Has Elon Musk pricked Lynas’ rare earths bubble?

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When Elon Musk’s Tesla said last month that it will not need rare earth ores for its next-generation electric vehicles it marked the latest string of bad news for $6 billion Australian miner Lynas Rare Earths, which had only just recovered from an existential threat to its Malaysian operations.

Rare earths had been considered irreplaceable for building the powerful magnets needed for these vehicles, and Tesla cited the move as removing a crucial production – and cost – constraint on its operations.

Elon Musk’s Tesla must cut the use of costly rare earths to meet its goals of making cheaper cars and grow its sales.Credit: Bloomberg

Lynas has made it clear that the growing demand for e-vehicles has underpinned demand, and prices, for rare earths. It drove the share price from $1.30 at the start of 2020 to a high of $11 last year, valuing the group at more than $10 billion at its peak.

Since then, Lynas has shredded as much as $2 billion of its market valuation, trading as low as $6. Has Musk’s declaration shaken the company, or can it keep on trucking?

Industry: Minerals and resources.

Main products: Rare earth ores – 17 elements crucial to the manufacture of many hi-tech products such as mobile phones, electric cars and wind turbines. Neodymium and praseodymium (NdPr) are the two elements that have been in particularly high demand due to electric vehicles.

Key figures: Amanda Lacaze has been chief executive since 2014 and the main driver of its success. Kathleen Conlon was appointed chair in 2020 and has been on the board since 2011.

How it started: Lynas, as we know it, was the brainchild of business veteran Nick Curtis who came up with the idea to build a processing plant in Malaysia and set the company up as the only processor of rare earths outside of China. Japanese commercial interests – stung by China’s blocking of rare earth exports in 2010 – helped finance the plant.

Operations commenced in 2012, but have been dogged by local controversy over the low-level radioactive material produced by the cracking and leaching process in Malaysia which must now be moved offshore by July this year. A new processing operation in Western Australia will pick up the slack.

How it’s going: With Lynas setting up the processing plant in Kalgoorlie, it has solved the Malaysia issue. The company’s main problem now has been keeping up with demand forecasts which have been sky-high on the back of increased EV production which need rare earths for the powerful and lightweight magnets they need.

Lynas boss Amanda Lacaze.Credit: Carla Gottgens

The company has also been in the fortunate position of receiving US government money to fund its plans to set up a processing plant in Texas as governments around the world grow worried about how much they rely on China’s stranglehold on the supply of crucial elements.

The bear case: When Elon Musk talks, people listen. So, when Musk, and other Tesla executives, unveiled plans to wean the car group off rare earths last month it had a major impact.

“You can’t run an automotive industry without rare earths,” Lacaze told the Melbourne Mining Club just last year. What if you can?

The company’s plans to increase rare earths output by 50 per cent by 2025 were deemed to be inadequate precisely due to the boom in car demand.

So, Musk’s edict to replace rare earth elements from his cars went to the heart of what has made this market a magnet for investors looking to ride the burgeoning demand for e-vehicles of all kinds.

The bull case: Musk might actually be able to pull this rabbit out of the hat and reduce Tesla’s reliance on rare earths, but not everyone is buying what he is selling.

Especially since Tesla’s comments say more about the company’s aggressive growth targets, and what it needs to do to get there than it does about the attractiveness of rare earths for the electrification of the auto industry.

According to Adamas Intelligence, there is a reason why automakers have not used cheap and accessible alternatives like iron oxide: getting the same performance comes at the price of significantly higher weight.

In one case it cited, the iron oxide magnets were 30 per cent heavier – “a massive weight penalty,” it said.

Tesla might find a cheaper alternative to power its low price cars of the future, but it won’t be easy.

“Rare earth magnets have been the breakthrough technology that lifted electric vehicles into the same league as conventional cars,” Fat Tail Investment’s James Cooper says.

JP Morgan remains a Lynas fan, it put an Overweight recommendation on the stock this month and an $8.50 price target.

Also this month, UBS analyst Levi Spry upgraded Lynas to a Buy despite lowering its price target to $8.50 due to the 33 per cent slide in the company’s share price since January. Tesla was not of any concern.

“We remain positive on long-term fundamentals. To this extent, we do not think Tesla’s intentions to thrift rare earths from its supply chain has a significant impact within our forecast horizon,” he said.

UBS is forecasting that Tesla will account for around 7 per cent of demand for NdPr by 2030.

“While not insignificant, we still see deficits forming and that inelastic demand (from other OEMs and industries) should keep fundamentals for NdPr strong.”

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Investors should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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