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How low can BrainChip go, Rare Earths and Gold… all this in our weekly Investor Webinar!

April 12, 2023

Brainchip, BRN, LYC, Lynas, Lynas Rare Earths, Northern Star Resources, NST


How low can BrainChip go?

In this week’s investor webinar we look at BrainChip‘s (ASX:BRN) share price and where it might be headed.

We also talk about Lynas Rare Earths (ASX:LYC) and Gold!

Disclosure: Pitt Street Research/Stocks Down Under directors own shares in BRN.

See full transcription below.


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Marc: Good morning on this beautiful Wednesday, the 12th of April. It’s a beautiful morning in Sydney at least. Morning, Stuart.

Stuart: Good morning.

Marc: You can tell that this awesome setting. It’s pretty cold out here actually now. Starting to feel like European summers, you know, [inaudible 00:00:26] time. All right. Lots to talk about. Rare earths, computer chips, and gold. So, we’ll kick it off with Lynas Rare Earths. Stu, take it away.

Stuart: Last week in our webinar, we spoke about rare earths. It starts showing up on our radar screen here on “Stocks Down Under.” Obviously, we’ve been following rare earths for a long time, but Marc detected some increased investor interest so we did a broad overview last week. And I wanna look at Lynas as an important stock that people should have on their radar screen. Now, what’s going on right now? Nikkei just reported, unverified, but they think that Beijing is potentially looking at an export ban on rare earths. Now, as we all know, China dominates the rare earths market, but less than it used to. About 70% of the world’s rare earths products come from China, used to be well over 90%. But the rest of the world has been scrambling to build up rare earths production capacity, both upstream and downstream. So, it’s not as bad, but China could still do a lot of damage if it implemented that threat. So, on the reasonable basis that China will pull something like this in the near future, it’s probably worthwhile investors knowing what’s going on with rare earths so they can jump at the right time. And Lynas is a leading player to take a look at. So, let’s look at Lynas Corp in particular.

So, world’s second-largest producer of separated rare earths. They started with a rare earths mine in Western Australia called Mount Weld. Turns out it’s one of the highest-grade rare earths mines you can lay your hands on. They do a lot of downstream processing in Malaysia, but they’re also building downstream processing capability both in Kalgoorlie, and they’re planning to do it in the U.S. State of Texas. No surprises there. The free world wants as much downstream processing capacity within the free world so that it doesn’t have to rely on Chinese capacity as well. There’s an additional factor is China is about 20 years ahead of the rest of the world in terms of the brainpower to know how to properly develop and process rare earths. So, you want that processing capacity in the West so really smart people in our part of the world can start to work on it.

Lynas is a top 200 company. The market cap is about $5.7 billion. And there’s a picture of Amanda Lacaze, who’s the CEO since about 2014. So, she’s been a stayer, Amanda has. Her background isn’t actually mining, it’s in telecommunications. That’s an advantage for a company like Lynas because it can make them potentially open to opportunities that possibly would be passed up by more geologically-oriented leaders. So, worth taking a look at Lynas as a leader in an industry that’s got to be important from a geopolitical perspective and just purely from a technological perspective as well.

Lynas did well in the first half of 2023. The margins on these products are great, revenue $370 million, EBITDA $189 million. Company’s got $934 million cash on its balance sheet, so it’s very conservative in terms of the way it runs itself. Unfortunately, Lynas has been in the news a lot for the last few years because of the operation at Kuantan in Peninsular Malaysia. It’s perceived to be an environmental hazard by the Malaysians and by various environmental watch groups. But Lynas has done a lot of work to clean up its act. Just got its license renewed in Malaysia for another three years. Meantime, we’ll probably expect the first order going to the Kalgoorlie processing facility within the next three months or so. The company now has a site where it wants to put up its processing plant in Texas. So, big expansion plans for this company are now underway. You wouldn’t know that from the stock price, though. There it is tanking badly since the start of the year. Unfortunately, it’s leveraged to the price of rare earths, which has been dropping. You’ll see that in a slide in a second. But my sense of it is at the right time, this stock can snap back quite nicely. Possibly this proposed rare earths ban is a catalyst, but I think once people get the hang of the growth profile of this company, and they’ve overcome any teething issues they may have in Kalgoorlie, I think that could be the second catalyst. If you flick over to the next slide, you can see why.

This is consensus numbers. Less revenue and earnings in the current year because of lower pricing, but that ends in the financial year we’re not too far away from now, FY24, where we turn around and get 14% growth. And then things really get ripping with the Kalgoorlie and potentially Texas facilities contributing in a serious way in 2025. Meantime, EV to EBITDA is about 10 times. So, I think this thing is undervalued based on its growth potential, let alone any upside that you could potentially get from a re-rating of rare earths prices. That’s the Chinese price of neodymium, one of those 17 rare earths in the package. They’re on the right-hand side of the screen. Giving up a lot of the spikes that it had in 2022 when it looked like there were shortages everywhere, but still way above the levels of the…well, not way above, but still comfortably above the levels that you saw for the six years up to 2020. So, I think if we see stabilization of rare earths pricing from here, combine it with the other advantages that we’re talking about, this one could be interesting. So, investors should be paying attention.

Marc: So, Stuart, that turnaround in revenue in 2024, and this starts in a couple of months, right, that financial year? So, what’s causing that turnout, is it volumes or is it pricing?

Stuart: It’s purely volumes. Being able to keep operating in Malaysia, extra output from Mount Weld and, obviously, downstream processing adds value to what you do. So, it’s a combination of all these things. I don’t think pricing is really an issue in ’24. I suspect people are expecting a price increase in 2025. Demand for rare earths grows strongly year on year because it’s an important factor in permanent magnets for wind turbines, and electric vehicles, and other stuff that’s important to the 21st-century economy, and particularly to the green economy. So, I’m seeing volume more as a factor in ’24, price is more of a factor in ’25, plus whatever happens in Texas could be a really big winner.

Marc: Right. And the price of rare earths, so it’s been coming down, but if you look at that period sort of 2014, 2020, it’s sort of around… What is it? Four hundred thousand?

Stuart: Well, that’s definitely 400,000 to 600,000 ton.

Marc: Yeah. So, could you consider that to be a sort of natural sort of long-term price? And has that spike been sort of a one-off or is there actually some driving factors that could drive the price back up to, maybe not that spike, but a little bit higher from where we are now?

Stuart: It’s a natural long-term base, but you’ve got to expect spikes every now and then such as the one you saw in 2017, ’18. The last really big spike before 2021 was 2010. So, a few times a decade, rare earths will spike, and then companies like Lynas will benefit from. But yeah, to your point, Marc, I think that level is a good base. I actually think we’ll see a gradual increase of that base over time given the demand for the commodity, and the fact that the West will be using less raw materials coming out of China. So, you’ll have better provenanced non-Chinese material that will demand a premium because of that.

Marc: Right. And in terms of your top three rare earths stocks, Lynas, obviously, is in that top three. Two other ones that you think could be winners in that environment?

Stuart: Yeah. People need to look at Peak Rare Earths, ASX: PEK. They’ve got a gigantic rare earth project in Tanzania called Ngualla. Now, the thing about Tanzania the like is it’s a country that’s been open for business now for the last year or so, thanks to a change of government and more liberal operating environment on the part of that government. So, this company stands a decent chance of being able to develop that project. I’d also take a look at some of the other companies we talked about last week. And I need to do a bit more thinking about what you added in as the third player, possibly Northern Minerals, ASX: NTU. And what’s interesting about that one is Nick Curtis, who was the founder of Lynas or the president of Lynas is working on that one. And they’ve got some domestic rare earths capability that they can provide. The thing about rare earths is every man and his dog is looking for a rare earths project in Australia. So, the field might be perceived to get a bit crowded and you’re gonna have to be selective. I actually don’t think now is quite the right time in spite of these concerns about an export ban. But rare earths needs to be on people’s watch screen against the day when things really start to get a move on.

Marc: All right. Well, it’s certainly on our screen. So, yeah, we’ll keep people posted. And who knows some of these shares start going forward.

Stuart: Yeah. It’s rare opportunities coming up.

Marc: Right. Alrighty. Computer chips then. So, we talk about…

Stuart: Every time you say chip, I get hungry, Marc.

Marc: It’s only 9:15, Stu. Because I know, you know, when you get hungry and you want some chips, that’s just your excuse to get a drink, right? But, yeah, we talk about Weebit Nano, but that’s one of our favorites. But there’s another stock that is widely held by retail investors on the ASX and that’s BrainChip, obviously. But if you look at what’s happened there over the last sort of year, it’s only trended down. So, the question really for BrainChip is how low can you go? And let’s start off with the stock in the last sort of 18 months coming off that peak early 2022 on the hype of the Mercedes news. So, it set high at that point in January. But like I said, it’s been coming down. It’s tried to break out of that downtrend a couple of times, but that failed. And more recently, it set support at around 41 cents. So, the current short-term picture is a downtrend and support at 41 cents, and that’s converging in sort of two months. So, something’s gotta give, you’d say, from looking at that chart. But let’s zoom out a little bit and see what happened prior to this period. So, why does this stock keep trending down? Because cash receipts, they’re going up, right? If you look at the latest 4C, that’s for the December quarter, and this was reported at the end of January. Cash receipts are going up. So, you see that number there, $1.2 million almost.

Stuart: And Marc, the reason for that is I can actually go to the store and buy an Akida chip, right?

Marc: No. So, this is mostly license fees they get from companies that work with MegaChips, for instance, and there’s probably some other small stuff in there. So, you actually can’t buy it in a product as of yet. There’s a lot of prototyping going on, but what you see here, these receipts are from license fees, probably some non-recurring engineering income as well. But if you look at the current quarter, that was $1.2 million almost, and for the full year last year, it was $2.7 million. So, just in that last quarter, they did about 40% of their cash receipts for the full year. So, that’s going up. But if you look at the cash, it’s still $2 million U.S, so that’s at the bottom there, 1.9 each quarter. If you look at the cash position, that’s down to $23 million U.S., which is sort of, like, 34 million Aussie at the end of December ’22. And compared it to Weebit after their cap raise, they’re sitting over 80 million Aussie at the moment. And so if you wanna expand, if you wanna commercialize faster, you’re gonna spend more money. And at some point, maybe they need to take some money out of the market. So, that’s something to keep in mind. I don’t think it’s very…it’s not urgent at the moment, but it’s something to probably they’ll have to do that at some point. Of course, what didn’t help last year was the interest rate environment. Interest rates going up, tech stocks, one of the key that’s coming down strongly. And I think the last two points are actually more concerning, one is lack of news around commercialization. And of course, not everything can be announced, I realized that, but the way BrainChip has done some of their news flow is basically through Twitter or through LinkedIn or some industry publications rather than just announce it straight to investors on the ASX through the ASX platform. So, not everyone looks at social media, right, for their news feed, they just rely on the ASX platform to get news from the company, but also a lack of senior management visibility. So, we met with their CEO last year, I think, Stuart, early 2022, and he hasn’t been back to Australia since. So, if you’re listed on the ASX, although it’s a nuisance to fly from the U.S. to Australia a couple of times a year, you still have to do it, I think, because you need to keep your investors informed, not just retail, but installs as well. And if you don’t…

Stuart: Yeah. To quote that famous tourism ad from a decade or so ago, “Where the bloody hell are you?”

Marc: Exactly. So, I think those two issues have led to some sort of lack of interest in recent times, let me put it like that, combined with the interest rate environment that didn’t help. But look, at the same time, Weebit’s done really well, right, over the last sort of year, especially the last six months, in the same interest rate environment. So, I don’t think that explains it for the full 100%. I think especially people wanna see news flow, wanna hear news from the company, although, I realized on the ASX, it’s sometimes hard to make announcements without having to disclose all sorts of stuff that you can’t disclose because you’ll lose the business, but still other companies do it as well, other companies manage this, and at the very least, they should be in Australia, management team should be in Australia two, three times a year at least. That’s just my opinion.

So, zooming out a little bit on the chart here, this chart goes back to sort of mid-2020. And there’s a lot of lines here, but let me explain. The top line there at 41 cents just below that, those are support lines, that’s at 37 cents. And so, if the share price goes down to these levels, expect buyers to come in and support the share at those levels. But the problem is, in charts like this, there’s also gaps. And basically, what that means if you look at the bottom line on the left, you see a breakaway gap there, basically, meaning share price hasn’t been in that area, so, between 20 cents and 22 cents, it just broke away from that, never filled that gap so far. And the same is true for 27.5 and 32.5 cents. So, there’s a bunch of gaps in the charts. And they say gaps must be filled in technical analysis, it doesn’t always mean it happens, but there’s a tendency for gaps to be filled in the course of trading. And this can take a few years, right? So, this is what we’re looking at, support at 41 cents and 37 cents, but at the same time, there’s a few gaps at the lower levels. So, if the support levels at 37 cents and 41, if they don’t hold, there’s a realistic opportunity that at least one of these gaps could be filled. So, that’s what we’re looking at at the moment. Very short term.

It’s crunch time, I think, for BrainChip because that descending trend line is getting closer to the support line. So, something’s gotta give here. And if you look at the moving averages, so the 200, 150-day moving averages, they’re all pointing downwards, right? So, that’s a bad sign in itself. Worst case scenario, we could go down to 20 cents. I’m not saying that’s gonna happen, but it could potentially happen because, in the very near term, 40 cents needs to hold. But if the stock is able to break through that downtrend, we can see 50 cents or potentially 60 cents if that breakout is confirmed. And what will help, I think, is the changing interest rate environment that we’ve seen over the last sort of, you know, what is it? Two months. A really short period of time, even less than that, six weeks. So, that could help tech stocks in general, I think.

And tonight at 10:30, we get CPI data out of the U.S. So, that will be an important one to watch. I think 5.4% is the consensus for core inflation. So, keep an eye out for that. And then lastly, stuff that the company does have under its own control because it can’t control interest rates. And it’s very hard to control trading, if not impossible, or they shouldn’t want to. But what they should do is communicate better, I think. And you should get management over to Australia more often to keep people sort of abreast of what’s happening at the company. And I think, yeah, other tech stocks do that even if they’re not based in Australia, so why not BrainChip? I think that’s a key factor for the weak performance of the share price in the last 12 months.

Stuart: It’s funny how Investor Relations 101, a lot of companies don’t realize that. You want investors to buy a stock, then you’ve gotta burn up some shoe leather.

Marc: Exactly. And once they’ve bought it, you know, you need to keep them up to date on what’s happening.

Stuart: Right.

Marc: All right. Real quick. Stuart, we’re looking at gold. I know you used to be a big gold fan, gold bull. 2022 wasn’t a great year, but more recently, we’ve seen some upticks there.

Stuart: Now, Marc, you’ve heard me say it more than once, and I’m pretty sure the viewers on our webinars. I always said that gold was headed over $2,000 an ounce again. So, congratulate me. Gold got to $2,004 an ounce just before we went on the call this morning. So, yeah, basically, gold is back. 2022 was a lousy year. This is from a webinar we did in May of 2022. And as you can see, gold have been range-trading since 2020 between $1,800 and $2,000 an ounce. So, it wasn’t doing anyone any favors for investors who were coming to the stock now. But look what’s happened in the meantime in the next chart. So, it traded all the way down to $1,650 last November, and now it’s gone on a tear. So, it’s made up for lost revenue. No surprises there, the inflationary environment has been completely out of control. And you’ve seen a snapback in all of those assets that people are using to manage their inflation risk, of which gold is the preeminent one that people have been using since 10,000 BC for just this purpose. So, gold needs to be back on people’s radar screen again, I think, now that it’s restored its status in that field and hasn’t ceded it to cryptocurrencies in any way.

The four that you need to have on your radar screen, Northern Star, which is an old favorite of ours, Evolution Mining, Perseus, which owns some big West African assets, and Gold Road, which owns half of the Greer gold mining in Western Australia. Back in May 2022, we talked about Northern Star in a fairly optimistic fashion. Stock was about $10.50 at the time. It’s now put on another $3 or so. As you recall, this company owns the Super Pit in Kalgoorlie, various other assets in Western Australia, and its big growth asset is the Pogo gold mine in Alaska, 56 million ounces of gold to draw on, so they could just sit back and do nothing and there’s plenty of gold still to be mined. But some reasonably aggressive growth plans to take advantage of the good times we’re having in gold. So, we’ll spend a bit more time looking at gold in the next few weeks, but it’s now safe to come back into the water on this one.

Marc: All right, good stuff. And let’s wrap it up here. Thanks, Stuart, for rare earths and gold. Thanks, everyone, for watching. Keep an eye out for CPI print in the U.S., because that’s a big driving factor for equities also in the Australian market in the next couple of months. Thanks for watching. We’ll see you next week.

Stuart: Bye.