Over the weekend, Jack wrote some commentary on news that the Chinese were considering linking the value of the Chinese yuan, or renminbi, to that of a basket of currencies, instead of directly to the US dollar. He indicated that this could have an effect on the rare earths sector outside of China.
I decided to get further clarification from him on some of the points that he raised and have shared some of my questions and Jack’s responses below for your reference.
Gareth Hatch: Jack, appreciation of the renminbi would make mining costs relatively cheaper for the Chinese rare earth element [REE] and other industries, compared to those outside of China. When it comes time to selling products, wouldn’t buyers outside of China actually see no difference where pricing is set in dollars, as it frequently is, with the Chinese sellers actually losing out because they’d get less renminbi back per dollar of material sold [a classic case of an appreciating currency negatively impacting exports]?
Jack Lifton: If REE concentrate prices go up inside China due to supply reduction, with increasing demand, then it takes more dollars to buy them. Such an increase in ‘real prices’, is certainly the hope of both the Chinese REE mining industry and of the non-Chinese junior REE miners. I guess I wasn’t clear on that. Any price appreciation due solely to renminbi re-valuation, is just a general problem for Chinese exports of all types, as you point out.
GH: The vast majority of junior REE exploration and mining companies do not yet have a mine with which to produce concentrates, nor do they actually carry much debt on their books – the money invested into these companies is usually converted into an equity position. So would there really be much significant direct impact of a re-valuation of the renminbi, on such junior miners, besides theoretical income statements that won’t be realized for years? If so, then the re-valuation of the renminbi would not be expected to really have much impact on the value / perceived value of non-Chinese junior REE miners, would it?
JL: Without the sale of actual concentrate or other products, the balance sheets and income statements of such junior miners may show diminishing shareholder value over time. Cash flows must be refreshed from time to time with new cash infusions. Private miners either invest their own money or have private placements which tend to dilute the shares. Renminbi appreciation will most likely be slow and may even go the other way if the US economy picks up. It will not, as you say, have much real effect on the real value of junior miners. Again only ‘real’ price increases will matter.
GH: Let’s talk about future price increases. Is it not the prospect of the environmental clean up and consolidation of these REE mines, both of which will potentially take REE capacity offline in China, that is going to be the likely key driver of increasing prices of REEs, primarily to buyers outside of China? If this is the case, then the re-valuation of the renminbi would not be expected to really have any impact on end price, would it?
JL: That is the case, yes. A re-valuation in and of itself will have little direct impact.
GH: A common debate in some circles relates to whether or not US and Canadian REE separation technology is more or less advanced than that used in China. If it is less advanced, then anyone seeking to sell US or Canadian separation technology, not tied to a specific proprietary process or deposit, is not likely to get very far in China, surely?
JL: Much of the development of such technology in North America is today only theoretical, while that in China is practical, because of their long experience. Until someone is up and running, it’s at best a toss up without a clear resolution.
GH: OK – thanks Jack.