Share presentation $LYC (-2,17%) (Lynas Rare Earth)
Lynas Rare Earths, Ltd. is an Australian rare earth mining company , listed on the Australian Securities Exchange as an S&P/ASX 200 company.
[Wikipedia]
1. the business model
2. the investment case
3. fundamental data
4. risks
5. summary
Note: This is not an investment advice!
1. the business model & rare earths
Rare earths are actually not rare, as the name suggests. To be exact, they are pretty much everywhere. In most countries, however, they are only available in concentrations that are too low to make mining economically worthwhile, and laws against environmental pollution prevent mining. This is because numerous toxic, sometimes radioactive end products are produced during processing. In most western countries, mining is therefore not worthwhile.
Lynas Rare Earth has two sites, one in Malaysia and one in Australia, where they mine and process rare earths. (For the problems of the Malaysia site see 4. risks more.)
So in principle Lynas Rare Earth is a normal mine operator, right?
2. the investment case
To make you understand why Lynas Rare Earth is such a unique company, we first need to clarify the following questions:
What are rare earths needed for?
The metals are used in numerous computer chips and electronics in general, as well as renewable energy, space and aerospace, as well as automotive and defense applications.
Which countries are mining rare earths?
And this is probably the key factor in the business model: China has a monopoly-like market share of about 90%.
Why is this a problem?
For the West, and especially the U.S., it's a major threat because rare earths are a critical resource for numerous industries, including defense. So if China -for whatever reason- decided to impose an export ban, it would lead to a collapse in supply.
What does this mean for Lynas?
Outside of China, there is only one other notable company mining rare earths: Lynas Rare Earth.
Many companies, especially after the outbreak of the Ukraine war and the zero-covid strategy in China, are trying to diversify their supply. These include car manufacturers, chip makers, etc. Basically, all industries that need rare earths. So even without an export ban, it is safe to assume that more companies will approach Lynas Rare Earth to sign exclusive contracts.
But that alone is not enough to justify an investment, we still need to look at the company itself.
3. fundamental data
P/E ratio 22/23e: 20.32
PEG ratio: 0.36
Sales 2022: AUD 920 million (= EUR 594 million)
Profit 2022: AUD 540 million (= EUR 349 million)
Annual profit growth: 244
Total equity: 1.65 B AUD (= 1.06B EUR)
Market capitalization: 7.96 B AUD (=5.14 B EUR)
The rare earths industry is forecast to grow by approx. 8% p.a.
4. the risks
In Malaysia, there have been protests against rare earth mining for years. Activists believe it is harmful to workers and groundwater. However, the protests have noticeably subsided over the past three years. In 2018, the Malaysia Authority began investigating the safety of the mining and fully approved the mining in 2021. The government, of course, does not want to simply abandon the extraction of this Strategic Resource, which could also be a reason. There is less risk from here, but the case shows that legal problems can quickly arise for mining companies, and Lynas in particular, when concerns about environmental pollution arise. However, since most countries also have geopolitical interests, I think the risk is limited.
5. summary
Lynas Rare Earth is a strategically important company to hedge against potential "China problems". Even apart from that, the company shows strong growth at a moderate valuation. However, one should not disregard possible environmental risks and moral hazard concerns, as they could lead to a production halt or expensive litigation.
Personally, I am invested with a smaller share.
Thanks for reading. I appreciate feedback!
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Sources:
https://en.m.wikipedia.org/wiki/Lynas
https://lynasrareearths.com/investors-media/briefings/
https://www.reuters.com/article/us-lynas-corp-malaysia-idUSKCN1RM0AD
