2 best ASX Rare Earth stocks to watch as deal-making intensifies in 2023

As the EV revolution gets underway, ASX lithium stocks have taken the spotlight for growth investors sporting a healthy risk appetite. Copper and graphite stocks have also been popular, as all three critical minerals are likely to see demand growth and supply gaps over the longer term.

However, what is less talked about — partially because there are less opportunities — are the Rare Earth Elements stocks, or ‘REEs.’ The group of 17 silvery-white metals are used across dozens of applications, including within electronics, batteries, lasers, ceramics, catalysts, clean energy, automotives, defence, and aerospace.

But it’s their use in the permanent magnets found inside 90% of the world’s EVs that could see Rare Earth stocks experience similar rises in 2023 as those experienced by lithium companies in 2022.

Like lithium, the elements aren’t technically rare, but their geochemical properties mean that they are rarely found in concentrated-enough amounts to be worth mining at scale. And also, like lithium, China is ahead of the west in sourcing supplies.

The country flooded the global marketplace with low priced REEs in the 1980s, forcing many operations out of business. Accordingly, with demand set to hit 315,000tpa by 2030, China now controls 60% of global production and a whopping 85% of processing capacity.

Demand for ex-China critical minerals is now heating up, while simultaneously, inflation is increasing production costs especially as legacy assets are drying up. These factors are driving serious deal-making, including most recently BHP’s takeover of copper producer Oz Minerals, and Newmont’s ongoing bid for Newcrest.

This leaves these two ASX REE stocks potentially in strong standing for position investors.

2 best ASX Rare Earth stocks

1. Lynas Rare Earths (ASX: LYC)

Lynas is by far the largest Rare Earths company in Australia and is also the only globally significant producer outside of China. With a focus on integrated delivery, the ASX company’s Mount Weld project is one of the highest-grade REE resources in the world.

In mid-2022, Lynas was awarded a US$120 million contract by the US Department of Defence to build a commercial heavy rare earths facility in the country, underscoring the importance of the overlooked critical minerals. For context, it currently operates the world's largest Rare Earths processing plant in Malaysia, where REEs are produced for export to Asia, Europe, and the States.

With H1 profits down by 4% year-over-year to AU$150.1 million — driven by an 8.8% drop in sales volume and 32% rise in the cost of sales — the company has also seen Rare Earths pricing decrease slightly since the end of the 2022 financial year. It’s also contending with regulatory issues at its Malaysian facility and analyst concerns that a crucial Kalgoorlie plant may be delayed.

But with Lynas shares down 22% over the past year, now could be the time to buy the dip in the AU$7.2 billion company.

2. Iluka Resources (ASX: ILU)

Iluka Resources is the second largest ASX Rare Earths stock, with a market cap of AU$4.3 billion. The miner has historically been involved in the zircon and titanium markets but has been slowly developing a portfolio of rare earths projects. FY22 results saw Iluka deliver record revenue of AU$1.73 billion, as production increased, and Zircon and rutile prices rose by 37% and 23% respectively.

Iluka operates the zircon and rare earths Wimmera project in Victoria, but also boasts the Eneabba operation in Western Australia. In mid-2022, the company awarded Fluor Australia a contract for engineering, procurement, and construction management services at the project, with building set to commence shortly and production planned to start in 2025.

The company has entered into an AU$1.25 billion risk partnership with the Australian government to deliver the processing plant at Eneabba, an Australian first — and as this will be one of few facilities globally —this positions Iluka ‘at the forefront of global electrification.’

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