Lynas Shares Corporation Ltd (ASX LYC) is a leading rare earth mining company in Australia, founded in 1983. ASX Lynas Shares own one of the highest-grade rare earth mines in the world and the company has continuously grown its revenue since 2014.
Although Lynas does not have a strong market share in the global market, it has great potential due to the increasing demand for rare earth in the Australian market. Lynas rare earth oxides are mined and processed at the Mt Weld Concentration Plan in Western Australia and then shipped to an industrial port in Kuantan, Malaysia for further processing.
About Lynas Corporation Ltd
Lynas stock is an S&P/ASX 200 listed company, with a market capitalisation of $1.8 billion. The major operation of Lynas consists of two parts namely the mining in WA and then the refining process, which is carried out in Malaysia.
As well as producing high quality and provenance assured rare earth materials, Lynas customers value the company’s reliability and sustainability of supply.
Materials are purchased by customers all over the world, who demand the best technical solution to produce their essential technologies including high-powered magnets, wind turbines, catalytic converters, oil cracking and hybrid motor vehicles.
Market position of Lynas Corporation Ltd
Due to the high entry requirement, there are limited players in the rare earth industry, such as Alkane Resources Limited (ASX: ALK), Arafura Resources Limited (ASX: ARU) and Greenland Minerals and Energy Limited (ASX: GGG).
Although competition in the domestic market is not aggressive, the global market is competitive because of the nature of the rare earth business.
China, as a dominant player in rare earth industry, has contributed 78.65 per cent of the world’s rare earth production in 2017, while Australia ranked the second with 14.98 per cent.
Lynas stock, as one of the largest players in domestic market the company only has a small market share in the global market.
Increasing Demand For Rare Earth Metals
The rare-earth element (REE) is a set of seventeen chemical elements, while neodymium and praseodymium are metals used in different areas. Due to their electronic, catalytic, optic and magnetic properties, rare earth metals are widely used to improve the performance of modern technologies, for areas such as magnets, polishing, metallurgy, batteries and glass.
As rare earth metals are closely related to the technology development of a country, and there is a rigid demand for them.
The market demand for rare earth has risen sharply over the past 10 years due to newly developed technologies. The most significant reason is the development of permanent magnets sector, which takes the largest proportion of rare earth consumption.
As shown in the figure below, the rare earth consumed in magnets takes a dominant position in the market and continues to increase rapidly due, in part, by the increasing demand for green energy.
The electric vehicle industry has developed rapidly for many years, and Neodymium-iron-boron magnets are used for those magnetic vehicles.
The development of the industry boosts the consumption of rare earth metals, which ensures the longevity of the demand on the industry.
Tesla, one of the world’s largest electric vehicle producers, announced that it may add further pressure on the constrained neodymium market for its Model 3 magnetic motor, which could further increase the demand for rare earth.
Rare earth plays an important role in military technology, as the materials can improve the metals that produce tanks, aeroplanes and missiles. Without a stable supply of rare earth, most American military equipment would not function as normal – this leads to a constant and stable demand for rare earth. Additionally, Japan’s continuous import of rare earth and its REE hoarding strategy might further increase the demand.
The Trade War Between US and China
The tension between US and China continues to grow after US President Donald Trump drew up a list of 1300 Chinese products which would face levies with the aim to penalise China for its trade practice. In response, China came out with their own list of 106 US products. With the trade dispute becoming drastic, China might eventually categorise rare earth as a weapon to compete against the US.
If China sharply reduces the export of rare earth, the price of the rare earth element might rise due to strong demand and decreasing supply, which can benefit the Lynas stock and contribute to greater profit margin. With the ‘semi-infinite’ rare earth elements found near the coast of Japan in early April, Japan might take action with its strong rare earth reserve to stabilise the price of the material.
The US relies on imported rare earth with more than 70% of the product imported from China. Since rare earth elements are significant for the operation of its military and electronic development, if China reduces the export of rare earth to the US, the US might increase the import from Australia, which is the second largest rare earth distributor in the world. As the demand shifts from the Chinese market to the Australian market, Lynas stock, as a domestic mining company, might benefit from the growth of revenue.
Revenue Growth of Lynas Stock
The balance sheet of Lynas shares explains that the revenue has been increasing over the past five years, which has shown growth of $0.8 million in 2013 to $196.9 million in 2017.
Demonstrated in the 2018 half-year report of ASX LYC shares, revenue achieved a level of $200 million in the first half year and obtained a 75% growth compared to $114 million reported in the half-year report of 2017.
These figures are consistent with the analysis above and shows that the market of rare earth resources is expanding.
Driven by the revenue, EBIT grew from 2014, even though the EBIT was negative in that year, the figure continued to decline and the net profit grew to $50 million in the first half year of 2018 financial year, which is the first time that the company made a profit in the past few years. This could be due to the successful operating model of ASX LYC stock to control costs as well as significant revenue growth.
P/E Ratio Shows High Market Expectation For ASX LYC shares
The P/E ratio of ASX LYC stock is 32, which is higher than the industry level at 28. Due to low earnings in the first half of the year performance EPS was 8 cents per share.
LYC shares PE ratio remained at a relatively high level compared to the PE of the industry. The market could expect a higher performance of ASX LYC shares which is the reason why markets have the incentive and willingness to pay higher than what LYC shares should be valued at based on its current performance. Therefore, the company is expected to have a better performance in the future.
Lynas Shares Poised To Take Advantage of Growing Rare Earths Market
The war between China and America has also created an opportunity for ASX LYC stock to grow by satisfying the high demand of rare earth resources in an expanding industry. Increasing sales and financial turnaround of the business are consistent with the growing rare earth resources market.
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This article on Lynas Corporation is written by Henry Fung, Managing Director at MF & Co. Asset Management, a boutique investment firm based in Sydney, Australia. For MF & Co.’s full website and further articles follow the link: MF & Co.
Categories: Australian Stocks