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Lynas Corporation "Upgrading Prices on Higher EV Penetration" (Buy) Morgan

Lynas is positively exposed to a step-change in demand from Electric Vehicles
Lynas is positively exposed to electric vehicle demand as each EV contains ~1-2kg of NdPr mostly in the motor. Our global automotive team has recently upgraded our Electric Vehicle forecasts; we forecast EV sales growing from ~2m now to ~36m by 2030. To meet this, we now forecast NdPr demand to triple from ~30ktpa of NdPr now to ~90ktpa by 2030e. We do not see sufficient investment in supply to match this and today we lift our NdPr price forecasts, our earnings and lastly our valuation by ~20% to $3.75ps. Lynas assets are very strategic, having the best Rare Earth deposit globally, in our view, being exploited through the only active non-China processing facility. Lynas is highly cash-generative, has a strong balance sheet, and the share price is below our valuation. We maintain a Buy rating.


Impact on the NdPr market and our price forecasts
We do not think the market has created sufficient incentives for supply growth to triple by 2030. We estimate that an incentive price for NdPr is ~US$60/kg. Prices have been below this level for most of the past 9 years, averaging ~US$41/kg. Rare earths projects have had a troubled history, generally lack financing and can take up to 5 years to develop and ramp up. China has been the dominant supplier of rare earths for the past 30 years, but trade policies there may restrict exports, a strategic vulnerability for global automakers. We forecast a deficit in the NdPr market to emerge by 2023e driven by a step change in demand from EV’s and a lack of supply growth. We forecast the NdPr prices to lift from US$50/kg now to a peak of US$100/kg by 2024e before reverting to our long term price of US$60/kg.


Modelling Changes
The lift to our price forecasts drives a 54% lift to our FY21e NPAT to $82m and a 43% lift to our FY22e NPAT to $204m. We have also increased the value we ascribe to a potential downstream plant from $50m to $200m. This lifts our NPV estimate by 21% to $3.75ps.


Valuation: $3.75ps (DCF, 10% d.r. and US$60/kg long-term NdPr)
Our price target of $4.05ps (was $3.40ps) is based on our 12 month forward NPV estimate.