Dirt cheap! Why Lynas shares could rise 18%

Bell Potter sees a lot of value in this rare earths miner's shares.

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Lynas Rare Earths Ltd (ASX: LYC) shares could be undervalued at current levels.

That's the view of analysts at Bell Potter, which are feeling particularly bullish on the rare earths miner.

What is the broker saying about Lynas?

Bell Potter notes that the company released its quarterly update earlier this week. While Lynas' sales fell short of expectations, its production was significantly stronger than the broker was forecasting. It commented:

LYC produced 1,742t NdPr (BPe 1,462 +21%) and 1,821t of other rare earths, generating revenue of $101m (BPe $115m) on sales of 2,310t, equating to an average realised basket price of $43.8/kg (BPe $32/kg). Given the weaker pricing environment 500t of NdPr was stockpiled over the quarter, as well as an undisclosed amount of SEG, which LYC will look to sell when pricing firms. Capex at Kalgoorlie has been increased from $730m to $800m, whilst the guidance over FY24 remains unchanged at $600m, indicating some items will be pushed to the next financial year.

The broker notes that these weaker prices could lead to downgrades consensus earnings estimates. It adds:

If the NdPr price holds US$55/kg through the remainder of FY24, consensus earnings will likely be revised lower by ~$30m, which, on Bloomberg NPAT Adj of A$97m at the time of writing is quite meaningful. If that's the case, then LYC may experience some short-term weakness.

Should you buy Lynas shares?

Bell Potter acknowledges that some investors may wonder whether it is wise to invest in the company when an earnings downgrade could be around the corner. However, it thinks they should focus on the longer term, believing that rare earths prices are likely to have bottomed. The broker explains:

So, do you buy now or wait for that earnings risk to clear? We believe the more important question is; does the market care about another negative quarter for LYC when the risks are mounting to the upside? It's apparent that the current NdPr price is close to the bottom of the cost curve, with the risks of stronger medium-term pricing outweighing the risks of weaker pricing in our opinion. In addition to this is Hancock Prospecting going substantial on both LYC and MP Materials (MP NYSE, not covered) in a matter of weeks, adding potential corporate activity catalysts. This combination makes holding out difficult, albeit profitable if timed correctly.

Bell Potter has retained its buy rating on Lynas shares with an improved price target of $7.55. This implies a potential upside of 18% for investors over the next 12 months.

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 Scott Phillips.

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