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Why the Lynas share price is the star performer on the ASX 200 today

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The S&P/ASX 200 Index (ASX: XJO) may be on course to record another decline on Thursday, but that hasn’t stopped the Lynas Corporation Ltd (ASX: LYC) share price from rocketing higher.

In late afternoon trade the rare earths producer’s shares are up 17% to $1.63. At one stage today they were up as much as 21% to $1.68.

This makes it the star performer on the ASX 200 ahead of the likes of Regis Resources Limited (ASX: RRL) and Perenti Global Ltd (ASX: PRN).

Why is the Lynas share price the best performer on the ASX 200?

Investors have been buying Lynas’ shares today following the release of a positive announcement after the market close on Wednesday.

That announcement revealed that the company has been advised by the U.S. Department of Defense (DoD) of its intention to award a Phase 1 contract to Lynas for a U.S. based Heavy Rare Earth separation facility. This follows the company’s tender submission to the DoD in December 2019.

Last year the U.S. Army revealed that it was looking to fund the construction of a rare earths plant for weapons development. This represented the U.S. Army’s first financial investment into commercial-scale rare earths production since World War Two.

According to the release, Phase 1 funding provided by the DoD will allow Lynas and Blue Line to complete detailed planning and design work for the construction of the separation facility, in line with DoD milestones.

After which, it revealed that successful completion of Phase 1 milestones may lead to further contracts for commercial scale production and operation of the separation facility. Though, management warned that this is not guaranteed.

Lynas’ CEO and Managing Director, Amanda Lacaze, was very pleased with the contract award.

She said: “We are delighted to be selected for Phase 1 by the DoD. We have confidence in the strength of our proposal and in our ability to meet the conditions set by the DoD for the development of a successful Heavy Rare Earths separation facility.”

“Today’s announcement creates the foundation for a facility in the U.S. that will assist the U.S. to avoid the supply chain vulnerability that has been exposed over the past year. We look forward to working with the DoD on Phase 1 of this important project,” she concluded.

Positive broker reaction.

This news went down well with one of Australia’s leading brokers.

According to a note out of UBS this morning, its analysts have retained their buy rating and $2.70 price target on Lynas’ shares. This price target represents potential upside of 65% over the next 12 months.

UBS was pleased with the development and suspects it could lead to a sizeable funding contribution by the DoD towards a new downstream business unit.

In addition to this, the broker feels this news highlights the underlying strategic value of the Lynas business. This is because it is the only major non-China based producer of rare earths, which are of increasing importance to the defence industry.

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Returns as of 6th October 2020

Motley Fool contributor James Mickleboro 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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