July 13th, 2022 | 14:32 CEST
Lynas Rare Earths, Defense Metals, Rheinmetall - The arms industry is booming
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The native Rhineland-Palatinate has been a passionate market participant for more than 25 years. After studying business administration in Mannheim, he worked as a journalist, in equity sales and many years in equity research.
Lynas Rare Earths - Huge government contract
Russia's war of aggression against Ukraine has highlighted a problem of the Western world. The dependence on Russian oil and gas is overwhelming for Germany and Europe. Therefore, it has now been decided between the EU and the US to strengthen the security of supply, for example, in solar technology, wind power and critical raw materials. In addition to the shortage of Russian energy raw materials, other dangers lie dormant due to extreme dependencies. For example, China currently has a quasi-monopoly in extracting and processing rare earth metals. These are needed, among other things, to produce permanent magnets for wind turbines and electric cars.
In addition to the renewable energy sector, demand from the defense industry is also steadily increasing. Neodymium-iron-boron magnets are considered the strongest permanent magnets in the world. They are installed in many military weapons systems, such as precision-guided weapons, satellite and stealth technologies, and unmanned vehicles.
But deposits outside China are rare. The Mountain Pass mine in California is responsible for 15% of global production, but the extracted metals were still shipped to the Middle Kingdom for further processing in the recent past. In addition, the Australian mines of Lynas and Iluka Resources are producing. The US subsidiary of Lynas Rare Earths recently concluded a contract with the US Department of Defense to construct a commercial plant to separate heavy rare earths in the United States. The contract is worth USD 120 million and fully covers the costs for the construction of the heavy rare earth separation plant. According to the Company, commissioning is scheduled for 2025 at the latest.
After highs above USD 8.50, the Australian's share prices corrected to the broad support area at USD 5.36. Lynas' market capitalization is currently USD 4.8 billion. Given the high demand for rare earth metals, this should prove to be a long-term buy zone.
Defense Metals - Excellent metallurgy offers opportunities
Still some way from the producer stage, equal in potential to the Mountain Pass mine, is the Wicheeda project of Canadian exploration company Defense Metals. The deposit, which has now grown to 4244 hectares, was taken over at the beginning of the year. Last year, a post-tax economic calculation (PEA) showed a value (NPV) of USD 517 million.
One of the outstanding features of the Wicheeda project is its first-class infrastructure. The deposit is located about 80 km northeast of the town of Prince George, a mining hub in British Columbia, Canada. It is strategically located on a major logging road that connects to Highway 97. In addition to a major hydroelectric transmission line and gas pipeline, the project is located near a line of the Canadian Railroad. By rail and road, the Port of Prince Rupert is also accessible some 500 km to the west.
Another plus is the mine's metallurgy, which is significantly close to that of Mountain Pass. Economical metallurgy requires that the minerals and the rare earths they contain are chemically and physically such that inexpensive processing techniques can easily remove them. Wicheeda has bastnäsite and monazite, which are the cheapest rare earths to process.
Defense Metals management plans diamond drilling this year for up to 5,000m. The campaign started recently. Despite record news in recent weeks, the Canadians' share price has not escaped the general market correction, falling by almost half to CAD 0.185 since Russia's invasion. In the long term, the demand for rare earth metals should continue to increase and Defense Metals should benefit significantly with its project. The stock market value is currently around CAD 33 million.
Rheinmetall AG - Further orders
Rheinmetall is one of the outperformers of the "war year" so far. Since the beginning of the Ukraine war, the share price started to run. With the announcement by German Chancellor Olaf Scholz that the defense budget would be increased by a one-off EUR 100 billion and that 2% of GDP would be invested in defense every year thereafter, the share price of the Düsseldorf-based company doubled within two weeks to an all-time high of EUR 227.90. Since then, a correction has taken place at a high level. After falling back to EUR 180, the share price turned back to the EUR 200 area on the back of the good news.
The share of the MDAX member received a tailwind from the US investment bank, Goldman Sachs. The investment bank confirmed its "buy" rating, and the price target was reduced only marginally from EUR 298 to EUR 290. Analyst Olivia Charley expects a weak second quarter due to the automotive supply business. The expert said that defense sales would only become visible in the following quarters.
Rare earth metals are urgently needed for climate change but also for the defense industry. Producers such as Lynas Rare Earths and Defense Metals should benefit from this in the coming years. Defense Metals also stands out due to its low stock market value. Rheinmetall, on the other hand, is benefiting increasingly from the increases in defense budgets.
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