November 23, 2009
Rare Earths: Is The Present Hype Justified ? Can We Pick The Winners ?
By Michael Hampton
www.minesite.com/aus/html
What a difference a year makes. There has been a dramatic transformation in the outlook for the Rare Earth companies from no hopes to big hopes, as the Rare Earths have become the latest "hot" sector to capture investors' imagination. We all know that mining investors are prone to flights of fancy, and the staying power of dreams will be now tested on a long hard road from discovery to production.
Metal Events Ltd's “5th International Rare Earths Conference" held in Hong Kong last week, was a great place for a reality check on the current state of the Rare Earths sector. Despite its history, and an ability to attract the top companies in this growing industry, the conference was concerned about their numbers. A room had been booked for 70 people, but in March it seemed that the interest level was too small to attract the usual number of participants. The organisers decided to go ahead with the same size room anyway, with whatever numbers they could get. When the doors opened on November 18th for the two day conference, there were 170 delegates, a new record - and the room was groaning with people.
The changes in market capitalisation of companies involved in the conference revealed the extent of the turnaround. Picking ten public companies in the audience with Rare Earth mining projects at various stages of development, the aggregate market capitalisation as of mid-November was US$1.59 billion. Using the same number of shares outstanding, and the end-2008 stock prices, the market capitalisation would have been US$518 million. That's a rise of 206 per cent in 10 and a half months, far above the general stock indices. One cannot help but ask, is the present optimism justified?
Dudley Kingsnorth of Industrial Minerals Company of Australia Ltd put it well in his presentation. Money is available, he said, but is not infinite. "Perhaps US$2 billion will be available to the Rare Earths sector," said Kingsnorth. "If it is spread evenly over the 57 existing projects, it will be squandered." The industry will need to advance the right projects, and advance them quickly, if it’s to prevent a destructive price squeeze in a few years time. The crunch may arrive as early as 2014 or 2015.
Overall annual growth rates in consumption have mostly fallen in the range of between nine per cent and 22 per cent per annum, according to Baotou Research Institute of Rare Earths (BRIRE). In a paper prepared by Ms. Song Honghang, Director, and presented by her colleague Wang Yan, a review of 60 years of history showed China's remarkable role in taking production from just 1,000 tons 1978, to 2,500 in 1980, and then 20,000 in 1989. After that rapid pace, there was a slowdown in 1990, but after that, growth resumed. From 1991 to 1995, growth was again back over 20 per cent per annum. Over the past decade, growth has been much closer to 10 per cent annually, which is still rapid on this bigger base. Total demand for Rare Earth Oxides was near 130,000 tonnes in 2008. While 2009 is a clear down year, thanks mainly to a big destocking in Japan, the potential for high growth over the coming decade is excellent. Our green dreams cannot be realised without ongoing growth in production of these unique metals.
The simple political reality, which we discussed in detail here when we covered last year's conference, is that the world is highly dependent on China for Rare Earths. Something like 90 per cent of annual production comes from China, and the Chinese are using more domestically and tightening their export quotes. BRIRE's figures show that Rare Earth Oxide ("REO") exports peaked at 55,000 tons in 2005, and have been falling as quotas are tightened. (REO figures are slightly deceptive, since the oxide is about five to 10 per cent heavier than its REE content.) Some industry sources estimate that as much as 10,000 tons of "gray" material leaves the country outside the quotas. But this "gray" figure is conjecture, and the Chinese government is aiming to restrain future leakage outside the quota. The inevitable nervousness over supply sources has brought about a race for new sources of production. Manufacturers in Japan, Europe, and the US all want to see diverse sources for these critical elements, as they launch new products with REE content.
Prices are down year-on-year, but a mania for the Rare Earth miners was ignited by a report coming out of one of the Chinese ministries in the Spring of 2009 that China was considering a complete ban on the export of certain rare earths in their raw form, preferring to export value-added products and spur manufacturing the jobs in China. This report was later "clarified" in the summer, but it was followed by recommendations from various stock brokers and analysts that Rare Earth related mining stocks were a good way to play the emerging green energy boom, since new mines are needed to counter a possible stranglehold by the Chinese.
In fact, with 2008 demand at 130,000 tons of REO, a resumption of 10 per cent-plus growth could add 15,000 to 20,000 tons annually to demand. That would essentially require perhaps one new world class Rare Earths mine being added each year for the foreseeable future. Fortunately, there are two giants waiting in the wings, and they are both outside China.
Lynas Corp's (LYC.au) Mount Weld deposit in Western Australia is a high grade carbonatite deposit. According to the presentation from the company's Vice President, Matthew James, the project is progressing well again. The key step was raising money to fund remaining construction costs. In late April, China Non-Ferrous Metals agreed to invest A$252 million for a majority stake. But the terms were not approved by the Australian government. So the company turned to the equity markets, and completed a two stage financing totalling A$450 million at A$0.45 in October. This will allow it to finish the mine and related infrastructure, and build a large processing facility in Malaysia, where there will be access to cheaper power. Mr James expects production to commence in the first half of 2011, initially at an annual rate of 11,000 tons. Later, Lynas will ramp up to between 20,000 and 22,000 tons, which would give it perhaps 14 per cent of the global market in REO.
Also at an intermediate stage is Arafura's (ARU.au) Nolans project, which chairman Nick Muir spoke about. Arafura has an approximate 30 million ton deposit, right in the "center of Australia." It has a pilot plant funded by the government, and is facing a capital expenditure of perhaps A$400 million to put a mine into production. Arafura will also be replacing its chief executive, who has recently resigned, and seeking possible strategic partners.
Later, Ian Chalmers of Alkane Resources (ALK.au) described his company's Dubbo project in New South Wales, a Zirconium and HREE project, which was the subject of a feasibility study in 2002, and which received a government grant to build a pilot plant, and which went into operation in 2008. Prospective buyers are presently evaluating output products. The economics of starting up an enlarged mine will be improved if zirconium, niobium, and yttrium prices line up, and allow the company to sign long term off-take agreements at prices which will support construction of an expanded mine.
Brief presentations were also given by privately-owned Frontier Minerals which has the high grade Zandkopsdrift carbonatite deposit in the Northern Cape province of South Africa, Greenland Minerals (GGG.au), which has the Kvanefjeld deposit in the country with the same name, privately-owned Mongol Gazar which has a deposit in Mongolia.
Beyond these, although they didn’t present, are dozens of companies with Rare Earth projects. Industry expert Dudley Kingsnorth mentioned that there are 57 Rare Earth projects on the go, but another conference delegate said that the figure is over 120 projects, including some newly added ones, which are based upon only "a handful of grab samples."
If history is any guide, and the market stays keen, a number of the new companies will raise enough capital to progress their projects. But how can anyone, especially an investor new to this sector, be expected to pick the winners, in what is becoming a crowded field at the early stage end?
The old formula of going for size and grade may not work, because the development of RE deposits is a highly complex matter. Evaluating the potential for a gold deposit with straightforward metallurgy is relatively easy. A poly-metallic deposit with complex metallurgy is more difficult, and picking winners in the Rare Earths sector may be the most difficult game of all. That is because there are so many different elements involved, each with their own supply, demand and pricing dynamics. And then there are the problems which begin as you mine the deposit. The rare earths must be extracted and separated from each other. Furthermore, we then get to the "dirty secret" of rare earths, which is that virtually every deposit is radioactive, with a significant concentration of thorium or uranium bound up with the Rare Earths themselves. This makes the separation and handling of the materials even more complex and critical and is why the price tags for capital expenditures are so very high.
But there is no doubt that the Rare Earths mining sector has a bright future. The likes of the gold rush that we saw after the nickel discovery at Voisey's Bay and the uranium price boom of 2007 may come to Rare Earths at well. But if too many early stage companies are floated, a large number of investors in these new companies are going to be disappointed.
[Text was too long. I had to shorten it]
Rare Earths: Is The Present Hype Justified ? Can We Pick The Winners ?
By Michael Hampton
www.minesite.com/aus/html
What a difference a year makes. There has been a dramatic transformation in the outlook for the Rare Earth companies from no hopes to big hopes, as the Rare Earths have become the latest "hot" sector to capture investors' imagination. We all know that mining investors are prone to flights of fancy, and the staying power of dreams will be now tested on a long hard road from discovery to production.
Metal Events Ltd's “5th International Rare Earths Conference" held in Hong Kong last week, was a great place for a reality check on the current state of the Rare Earths sector. Despite its history, and an ability to attract the top companies in this growing industry, the conference was concerned about their numbers. A room had been booked for 70 people, but in March it seemed that the interest level was too small to attract the usual number of participants. The organisers decided to go ahead with the same size room anyway, with whatever numbers they could get. When the doors opened on November 18th for the two day conference, there were 170 delegates, a new record - and the room was groaning with people.
The changes in market capitalisation of companies involved in the conference revealed the extent of the turnaround. Picking ten public companies in the audience with Rare Earth mining projects at various stages of development, the aggregate market capitalisation as of mid-November was US$1.59 billion. Using the same number of shares outstanding, and the end-2008 stock prices, the market capitalisation would have been US$518 million. That's a rise of 206 per cent in 10 and a half months, far above the general stock indices. One cannot help but ask, is the present optimism justified?
Dudley Kingsnorth of Industrial Minerals Company of Australia Ltd put it well in his presentation. Money is available, he said, but is not infinite. "Perhaps US$2 billion will be available to the Rare Earths sector," said Kingsnorth. "If it is spread evenly over the 57 existing projects, it will be squandered." The industry will need to advance the right projects, and advance them quickly, if it’s to prevent a destructive price squeeze in a few years time. The crunch may arrive as early as 2014 or 2015.
Overall annual growth rates in consumption have mostly fallen in the range of between nine per cent and 22 per cent per annum, according to Baotou Research Institute of Rare Earths (BRIRE). In a paper prepared by Ms. Song Honghang, Director, and presented by her colleague Wang Yan, a review of 60 years of history showed China's remarkable role in taking production from just 1,000 tons 1978, to 2,500 in 1980, and then 20,000 in 1989. After that rapid pace, there was a slowdown in 1990, but after that, growth resumed. From 1991 to 1995, growth was again back over 20 per cent per annum. Over the past decade, growth has been much closer to 10 per cent annually, which is still rapid on this bigger base. Total demand for Rare Earth Oxides was near 130,000 tonnes in 2008. While 2009 is a clear down year, thanks mainly to a big destocking in Japan, the potential for high growth over the coming decade is excellent. Our green dreams cannot be realised without ongoing growth in production of these unique metals.
The simple political reality, which we discussed in detail here when we covered last year's conference, is that the world is highly dependent on China for Rare Earths. Something like 90 per cent of annual production comes from China, and the Chinese are using more domestically and tightening their export quotes. BRIRE's figures show that Rare Earth Oxide ("REO") exports peaked at 55,000 tons in 2005, and have been falling as quotas are tightened. (REO figures are slightly deceptive, since the oxide is about five to 10 per cent heavier than its REE content.) Some industry sources estimate that as much as 10,000 tons of "gray" material leaves the country outside the quotas. But this "gray" figure is conjecture, and the Chinese government is aiming to restrain future leakage outside the quota. The inevitable nervousness over supply sources has brought about a race for new sources of production. Manufacturers in Japan, Europe, and the US all want to see diverse sources for these critical elements, as they launch new products with REE content.
Prices are down year-on-year, but a mania for the Rare Earth miners was ignited by a report coming out of one of the Chinese ministries in the Spring of 2009 that China was considering a complete ban on the export of certain rare earths in their raw form, preferring to export value-added products and spur manufacturing the jobs in China. This report was later "clarified" in the summer, but it was followed by recommendations from various stock brokers and analysts that Rare Earth related mining stocks were a good way to play the emerging green energy boom, since new mines are needed to counter a possible stranglehold by the Chinese.
In fact, with 2008 demand at 130,000 tons of REO, a resumption of 10 per cent-plus growth could add 15,000 to 20,000 tons annually to demand. That would essentially require perhaps one new world class Rare Earths mine being added each year for the foreseeable future. Fortunately, there are two giants waiting in the wings, and they are both outside China.
Lynas Corp's (LYC.au) Mount Weld deposit in Western Australia is a high grade carbonatite deposit. According to the presentation from the company's Vice President, Matthew James, the project is progressing well again. The key step was raising money to fund remaining construction costs. In late April, China Non-Ferrous Metals agreed to invest A$252 million for a majority stake. But the terms were not approved by the Australian government. So the company turned to the equity markets, and completed a two stage financing totalling A$450 million at A$0.45 in October. This will allow it to finish the mine and related infrastructure, and build a large processing facility in Malaysia, where there will be access to cheaper power. Mr James expects production to commence in the first half of 2011, initially at an annual rate of 11,000 tons. Later, Lynas will ramp up to between 20,000 and 22,000 tons, which would give it perhaps 14 per cent of the global market in REO.
Also at an intermediate stage is Arafura's (ARU.au) Nolans project, which chairman Nick Muir spoke about. Arafura has an approximate 30 million ton deposit, right in the "center of Australia." It has a pilot plant funded by the government, and is facing a capital expenditure of perhaps A$400 million to put a mine into production. Arafura will also be replacing its chief executive, who has recently resigned, and seeking possible strategic partners.
Later, Ian Chalmers of Alkane Resources (ALK.au) described his company's Dubbo project in New South Wales, a Zirconium and HREE project, which was the subject of a feasibility study in 2002, and which received a government grant to build a pilot plant, and which went into operation in 2008. Prospective buyers are presently evaluating output products. The economics of starting up an enlarged mine will be improved if zirconium, niobium, and yttrium prices line up, and allow the company to sign long term off-take agreements at prices which will support construction of an expanded mine.
Brief presentations were also given by privately-owned Frontier Minerals which has the high grade Zandkopsdrift carbonatite deposit in the Northern Cape province of South Africa, Greenland Minerals (GGG.au), which has the Kvanefjeld deposit in the country with the same name, privately-owned Mongol Gazar which has a deposit in Mongolia.
Beyond these, although they didn’t present, are dozens of companies with Rare Earth projects. Industry expert Dudley Kingsnorth mentioned that there are 57 Rare Earth projects on the go, but another conference delegate said that the figure is over 120 projects, including some newly added ones, which are based upon only "a handful of grab samples."
If history is any guide, and the market stays keen, a number of the new companies will raise enough capital to progress their projects. But how can anyone, especially an investor new to this sector, be expected to pick the winners, in what is becoming a crowded field at the early stage end?
The old formula of going for size and grade may not work, because the development of RE deposits is a highly complex matter. Evaluating the potential for a gold deposit with straightforward metallurgy is relatively easy. A poly-metallic deposit with complex metallurgy is more difficult, and picking winners in the Rare Earths sector may be the most difficult game of all. That is because there are so many different elements involved, each with their own supply, demand and pricing dynamics. And then there are the problems which begin as you mine the deposit. The rare earths must be extracted and separated from each other. Furthermore, we then get to the "dirty secret" of rare earths, which is that virtually every deposit is radioactive, with a significant concentration of thorium or uranium bound up with the Rare Earths themselves. This makes the separation and handling of the materials even more complex and critical and is why the price tags for capital expenditures are so very high.
But there is no doubt that the Rare Earths mining sector has a bright future. The likes of the gold rush that we saw after the nickel discovery at Voisey's Bay and the uranium price boom of 2007 may come to Rare Earths at well. But if too many early stage companies are floated, a large number of investors in these new companies are going to be disappointed.
[Text was too long. I had to shorten it]
