Lynas Rare EarthsMajor uncertainty resolved, Kalgoorlieoffers...

Lynas Rare EarthsMajor uncertainty resolved, Kalgoorlieoffers potential upside Reiterate Rating: BUY | PO: 10.20 AUD | Price: 6.82 AUD Key operational risk removedLynas (LYC) has announced its Malaysia license update. The imposed condition on cracking & leaching (C&L) in Malaysia until 31 Dec 2023 is now removed from the current license, which was renewed 3rd March 2023 for three years until March 2026. LYC is now required to increase its R&D investment to study the removal of NORM (naturally occurring radioactive material) from its C&L residuals. The NORM was the reason for the Malaysian government to shut down LYC’s C&L plant operating in Malaysia and LYC to relocate to Kalgoorlie Australia. Kalgoorlie is the replacement plant LYC has been building in the last few years. As mentioned in our report: Navigating the transition period, the biggest downside risks were the uncertainties of the transition from C&L from Malaysia to Kalgoorlie, including the delay of first production and pace of ramp up. LYC has been racing against the clock to get Kalgoorlie started before end of CY2023. Today’s announcement removes LYC’s biggest operational risk and the overhang on the stock.Kalgoorlie is no longer a replacement but an opportunityWe now see Kalgoorlie as an option rather than a replacement to LYC’s C&L capacity. In the medium term we see upside risks for LYC to achieve its growth target of 12ktpa of NdPr earlier than FY26e. Our previous thesis of “navigating the transition period” no longer applies as no transition is required from Malaysia to Australia, and LYC will be operating from Malaysia as usual. Longer term, we see the potential for LYC to go beyond the current target as Mt Weld has a 25-year mine life and is high-grade rare earths mines. We also believe the cost pressure of operating Kalgoorlie C&L in Australia in the next few years have now eased. We lowered our FY24 to FY26 costs by 23%, 17% and 5.0% respectively. Consequently, our FY24 to FY26 EBITDA increased by an average of 16% and our price objective based on blended DCF and EV/EBITDA has increased from A$9.50/share to A$10.20/share implying 50% upside. Reiterate our Buy as LYC is the only integrated NdPr producer of scale ex-China. We remain positive on a structural deficit in rare earths driven by growth in Electric Vehicles and wind turbines24 October 2023EquityKey Changes( A$)Chen Jiang >> Research Analyst Merrill Lynch (Australia) [email protected] Redfern >> Research Analyst Merrill Lynch (Australia)Matt Chalmers, CFA >> Research AnalystMerrill Lynch (Australia)Meredith Schwarz >> Research Analyst Merrill Lynch (Australia)Cameron Taylor >> Research Analyst Merrill Lynch (Australia)Jonathan Mannes >> Research Analyst Merrill Lynch (Australia)Stock DataPrice (Common / ADR) Price Objective DateEstablished Investment Opinion 52-Week RangeMarket Value (mn) Market Value (mn) Shares Outstanding (mn) Average Daily Value (mn) Free FloatBofA Ticker / Exchange BofA Ticker / Exchange Bloomberg / Reuters ROE (2024E)Net Dbt to Eqty (Jun-2023A)P reviousCurren t Price Obj. 9.50 10.202024E EPS 0.31 0.42 0.93 0.75441.8966.2 1,105.0 2025E EPS 0.802026E EPS 0.70 2024E EBITDA (m) 340.8 2025E EBITDA (m) 847.2 2026E EBITDA (m) 1,054.0 Estimates (Jun) (A$) 2022A 2023A 2024E 2025E 2026E Net Profit b/f Abnormals 545 320 392 868 697 EPS 0.60 0.34 0.42 0.93 0.75 EPS Change (YoY) 231.7% -42.0% 20.4% 121.1% -19.7% Dividend / Share 0 0 0 0 0.30 Free Cash Flow / Share 0.30 (0.23) (0.33) 0.66 0.64 ADR EPS (A$) 0.599 0.341 0.420 0.929 0.746 ADR Dividend / Share (A$) 0 0 0 0 0.299 Valuation (Jun) P/E 11.38x 20.03x 16.23x 7.34x 9.14x Dividend Yield 0% 0% 0% 0% 4.38% EV / EBITDA* 9.12x 14.34x 13.53x 5.55x 4.42x Free Cash Flow Yield* 4.30% -3.28% -4.90% 9.62% 9.35% * For full definitions of iQmethod SM measures, see page 4. >> Employed by a non-US affiliate of BofAS and is not registered/qualified as a research analyst under the FINRA rules. Referto"OtherImportantDisclosures"forinformationoncertainBofASecuritiesentitiesthattake responsibility for the information herein in particular jurisdictions.BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Refer to important disclosures on page 5 to 8. Analyst Certification on page 3. Price Objective Basis/Risk on page 3. 12615705Timestamp: 24 October 2023 09:01AM EDT6.82 AUD / 3.77 USD 10.20 AUD / 6.70USD 24-Oct-2023 /24-Oct-2023 B-1-9 / C-1-9 6.02 AUD-9.85 AUD 4,028 USD 6,369 AUD 933.8 / 933.8 19.89 USD 99.6% LYSCF / ASX LYSDY / OTU LYC AU / LYC.AX 33.0% -38.5%NdPr: Neodymium and Praseodymium R&D: Research and DevelopmentW