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Is the Lynas Corporation Ltd share price a buy?

Shares in rare earth miner Lynas Corporation Ltd (ASX: LYC) are up 1% to $2.60 on Monday, following the release of the company’s quarterly update.

The price of the stock has tripled since this time last year, but there might be room for further growth.

What was in the update?

Lynas delivered a mixed result in the March quarter. The company increased sales of its key products – neodymium and praseodymium (NdPr) – to 1,332 tonnes, up 9% from the previous quarter. The price of these minerals remained strong in China, and customer orders exceeded production.

A decrease in sales and prices of other rare earth oxides offset the gains from NdPr, and the company posted sales revenue of $86 million, an 8% decline from the previous quarter.

Cash flows from operating and investing activities were barely positive at $4 million, but the company managed to reduce its debt from US$256 million to US$185 million by converting bonds to share capital.

Outlook

Lynas is one of the world’s largest producers of rare earths that are in high demand for various applications in industrial processes and electronics.

The demand for NdPr would really take off with a boom of electric cars, since these materials are used to manufacture energy efficient electrical motors. To meet an increase in demand, the company launched Lynas NEXT, a programme of mine and plant upgrades aimed at increasing NdPr production to 600 tonnes per month from January 2019.

Should you invest?

Although Lynas is trading close to its 52-week high, I think there is potential for further upside in this stock. Once the Lynas NEXT programme is complete, the company can increase sales, and use cash flows to further strengthen its balance sheet and maybe resume paying dividends.

Investing in Lynas also entails significant risks, as prospects for this company depend to a large extent on the future of electric cars.

However, for those interested in gaining exposure to the electric vehicle market, Lynas is an interesting alternative to lithium miners like Galaxy Resources Limited (ASX: GXY), Orocobre Limited (ASX: ORE) and Pilbara Minerals Ltd (ASX: PLS), in case rising production will lead to an oversupply of lithium.

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Motley Fool contributor Tommaso Autorino has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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