The Lynas Rare Earths Ltd (ASX: LYC) share price has dropped around 20% since the beginning of 2022. It has been a hefty fall.
Lots of businesses with compelling longer-term growth potential have been sold off this year. ASX growth shares have lost some investor support and now don't command the same level of valuation as before.
Inflation and higher interest rates are certainly having an impact on the ASX share market and the economy. But, should a resources business be punished in the same way?
Let's have a look at how the business has actually been performing recently because operational performance can be very different to movements of the share price.
FY22 earnings recap
In the 2022 financial year, Lynas reported that its revenue jumped by 88% to $920 million, earnings before interest, tax, depreciation and amortisation (EBITDA) went up 155% to $601.2 million and net profit after tax (NPAT) increased 244% to $540.8 million.
The company reported that favourable market conditions and strong demand for rare earth materials saw rare earth prices sustained at high levels in the second half of the financial year, with the Neodymium-Praseodymium (NdPr) market price remaining 70% to 80% higher than the same period last year.
Lynas has continued to work on its 2025 growth plan with construction of its rare earths processing facility in Kalgoorlie, as well as a heavy rare earth separation facility and light rare earth separation facility in the US.
New agreement
It was only last week that the rare earth company announced the signing of agreements with Japan Australia Rare Earths (JARE) which reconfirms its shared commitment to work together on future development opportunities.
Under the agreements, JARE will provide a contribution of US$9 million to the exploration program at Mt Weld on the exploration target in the fresh carbonatite below the current Mt Weld life of mine design and ore reserve. JARE will also provide technical support to the exploration program through the involvement of world-leading geologists and other technical professionals.
JARE has also agreed to remove capital management restrictions, so Lynas can do things like issue dividends, carry out share buybacks and so on.
Is the Lynas share price a buy?
The broker Macquarie currently has a neutral rating on the business, with a price target of $9.50. That implies a possible rise of mid-single-digits for Lynas over the next 12 months. However, it noted that rare earth prices have recently fallen back.
The broker Ord Minnett is much less optimistic about Lynas' prospects. It has a sell rating with a price target of just $4.85. That implies a possible fall of more than 45% from here. The broker notes the high level of capital expenditure that Lynas is planning to spend on its projects, with project execution being a potential risk. It also pointed out that the Lynas share price has fallen.
Looking at the Lynas share price and projections, Macquarie thinks Lynas is valued at 13 times FY23's estimated earnings and Ord Minnett thinks Lynas is priced at under 11 times FY23's estimated earnings.
