Today’s announcement by Arafura Resources, the Australian-owned and Australia-based rare-earth mining venture that it is in funding talks to raise A$1 billion (US$964 million) to develop its rare-earth mine, served notice upon the world of natural resources’ supply that yet another non-Chinese rare-earth project would need a great deal of money to bring its product(s) to the market.
By my count, Arafura Resources is the fifth rare-earth mining venture to ring the ‘above US$500 million’ bell in just the last two years. The first such was Australia-based Greenland Minerals and Energy, which has said it will need US$2.3 billion. Next was Lynas Corp., another Australian venture, which has raised more than US$600 million so far on its way to production. The newest big spenders are America’s Molycorp, which recently raised US$400 million in its recent IPO, but said it would need more than US$500 million, and most recent of all, Canada’s Avalon Rare Metals, which filed required Canadian Securities Commission disclosures documentation, stating that it may need as much as C$900 million for its Northwest Territories project.
These ventures all have one thing in common, which is that most of the money required by all of them is admittedly required just to produce ore concentrates. The problem with this goal, is that, as for most mines in general, but for rare earth mines in particular, the ore concentrate stage is the lowest point in the value chain.
The Australian rare-earth expert commentator Dudley Kingsnorth, stated at the 6th Annual Chinese Society for Rare Earths Summit on August 3, 2010, that he estimated the total value of all of the rare-earth ore concentrates produced in the last calendar year to be south of US$1 billion. Let me point out here that it does not matter what the selling price of high-purity rare-earth metals may be, or may jump to, when you are valuing the ore concentrates from which they are produced. The value of the ore concentrates will rise much less than the price of the high-purity individual metals, because it is post ore concentration where most of the added costs arise.
If you believe, as I do, that the total demand for rare earths will no more than double in the next decade, then it is obvious that we are faced with a mining industry expansion which has probably too many new entrants competing to recover their cost of investment, from a relatively small total revenue pool. This means that there are already too many new entrants, and if all of them raise the necessary capital they believe they need, then some strategic investors will never see any profit.
Besides the problem of too many competitors chasing too small a pool of money, there is the problem that not all rare earths are as desirable as the others.
The most valuable rare earth in terms of total demand and total revenue, is the metal neodymium, the basis of 90% of the world’s rare-earth permanent magnets. Its price as a high-purity metal has been climbing lately, and almost all of the projected balance sheets and income statements of the rare-earth mining ventures are based on neodymium’s current high price. But common economic sense and the basic law of supply and demand tell us that if neodymium is overproduced, then its price at every point in the value chain will fall. If this happens, many of the business models of the members of the ‘billion-dollar cost club’ will fail to show a profit, no matter where in the value chain they are calculated.
The other economic curiosity among rare-earth mining ventures, is the belief by many of the miners that if they produce large quantities of the currently-highest-priced rare earths with commercial uses, the so-called heavy rare earths dysprosium and terbium, then the prices of those metals will stay high no matter what the excess of supply over demand might be. This is plain silly and misleading.
I have come to the conclusion that in rare-earth mining, outside of China, small is beautiful and the higher the proportion of heavy rare earths to total rare earths, the better for any venture.
There is no way that a non-Chinese rare-earth mine will be able to outproduce the Chinese mines in Inner Mongolia, in total production of eiher neodymium or lanthanum, the two most widely used of all of the rare-earth metals; but even the Chinese believe that they will not be able to meet the demand for dysprosium and terbium beyond this decade.
If the demand for dysprosium and terbium doubles, then there will be a major shortage of dysprosium and terbium beginning by 2015. I am betting that Chinese, Japanese and Korean investors will focus on neodymium and, perhaps, lanthanum only in the short term, but on dysprosium and terbium for the long term.
There are six rare earth mining projects being developed outside of China by Japanese companies, such as Toyota, Sumitomo, and Mitsui at the present time. I think that Japanese companies issuing letters of intent to rare-earth mining ventures in Australia and the USA are simply using the no-cost letters of intent as insurance policies, which they will allow to expire if and when their own mining ventures bear fruit. If the letters of intent are from Korean or Indian companies, then I would value them higher. I understand why the issuers of such letters want their identities kept secret – for competitive advantage – but I would feel that the letters were more valuable if I knew they were from Korean, Indian, or European stockpile agencies or industries.
This weekend I’ll write up my thesis on ‘right-sizing’ rare-earth mining ventures and post it here on the TMR Web site.