Lynas Corporation (ASX: LYC) is focused on becoming a producer of rare earths, and holds one of the richest deposit of rare earths in the world at Mount Weld in Western Australia.
JP Morgan rates Lynas Corporation overweight with A$0.91 price target
JP Morgan's latest equity research has described global rare-earths developer Lynas Corporation as "a rare opportunity" as it has a strong first mover advantage in the industry.
ASX Code: LYC
Market Cap: A$0.91bn
Initiation: Overweight
Price: A$0.55
Price Target: A$0.91
Key Points
JP Morgan has initiated coverage on Lynas Corporation (ASX: LYC) with an overweight rating and a $0.91 Jun 11 price target. LYC is a development-phase company in the rare earths industry.
The Group is progressing an integrated rare earths project with a mining operation and concentration plant at Mt Weld in Western Australia servicing an Advanced Materials Plant in Malaysia.
Following a recent capital raising, the Group is now fully funded for Phase 1 of the project (11Ktpa rare earths oxide by FY12E) and has signed a number of customer offtake agreements.
From there, LYC hopes to develop Phase 2 which would double production.
JP Morgan believes the fundamental outlook for rare earths is positive. Demand is supported by consumer electronics, hybrid vehicle technology and other environmental protection applications.
The use of rare earths in neo-magnets and industrial applications in these industries is expected to drive global demand higher. Despite this expected growth in demand, the supply of rare earths remains scarce and is heavily skewed towards China.
Recent Chinese government initiatives to limit marginal, unsafe supply and the level of exports are also adding to current market tightness.
JP Morgan expects these market dynamics to support prices over the medium term, especially since the near-term global supply response appears to be very limited.
With LYC’s integrated project the most advanced rare earths project outside China, JP Morgan believes the Group possesses a strong first mover advantage and is in an excellent position to leverage these trends.
Key investment risks include unexpected project delays and cost inflation, the proposed RSPT in Australia, geotechnical issues at Mt Weld, a sharp downturn in global rare earths prices and a stronger A$.
JP Morgan's NPV valuation today is $0.91 using its base case assumptions. Importantly, they do not believe the current share price fully reflects the potential valuation upside associated with the successful delivery of the expanded integrated rare earths project.
JP Morgan maintains a high degree of confidence that the project will succeed, and as such, they think now is the time for investors to consider an Overweight position in LYC.
In doing so, they believe investors are well placed to leverage positive rare earths industry dynamics over the medium term. Positive near-term catalysts include the execution of further offtake agreements and the completion of the concentration plant at Mt Weld.
