The Lynas Rare Earths Ltd (ASX: LYC) share price has soared almost 20% over the past month. It opened on 14 October at $7.64 and closed on 14 November at $9.15 — that's an impressive gain of 19.76%.
Meanwhile, the S&P/ASX 200 Materials Index (ASX: XMJ) moved upwards with a 12.36% gain over the same period.
The broader market, measured by the S&P/ASX 200 Index (ASX: XJO), also jumped higher in this timeframe, gaining 7.5%.
There are differing opinions on the future trajectory of the Lynas share price. One expert believes it could be on an upswing, while another believes the company's first quarter update for FY23 showed weakness which could cause its share price to fall.
So let's fully examine the bull and bear case for Lynas's shares.
What the bulls say
In an article in Livewire, Kardinia Capital portfolio manager Kristiaan Rehder picked Lynas as a stock that could outperform over the next five years.
One aspect of the company that caught Rehder's eye was its balance sheet which holds $1 billion worth of cash and cash equivalents. This liquidity was said to be pivotal to Lynas scaling its production volume from 7.2 kilotonnes of neodymium and praseodymium (NdPr) per annum to 12 kilotonnes per annum through increased capital expenditure.
Rehder notes that Lynas is "highly profitable", as well as efficient in transforming shareholder value into earnings. Measuring this is the return on equity (ROE) ratio, which Rehder believes will remain above 20% over the next few years while also being tethered to the commodity prices of NdPr.
Rehder also saw an advantageous macro backdrop for the Lynas share price that could keep demand for its product high. Tailwinds included the world's transition to electric vehicles.
Additionally, Rehder told Livewire:
With rising geopolitical tensions globally, Lynas holds a strategic position as the dominant ex-China producer of rare earths, with the US Department of Defence agreeing to co-fund the development of two rare earth separation plants in the USA. We believe this warrants a valuation premium.
What the bears say
Representing the bears is Tony Paterno, senior client advisor at Ord Minnett, who recently gave Lynas a sell recommendation in an article that appeared in The Bull.
It should be noted that Paterno's orientation on Lynas's shares is far more nearsighted than Rehder's.
Paterno drew his bearish thesis from Lynas's first quarter results for FY23, which reported that the company's revenue fell 44%.
"The 2023 first quarter update was weak, in our view," said Paterno. Aside from the downfall in Lynas's revenue, he also notes that its capital costs are set to increase by 15 per cent to $575 million.
This cost increase was addressed in Lynas's quarterly report. The funds will be used to upgrade its facilities by adding a carbonate refining process at its Kalgoorlie Rare Earths Processing Facility.
Lynas share price snapshot
Despite its gains over the past month, the Lynas share price is down 10% year to date. For comparison, the ASX 200 is down 4% over the same period.
The company's market capitalisation is around $8.28 billion.
