Lynas Rare Earths (ASX:LYC) has the potential to participate in Australia's Critical Minerals Strategic Reserve (CMSR), although likely at relatively small volumes in the initial years, according to a Wednesday note by Jefferies.

The Australian Government plans to implement support mechanisms in 2026 through the CSMR for rare earths, antimony, and gallium and intends to act as a mediator between producers and partners aligned with the G7 nations to help develop supply chains outside China, the note added.

Jefferies expects Lynas to participate if doing so is both economically and strategically beneficial, while noting that LYC has previously expressed concerns about the creation of the CSMR due to potential artificial interference in market dynamics.

Incentivising new supply could be a medium-term negative for LYC if demand growth does not exceed the pace of artificially stimulated supply growth, and any reserve structure that results in improved realised prices for Lynas would be a positive in the near term, the investment firm added.

Jefferies kept a hold rating on Lynas Rare Earths with a price target of AU$14.50.