Arafura Rare Earths Ltd (ASX: ARU) shares have come under pressure this month.
This has been driven by concerns over comments out of Tesla, which suggested that the electric vehicle giant may stop using rare earths in its cars.
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Should you buy Arafura shares following this weakness?
According to a note out of Bell Potter, its analysts believe that investors should be taking advantage of this weakness.
At the start of the week, the broker upgraded the company's shares to a speculative buy rating with a 72 cents price target.
Based on the current Arafura share price of 60 cents, this implies potential upside of 20% for investors over the next 12 months.
'A knee jerk reaction'
Bell Potter believes the Tesla-induced selling has been an overreaction. It commented:
The recent 16% sell-off in ARU in reaction to the Tesla Investor Day presentation was a knee jerk reaction and in our view, was overdone. We maintain our valuation for ARU of $0.72/share and return to a Speculative BUY recommendation.
We view TSLAs' announcement as risk management to support its current growth in EV sales over the next decade (20m EV sales by 2030) as the decision reduces procurement risks stemming from a lack of secure near term supply ex-China.
The broker also highlights that even if Tesla were to increase its electric vehicle market share from 13% to 40% by 2030 and went without rare earths, there would still be a need to increase supply materially over the coming years. It adds:
We have calculated an alternative to our base case D&S model and assumed TSLA's ambitious growth target, basically assuming they hold 40% market share (up from 13% currently) by 2030. The result reduced our NdPr demand estimates by 10ktpa, which would still require the addition of 4.3x of Nolans capacity over the next 7 years. Given the scale, grade and advanced nature of the Nolans project we would still view this as a difficult task to achieve thus concluding price support for NdPr should be maintained.
All in all, the broker remains positive on the future of Arafura and its shares.
