The Arafura Rare Earths Ltd (ASX: ARU) share price has taken a tumble in morning trade.
At the time of writing, the rare earths developer's shares are down 8% to 56 cents.
Why is the Arafura share price sinking?
Investors have been selling rare earths shares amid concerns over comments made at Tesla's investor day event on Thursday.
According to Bloomberg, Tesla's Colin Campbell has stated that it will drop the use of the rare earths in its future electric vehicle models due to health and environmental risks that come with mining the critical minerals.
Tesla instead plans to use a permanent magnet motor that won't use rare earths.
Yang Jiawen, from Shanghai Metals Market, told Bloomberg:
It would be a big blow to the rare earth industry if there is a complete substitute to rare earth based on current technology. Without Tesla disclosing any information on possible substitutes, I am cautious on the news.
Is this a buying opportunity?
While the team at Bell Potter only has a speculative hold rating on the company's shares, it does see plenty of value in the Arafura share price at the current level.
It currently has a price target of 72 cents on its shares, which implies potential upside of 28% over the next 12 months.
Last week, it commented:
ARU has performed in-line with our investment thesis, with the stock gaining +74% since initiating in May-22. Over the coming months, key catalysts for further stock price appreciation are 1) reaching a Final Investment Decision (FID) (BPe Mar-23) 2) securing ~85% binding offtake (34% secured to date) and 3) progressing financing for the Nolans Project. As the business successfully reaches these milestones, we believe it prudent to un-wind our risk discount for the Nolans project, which is currently set at 30%. In our view, recent share price appreciation implies these events to be priced in.
