March 25th, 2022 | 13:13 CET
Defense Metals, Hensoldt, Rheinmetall - Special boom for the defense industry
Table of contents:
Defense Metals - Rare earth metals for armaments
In addition to electromobility and the energy transition, the defense industry is another sector with a high demand for so-called rare earth metals ("rare earths"). The name is misleading. The deposits of the 17 rare earth metals are larger than those of many other metals. However, they do not occur in concentrated form alone or as ores but are bound in combination and at low levels in minerals. Because of this, and also because of similar chemical properties, their separation is very labor-intensive. China dominates the world market by a wide margin.
Rare earth metals are used, for example, in the production of permanent magnets or battery storage systems. Due to the surge in demand in the wake of the energy transition and distortions in the supply chain caused by the global corona pandemic, the dependence on China has been painfully felt by many countries. Alarm bells rang in the defense industry in particular. Here, rare earth metals are indispensable for missile guidance systems, radar systems and satellite technology.
There is a struggle to restart production chains of rare earth metals in other countries. For example, the US government has funded MP Metals, a US company, with about USD 6.95 billion to restart refining rare earth oxides extracted from the only mine in production in North America on US soil starting in 2022.
Another pioneer specifically targeting the defense industry is Canada's Defense Metals. According to a Preliminary Economic Assessment (PEA), its Wicheeda project, located in a well-known mining region in British Columbia, has the potential to become a globally significant deposit of rare earth metals.
The PEA released in November 2021 indicated a project value (after tax) of CAD 516.5 million, with a mine life of 19 years. The Company has since released additional drill results that should increase resource estimates, further extending the mine life and thus increasing the project value. The Company has a manageable market capitalization of CAD 45 million.
Hensoldt - German defense specialist in stock market frenzy
Since the invasion of Ukraine by Russian troops on February 24 and the subsequent announcement by the German government of a special fund of EUR 100 billion for the modernization of the German armed forces, the share price of listed German defense companies has known only one direction: north.
A well-known representative is Hensoldt, which was created from the former radar division of Airbus and has its headquarters in the Bavarian capital of Munich. Although profit-taking set in for a short time last week, the rally continues. The papers have already gained more than 130% in the last four weeks.
The next step is to permanently overcome the psychologically important EUR 30 mark. Analysts have raised their forecasts given the emerging flood of orders. JPMorgan, for example, raised its price target from EUR 22.50 to EUR 30 based on a profit forecast for the years 2023 to 2025 that is up to 53% higher and upgraded the stock to "Overweight".
Rheinmetall - Analysts see further share price potential
The Düsseldorf-based manufacturer of ammunition and heavy war equipment is seen as one of the biggest potential beneficiaries of the special fund planned by the German government. According to CEO Armin Papperger, the Group is well prepared for the coming flood of orders. The Group can currently deliver an equipment package worth EUR 42 billion to the German government. This package includes munitions, helicopters and heavy tracked and wheeled tanks.
In addition to the emerging growth in profits, another factor should speak in favor of an investment in defense companies: a discussion has currently flared up as to whether shares in war equipment manufacturers can be classified as "sustainable" in the future. The Swedish SEB Bank is already moving ahead and has announced that it will lift the ban on investment in defense companies from April. Analysts are convinced by the Düsseldorf share. Bank of America formulates a target price of EUR 220, and Warburg Research sets the target zone at a similarly high level of EUR 210.
An investment in the defense sector is a moral question that everyone must answer for themselves. From an economic point of view, good returns are possible here in the near future; groups such as Hensoldt and Rheinmetall are among the profiteers. Defense Metals is also promising. The Canadians have the potential to become an urgently needed producer of rare earth metals.
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