The Lynas Rare Earths Ltd (ASX: LYC) share price closed at $8.80 on Thursday, up 1.85%.
In the year to date, the Lynas share price is down 20%.
However, over the longer run, it's up 400% over five years.
One expert says Lynas shares still offer value to ASX investors at today's price. Here's why.
Rare earths shares are hot stocks in 2022
ASX rare earths shares have had a lot of buzz in 2022. And why wouldn't they?
'Rare earths' refers to a collection of 17 minerals that have a variety of uses in modern technological devices like smartphones. And it's not like we're going to stop wanting our tech gadgets any time soon.
Secondly, rare earths play directly into the decarbonisation theme. Some of them are used to produce permanent magnets that manufacturers prefer for electric vehicles (EVs) and wind turbines.
Not only that, but China mines about 60% of the world's supply, and processes about 80%. And these days, most countries would prefer to work with pretty much any other nation (except Russia).
This is because China has become much more geopolitically aggressive. China has wrested more control over Hong Kong, it's determined to reclaim Taiwan, and it sees the South China Sea as its own asset.
Plus, it's got a raft of trade sanctions against Australia at the minute, so in short, China doesn't like us.
Where does Lynas fit in?
Australia is the world's second-largest producer of rare earths because of Lynas. It's the only significant producer outside China.
That puts Lynas in a prime position. Not only can it mine and sell more of its minerals, it can also export its know-how. In fact, it's already doing this in the United States.
The US defence department has given Lynas a US$120 million contract to build a heavy rare earths separation facility in Texas. It has also given Lynas a US$30 million grant to fund a light rare earths separation facility nearby.
This is important to the US because it's pretty much reliant on China for rare earths processing right now.
Tim Montague-Jones is the head of Australian equity research at ASR Wealth Advisers. He says his team sees "the longer-term value of owning what is one of the few Western processing companies and miners of rare earths materials".
Montague-Jones writes on Livewire:
Governments are now in the process of stepping back into the market to ensure critical products can be secured and made domestically and reduce the reliance on countries such as China.
We view Lynas as a long-term investment for a balanced portfolio set to benefit from the reduction in carbon emission as economies invest in renewables and electric vehicles.
What gives Lynas an edge in the rare earths sector?
Montague-Jones points out that Lynas owns the world's largest rare earths mine outside China. That's the Mount Weld mine in Western Australia's Kalgoorlie region. He says:
This simple fact provides two compelling reasons to invest in Lynas.
Firstly, as a major rare earths producer, Lynas is well positioned to benefit from key megatrends such as the adoption of EVs and renewable energy, both of which use these key materials as inputs.
In addition, a premium is added when you consider that China produces and processes the vast majority of the world's rare earths and that major countries and companies are seeking to diversify away from this supply concentration.
Decarbonisation a tailwind for the Lynas share price
Lynas is well-positioned to benefit from the world's pivot to decarbonisation.
Firstly, rare earths are an input into the magnets installed in nearly 80% of EVs. And unless you've been asleep at the wheel (sorry, couldn't help it), you know that EVs are a massively expanding global industry.
These magnets are also sought-after for the manufacturing of wind turbines. We'll need a lot of turbines if we want to create more energy from renewable sources, and Montague-Jones quotes estimates from the EU Joint Research Centre suggesting these magnets will be used in 70% of future wind turbines.
He says the expectation is that global demand for rare earths will increase from 250,000 tonnes this year to more than 500,000 in the early 2030s. That's big.
As my Fool colleague Bernd reports, Australia produced 20,000 tonnes of rare earths out of a total global production of 240,000 tonnes in 2020.
Montague-Jones said:
Lynas' management team recognises the growth runway for rare earths, and are currently investing in expanding its capabilities and capacity.
Lynas is in a healthy position to invest in these expansions as it maintains a strong balance sheet, sitting on a net cash position of $780 million.
In addition to planning a new facility in the US, Lynas is already building a processing facility in Kalgoorlie, in the same region as its Mount Weld mine. This is in addition to its Malaysia processing plant. Lynas is also investing in expanding capacity at its Mount Weld mine.
Lynas share price 'still appears to have value'
The fundie notes that the Lynas share price has "surged in recent years", so investors may think they've missed the boat. He says:
Although it would certainly be nice to invest in this company at a cheaper valuation, when you consider the structural increase in demand for rare earths, as well as the premium assigned to being the largest producer outside of China, Lynas still appears to have value trading at a P/E of 14x.
P/E stands for price-to-earnings (P/E) ratio. As we explain in Motley Fool's Education Centre, the P/E ratio is a commonly-used metric that helps investors determine a company's value.
The P/E measures the share price against the earnings per share (EPS). Generally, stocks with P/E ratios below 15 are cheap while those above 18 are expensive.
Expert recommends buying the 2022 dip
Montague-Jones sees the fall in the Lynas share price this year as an opportunity. He says:
This is particularly the case with the share price down roughly 20% from its peak due to concerns about operational issues at its processing plant in Malaysia and a downturn in discretionary spending on products that use rare earths, such as smartphones.
However, we see this price weakness as an opportunity.
Lynas is diversifying its processing operations, and we choose to look past cyclical weakness as smartphone purchases will eventually recover and not negate the long-term structural growth in EVs and wind turbines.
