Shares of Lynas Rare Earths Ltd (LYC.AU) plummeted 5.24% during Wednesday's trading session, as investors reacted to a bearish broker report suggesting significant downside risk for the rare earths producer. The sharp decline comes amid growing concerns about the stock's valuation and long-term price assumptions for neodymium-praseodymium (NdPr).

According to a note from Bell Potter, Lynas shares could be at risk of a substantial correction. The broker has reaffirmed its sell rating on the stock with a price target of $7.65, implying a potential downside of approximately 50% from current levels. Bell Potter's analysts argue that the market is pricing in a long-term NdPr price of US$160 per kg, which is significantly higher than their own forecasts, consensus estimates, and current spot prices.

The broker's bearish stance is based on fundamental business factors, suggesting that recent positive sentiment in the critical minerals sector may have pushed Lynas' valuation beyond justifiable levels. While acknowledging short-term tailwinds supporting the stock, including potential sovereign investments following the US Department of Defense's deal with MP Materials, Bell Potter maintains that fundamentals will ultimately prevail. This cautionary outlook appears to have prompted some investors to reassess their positions, contributing to today's sharp sell-off in Lynas shares.