Lynas Rare Earths has plunged 20% in a month: Is it a buy?

This former stock market darling is seeing its valuation head south. Is it a lost cause or an absolute bargain?

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A year or two ago, Lynas Rare Earths Ltd (ASX: LYC) shares enjoyed a rapid ascent as the market recognised the business as the only major producer of rare earths outside of China.

To boot, rare earths were a critical ingredient in batteries for electric vehicles, which are enjoying a surge in popularity.

However, the Lynas share price has crashed almost 20% over the past month. In fact, the stock has languished over the past 12 months, losing more than 26%.

So what is happening? And is it still a stock worth buying?

Woman in yellow hard hat and gloves puts both thumbs down

Image source: Getty Images

Rare earths market has been shaken up

According to Shaw and Partners portfolio manager James Gerrish, an announcement from a major buyer of rare earths shook up producers recently.

"The rare earths market has been volatile this week on the back of Tesla Inc (NASDAQ: TSLA) announcing plans to install permanent magnets in their cars to reduce the reliance on the expensive materials," he said in a Market Matters Q&A.

"Very little detail was provided on the plans and we think there is a lot of work to get through before this becomes a reality."

But this development did not worry Gerrish.

"Tesla, and EVs in general, are just one of many demand sources of rare earth materials," he said.

"We continue to like Lynas, the biggest player in the space outside of China."

Due to the geopolitical importance of its status as a rare producer in the first world, Gerrish noted Lynas enjoys government support from both Australia and the United States.

The share price drop in the past month and year merely presents an attractive entry point.

"While there are some risks around execution with the new Kalgoorlie plant, we think the market is taking a harsher view than what the company will deliver."

Lynas has plenty of fans

Gerrish is not the only professional with a positive outlook for Lynas Rare Earths.

The Motley Fool reported a fortnight ago that the analysts at Firetrail declared the stock as one of the best to buy for the next decade.

"To make batteries, we need lithium, rare earths, nickel, cobalt and copper," stated the team.

"We hold Lynas Rare Earths Ltd in our Australian portfolios."

Wilsons equities strategist Rob Crookston flagged last month that Lynas could even be an attractive takeover target.

"We are anticipating a robust year for resources stocks, which will include M&A activity as the sector undertakes growth and consolidation to take advantage of strong balance sheets after a bumper 2022," he said in a memo to clients.

"We believe the large major miners are looking to diversify towards EV minerals."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. 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 Scott Phillips.

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