Last week I received some criticism via email, from executives at some of the companies that I did NOT mention in my most recently published TMR article, “Decoupling The Rare-Earth Junior-Mining Market From Emphasis On Molycorp And Lynas.” Each apparently assumed that absence of evidence was evidence of absence. Let me try to set the record straight by expanding the narrow coverage, which I purposefully chose in that article.
There are a number of potential new producers of LIGHT rare earths that I like the look of. I note that most blogger-commentators assume, wrongly, that by merely going into production at any level, Molycorp Inc. (NYSE:MCP) or Lynas Corporation Ltd. (ASX:LYC) will close the window of competition for the non-Chinese supply of rare earths. This is simply not true. There is absolutely no chance that the future rare-earth-demand market will simply replace one monopoly with another.
Last week it was my intention to publish an article speculating primarily and specifically on the survival of the heavy-rare-earth-themed junior miners beyond 2015. I assumed that my audience would understand that I was not writing about the future market for the supply of the light rare earths, but that I was writing specifically about the future market for the supply of the heavy rare earths. It seems that even within the rare-earth world, a lot of people do not understand that a monolithic rare-earth market, per se, does not exist, other than in the fertile minds of share-price promoters, and that there are individual active markets for just some of the rare earths, and just small, research-focused markets for the rest of them.
The most important of the light rare earths are in my opinion lanthanum (La) and neodymium (Nd). Low-cost producers of either or both of them, with low break-even points and high value-added entry points into the supply chain will be suppliers of these two materials in and after 2015, especially if these characteristics are combined with excellent marketing.
China has been operating without any serious competition now for more than a decade. Outside of China, in the short-to-medium term I see only four new producers capable of joining Molycorp (a well-established, existing producer looking to expand its operations) in making the cut, in some combination, in the La and Nd markets. Each appears to be a well-managed entity with good grades and significant deposits of light rare earths. These new companies should each be foremost in the minds of the business development and marketing staffs of Molycorp and of each other, because I consider each of them to be a potentially formidable competitor. Those four new producers are:
- Lynas Corporation Ltd.
- Arafura Resources Ltd. (ASX:ARU)
- Frontier Rare Earths Ltd. (TSX:FRO)
- Rare Element Resources Ltd. (TSX.V:RES)
I have followed these four companies quite closely. However I don’t have any direct knowledge of Lynas’ operations. I have met with and had extensive discussions with Lynas’ Matthew James and Eric Noyrez on different occasions, and I was very impressed by their respective knowledge.
During my visit to Australia in June 2011, my colleague Gareth and I were invited to visit the site of Arafura’s Nolans Project site. We toured the future mine site and its drilling camp guided by the operations manager, and I found him and his geological staff and workers to be outstanding. I have not had the chance to meet Arafura’s technical or senior management.
I first visited Frontier’s well-situated Zandkopsdrift project, right after the 2010 Mining Indaba, in Cape Town. I was privy to its original marketing to the institutional investment world, and I was compensated for some services rendered at the time. I said at that time, and I repeat it now, that the Frontier offering prospectus was the best document of its kind I ever saw. Frontier’s senior management is top notch, administratively and financially. I have not met the company’s technical or operating management.
I have also visited Rare Element Resources’ Bear Lodge project, well-situated in Wyoming, and I have had extensive contact with its senior administrative and technical management and staffs at both the mine-development site and at its administrative HQ. All are professionally of the highest caliber. I am currently a business-development consultant to Rare Element Resources.
I believe that if its Malaysian political issues are resolved, then Lynas will be the first NEW large scale, built from the ground up, producer of the light rare earths outside of China, since the Chinese achieved absolute dominance in the market in the 1990s. Lynas has top-flight technical and marketing management, and its Malaysian plants were designed by Rhodia, which is certainly one of world’s pre-eminent and ongoing centers of expertise, in the separation and purification of the rare-earth elements by solvent-extraction operations.
It is my belief that Chinese actions with regard to markets, both foreign and domestic, for anything (commodity, manufactured good, or service) with economic consequences, are driven by the state, in furtherance of well-planned industrial policies. Such polices, continually measured by performance to objective, are intended to raise China’s standard of living as uniformly as possible in the short term, and as widely as possible in the long term.
This means that if it is Chinese policy to switch its economy from one that is export-driven to one that is consumer-driven, and if its primary restraints are to control simultaneously both inflation and the value of its national currency with regard to the convertible currencies, then it is most likely today reacting to the fact that it is overproducing the light rare earths and under producing the heavy rare earths. The current five-year plan, which runs through 2015, calls for the elimination of corruption and environmental damage in the rare-earths mining industry. This is being accomplished in stages that encompass the consolidation of the industry followed by a strict internal control of production (licensing regime) and finally, I believe, by the potential creation of a transparent trading and futures market for the rare earths within China.
Exports of rare earths as raw materials will continue only so long as they are produced, for any reason, in excess of domestic needs. The result of the restructuring of the industry is to be the absolute control of the supply of the rare earths, so as to insure that they have as much value added as possible within China no matter what their ultimate destination. I believe that at the present time, or certainly by 2015, the heavy rare earths, terbium (Tb) and dysprosium (Dy), are essentially to be no longer exported in any form other than as contained in finished goods. I also believe that the light rare earths will be produced within China only to the extent needed by the market within China by 2020.
There will thus arise opportunities for any rare-earth-containing product desired to be produced outside of China, to have its rare-earth content be supplied from outside of China. This demand will arise solely in the event that the total supply chain for rare-earth-containing products exists outside of China. Today such a total supply chain, except for the first step, the mining, exists only in Japan.
Total supply-chain construction, for the above reasons, is now underway in Korea (utilizing non-Korean mining) and in the EU financed by private enterprise, as it has also been financed in Japan. If the financiers and industrialists of the USA do not now immediately design, finalize, and implement total supply-chain re-construction, the USA will cease to be in the rare-earth-containing, end-use-product supply business. Of course the USA could remain a source of raw materials, if the criteria listed above for individual business survival are met by an American company.
I believe that along with Molycorp, the four predominantly light-rare-earth producers that I noted above, will all be in business at the beginning of 2015, and well under way, and in some cases will have either ramped up production or will be in the process of doing so.
The continued long-term survival of any and all of them, will depend on staying in business long enough to get to the point where their relatively small amounts of heavy rare earths will add substantial revenues to their balance sheet. In each case, this will require at least 20 ktpa of production. A combined 100 ktpa of production from these five producers would add around 14 ktpa of Nd to the global supply in 2015, and around 400 tpa of Dy.
I believe that the global demand for rare-earth permanent magnets will continue to grow at today’s rate of 10% pa. Therefore four years from now, in 2015, the demand will have grown by nearly 50%.
I do not believe that all four of the new companies I have discussed above will have reached a production rate of 20 ktpa by 2015, and I do not believe that any of them will recover more than 80% of their contained rare earths. Therefore this makes me believe that, if the Chinese do NOT increase their overall production of light rare earths from its present level, then Nd could be in short supply in 2015, and even if the Chinese should increase their current production rate of light rare earths, I do not believe that they can do so for the heavy rare earths. The result is that Dy production will be more seriously in deficit in 2015 than I believe it already is now.
This means that I think Nd oxide prices will bottom at $100/kg or more, although I think they are too high today, and that I think that Dy prices will continue to be strong.
All of this depends on the adoption of a rational marketing scheme by the non-Chinese rare-earth industry. The demand for Nd by the OEM automotive and alternate-energy industries is price sensitive, due to competition. “China Incorporated” is presenting an unprecedented challenge to both industries, because it will surely supply its own domestic industries before it even worries about export, and China Inc. will not put its domestic industries in a non-competitive position under ANY circumstances.
Non-Chinese end users that produce within China are already in a dilemma. They feel secure that in their Chinese operations they have security of supply based on the large numbers of Chinese workers they directly employ. Most think also that even if China directs the growth of its economy towards increasing domestic consumption they will still benefit financially. Therefore they are trying to source critical and strategic metals for their non-Chinese operations separately and outside of China.
But the end users will NOT pay any price. They must remain competitive in world markets in order not only to survive in their non-Chinese markets, but also to prevent Chinese excess production from undercutting them in the export (from China) markets. Keep in mind that China will not switch from an export-driven to a domestic-consumption-driven economy in one day. The transition will be gradual, and the Chinese will always want to be able to “dump” excess production offshore.
Note well that the heavy-rare-earth production-themed companies that I discussed last week, which survive, will all produce Nd and La along with Dy, Tb and yttrium (Y). The aggregate additional supply of this Nd and La will help keep the prices for those light rare earths in check, and it is trivially obvious that magnet producers and end users will have little choice in the matter, if the Dy producers insist on their taking Nd from them as well, in order to guarantee their supply of Dy or Tb.
The various rare-earth markets are interdependent in a complex way that depends on their end uses. Greedy stock promoters are no match for the forces of the market. “Announcements” are not solutions to problems of supply. Production levels are the only “announcements” anybody in the industrial world cares about. No assured production means no guaranteed demand.
Thank you for your very thoughtful insights. As an active investor in this sector your comments are quite valuable.
Hello Jack….Many thanks for another very good and convincing (and valuable) “layout of the land” article. The number of variables and actors involved (and the unpredictability of each one) makes predictions based on their interactive summation going forward almost impossible. (in my opinion)
One of the few “certainties” is that China will continue to do exclusively what it thinks (though it may misjudge) is in its own interest and so will the individual Western companies. (a coordinated Western policy is
As a consequence of my above “overall analysis” (significantly informed by your own) I have bought a relatively small amount of each of the HREE companies you had identified / recommended earlier and I notice that I also already have most of the LREE companies you now list above. ( I have 8 Rare Earth companies in all in my portfolio)
(Diversification obviously reduces the chances of hitting the super- jackpot but it also reduces the chances of going broke)
And of course I will continue to maintain a proper portfolio balance also between Rare Earths (overall) and other junior mining sectors such as gold, silver, and selected base and industrial metals. And I will continue to read your articles to get a better idea of which companies to add and which to delete.
Hopefully by 2015 all the above sectors (including Rare Earths) will be nicely up. But of course if the various structural imbalances both within countries and regions and across them and the current pathetic state of the world economy ….and the disparate (and contradictory) stimulus and austerity policies which policy makers are half -heartedly and belatedly pursuing trying to govern it and improve it…., continue, then “all bets are off”. (except perhaps bets on physical gold or silver buried in the back yard)….thanks again, and best regards…
Do you really expect Rare Element Resources to be in production at any level in 2015?
I do indeed expect Rare Element Resources to be in production by 2015 based on my observations and on my analysis of the company’s business model. I also think that RER will most likely be the lowest cost producer of individual light rare earth pure compounds in the USA by 2015.
Continuing good Management decisions are now the key to RER’s success.
I wouldnt worry about what these company guys say after all the huge pay salaries they give themselves for non producing mines
NOW we wouldnt want to upset that by pushing share holders into mines that are near production and making money would we
Plenty of holes in the ground with liars standing over them. Same liars getting 500K plus per year
Go for it Jack – tell it like it is
As usual, your comments and reports are true lessons of knowledge about the world of REE. For your information, brazilians companies are investing in REE projects at a modest pace, mainly in searching for deposits with tendence to increase investments in the years ahead.
As prove of interest we will have the first technical meeting on 07 December, 2011 in Rio de Janeiro. I will send you the the conference programme.
Just one question: Do you know about the recent discovery of a expressive deposit of REE minerals in Japan?
HI, what do you think about…. UCORE RARE METALS
(Other OTC: UURAF.PK )
this all reminds me of a lesson learned early in my life with commodities–
heed the miner mining the market; focus your attention on the miner minding his mine. look also at track records; successful miners be like successful race horses- they’ve won before.
Any thoughts on Stans Energy or DNI Metals, both on TSX-V
Stans Energy is a Great investment opportunity, undervalued and ignored because their PR is too conservative. However they arent overpromising, but they deliver. Produced 80% of hre for Former soviet Union having the Know how and most likely starting production on a Small scale of 600 td. A Small Player yet, but Huge shareholder Value IMO.
Thanks Jack! Very good insight. One of your better posts.
I don´t understand why to invest in a REE mining company that might be in production 2015, when you can buy Dacha wich holds a stockpile of refined HREE´s right here, and right now? Currently trading at 60% discount to FD NAV. I have owned several mining juniors through the years, and there are always these PP´s, failed start-ups etc… And with al the issues that is mentioned with REE- mining, one can only imagine the difficulties ahead. If you stubbornly want mining companies; fine, but Dacha sounds like a smarter way?
The Russians threw all kinds of money at Kutessay to keep it producing. At 400:1 the ORE/REO rates are not economically viable. Rates for other mines are:
Lynas Corporation Ltd. 14:1
Arafura Resources Ltd. (ASX:ARU) 35:1
Frontier Rare Earths Ltd. (TSX:FRO) 46:1
Rare Element Resources Ltd. (TSX.V:RES) 29:1
Great Western Minerals 8:1
what is this ???
if you mean “what are the ORE/REO rates listed in the comment prior to yours they are the stripping ratios. This means that for example, on average, Lynas must raise 14 tons of ore to obtain a maximum of 1 ton of rare earth oxides.
This can be a misleading measure on a stand-alone basis, because it makes it look as if Great Western is the clear winner. But if one takes into account that Great Western’s deposit has a net total of less than 50,000 tons of proven resources while Lynas’ deposit has millions of tons… On the other hand one must note that GW’s ore contains a much higher percentage of the critical rare earths than does Lynas, so its ore concentrate’s value is higher per ton…Also GW has to move a lot less rock to get product.
Obviously there are many, many factors to consider and not all of them are objective numbers either.
Notwithstanding that, however, I will venture to say that a stripping ration of 400:1 is not likely to be viable unless the project is one like the Chinese absorption clays where the “grade” of the material to be “processed” is at best 200-400:1 but the CREEs are present in unusually high ratios to the total rare earths present and there are no radioactive species to contend with.
I hope this helps.
Thanks again for another excellent analysis. You and Gareth are always must reading for me.
I do have a question about this sentence in your last comment to the column:
“On the other hand one must note that GW’s ore contains a much higher percentage of the critical rare earths than does Lynas, so its ore concentrate’s value is higher per ton”
The TMR index and graph seem to indicate that Mt. Weld has a slightly higher basket value than does Steenkampskraal.
What am I missing?
Watching Fareed Zakaria this morning having a discussion with three experts on China, they all seemed in agreement tha China is on the cusp of some dramatic events over the next few years, and it is the inertia of the current system that has primarily slowed the progress of possible catastrophe. The concern that comes out of this is the big “What If”: What, if China reduced or stopped REE production due to internal conflicts, would it do to, or for, non Chinese miners and potential SX facilities, and share prices of the more advanced companies?
Such a question is of course negligible in consequence to what such dramatic events would mean to international economies.
Keep in mind that the overwhelming GLOBAL demand for rare earth downstream products at the metals level is more than 80% within China. The production of rare earth permanent magnets within China consumes more than 60% of the world’s total production of neodymium and praseodymium and most likely nearly 80% of the world’s (China’s) production of dysprosium.
If today China STOPPED all production of REEs the end user market would collapse since the rest of the world has NO CAPACITY EXISTING or under immediate construction to replace the downstream total supply chain, separating, refining, producing metals, alloys, or magnets, capacity currently operating or available within China.
The extremely limited capability in the west to design and construct solvent exchange plants, for example, would mean in the “What if” scenario you posit the end of the large scale use of REEs.
Subsidized small mining/refining/fabricating operations would probably keep the NATO militarily going along with subsidized recycling.
If the Chinese economy has a hard landing REEs will be the least of the world’s worries.
I wouldn’t give you a nickel today for any share in any “advanced” company if the Chinese stop REE production altogether. I think the total supply chain outside of China is finally being reborn, so that within 2-3 years there will be a significant inroad into Chinese monopolization of the REE space. Until then…
I had asked the question in light of this article discussing the Rare Earth situation beyond 2015, ie”dramatic events over the next few years”, not if it happened tomorrow. And I finished with, “Such a question is of course negligible in consequence to what such dramatic events would mean to international economies.”
You have clearly stated that you believe China will become an importer of REEs at some point in the future, which would have the net affect of iincreasing demand for non Chinese REE producers . In my opinion that in itself could be construed a dramatic event compared to the current quotas for export where only aout half are actually bought. So, if I may restate, ” If any events conspire to dramatically reduce China’s export of REEs by 2015, and thereafter, what would this mean to companies like Metamec, Lynas, Molycorp, GWG/LCM/GWTI, and potential facilities like IMC?
And I was assuming that by 2015-16 the above companies are meeting their “inroad” timelines for construction/production.
pardon the typos
I was wondering how you view Frontier Rare Earths now that almost 2 years have passed. Do you believe they still have a viable project? Furthermore, are you concerned at all about delays in the PFS and estimated time until production?
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