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.