Lynas Rare Earths Ltd (ASX: LYC) shares certainly have been in fine form this year.
Since the start of the year, the rare earths producer's shares have rocketed an incredible 130%.
But those gains could be over according to one leading broker, and heavy declines could be on the way.
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What is the broker saying?
According to a note out of Bell Potter, its analysts concede that investors have ignored its sell rating after positive developments in the US market. It said:
Our Sell-rating on LYC, which we view as based on underlying business fundamentals, has been materially outpaced by sector sentiment. The support for critical minerals- leveraged equities was most recently reinforced by the US DoD's MP Materials (MP, NYSE not covered) investment and offtake agreement.
However, it still doesn't believe that this justifies the current valuation of Lynas shares.
Bell Potter estimates that the market is pricing in a long term NdPr price of US$160 per kg, which is materially ahead of its own forecasts, consensus estimates, and spot prices. It adds:
Our LYC DCF derived NPV of $7.91/sh assumes a long-term NdPr price of US$95/kg; this assumption is not materially different to consensus. Holding all-else equal, we would need to assume a long-term NdPr price of US$160/kg for our valuation to lift to LYC's current share price; 68% higher than our base case. Spot NdPr prices are currently around US$77/kg.
Lynas shares tipped to sink
In light of its NdPr forecasts, the broker thinks that the rare earths producer's shares could be at risk of big declines if prices don't head towards levels needed to justify its valuation.
As a result, Bell Potter has reaffirmed its sell rating and $7.65 price target on its shares.
Based on its current share price of $15.09, this implies potential downside of approximately 50% over the next 12 months.
Commenting on its sell recommendation, the broker said:
We maintain our Sell recommendation and $7.65/sh Target Price, with the view that fundamentals will ultimately prevail. However, we do recognise that the current themes pushing LYC higher (and supporting the sector more broadly) are likely to persist as tailwinds over the short term. We have seen the US play its hand with the MP Materials deal; this could form a blueprint for other sovereign investments. LYC provides a relatively clean and large-scale leverage to the sector and these themes.
