The ASX-listed rare earths sector has certainly been on fire in recent times, with the escalation of the trade war between the US and China only adding fuel to the fire.
China last week announced it would impose export controls on an additional five rare earth elements, bringing the total number of elements impacted by export restrictions from the country to 12. The country controls at least 70%, and some reports suggest as much as 90%, of the global trade in rare earth elements.
US President Donald Trump responded to the Chinese announcement with threats of a new 100% tariff on Chinese goods, as well as potential curbs on US exports to China.
Image source: Getty Images
Stoush a boon for local producers
The increasingly fiery stoush between the two nations has pushed shares in Australian-listed rare earths companies to new highs, with Lynas Rare Earths Ltd (ASX: LYC) consolidating its value above $20 billion this week, hitting fresh 12-month share price highs of $21.96 on Tuesday, up 8.3% in early trade.
This compares with their 12-month low of a mere $6.16.
Iluka Resources Ltd (ASX: ILU) shares were actually the best performer among S&P/ASX 200 Index (ASX: XJO) shares on Tuesday morning, up 12.1% to $8.61, while Meteoric Resources (ASX: MEI) shares hit a new 12-month high of 24 cents, up 17.1%.
Bull run has shares looking expensive
But while Lynas is well-placed as a major producer of rare earths from its Malaysian and Australian operations, the recent run-up in its share price has Macquarie analysts suggesting that it's fully priced at recent levels.
A positive for all stocks in the sector, Macquarie analysts say, is the Australian Government's potential plans to create a strategic reserve for rare earth minerals in collaboration with the US.
But that doesn't mean there is upside from here as they explain:
While this presents a catalyst for rare earth element equity names in the near term, we believe a large portion of that has already been priced for Lynas and Iluka. Given equity names have outpaced underlying neodymium-praseodymium price increases and diminishing effects of further control tightening, we see Lynas and Iluka as fully priced at these levels.
Macquarie has a neutral rating on those two stocks, while it still has an outperform rating on Meteoric Resources, where its analysts see "significant upside".
The broker has a price target of $18.50 on Lynas shares, representing a 12% increase from its previous price target, but still well below the current share price. Additionally, it has a price target of $7.10 on Iluka, which is also well below the current share price. Macquarie has increased its price target for Meteoric Resources by 15% to 39 cents, 62.5% above prevailing prices.
