The Lynas Corporation Ltd (ASX: LYC) share price is up more than 83% in 2019 and just broke its 52-week high of $2.96. Record production levels and ongoing US–China trade tensions could be the catalysts that see the Lynas share price move even higher in 2019.
What does the Lynas Corporation do?
Outside of China, Lynas is the largest miner and producer of rare earths in the world. The term 'rare earths' describes a group of metallic elements which are critical to producing smart phones, electric vehicles, wind turbines, and alloys. Lynas currently operates two large projects—a deposit and mining facility in Mount Weld, WA, and a rare earths separation facility in Kuantan, Malaysia.
For a while, the Lynas share price was trading in relative obscurity for a number of reasons, including low rare-earth prices, regulatory uncertainty, high capital costs and an unstable balance sheet. However, in 2019, Lynas is emerging as one of the best performers on the ASX, following a takeover bid and China–US trade relations putting a squeeze on the supply of rare earth materials.
Record production and a Wesfarmers takeover offer
Neodymium and praseodymium (NdPr) is critical to the production of electrical vehicles and is the most closely watched rare earth price in relation to Lynas. The Mount Weld mine owned by Lynas boasts the largest and highest quality of NdPr deposits in the world.
Despite the NdPr spot-price averaging a low US$38.50, Lynas released a quarterly production report earlier this year indicating better than expected financial results, with the company cracking $100 million in revenue. According to the report, Lynas produced a record 1,591 tonnes of NdPr in March, up 30% on the previous quarter. In addition, production of rare earth oxides were also a record 5444 tonnes, up 23% from the December quarter.
Following record production results for the quarter, Wesfarmers Ltd (ASX: WES) launched an unsuccessful $1.5 billion takeover bid, valuing the Lynas share price at $2.25 per share.
US–China trade-war beneficiary
The Lynas share price has also reflected strategic value in recent times as trade tensions rise between the US and China. The global supply sources of rare earths are limited, with the US relying on China for around 80% of its rare earth exports.
In retaliation to trade tariffs imposed by the US, China may threaten to freeze its supply of rare earths to the US. As a result, the restricted supply would leave Lynas as the only source of rare earths, which are critical to the US military and key industries.
Some analysts believe that if sanctions are initiated, Lynas could triple production of rare earths and the price of NdPr could reach $US80 per kilogram in the long term. Currently, Lynas aims to increase its annual NdPr production to 10,500 tonnes by 2025 and has signalled intentions to build a processing plant in Texas.
Is it a buy?
In my opinion, the Lynas share price is trading on the volatility of US-China trade tensions, which has seen it break 52-week highs. However, given the volatility I think it would be wise for investors to remain cautious before buying shares in the company. A prolonged trade war and emerging electric-vehicle market provides great potential for future growth, however I would wait for a pullback and consolidation in share price before buying.
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