Local environmental group Save Malaysia Stop Lynas applied for an injunction to block Lynas's license for the facility in Kuantan, Malaysia, which they say is 1.2 miles from a residential area, putting 30,000 people at risk from toxic leaks and emissions.
A hearing is scheduled for Oct. 4.
Lynas said the court decision won't delay production at the facility because it had planned to begin production after Oct. 4.
Lynas plans to ship the slightly radioactive ore to the Kuantan plant from the company's Mount Weld mine in Western Australia and has said the refinery would meet nearly one-third of the world's demand for rare earths.
The facility is expected to help break China's monopoly of rare earths, 17 minerals used to manufacture such products as wind turbines, batteries for hybrid and electric cars, flat-screen monitors, missile guidance systems and mobile phones.
SMSL petitioned the Kuantan court to suspend Lynas's license until two judicial review cases challenging the government's decision to grant a temporary operating license are heard.
One of the cases calls for revoking the temporary operating license granted by the Atomic Energy Licensing Board in January because a detailed environmental impact assessment for the project wasn't carried out and a radiological impact assessment and radioactive waste management plan wasn't submitted.
"This is a small step in the right direction," Tan Bun Teet, a spokesman for SMSL said in a statement, adding that the group is hoping the court on Oct. 4 will grant a longer stay on the suspension so that both cases can be adequately assessed.
"The public will be waiting anxiously because we do not wish to have a world-scale rare earth plant in our backyard," said Tan.
When the Malaysian government approved the temporary operating license for the plant Sept. 6, Lynas's shares jumped more than 50 percent, The Wall Street Journal reports, but had fallen 5 percent Wednesday after the company confirmed the suspension late Tuesday.
Deutsche Bank this month said that Lynas would need about $120 million in working capital financing in the months ahead. On Tuesday, Lynas said it had renegotiated debt covenants with a Japanese lender due to delays at the Kuantan facility but the renegotiated covenants limit the amount of new debt Lynas can raise in the short term to $80 million, the Journal reports.