Where next for Lynas shares?

Lynas Rare Earths (ASX: LYC) shares have risen by 224% over the past five years, but have fallen from a high of $10.66 in early January 2022 to $6.51 today. With REE prices still comparatively weak, billionaire and serial mining investor Gina Rinehart recently upped her stake — and a collapsed merger could be back on the cards.

Lynas shares: half-year results

Back in February, Lynas reported mixed earnings; while the numbers had fallen significantly, this was set against a background of falling REE prices which remain subject to typical cyclicals. Revenue decreased by more than a third year-over-year to $234.8 million leaving net profit down by 74% to $39.5 million.

Meanwhile, EBIT dropped by some 80% to $31.8 million — though the company retained a cash and equivalents position of $686.1 million.

CEO Amanda Lacaze remained upbeat, commenting that ‘the rare earths market is important to many industries and we continue to see strong customer demand for Lynas' products. Lynas has a proven track record of managing costs and operations to ensure that we can be successful in all market conditions, and across all stages of the market cycle.’

Where next for Lynas shares?

As the owner of the Mt Weld mine, Lynas remains the only globally significant producer of rare earths outside of China — due both to its ownership of the mine, and also its processing of ores at various facilities including Kalgoorlie and Kuantan in Malaysia.

In particular, it produces large amounts of Neodymium and Praseodymium (NdPr). These power the strongest types of rare earth magnets, which enable the conversion of electrical energy into motion via permanent-magnet motors. These motors power EVs alongside dozens of industrial processes.

As China has already restricted the export of two REEs, gallium and germanium, Lynas’ ex-China deposit may be becoming strategically valuable.

Goldman Sachs retains a ‘buy’ rating on the stock with a price target of $7.50. It argues that Lynas is undervalued, trading at 0.7x its net asset value and has a strong balance sheet. Goldman also notes that the ‘NdPr market balanced over medium term but deficits over long run on higher Chinese supply,’ and also that there is strong potential production upside.

Merger revisited?

Over the past few days, it has emerged that Gina Rinehart’s Hancock Resources has spent $49 million upping its stake in Lynas to 5.8%. For context, it also owns 5.3% of MP Materials — and these two holdings were subject to a potential $10 billion deal before it collapsed last year.

Rinehart and Lacaze recently publicly lavished praise on each other, and for context, MP Materials remains the second-largest non-China REE producer. Rinehart also owns a stake in Brazilian Rare Earths, and a merger of all three could create an imposing force in the sector.

However, China-based Shenghe owns circa 8.3% of MP Materials, which currently processes most of the rare earths mined at Mountain Pass in California at its Chinese facilities. On the other hand, MP Materials is already in the middle of moving onshore processing to the US with the Department of Defence’s support.

Rinehart recently helped to scupper Albemarle’s $6.6 billion takeover of Liontown Resources, with speculation still swirling that she is considering a takeover.

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