Earlier today, China announced that its national currency, the renminbi, will from now on be linked to the value of a ‘basket’ of currencies, instead of to the US dollar alone. Rare earth mining entrepreneurs outside of China will tell you that this is now a reason to buy into their ventures, or to support IPOs for them. I think, however, that there is another side to this particular coin, a side that should give investors looking at the rare earth mining sector pause.
The rare earth mining industry, which is today essentially entirely Chinese, is looking for the prices of their products to rise, so that there can be expansion in China of existing facilities and the development of new ones, while a massive state ordered cleanup of environmental damage is underway. This is along with a state-ordered industry consolidation to do away with the root causes of that environmental damage and low pricing (i.e. fierce internal competition by those who had no regard for the actual costs of operating mines safely, or for environmental responsibility).
This may not bode well at all for Western junior exploration and mining companies who want to believe that prices will rise enough now, to make their speculative balance sheet income statements show profits at the mine face, where the product is ore concentrates.
Chinese miners and Chinese refiners will not see much change in their costs, which, of course, are calculated in renminbi. American buyers will see all of the price increases if the dollar goes South, or if the other currencies in the basket do. The re-valuation of the renminbi will in fact drive even more end-users of commodities such as rare earths, to open shop in China to supply the internal Chinese market.
We need to ask ourselves: where should an American supplier of a high tech service like rare earth metals separation and refining, go to sell his technology for the best price? The answer at the moment, is of course China.
The production of rare earth ore concentrates, which is the goal of most mines, is generally a non-profitable enterprise in the Western world except, perhaps, for those few deposits that have economically recoverable quantities in their ore bodies of the ‘Big Four’ rare earths: neodymium, praseodymium, dysprosium and terbium. In order for mines that can produce only the lighter rare earths to be profitable, the prices of the light rare earths would have to increase dramatically and soon. I doubt whether a renminbi re-valuation in even the mid-term future, could cause enough of a price increase to move the vast majority of rare earth mining ventures in the West to anywhere near profitability, as ore concentrate suppliers.
The Chinese, in particular, will only now back the development of those mines outside of China that can bring them supplies of the heavy rare earths, such as dysprosium, terbium and possibly europium.
All rare earth mines produce lanthanum; I do not consider that particular rare earth, or its price, to be a possible driver for developing rare earth resources.
Last updated: June 22, 2010.
Jack,
I am wondering what that means for the Australian producers such as Lynas and Arafura. Lynas I understand has a medium to good supply of the heavy RE’s and as the Chinese are the major shareholders I am wondering if this move for the currency is a positive or negative for these producers?
Steve M,
Chinese are not major shareholders of Lynas. They tried to offer a financing package for LYC, in exchange for 50+% of equity, however this was not allowed by Australia’s Foreign Investment Review Board (FIRB) and LYC subsequently, raised enough cash through a equity offering to Institutional and retail investors. This has provided them with enough cash to progress with stage 1 of their REE development, which will produce separated and refined RE oxides.
Both Lynas and Arafura, intend to produce separated and refined RE oxides, so this article doesn’t really apply to them, as it is discussing the production of much cheaper RE concentrates. ARU and LYC intend to capture much of the value-adding processes to produce separate RE oxides themselves by using their own dedicated facilities.
Choice
The biggest problem with monopolists is they act like monopolists when they’re buying and when they’re selling. Until there is a reasonable bulk of rare earth mining, processing and finished goods manufacturing outside of China, competing miners will likely receive less than full and fair value for their ore concentrates and the price of finished goods from the Chinese processing and manufacturing supply chain will be determined in a manner that best suits Chinese interests. This makes for a very dangerous long-term market dynamic.
Reganbaha,
Thanks for that. I was aware of the rejection of the Chinese bid, but for some reason I thought that the Chinese were major shareholders.
regards
With all due respect the idea that Renmimbi revaluation would be a negative for commodity producers is absurd. While you no doubt have knowledge about the science of rare earths your disdain for stock promoters clearly clouds your view of how markets work. MANY of these marginal rare earth plays will skyrocket once prices for rare earths inevitably rise whether they ever produce or not simply because of speculation. And thats OK. That is how the market works. It is the investors job to get AHEAD of the speculative fury so that they are well positioned to profit when everyone rushes in. I for one am invested in over a dozen of these companies. Do I expect all of them to work? NO. I dont have a clue which ones will produce or just go up or down in price. Nor do I care. I risk x amount to make exponentially X amount when the sector goes. Thats the game and your readers would be better served with info that did not discourage them from playing that game. The facts are that Rare Earth prices are artificially low. That demand is skyrocketing and that a supply response will be neccesary and that that supply response will take many years to ramp up. And dont forget the geopolitical ramifications of it which will drive the prices even higher to ridiculous levels as all commodities get to when they go. ESPECIALLY the illiquid ones. In the meantime people will get rich speculating if they tune out the scare tactics derived from your anti-promoter bias.
“This may not bode well at all for Western junior exploration and mining companies who want to believe that prices will rise enough now, to make their speculative balance sheets show profits at the mine face, where the product is ore concentrates.”
The recent article at Rare Metal Blog about Avalon’s Nachalacho deposit is an example. But the production is 5 years out and will take a billion dollars to develop. Nevertheless, the posturing has begun for investors.
Great Western Mining Group has about $150,000,000 worth of TREO piled on the surface, ready to be milled and concentrated now, and they have a mining permit for a 14% TREO, 3.00 per ton orebody, with a Feasibility Study underway. So why isn’t that stock rocketing?
There’s obviously a lot more afoot here than simple balance sheets. I don’t understand it all, but for now all the due diligence in the world seems to come back to the same dozen or so companies.
Ladies and Gentlemen,
I, of course, meant to say: This may not bode well at all for Western junior exploration and mining companies who want to believe that prices will rise enough now, to make their “speculative” income statements [not balance sheets] show profits at the mine face, where the product is ore concentrates.”
Mea culpa,
Jack
Folks – I had a short discussion with Jack earlier today, on some of the points that he raised in this article. Our Q & A can be found at:
http://www.barnswood.com/tmr/wp/2010/06/will-changes-in-the-chinese-yuan-really-affect-the-rare-earths-industry/
Gareth
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