Should you buy Iluka or Lynas shares for rare earths exposure?

Which rare earths producer should you buy?

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If you’re looking for exposure to rare earths, then there are a couple of quality options for you to choose from on the ASX 200.

These are Iluka Resources Limited (ASX: ILU) and Lynas Rare Earths Ltd (ASX: LYC).

Which rare earths producer should you buy?

The team at Goldman Sachs has been looking at the industry and has given its verdict on the two companies.

According to the note, the broker believes investors should buy Iluka over Lynas at this point in time.

Goldman has a conviction buy rating and $14.00 price target on Iluka’s shares. This compares to the current Iluka share price of $12.43.

As for Lynas, this morning the broker initiated coverage on the company with a neutral rating and $9.50 price target. This is a touch lower than the current Lynas share price of $9.69.

Goldman commented: “We prefer ILU (Buy, on CL) over LYC (Neutral) for Rare Earth/NdPr exposure based on valuation. Factoring in our long run NdPr price of US$80/kg, our price target on LYC offers 2% downside.”

Why Iluka?

The broker is bullish on Iluka due to its attractive valuation and compelling minerals sands and rare earth growth potential.

The broker said: “We think ILU is undervalued (on c.5x EBITDA) vs. key rare earth (c.15x) and mineral sands/pigment (c.6x) industry peers.”

“We are positive on ILU’s project pipeline and forecast >40% production growth in mineral sands volumes, c.18ktpa of Rare Earths (~3.5-4ktpa of high value NdPr), and a >50% increase in EBITDA over the next 5 yrs to 2026.”

In addition, Goldman highlights that rare earths are in high demand from end users and this is expected to remain the case for some time thanks to their use in renewable energy and electric vehicles.

It said: “NdPr market to remain in deficit beyond 2025 based on our NdPr SD model incorporating our global 2030 wind & EV targets and ex-China mine supply forecasts. Current NdPr spot China is ~US$135/kg.”

All in all, this could make Iluka shares worth considering if you’re looking for exposure to the resources sector or rare earths.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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