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Why the drop in Lynas Corporation’s share price is a buying opportunity

The Lynas Corporation Ltd (ASX: LYC) share price gave up morning gains following the release of its quarterly update and is underperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

The LYC share price tumbled 1.9% to $2.61 at the time of writing despite opening stronger while the top 200 stock benchmark rallied 0.3%.

The rare earths miner is also underperforming its peers. The Rio Tinto Ltd (ASX: RIO) share price gained 0.7% to $98.92, the Alumina Limited (ASX: AWC) share price added 1.1% to $2.38 and the Iluka Resources Limited (ASX: ILU) strengthened 1.4% to $9.41.

What’s weighing on the Lynas share price

The weak Neodymium (NdPr) price is one likely cause of Lynas’ share price weakness with the miner reporting poor demand for the mineral used for producing strong magnets from China due to the ongoing trade war which is dragging on the Asian giant’s industrial production.

There could also be some nervousness as Lynas approaches a key deadline regarding the renewal of its operating licence in Malaysia. Management said it is working with the Malaysian government and believes that the country’s cabinet will announce a decision by mid-August.

It also doesn’t help sentiment that the miner reported a decline in production and sales for the June quarter. Sales volume dipped 6% over the previous quarter while sales tumbled 15.8% to $87.5 million.

Should you buy Lynas?

The lower NdPr price and the stockpiling of the commodity contributed to the bigger drop in price over volume, although management reported an increase in its cash balance to $89.7 million for the 4QFY19 compared to the March quarter’s $67.1 million.

Investors shouldn’t be too worried about volatile rare earth prices as this group of commodities as I believe there is a fundamental change in how the world views these minerals in light of the US-China trade war.

Rare earths are regarded as a strategically important resource, not dissimilar to how crude oil is viewed in the past.

The world, including the US, will be looking to cut their dependence on China, which is the biggest supplier of these minerals by a country mile.

This puts Lynas in the driver’s seat as it is one of the most significant rare earths companies outside of China.

The strategic significance of rare earths also leads me to believe that Malaysia will renew Lynas’ license to keep operating its processing plant in that country. It is arguably in Malaysia’s national interest to have such an industry.

For these reasons, the drop in Lynas’ share price could represent a buying opportunity for longer-term investors.

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Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. Connect with him on Twitter @brenlau.

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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