Critical mineral stocks for an uncertain world: Is Australia the solution to China restricting exports?

Anthony Albanese has offered to become a cornerstone investor in the global supply of critical minerals. It’s one of the few bargaining chips Australia holds in the escalating trade war between the US and China, and the Prime Minister has pledged $1.2 billion to stockpile reserves for the nation’s allies.

China dominates the sector, leading the production of 20 critical raw materials and holding a near-monopoly in the refining of many of them. Critical minerals — such as lithium, graphite, cobalt, manganese and rare earths — are essential building blocks for the batteries and magnets powering the energy transition. Many are also vital for electronic components.

As the trade war intensifies, investors are questioning whether Australia may become an increasingly attractive supplier, particularly as China restricts exports of many of these products.

Now that the US has identified 51 separate critical minerals, attention is turning to Australia’s role.

Here are three companies that have attracted renewed interest in the wake of Donald Trump’s trade war. But a caveat: junior miners in the space regularly swing between euphoria and despair — trading them is not for the faint-hearted.

Iluka Resources

The mineral sands producer has operations in Western Australia, where it produces titanium dioxide, and in South Australia, where it owns the world’s largest zircon mine. The company has taken investors on a wild ride, with shares peaking near $12 in late 2023 before falling to $3.73 this week. However, the Federal Government has already backed Iluka with a $1.65 billion loan to help build a processing plant.

Investment bank Citi described the potential announcement of a new critical minerals reserve as “clearly a potential positive” for the stock, prompting an 18 per cent upgrade in Iluka’s target price to $4.40. On Thursday, the stock rose 4 per cent in morning trade on speculation about a government-run stockpile.

Citi rates the company as “high risk” and warns that its valuation depends on a “substantial improvement in rare earth pricing and/or the creation of an ex-China rare earths market”. Goldman Sachs is more bullish, setting a price target of $6.60—a 76 per cent premium to Wednesday’s close.

Lynas Rare Earths

Another boom-and-bust stock, Lynas reached dizzying highs of nearly $25 in 2011 before crashing to $0.36 in 2015. It’s currently trading at $8.39.

Lynas operates a rare earths mine in Western Australia and a processing plant in Malaysia, producing neodymium and praseodymium (NdPr), which are used in magnets that power electric motors. The stock has surged 50 per cent since April.

The company is also developing a heavy rare earths processing plant in Texas via a deal with the Biden administration. Given the potential ban on magnet exports from China, the operation could become a strong revenue driver.

Macquarie has a “neutral” rating on Lynas as it assesses the impact of China’s export restrictions. On one hand, reduced Chinese exports could depress NdPr prices. On the other, Macquarie believes an ex-China market “could potentially be willing to pay a premium for products from Lynas for supply security,” noting that China’s previous ban on gallium created a market priced 70 per cent higher outside China.

Pilbara Minerals

Lithium is another commodity critical to the energy transition, feeding directly into the battery supply chain. Australian lithium miners are highly leveraged to electric vehicle demand—driven largely by China’s rapid automotive expansion. But lithium’s relative abundance makes it prone to boom-and-bust cycles.

Pilbara Minerals has experienced the highs and lows firsthand, with shares reaching $5.37 in 2022 before falling to $1.46. Production continues to ramp up across the Australian sector, with several new projects yet to come online—adding further pressure on prices.

Goldman Sachs reports that China is holding significant lithium inventories, limiting near-term share price upside. However, the bank believes the sector may mature, with companies focusing more on cost discipline and improved production. It also anticipates M&A activity will help rationalise the industry.

At the start of April, Goldman set a target price of $1.75 for Pilbara Minerals, and the stock has been rising since. At Thursday’s price of $1.47, that implies around 20 per cent upside.

Goldman also has a positive view of IGO, another Perth-based lithium miner with a nickel operation. It set a price target of $4.60, up from the current $3.70.

This information is for informational purposes only and is not intended to be personal financial advice,