The Goldilocks Mining Principle: Right-Sizing Rare-Earth Mining Ventures

Jack Lifton & I recently had a private discussion on the merits of a number of rare-earth mining ventures, and how the proposed size of each project (in terms of tonnage in the ground and / or production rate) might affect the overall probability of success. While we agreed on a number of the points discussed, our overall perspectives on the topic differed somewhat, and so we decided to summarize our observations and present them here.

 ——-

From Jack Lifton:

 I cannot see any practical, economically realistic way that a rare-earth mine, without participating in a distributed-overheads scheme, can be profitable at the point of selling ore concentrate into the market.

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I believe that this was the dirty little secret of why the rare-earth-mining industry failed in the non-Chinese world during the last generation. China’s secret of success was not brilliant market-entry timing or low labor costs, as the pundits have theorized, but rather it was state participation in absorbing overheads, either as direct grants or mandated, shared-infrastructure resources.

There are only two ways to finance a rare-earth – or any other – mine. These represent the reaction of political/economic systems to demand for a natural resource. Capital to develop the production of a resource can come from either :

1) Private equity (free market), or one of two types of

2) State subsidy, either the

a) Chinese model: direct government control and subsidization, or the

b) Japanese model: indirect government control by the encouragement of private participation, through vertically integrating a mining / refining operation into a combined balance sheet, and thus distributing the mining / refining overheads. This model has been adopted by Toyota for its Vietnam-based rare-earth and Argentina-based lithium mining / refining operations.

Unfortunately the US Congress is being lobbied to utilize the Chinese model, rather than the Japanese version, and no rare-earth champion from private industry seems actively ready to carry the ball.

But in any case, nearly any small rare-metal-focused mine, as a freestanding entity producing concentrates, will fail economically; it will either not make a return on the private equity, or will require permanent state subsidies, unless it is part of a vertically integrated supply chain, where there is a profit point with a high-enough selling price, at a high-enough margin, to cover the costs of the supply-chain steps, including the mining, occurring at earlier points in the supply chain.

If my hypothesis is correct, then it is best to right-size the mining part of a rare-metal supply chain from the very beginning. This means that the production target for the mine must be in line with the least-necessary demand, and the most-likely growth of that demand for its product(s), in order to conserve and to maximize the efficiency of the deployment of the capital to get the fastest return possible. Thus it would seem that in the present situation of the potential global-supply imbalance among the rare earths, the smaller the non-Chinese mine, and the more heavy rare earths it can produce, then the more likely it can have a low-enough negative cash flow, so that an overall positive cash flow can be achieved, by integrating it into the closest point of the smallest-turnover supply chain possible.

I believe that for the rare-earth supply chain, this point is the manufacture and sale of rare-earth permanent-magnet alloys of neodymium-iron-boron and of samarium-cobalt. For the magnets made from such alloys to be of the highest quality, they will need to be of the type utilizing dysprosium additions, to achieve the highest-temperature, high-efficiency operation. Dysprosium is a heavy rare earth that is currently the sine qua non for the most-valuable rare-earth permanent magnets.

Dysprosium and another ‘heavy’ rare-earth metal, terbium, are today only produced in China. But China admits it is running out of both of them. Thus they are the most critical of all of the rare-earth metals. Few deposits are known that contain commercially recoverable quantities of either of them.

The only US-located venture actively underway, that could meet the criteria discussed above – small size and commercial heavy-rare-earth content –  is Ucore Rare Metals’ Bokan Mountain project in Alaska. Ucore is currently undertaking a drilling program there, to confirm and to verify the extent of a very significant occurrence of heavy-rare-earth-rich deposits at Bokan Mountain.

Globally, two ventures with projects meeting these criteria, and of which I have direct knowledge, are Great Western Minerals Group (GWMG) of Canada and Frontier Rare Earths, a UK-domiciled company. The former has potential right-sized assets both in Canada and South Africa. The latter has them also, but only in South Africa. GWMG is particularly attractive, because if it can add a small separation, refining and metal-production operation to its existing deposit and magnet alloys plants in the UK and USA, it can become one of the only viable freestanding rare earth operation outside of China to be profitable through vertical integration. Great Western’s business model shows that it is profitable at the stage in the supply chain where it is selling rare-earth permanent-magnet alloys.

Disclosure: I have been, or am currently a paid consultant, to all three companies named above. I currently do not own shares in any of them.

 ——-

From Gareth Hatch:

When it comes to considering the ‘right size’ for a rare-earth mining venture, I think that we first have to acknowledge that in the current and future evolution of the wider, global rare-earths sector outside of China, in simplistic terms there are at least two competing agendas.

At the far end of the supply chain, we have end users of finished or semi-finished products, with a desire to have as much material available in the market as possible. Having strong supplies enables ready access at low prices, leading to good margins in the end products and technologies that the end users will ultimately sell. Supply surpluses also give companies the luxury of creating buffer stocks, to alleviate fluctuations in future supply or pricing of materials – albeit balanced with the desire to minimize the amount of cash tied up in such inventories, and to minimize exposure to future price decreases.

At the other end of the supply chain, we have miners and potential miners of rare earths, who, on an individual basis, need for the current and future prices of rare earths in all forms – ore concentrate, partially separated mixed oxides, fully separated oxides, metals or alloys – to be as high as possible, while simultaneously working to drive down the cost of production. They need this in order to make the projections for their projects work, and to give a return on investment at a favorable rate. Common factors that lead to favorable conditions are scarcity – either in terms of actual quantities of material in the ground, or in the production rates for exploiting these material – and increased demand.

These competing agendas are of course by no means unique to the rare earths sector, although the latter scenario probably has few equals in terms of technical and financial complexity, outside of the rare earths.

We also have to remember that unlike, for example, the gold market, significant increases in overall supply can put significant downward pressure on pricing. Without a commensurate surge in demand, the availability of resources from multiple channels of new supply, will affect the overall market pricing of those resources.

So, returning to the original concept under consideration, let’s think about how the above applies to individual mining ventures. If the production rate of a mine is too large, and the output is entering the open market, then we risk depressing the prices for the resources that are produced, and thus we risk the capital invested into the project in the process – which will likely be considerable in order to facilitate such a large production rate in the first place.

On the other hand, if the size of the deposit or the production rate is too small, then we run the risk of not having a viable mine life, and not being able to get a return on investment quickly enough. So generally we’re looking for something in the middle – akin to a ‘Goldilocks’ principle for right-sizing rare-earth-mining ventures.

These two factors are not unique to rare earths, but there are two additional factors to consider here, one of which is unique to the rare earths and other polymetallic deposits. We have to consider the distribution of the individual rare earths in any given mineral resource, and the overall material grade of the resource, since rare-earth deposits are not created equally. A relative composition of total rare earths present that is skewed towards the heavy rare earths, is likely to be of particular interest because of the inherent higher market values of such materials in finished form. On the other hand, a resource with a high material grade of total rare earths, even if it doesn’t have a relatively high distribution of heavy rare earths may still be attractive, because of the overall value of the rare earths per tonne of mineral resource. Of course, all associated valuations of mineral resources based on these factors, assume the cost-effective development and availability of an optimized metallurgical process for extraction, among other things.

So again, there is a ‘Goldilocks principle’ at work with regard to the resource itself, as well as the subsequent production that exploits it.

Given all of the above, I would agree that larger projects (those with high production rates) are going to be of less interest to companies who wish to vertically integrate rare-earth production directly into their supply chains, as a means of securing supply and lowering production costs. The capital required to facilitate higher production rates, and the relatively low amount of materials any one company, regardless of how large they are, can consume, are negative factors here. So this would indeed be where smaller mineral resources, or lower production rate projects could come in to their own.

To those mentioned above by Jack, I would also add Alkane Resources’ Dubbo project to the list of potential “smaller” projects. At 23%, its overall relative distribution of heavy rare earths within the grade is greater than that of GWMG’s Steenkampskraal (7.7%) or Frontier Rare Earths’ Zandkopsdrift (7.8%) projects, both located in South Africa (Ucore’s Bokan Mountain project has not yet been defined as a mineral resource using 43-101 or JORC-compliant guidelines, and is not a past producer of rare earths, so I won’t comment on their data). The overall in-situ tonnage of total rare earths is in between those for the two South African deposits, and the metallurgical processing work is further along than either project. There are other factors too, but you can see that Dubbo is a candidate for the type of “right-sized” smaller project that we’ve talked about. It’s not the only one either – projects such as Stans Energy’s Kutessay II mine in Kyrgyzstan also fall into this category.

Now all of that said, I would suggest that there is room for 2-3 ‘large’ producers of rare earths in the marketplace outside of China (large, as in production rates of 10,000 tonnes per year or more), as that market place now stands, even if these projects are predominantly light-rare-earth deposits. The two leading projects of this type, Molycorp’s Mountain Pass and Lynas’ Mount Weld, each have plans to do something with the ore concentrates once produced, that will add further value to the resource. Not all of the details necessary to independently evaluate the plans that these companies have for their projects, are in the public domain yet.

I would also argue that additional larger projects could still be viable, ahead of any future substantial increases in demand, if, for example, one or more centralized separation and refining operations could be developed, to whom these new entities could sell their ore concentrates, at prices greater than they would otherwise obtain on the open market (i.e. to Chinese companies). Of course, such centralized facilities would have to overcome significant technical and economic challenges to be feasible, but the concept is worth looking at as a means of producing materials, that could ultimately provide economies of scale to the producers, while maintaining reasonable prices for end users.

Getting the right balance here between projects that are tightly integrated into existing supply chains, projects that are able to economically produce value-added products for sale in the open market, and those that could provide feedstock to centralized separation and / or refining facilities, could very-well lead to an incremental and profitable increase in demand for rare earths such as neodymium, used in permanent magnets, as the supply of such materials is secured.

Of course, the corollary is that if the rare-earths sector gets it wrong (particularly if efforts are not coordinated in some way, without falling foul of anti-trust issues), then we could still be relying on China for our rare earths for many years to come…

…not a good scenario.

Disclosure: I am not now, nor have I been in the past, a paid consultant to any of the companies named above, nor do I own shares in any of them.

Gareth Hatch


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Tracy Weslosky is the Publisher and Editor-in-Chief of InvestorIntel, a leading global investment intelligence source created for the innovative and entrepreneurial minded. Tracy is also the Founder & CEO for ProEdge Media Corp., an online publishing and media production company since 2001; and is the Managing Partner for 724 Capital Corp., a business consulting firm. Previously she has owned a boutique Investment Banking firm for 7 years that was the basis for a business reality television series called, DealFlow. Aired around the world for 3 years on CNBC World, WealthTV and many other networks globally; Tracy is a speaker, writer and an entrepreneur.
  1. Fantastic Gareth,
    You have expressed more eloquently than I, part of what I have been trying to
    point out in all my previous posts.
    Alkane has all the right ingredients for success. Not only a much larger percentage of heavy
    rare earths and a 70-100 year mine life, but also that the proposed heavy rare earth production is further underpinned by what will be very profitable zirconium / niobium
    production.
    At the expanded case 1,000,000 tons per annum that Alkane are now entertaining
    total production would be comprised of
    37,000tpa would be zirconium and zirconium derivatives
    5000tpa Niobium Tantalum Hafnium – of which 3500tpa would be niobium
    4950tpa of light rare earth -Lanthanum Cerium Neodymium Praseodymium
    1500tpa of HEAVY RARE EARTHS – Yttrium Gandolinium Dysprosium Terbium
    YTTRIUM and HEAVY RARE EARTHS are expected to account for 40% of revenues
    from the project ! Nice balance, especially if you are the largest heavy rare earth
    producer outside of China !
    The heavy rare earth component, as I am sure most readers are aware, will make Alkane
    the largest producer of heavy rare earths outside of China in the near term.
    I believe Alkane is in the “goldilocks zone” for a rare earth success story.
    The zirconium / niobium output was planned as profitable in its own right and was proceeding towards realization as a mine. Then with the recent developments in China
    the rare earth component of the proposed mine, especially the heavy rare earths,
    took the numbers into very very favorable territory.
    Further to this Alkane’s current share price only reflects the value of it’s gold reserves -
    basing the calculations on one resource ounce being worth A$128 !!
    Both of its gold projects are in the final stages of planning.
    (interested readers can search – “Fat Profits -A free call option on the Dubbo Zirconia Project (rare earths)” for a complete analysis of Alkane’s position.
    So to summarize the factors in Alkane’s favor ;
    1.The most technically advanced market ready heavy rare earths project in the world.
    2. Underpinned by profitable zirconium and niobium production
    3. World zirconium demand is increasing. Medium term supply is limited – very significant price increased are expected in the next five years
    3. No sovereign risk.
    4. Twelve years of R+D in preparation. Australian Government Grants to undertake the technical preparation and rung the Pilot Plant. Metallurgy is complete. Niobium and Zirconium samples have been produce in large quantities and been sent to customers for trialling.
    5. HREE circuit proven. Light REE circuit currently being proven.
    6. Successful pilot plant in operation for a number of years.
    7. Proprietary IP developed for very efficient, cost effective processing. Best of type.
    8. Proposed mine is near a major regional centre – no heavy infrastructure costs.
    9. Light rare earth market may be oversupplied in five years. Heavy rare earth
    market demand should be permanent.
    8. Very experienced and conservative management.Best of type.
    10.Deep value in the company – shares are deeply undervalued.
    and I can now add to this list
    11. In the “goldilocks zone” in terms of right sizing and supporting revenues.
    I expect before too long I will be able to add “partnering for vertical integration and value adding”. That’s a guess but I would put a reasonable probability on it in the near to medium term.
    Graeme Irvine’s recent posting certainly pointed to such possibilities and now your article Gareth has added another dimension. Thanks.
    If anyone can point out where there is a better investment in the rare earth space than Alkane, or where I am misreading anything, I would be glad to hear from them and debate the case.
    Until then I will be buying more Alkane shares, as I have been doing very recently.
    All the best to all contributors and readers. Keep up the good work.
    The daily developments and articles are fascinating.

  2. Perhaps it would be instructive to lay out the anticipated supply/demand curve.
    I would submit that neither Molycorp nor Lynas are going to be able to meet the demand, even fully producing in 2012.
    Mr. Lifton is immersed in this field, but frankly, I do not think he understands this from an investment perspective. I can’t believe he sold his shares in GWG.
    To be clear, if prices do not come down soon for REEs, GWG’s subsidiary LCM will be out of business.

  3. Casual Observer: thanks for the feedback.
    Prescient11: Regarding Molycorp & Lynas not meeting demand – it depends on the specific timeframe and specific rare earths of interest. The point above, taken to an extreme, is that if, say, 8 different large producers come on-stream in the next 2-4 years, the market will be awash with rare earths, particularly light rare earths, and the price will collapse – unless there is some huge surge in demand.
    Regarding LCM: not necessarily. From a pricing point of view, the permanent magnet industry has a history of raising and lowering magnet prices, in response to rising raw material and magnet alloy costs. This wouldn’t be the first time that finished magnet alloy prices had to be raised in response to rising REO prices [of course the complaint from magnet customers is that the prices never seem to go down as quickly as they went up - similar to your local gas station I suppose...]. We also don’t know what buffer stocks LCM might have, either, or long-term purchase agreements at locked-in prices – same goes for any company in this space.
    On the other hand, what does seem to be unique in this situation, is the rising differential between FOB China and domestic pricing of rare earths, which is getting to be very significant, and so clearly there are issues of competitiveness… assuming the competitors are based in or have facilities in China.

  4. Gareth,
    Thanks for the comment. I am trying to figure out though what you mean by “large producers”, what kind of tonnage are you talking about? Assuming 280,000 tonnes of demand is going to be the norm come 2020, and the only near term (2012) producers other than the Chinese that I see coming on line are MCP and LYC, there is going to be a significnat gap between supply and demand. I think the Chinese output will remain steady at about (I grant GWG might get SKK going, but that is a very small deposit with small scale potential as far as annual output and not exactly the clearest road to development, so I’m giving no tonnage for that). 140-160k tonnes for the next 3-5 years.
    And as you stated, you need to look at the individual elements themselves to try and quantify these issues. For example, roughly half of MCP’s entire REE distribution is Cerium. Yet, they have stated that they may be a market purchaser of Cerium because of their XSORBX product. (Who knows whether it works or not, but that should definitely be on the radar). Let’s meet halfway and say they can produce all the cerium they need for XSORBX and thus it sucks up their entire production. Thus, if MCP is producing 10,000 tonnes of REEs every year, but using half of them, the production is halved.
    I would agree that if 8 large producers came on stream that would be a problem, but the secondary group (being AVL, QRM and REE (admittedly I do not know much about ALK)) have very low estimated annual outputs of REEs in their plans. I guess what I am saying is, I think the market can more than handle most of these mines coming online and probably needs them if Chinese production remains stagnant and the demand curve is as we expect, even conservatively looking at it.
    Finally, I think you’ve hit the nail on the head with regard to LCM and FOB disparity. I attempt to use the 3 year average domestic Chinese price as my guidepost in investing in a company. My opinion is that this is the MOST conservative base price for REEs one can rely on. You could be quite right about LCM, but all I can say is it’s going to be tough for sure competing against Chinese companies paying the domestic price and trying to stay in the black.

  5. Your welcome Gareth,
    It is always refreshing to get truly objective perspectives
    from professionals.
    prescient11
    It looks like you have done a lot of homework and that is commendable,
    however I find it amazing that you are not invested in Alkane.
    Alkane is set to become the largest producer of HREE’s outside China
    in the near term. They have the most technically advanced and market
    ready project for HREE’s in the world. HREE’s prescient11 – the expensive ones – the ones China can’t and won’t be able to produce enough of to meet it’s own demand – let alone the rest of the world. That should surely arouse your interest.
    I suggest you go through all Alkane’s releases and reference the directions
    for further analysis that I have given on my posts.Plus search all related articles on the net.
    I guess if a guy like you is who is well invested in this topic and business
    doesn’t know much about Alkane, it helps explain why you can buy a free call option on their business for nothing !
    In your most recent post you are still working on a lot of “ifs”.
    If all Molycorps Cerium can be used in its new product etc.
    Investing with this many “ifs” like this is a very risky business.
    I think some reasonable assumption to make would be that in three to five years there will be a handful of larger dominant players mostly producing LREE’s and that price pressures for light REE’s will have adjusted. A couple of the dominant players may become vertically integrated conglomerates in ways that we can’t imagine now.
    Demand for HREE’s will remain strong and ongoing and there will be small
    handful of dominant producers, some of which will add significantly
    to their value chain with technical advance/ strategic partnerships.
    Dollar for dollar it may work out that the best of the smaller technically advanced HREE producers are far more profitable than the larger, predominantly LREE producers.
    This depends on how skillfully the larger ones can vertically integrate / partner and create free cash flow for their businesses and what new markets develop for both LREE’s and HREE’s.
    Of the HREE’s Terbium and Dysprosium will be most in demand.
    With these assumptions in mind prescient11 – take a look at Alkane.
    And be careful with your money !

  6. Prescient11: I’m not sure I understand why you’re comparing potential market production capacity in 2012, with projected demand figures for 2020 [which come from where, by the way?]. Are you not comparing apples to oranges? What is the demand in 2012, or 2015, say? Many, many things could happen in 10 years; certainly that’s enough time for numerous additional projects to come online, assuming the financial and technical challenges are solved for each. There could also be major changes in demand too.
    My arbitrary “definition” for large producer above was 10,000 t per year or more of rare earths. Quest’s Strange Lake numbers work out to be very roughly 10,000 t per year, and Avalon’s Nechalacho around 8-9,000 t per year once up and running. I haven’t seen projected data for Rare Element Resource’s Bear Lodge.
    Note that Molycorp’s goal is to be producing 20,000 t of REOs / year in 2012, and they are on record as saying that they could / would go to 40,000 t per year if the market required it.

  7. Casual,
    Thank you very much, as I enjoyed your post quite a bit. I will do some DD in ALK.
    Earlier on I was invested in LYC, but pretty much closed that out at about even to go elsewhere.
    My suggestion to you would be QRM, that’s my favorite. ALK looks like it could be a sleeper though, so thanks for getting my interest up, I’ll take a look.
    The HREE players I know of are UCU, QRM, AVL (maybe TSM, RUU, and now ALK as you have added them).
    Not to knock the aussie’s, but normally I prefer Canadian companies as public disclosure requirements are more stringent. thanks again though.

  8. I have just re-read your post prescient11.
    Some good analysis and data. Thanks.
    The ALK project is proposed to be up and running 2013, so I guess
    after MCP and Lynas it will be the next.

  9. Maybe Jack sold his GWG shares to invest in Alkane, but can’t
    mention his shares or Alkane because he is not working for them :)
    Just kidding Jack.I enjoy reading all your writing and have learnt a lot
    from you.
    Thank goodness we have Gareth, who appears not to be invested in anything
    other than getting to the facts of the matter.

  10. I think one further reasonable assumption that could be made
    about the REE business three to five years from now would be that those handful of larger companies and small handful of smaller companies that make the grade technically and financially will be very very valuable, and perhaps, geo politically strategic.

  11. Gareth you are right about prescient11′s analysis comparing apples with
    oranges.
    I noticed this but was more interested in the production figures he was
    quoting, which you have now also put a question mark against.

  12. Just one further point.
    Gareth, which HREE’s do you think will be in most demand over the next three to five years ?
    Terbium, Dysprosium, Neodymium ?

  13. Casual Observer: in terms of overall tonnage, yttrium will very likely be the heavy rare earth in greatest demand. Dysprosium and terbium will track to the rising demand for permanent magnet materials that use neodymium. this latter element itself will be a critical driver for overall rare earth production, since you have to extract everything else in order to get to it. Note though that neodymium is not a heavy rare earth.

  14. Gareth,
    Here are the numbers I have, which I find to be conservative by people that can be trusted.
    Dr. Chen (Chinese REE expert – 4/11/10 RMB post)
    He states that in 2015, the Chinese view is that worldwide demand will be 210k tons, and Chinese demand will be 138k tons.
    By 2020, he states that Chinese demand will have risen to 190k tons. He also provides the incredible figure that the Chinese estimate that 30-40k tons are smuggled out of China every year. (not sure if this is true or not so I assign it a 0, but given the recent crackdown by the Chinese on enviro/smuggling, imagine the strain if 40k tons is added to CURRENT demand figures).
    Similarly, Dudley Kingsnorth states that world demand will be 280k tons in 2020 (this comes directly from RES PEA) and his numbers are consistent with Dr. Chen’s for 2015. Very importantly, Kingsnorth further states that Chinese production will be stagnant during this time, a view I agree with.
    Thus, we are looking at a substantial supply deficit during the time frames I’m talking about. Let’s just look at 2015 for example. Demand expected at 210k tons, Chinese production at 150k (optimistic, I believe).
    Well there’s a natural deficit of 60k. By then, LYC and MCP will be online, LYC plans to produce 10,500 TREO annually, MCP 19,050 TREO annually (and again, they’ve said they’re going to be consuming their own cerium). So they and the smuggling will help.
    The other projects I’ve got coming online next in 2015 are QRM — 22,000 annual TREO, RES — 11,400 annual TREO, AVL — 10,000 annual TREO. (I do not know ALK’s anticipated production).
    It is my view that demand will outstrip supply unless there are additional projects coming online quickly.
    Of course, no one knows what the future holds, but I don’t think Toyota and everyone else will sit around twiddling their thumbs to make sure they have stable supply, let alone the governments who need these materials for advanced weaponry. If anything, I think the wildcard demand picture is to the upside, but who knows.

  15. Slow Friday afternoon before the (Canadian) Thanksgiving long weekend, so allow me to add my two or three cents from my limited and, – I am sure – some would say, self-serving, perspective. I don’t disagree with comments made above and I certainly will not comment on too many company specifics, for obvious reasons. I do find it remarkable, however, that even informed and respected analysts in this field continue to ignore a few 800lb gorillas in the room. Let me try to strip off some of the noise and hysterics surrounding our industry and distill the issues down to the fundamentals.
    One of the fundamental reasons why China dominated this space over the course of the 90′s (it went from about 20-25% in global market share to over 70% in a market that more than doubled in size over the decade) was that the largest, so-called, rare earth mine and deposit in the world is neither (a rare earth mine or a rare earth deposit, that is). Instead, Bayunebo(or Bayanobo – there are many ways to spell this) in Inner Mongolia is a very large iron ore mine that has, and will continue to be, a very large producer of iron ore for both economic and strategic reasons to China. Its tailings are still the largest source of light rare earths in the world. Incremental economics (another way of saying “distributed overheads” to use Jack Lifton’s term) are very powerful in this instance. Effectively zero mining costs plus a processing and utilities infrastructure largely paid for by the iron ore operations meant that it was impossible for other stand-alone mining operations such as the monazite beach sands operations in Australia and S Africa (that provided Rhone Poulenc – now Rhodia – with raw material feed for decades) and Molycorp’s Mountain Pass bastnaesite mine and RE processing plant, were at a distinct cost disadvantage, state subsidies, labour costs etc. notwithstanding.
    To add insult to injury, Baotou Iron and Steel’s rare earth processing subsidiary, Inner Mongolia Baotou Steel Rare Earth, has historically only processed a fraction of this tailings stream (typically in the range of 20-25%), while the rest has been sent, unprocessed, to a massive tailings pond. A few years ago, Jim Hedrick at the USGS caused a bit of a stir in China when he reclassified the rare earths that were contained in this tailings pond. A few observers claim that as mining shifts to different parts of the Bayunebo ore body, lower rare earth grades are being accessed; talking with Baotou Steel officials, Ministry of Commerce officials and Ministry of Industry regulators, this does not appear to be a factor of great significance, since the majority of the tailings still end up in the tailings pond unprocessed for their rare earth content. Baotou Steel’s famous “stockpile” initiative is to recover the REs in all the tailings in the form of a RE concentrate and stockpile it until it is needed in the future.
    There is a second gorilla in the room: China today consumes 60% of all the rare earths produced in the world. China’s rate of rare earth consumption is growing faster than any other market. To be clear, Chinese consumption includes all Chinese-owned operations as well as foreign magnet, alloy, catalyst, phosphor etc. consumers serving the domestic and export markets. Japanese plants in China account for a large portion of domestic Chinese consumption. There is a lot of talk about wind turbine generators and hybrid cars driving rare earth demand in the future. The lesser known fact is that this demand will largely be for NdFeB magnets (meaning Nd, Pr, some Dy and a little Tb and not the rest of the REEs in the periodic table). Ce and La account for 70-75% of any typical light RE ore distribution. Unless there are large applications developed for Ce and La, (like Molycorp’s XorbX Ce for example if it takes off) prices for Nd, Pr, Dy and Tb will have to carry the cost of production (mining, concentration, cracking, separation) of all the other elements.
    Gorilla #3: Most Japanese sintered NdFeB magnet producers source a great deal of their strip-cast alloys from Japanese plants in China. These alloys are not subject to export quotas or export duties, which means that Chinese export quota restrictions so far have had a very moderate impact on the availability of magnets for hybrid cars. At the same time, wind turbine producers outside of China have gearless, permanent magnet (ie. sintered NdFeB) generators on the drawing boards and some have working, optimised prototypes but the majority of commercially available units are made in China by Chinese companies.
    At today’s prices, it would appear that every rare earth development project makes sense. The relevance of the points above, however, has to do with where RE demand growth will come from. If it comes from outside of China, then there is a realistic chance that a number of RE development projects will be commercial and a few of them will be very successful. If, on the other hand, the bulk of demand growth is in China, then the companies developing these projects had better have (1) production costs competitive with Baotou and (2) have a China strategy that will allow them to access the Chinese market for REs. Looking at the public disclosure of most of the companies trying to bring RE projects to commercialization, Molycorp appears to be the only company that has flagged the importance of this point and has done a lot of work to optimize its process and minimize its production costs to be competitive with Chinese costs.
    On top of these issues, one also needs to have a view on the direction of Chinese regulations. But that’s a discussion for another time. In a nutshell, this is a very complex industry with even more complex dynamics.

  16. prescient11: J K Galbraith is once supposed to have said that “the only function of economic forecasting is to make astrology look respectable.” Joking aside, it takes braver men and women than me to predict things that far out :-)
    Constantine: thank you as ever, for your excellent remarks and observations. They definitely add much-needed additional perspective to the topics at hand.

  17. Constantine, very good thoughts. Thank you.
    Gareth,
    Here’s one question that I had that kind of addresses Constantine’s post and J. Lifton’s previous posts.
    If the Chinese seem to have a limitless supply of LREE that costs nothing to produce, then why the hell did they take a stake in Arafura and try to take a controlling stake in LYC. And perhaps try to acquire Mountain Pass through the Unocal purchase (although probably not the focus but who knows).
    Why are they trying to buy deposits that are pure LREE plays? It just doesn’t make sense to me if they are sitting on an endless pit of no cost LREEs… Something is not adding up.

  18. prescient11: the other potential reasons aside for a moment, do remember that there is a difference between the size of a given resource, and the rate of production associated with it.

  19. Excellent Constantine. thanks,
    I do appreciate your reservations, perhaps based on professional obligations,
    not to comment on individual company specifics.
    I am not so constrained and if I read you right ; that you not disagree with what
    was written above, then I can conclude that you agree that companies that have supporting
    revenues and are focussed on HREE’s ( for which it appears there will be ongoing demand from China ) are best positioned for commercial success.
    With this in mind I suggest that interested readers / investors do their own due diligence on
    Alkane Resources. Dollar for dollar I still believe it the best story in the rare earth space at present.

  20. A couple of further points. It looks like,after Molycorp and Lynas, Alkane will be the next company
    into production. (2013).
    I would suggest that there is a first mover advantage.
    Further, we may be underestimating the growth in new applications for REE’s.
    Has there been any historical example of the development of materials
    that have broad technological uses not finding myriad new applications ?
    Gareth?

  21. Excellent discussion! Thanks to everyone involved. I still don’t care about companies who won’t have cashflow before 2015. It has something to do with the apples and oranges Gareth mantioned…
    Kris (long NEM, GWMG; still doing DD ALK and RUU for possible serious investing)

  22. Constantine,
    I wish to say, once again, excellent. You have made a very important and
    obviously well informed contribution for all readers / investors in this
    emerging industry.
    What both Gareth and yourself have said re-inforces what I have been trying to get across to
    readers / investors.
    Gareth said
    “Casual Observer: in terms of overall tonnage, yttrium will very likely be the heavy rare earth in greatest demand. Dysprosium and terbium will track to the rising demand for permanent magnet materials that use neodymium. this latter element itself will be a critical driver for overall rare earth production, since you have to extract everything else in order to get to it. Note though that neodymium is not a heavy rare earth”.
    Constantine said
    “Unless there are large applications developed for Ce and La, (like Molycorp’s XorbX Ce for example if it takes off) prices for Nd, Pr, Dy and Tb will have to carry the cost of production (mining, concentration, cracking, separation) of all the other elements”.
    Alkane’s LREE’s = Lanthanum, cerium, Nd neodymium and Pr praseodymium
    Alkane’s HREE’s = YTTRIUM , gandolinium ,Dy dysprosium and Tb terbium
    + large scale production of Zironium and its derivatives and Niobium (see the recent article in Rare Metal Blog on Niobium).
    So, readers, investors, you can see that the ALK project is heavily concentrated in the area
    where two of the leading independent voices in the rare earth space, acknowledge
    there will be viability and demand.
    (If you are unaware of their bio’s search – Constantine Karayannopoulos – Gareth Hatch).
    I think that I can pretty much rest my case for Alkane given what has emerged in the blog above, but knowing myself as I do I expect I will be back in the discussion before too long.
    Interested readers should refer to all my previous posts on ALK and if you require further
    information then follow the leads I have given in those posts.
    All the best to all readers and contributors of Rare Metal Blog.
    I hope this information is of use. Please do your own due diligence and if anyone can
    inform me why ALK is not, far and away, dollar for dollar, the top investment in the rare earth space at present I would be glad to hear from them so that I can correct my misreading.
    I have very recently bought ALK shares and intend to buy more.

  23. Casual Observer,
    Could you gives us a hard dollar synopsis on the “penalties” or additional charges when purchasing Alkane or other Oz stocks on Canadian or American exchanges? Also, are there any other charges associated with selling Ozzy stocks?
    Thanks

  24. Tek,
    ALK is listed on the ASX.
    I don’t know the answers regarding penalties or how Australian stocks are bought through
    US exchanges. You need to ask a broker.
    The only thing I would say to you is don’t worry about the pennies when you are making the pounds.
    You can go broke saving money.

  25. Tek,
    ALK is listed on the ASX.
    I do not know the answers to your questions re:
    purchasing through Canadian or US exchanges.
    You need to ask a broker.
    One thing I would say is don’t worry about the pennies
    when you are making pounds.
    You can go broke saving money.

  26. Gents (and, perhaps, ladies since some of you are using pseudonyms),
    Good discussion with many good points made.
    Prescient11 – Great question on why the Chinese have tried to take control of Lynas, a strategic stake at Arafura and control of Unocal/Molycorp, if they are indeed wasting more LREEs than they are recovering. Let me first discount the Unocal/Moly deal. CNOOC was going after oil assets around the world. This acquisition effort came soon after the failure of Minmetal’s efforts to acquire Noranda. Large, Beijing-controlled Chinese State Owned Enterprises (SOE) had just started to test the global resource acquisition waters and had just started to learn the game. In the process, they made mistakes. Noranda and Unocal were examples of multi-billion $ teething pains that, if they had to do it over again, they’d be going about it a very different way.
    Regarding the Chinese interest in Arafura and Lynas, let me first say that it was not Baotou Steel taking a stake in these companies and just because Chinese companies try do do certain things around the world, this does not necessarily mean that THE Chinese are following a particular course of action. One needs to take into account a number of factors: (1) Since Deng Xiao Ping’s famous quote on the China’s REs being the equivalent of Saudi Arabia’s oil, REs have occupied a very unique position in the collective Chinese mind. I has almost become a national duty for resource (or not) companies to try to get involved in the RE industry. (2) The primary RE industry regulator in China, the Rare Earth Office headed by Mme Wang Caifeng at the MIIT (it was moved a year ago from the NDRC) seems to have picked its winners who are mandated with the consolidation of the mining industry, particularly in the unruly South: Baoutou Steel in Inner Mongolia, Minmetals and Chalco in South China’s ionic clays and Jiangxi Copper (in which both Minmetals and Chalco own large stakes) in Sichuan. At this point, Minmetals, Chalco and Jiangxi Copper seem to have their hands full with the provincial governments which, theoretically, control the resource. In my own view (and the view from a couple of the SOEs I mentioned above), the two companies that were associated with Arafura and Lynas were second-tier trading companies (and I seem to recall that at lest one was provincially mandated) that may have wanted to get involved in the RE industry in China but had effectively been shut out by Minmetals, Chalco and Baotou Steel. (3) There is fierce competition among Chinese companies (SOEs or private) and not everything they do is part of a grand design by Beijing, particularly companies associated with provincial and local governments. As an old Chinese proverb goes, the mountains are tall and the emperor is far away (this proverb also goes a long way in explaining the South China clay (HREE) mining situation in Jiangxi, Guangdong, Fujian and now Guangxi). (4) As both Arafura and Lynas were anxiously looking for new investors at the time, it would not be unsafe to speculate that someone with Nick Curtis’ (Lynas CEO) persuasive investment banking skills was able to convince old associates and relationships in China to invest in his company; remember that, as the world collapsed during the recession, the Lynas deal with its Chinese investors was at a deep discount to where Lynas shares were trading before the western bankers and investors pulled the plug.
    Gareth, Casual Observer – One word of caution on Yttrium: It is the workhorse material in red phosphors for displays and lighting but, with the exception of a paint additive developed a few years back by PPG and requiring low grade Y2O3, I have not seen any major Yttrium consuming application emerge. My sense is that demand for Nd,Pr, Dy and Tb will grow at 10-20% pa (Nd and Pr closer to the top end, Dy and Tb at the lower end as the Japanese magnet/alloy manufacturers are trying to reduce the Dy and Tb content). If wind turbine generators become the commercial success that everyone seems to think they will be (I just do not know enough to comment), together with the proliferation of small, micro and HEV motors, demand for the magnetic REEs may even exceed the 20% growth rate in a sustained way.
    Here’s also some free advice (and it would be worth exactly what you pay for it) in terms of investing in the RE junior mining sector: Look for companies with deposits that satisfy the classic exploration priorities of (1) tonnage (2) grade but also something that it is absolutely critical in the sector (3) mineralogy, which is directly linked to the ease/cost of processing the ore to a concentrate. It was the mineralogy of South China clays (REEs ion-exchanged onto clays and easily leached in three simple high school chemistry steps) that took a resource that initially appeared ridiculously marginal in terms of grade (0.01-0.1% REO in the ground) and revolutionized the world and use of HREs. If you cannot produce a decent concentrate at a decent recovery, you have to start chemical processing early, which means that processing costs will be very high and possibly uncompetitive to other projects. Look also at factor (4) the individuals behind each project; their track record and the teams they have assembled around them.
    At Neo, our exploration priorities are clear, as we have publicly discussed. Since we feel that the LREE sector will be well served by Baoutou, Molycorp and Lynas eventually (in fairness, there are still execution risks associated with every new project), we are focusing on HREE projects with byproduct economics. If we come across a stand alone HREE (or even LREE) project with exceptional mineralogy that has a chance to make up for the lack of by product support, we will also take a serious look at it.

  27. Tek,
    I do not know anything about purchasing
    Australian stocks through American or Canadian exchanges.
    I imagine fees will very depending on the broker or bank
    you are using.

  28. Music to my ears Constantine,
    Another great post. Thanks.
    In regard to Yttrium.
    In the case of Alkane, as you know, they have very good distributed overheads
    through their proposed Zirconium / Niobium operation.
    I would like to hear your thoughts on the market for Yttrium stabilized Zirconia.
    Everything you have said points to Alkane.
    Their tonnage and grade of HREE’s are the best.
    They will be the first mover in the HREE space.
    As I understand it their proprietary mineralogy is also world class ensuring very low
    processing costs.
    I am sure you have seen this release in regard to their mineralogy — I will point interested readers / investors to it — Search using these keywords –
    “MEDIA: Dr. Mariano Believes ALKANE Work Could Hold Key to Treating the World’s Eudialyte Deposits”.
    Alkane, as this article points out, have developed a proprietary mineralogy that reduces
    operating (extraction) costs to, as I understand it, worlds best practice levels.
    In regards to management, I am sure you are also aware that the experience in the Alkane
    team in regards to knowing just what it takes to get an integrated, distributed overheads
    rare earth operation going is second to none.There is a depth of experience there
    that would be hard to match.
    Alkane is not a “stand alone” REE company in the purest sense as it has two very
    lucrative gold projects. Other than that everything that you have suggested that
    investors tick off before making an investment is clearly and uniquely present in Alkane.
    The only question that remains (and it is a cheeky question, but one begging to be asked) is that if Alkane fully and obviously meet all of Neo’s, are they under your consideration ?
    If they clearly an uniquely meet your criteria I guess the answer must be yes ?

  29. Sorry a typo
    “If Alkane fully and obviously meet all of Neo’s CRITERIA, are they under your consideration ?
    If they clearly and uniquely meet your criteria then I guess the answer must be yes ?

  30. Constantine,
    I know I have asked a cheeky question that you will be constrained
    not to answer ! However given the context of the discussion it did beg asking.
    To other readers I would like to point out that if anyone in the world
    knows what it will take to make a rare earth project successful it is
    Constantine.
    He has laid out a set of criteria for a HREE producer.
    Alkane, uniquely meets those criteria in spades.
    In my view there are three major companies in the rare earth space.
    Molycorp and Lynas in the light rare earth space and Alkane in the heavy rare earth space.
    These will be the first three companies to production.
    Molycorp and Lynas are rightly richly valued as they have the scale and potential to become vertically integrated conglomerates.
    Alkane is the major company in the HREE space.
    The HREE space is where, dollar for dollar, the best money will be made.
    Alkane has distributed incomes (from the highly lucrative zirconia market) and holds the best reserve of HREE’s and the most cost effective and already realized mineralogy.(the mineralogy can take years to perfect and as Constantine has rightly pointed out is a key consideration).
    HREE demand is likely to remain unfulfilled.
    China cannot produce enough HREE’s to fill its own demand
    let alone the rest of the world.
    Alkane’s market cap currently represents no more than it’s gold holdings !
    In my view its share price is at least 75% undervalued – and more as it
    moves towards project realization.
    Alkane is a very very valuable company that is currently deeply undervalued.
    All the information an investor needs to do their own due diligence is in the public domain and I think this very interesting exchange we have had her on Rare Metal Blog helps join up all the dots.
    The three major companies in the rare earth space are, in my opinion,
    Molycorp
    Lynas
    Alkane.
    Which one would you want to buy at current prices ?
    All the best to all interested readers and contributors to Rare Metal Blog.
    I hope the information that has emerged in the above exchange is useful to you.
    PS. Constantine, I am still interested to hear your thoughts on the market
    for Yttrium stabilized zirconia.

  31. Casual Observer: you are obviously very enthusiastic about Alkane; I’m not sure though that this is the appropriate forum for making repeated promotional comments on that or any other company.

  32. The last two posts I made and the latest post Gareth made
    are not appearing on my screen.
    Can anyone inform me if this is just a problem I have or
    are others experiencing the same problem ?

  33. The most recent post from Constantine is also not appearing.
    Tek,
    You will have to ask your broker about buying shares.
    I do not know anything about buying from US or Canadian
    exchanges.

  34. Ok,
    I can see Gareth’s post now.
    Gareth, – Have I been “edited” ?
    I am presenting the facts.
    Yes I am keen on Alkane because the facts support the enthusiasm.
    In this regard I think I may be able to align myself with Constantine
    in as much as it may be time to look at the facts and get some
    visibility amongst the hysteria and misinformation surrounding rare earths.
    I think that there may be many readers who will appreciate enthusiastic
    support for a given company – IF IT IS SUPPORTED BY FACTS -. and if
    those facts can be verified by information that is in the public domain.
    It helps investors join up the dots while doing their own due diligence.
    As a scientist I am sure that you will appreciate enthusiasm for uncovering
    what is true.
    There are many pundits on this site who present carefully crafted perspectives for the companies that they are either invested in or are working for while simultaneously omitting other companies that have as good or better stories.Perhaps because they exhibit a degree of “restraint”
    that is acceptable to you, they are given free reign.
    When I entered Rare Metal Blog, I do not recall seeing a set of rules
    of censorship. If such a set of rules exists I would gladly abide by them.
    Until then I will continue to exercise my right to free speech and
    call things as I see them, and I hope you continue do the same.
    But do tell me – Have I been “edited” ?

  35. Not all of the contributions to this conversation are appearing on my
    screen at any one time. Hence I have replied or posted twice as the posts did not appear.
    Well, I think I can see where your objection may be Gareth.
    I cannot see one exchange and I think it may be the one you are objecting
    to or have edited. I took a quote from you and another from Constantine
    and drew a reasonable conclusion from those quotes.
    Perhaps this offended your sense of objectivity as you felt it implicated you in my conclusion. If that is the case, sorry. It looks like those quotes may have been edited.
    Anyway, things are all said and done now. I am satisfied that I have
    got all my points across.
    The conversation and especially Constantine’s contribution has been
    great. It has clarified a lot of things for me and I hope. for other readers.
    All the best to all readers of Rare Metal Blog.
    I will continue to follow all developments with great interest.

  36. One final comment Gareth,
    I think the fact that Constantine joined the conversation
    attests to the fact that it was an informed exchange with significant
    and relevant content.
    All the best.

  37. Excellent article, very insightful, with probably even more interesting comments! Constantine talks of 800lb gorillas in the room, I usually talk of elephants in the room, but I think its the same metaphor. Anyway the elephant in the room for me is capital costs – an issue Jack touches on in the article.
    The recent huge capital cost forecasts in the rare earth mining space, reflects an issue across the wider mining industry as a whole – soaring capital costs. This is discouraging large miners from building new mines – instead they are focusing on marketing and extracting a greater share of metals prices, or buying other operating capacity and reducing operating costs, to once again increase their share of the metals prices. It is left to the junior sector to build new capacity, as this is the only realistic way of entering the industry.
    For new mine capacity to be built, the downstream industry will have to help fund it, reducing effective capital costs at the mine stage, spreading the capital risk along the supply chain and making the mine investments more attractive.
    The issue is slightly different in rare earths as there is no existing mine capacity (outside China) to buy to try and reduce the operating costs of, or to try and extract a greater share of the metal price. Also the mine stage receives less of the share of the final metal price, than say copper or steel (iron ore). As such the only way of entering the rare earth’s mining industry is building new mine capacity – in a way the rare earths mining industry has reached this final stage, where there is no easy option left but to build risky new mine capacity, before the other metal mining industries have reached this critical decision point.
    Once mining investors realise this lack of options in rare earths mining they will invest elsewhere in the mining industry for a more certain return, either funding takeovers of existing mining capacity in another metal, with the aim of reducing operating costs or improving marketing strategies to extract a greater share of the metals price; or building new mine capacity in other metals where a greater share of the metal price is already received than in rare earth metals.
    As such if the downstream rare earths consuming industry wants to expand it needs to help fund the new rare earths mining capacity, reducing the effective capital cost at the rare earth mine stage and making the investment more attractive. Quite how the capital risk is spread along the supply chain is still open for debate (i.e. Jack’s China and Japan models), but may end up blazing a trail for the rest of the metals mining industry.

  38. Casual Observer: you have not been edited. There does appear to be some quirkiness in the way that the comments are shown on this article [because there are so many], but if you scroll all the way down to the bottom of the original page, you’ll see a small ” >> ” hyperlink which if you click, and then scroll down on the subsequent page, will allow you to see all of the comments.
    Please do not misinterpret my prior comment as an attempt to “restrict” or to “silence” you; It’s great that you’ve made your points, but repeating them over and over in consecutive comments, in my mind comes across as being overly promotional. You had us at “hello” :-)

  39. A point on the Chinese investments in foreign LREE mine assets as well.
    Undoubtedly there are some government directed plans in the raw materials industries, such as encouraging the lead/zinc smelting industry to invest in foreign mines, despite ample lead-zinc resources at home or possibly encouraging the investment in foreign LREE assets despite ample domestic resources – the reasons behind this include:
    - diversification of supply (to mitigate against weather/natural disaster/political unrest type problems in the key mining regions)
    - protection of domestic resources – if China depletes all its mine resources over the next few years it may leave itself with strategic resource problems later on.
    - to encourage higher commodity prices in certain metals, aka BHP Billiton/Rio Tinto/Vale in iron ore. These companies could easily supply the whole iron ore market themselves, but if they allow a little high cost, marginal capacity it creates much, much higher iron ore prices, from which they benefit enormously, without having to invest anything. China has the lowest cost rare earth mines, so would benefit the most from higher rare earth prices.
    - the Chinese government also has aspirations of making China a true developed country, which involves having less reliance on dirty, low paid mining jobs and has more higher paid downstream industry and service jobs. As such the country will ultimately aim to import the majority of its raw materials and export high value finished goods and services – to do this it needs to encourage new mine capacity on elsewhere in the world. This seems to be exactly what’s going on in rare earths at the moment.
    All of these suggest strategic reasons for Chinese companies investing in LREE projects abroad, however, in my opinion I think people sometimes ascribe too simpler view of Chinese foreign investment – that it is all part of “one grand plan” followed by all actors. This is analogous to assuming there is a “grand North American plan” which all North American based investors follow.
    Surely within China there are contrasting views on what different supply/demand prospects are for a variety of metals, what are the best investment strategies etc – these individuals will all follow their own plans, so you will see a variety of different investment decisions from Chinese companies – some of which you will agree with and seem to make sense to you, and some that you disagree with that don’t seem to make sense. In the same way that a quick look through this blog, of mainly North Americans, shows a wide variety of views on the future of the rare earths industry, which strategies to follow, which companies will succeed etc, despite a general overall agreement that something has to be done about the rare earths problem (which in itself there is some disagreement of the definition).
    Finally the assumption of one Chinese foreign investment plan also assumes that all Chinese investors have access to rare earth investments within China – it strikes me in a country where industry is so highly politicised this can’t be true. There will be Chinese investors who want to get into rare earths but can’t get access to investments in China, so like there Western world investors who want access to Chinese rare earth investments, only really have the option to invest in rare earth companies outside China.

  40. Ok Gareth,
    Yes I am having a little difficulty with my postings (seeing them when they are posted). I have only just now accessed Greenfields’ contribution by searching him/her.
    I can now see all the follow up postings.
    Good to hear I wasn’t edited.
    Maybe I was a little strident ; perhaps what I regarded as Constantine’s indirect affirmation of my position got me “started over” :) .
    Anyway it looks like the entire discussion has been well received and is still
    attracting attention and drawing comment.That’s great.
    We all appreciate the value of comprehensive and open discussions
    that inform markets and ensure that capital flows efficiently to the areas of highest potential. And it is a lot of fun to have those conversations !

  41. Good post, thanks for your response.
    I agree with much of what you said. However I have some comments
    on the section of your post where you said -
    “Once mining investors realise this lack of options in rare earths mining they will invest elsewhere in the mining industry for a more certain return, either funding takeovers of existing mining capacity in another metal, with the aim of reducing operating costs or improving marketing strategies to extract a greater share of the metals price; or building new mine capacity in other metals where a greater share of the metal price is already received than in rare earth metals.
    As such if the downstream rare earths consuming industry wants to expand it needs to help fund the new rare earths mining capacity, reducing the effective capital cost at the rare earth mine stage and making the investment more attractive. Quite how the capital risk is spread along the supply chain is still open for debate (i.e. Jack’s China and Japan models), but may end up blazing a trail for the rest of the metals mining industry”.
    Let’s put aside the very big players Molycorp and Lynas and consider
    the other rare earth miners that will become successful.
    I think it comes back to the “Goldilocks Principle” that Jack and Gareth presented. Some rare earth mines can and will be very profitable, (some very very profitable) if they have a business model that has some reliable distribution of revenues and their mineralogy is very efficient. Add to this some strategic alliances with downstream producers and, after basic mine operation is mastered, some possible value adding of concentrates on site with or without strategic partners.
    Some of the figures I have seen, which I believe to be realistic suggest a payback period on CAPEX of between four and five years. Further, we may be assuming that no new applications for rare earths will appear. I expect that there will be a very rapid expansion of applications for rare earths that will surprise to the upside.
    I can’t see how the downstream industry will”help fund” the rare earth mining sector unless it is in the context of a mutually beneficial, financially sound strategic partnership (many of these may be possible).
    Finally I also do not think that mining investors, once they have discovered the “realize this lack of options they will invest elsewhere” (in which case there will be no development of the rare earth mining industry)?
    I think what investors will do is what they are doing now.
    Assessing the science, the math, and the weight of probability in the knowledge that what they are witnessing is the birth of an industry
    that is going to supply the next century with key resources.
    I have no doubt that a viable industry,for the best players in the will emerge, and the economics will be very very attractive.

  42. Casual Observer – Thanks for taking the time to make such a interesting reply.
    In general I agree with what you’re saying, I just don’t think I articulated it very well – capital finance tends to make my head spin.
    Yes, if you follow my logic, no one would invest in rare earths, which is clearly not what is happening, even if we assume a lot of the current investments are just pure speculation. I think what I’m trying to hint at is that the economics aren’t right yet and I think there’s a little bit to go yet before someone provides a significant amount of project funding.
    Trimming capital would seem to be the easiest way of correcting the economics. In my experience observing the copper market, which is similarly capital stressed we have seen a lot of downstream investors subsidising copper mine projects – either Japanese smelters in the 90s, or more recently their Chinese and Korean rivals. You see the same with India and iron ore. I’m just wondering if this will occur in the rare earths sector – or indeed if governments themselves will provide funding as often happens in Africa and Asia – though usually partly for control reasons as well as promoting the economy. Also in copper we’ve seen some pretty ambitious junior companies designing mines to be as capital effecient as possible, sacrificing a little on the operating cost side – I guess this is the right sizing been described above. This is the “you have to be in it, to win it” principle.
    Though it seems also possible that by the time all this has been sorted out, the situation will be so severe that prices will skyrocket and that will make the economics – in general though its not a good idea to rely on future abnormal prices to make your project economic.
    Thinking on a bit the other possibility is that since the processing-seperation stages seem to be the tricky area, it could be that the further downstream end users part fund this stage not the mine stage, whilst the mining sector itself funds part of this stage as well – which I guess is kind of what GWMG are doing and Avalon seem to be considering.
    Ultimately a lot of it is about capital allocation, which is the big thing in mining at the moment, in my humble opinion.
    But to bring it back to our favourite subject, it seems rare earths is going to produce a couple of very big winners (like you say) and a lot of losers. (Personally I bet the physical traders will be the long term winners). But best of luck with your investments, you’re clearly a braver man than I am!

  43. Constantine: thank you for the additional perspective. Regarding yttrium, if I read the figures correctly, the overall annual usage of yttrium, even without new applications, is greater the overall tonnage of all other heavy rare earths combined. I will be interested to see how the growth in usage of high temperature superconductors (HTC) might affect the future demand for yttrium, since it is a component of the yttrium-barium-copper-oxide HTC compound used for such applications. Will probably be a while before we see significant usage, but I think it’s coming.

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