The Lynas Rare Earths Ltd (ASX: LYC) share price has been outperforming the market over the past 12 months.
During this time, the rare earths producer's shares are up an incredible 190%.
Does this make them overvalued? Let's see what analysts at Bell Potter are saying about the high-flyer.
Image source: Getty Images
What is the broker saying?
Bell Potter has had a sudden change of tune on the Lynas share price.
After warning that its shares were severely overvalued and in danger of crashing deep into the red, the broker now feels that they are about fair value.
The catalyst for this appears to have been an announcement this week relating to its JARE offtake agreement. It explains:
LYC announced after market it had extended the JARE (Japan Australia Rare Earths B.V.) offtake agreement to 2038. The extended agreement allows for deliveries of up to 7,200tpa NdPr, subject to no opportunity loss to LYC, with firm commitments of 5,000tpa. In addition to the NdPr sales, LYC agrees to sell up to 75% of all Heavy Rare Earth (HRE) oxides produced at Lynas Advanced Materials Plant (LAMP) to Japan, with firm commitments of 50%, at prices and terms which represent no opportunity loss for LYC.
The pricing regime under which the agreement has been struck sets a floor price of US$110/kg, with joint participation in prices above US$150/kg. Should LYC achieve a price in excess of US$150/kg for NdPr, they agree to share 30% of the upside with JARE to a maximum of US$10m per calendar year. The updated agreement is subject to an annual review process.
Bell Potter highlights that this effectively means that Lynas is guaranteed revenue of approximately $775 million from the arrangement. It adds:
This effectively guarantees revenue of ~A$775m at the current exchange rate for NdPr and accounts for 48% of the targeted production rate of 10.5ktpa. We have calendarized the Visible Alpha consensus estimates over the next three years to work out the incremental revenue from the introduction of the price floor on the NdPr only. The result is a 7% increase in Revenue on consensus estimates for CY26, and 3% for CY27 and CY28.
In light of this, the broker has upgraded its earnings estimates materially through to FY 2028, which has had a major impact on its valuation.
Lynas share price gets valuation boost
According to the note, Bell Potter has upgraded Lynas' shares to a hold rating with a price target of $19.00. This is up 64% from its previous price target of $11.60.
Commenting on its upgrade, the broker said:
We continue to see risks around the valuation premium and multiple, which in our opinion are pricing in perfection in an imperfect world. However, we note that the announcement safeguards a substantial portion of revenue and earnings, reducing the impact of adverse price swings should additional supply enter the market over the coming years and somewhat justifying that premium. Our recommendation shifts from Sell to Hold and our TP increases to $19.00/sh (previously $11.60/sh).
