstock from its Kalgoorlie rare earth processing facility is underway.

Upgrades to solvent extraction and production finishing to meet 2025 capacity targets (10,500 tonnes per year of neodymium and praseodymium) are currently underway.

Lynas has also received US government support to undertake a commercial heavy rare earth separation facility. The US$120 million US Department of Defense contract will be co-located with a light rare earth separation facility, which is expected to be strategically positioned at an industrial complex on the Gulf Coast of Texas.

The Commercial Light Rare Earths Separation Facility adjoining the US state-supported industrial complex will receive $30 million in government funding, with Lynas contributing an equivalent amount.

Investor Presentation

Lynas Rare Earths

The company is increasingly taking a prominent place in the supply chain for the extraction and processing of exotic materials.

finance

The A$7.65 billion exotic metals and mining pioneer saw its revenue double from A$489 million (FY2021) to A$920 million (FY2022). Gross profit margins followed suit, with the company posting margins of 62% (FY2022).

To put that into perspective, the company posted A$186 million in gross margins (~38%) on sales of A$489 million. Enthusiasm around the strategic importance of the industry is beginning to be reflected strongly in financial publications.

EBITDA margins skyrocketed (~57%) as did the company’s AU$7.65 billion market cap. Only 6 years earlier, the company had a total market capitalization of $184 million, highlighting a breathtaking growth in the capital structure (x40).

EPS tripled (A$0.18 for FY2021), reaching A$0.60 for FY2022. There’s nothing too scary on the balance sheet – granted claims have accelerated, but current assets (A$1.13B) comfortably cover current liabilities (A$123)

A standout feature is the A$965 million held by the company in cash. No liquidity worries here. Leverage also doesn’t seem to be a major issue with total debt of A$190 million.

Capital expenditure (A$186 million) continues to feature distinctly in cash flow from investing as the company continues its industrial expansion. No big credit risk either, with the company posting A$273m of free cash flow. The company’s valuation multiples remain on the upside at 17.8XP/E over the next 12 months.

Analysts have a positive outlook for the exotic materials miner with CY 2023 at A$952 million and CY 2024E at A$1.314 billion. Net income should be somewhat affected next year given the large investment program to bring industrial assets online (expected net income of $431M 2023E). Overall, the outlook remains positive.

Risks

The risks are not as high as in other sectors of the mining industry. Products, such as electric vehicles and wind farms, remain strongly supported by sovereign states. Despite economic headwinds, particularly in consumer discretionary, governments should continue to provide fiscal stimulus to support the energy transition.

The balance sheet is strong, so tighter credit markets should not be a problem either given the liquidity available for growth initiatives. Governments support industrial development, which is another positive for Lynas Rare Earths.

The biggest risk I currently see is the current valuation. At 17x, it looks like there are plenty of value-added project initiatives that can be priced into the market. Venture capital volatility has been extremely high, but the company should continue to benefit from rising commodity prices.

Key points to remember

There’s a lot to love about Lynas Rare Earths. The Western Australian exotic metals specialist is playing a leading role in the plight of Western countries to deleverage China’s dependence on rare earths.

As a result, tax systems, governments and industry are collectively embracing changes that can produce lasting positive results. Competition is intensifying but is currently largely outpaced by the growth in demand.

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