Rare Earth RPMs, Reaching Production Mode versus Reaching Profitability Mode, which metric is more important to investors?
What are the critical rare earth companies, and are there any such companies? These are not supply chain questions; these are existential questions for the rare earth markets of the near future. The critical rare earths are those used in the mass production of consumer devices or devices designed to facilitate mass consumer demand (For example, yttrium ceramics are critical to the safe and long lived operation of jet engines for mass production). Today in 2014 the critical rare earths for the civilian market are neodymium/praseodymium, terbium, dysprosium, and yttrium. The supply of each of these today is either entirely or almost entirely from and thus under the control of China. By critical I mean both:
- The technologies enabled by the above critical rare earths, used individually or in combination) cannot be enabled as efficiently or, in some cases, at all by any other elements single or in combination, and
- The current supply of each and every one of them is inadequate to allow further growth in the mass production of the technologies enabled by them.
First, for those of you younger than 50; i.e., those one generation younger than I am. “RPM,” was once a common acronym for the phrase “revolutions per minute,” the measure of the speed of rotation of analog plastic discs used to record sound by mechanically impressing the vibration patterns (wavelength and intensity) that sound produced onto a malleable medium which was then made solid and fixed. The recording speed and the playback speed were important metrics of the quality of the “recording,” which was pathetic when compared to our contemporary digital sound recording technology which transforms the same mechanical audio data into digital, magnetic, signals with fidelity (faithfulness to the original sounds) orders of magnitude better than the “vinyl discs” of yore.
“Video,” likewise went through a recording technology revolution. Kinescope, the recording of the image on a cathode ray tube onto cellulose nitrate backed silver halide coated “film” was the first way and it was replaced by transforming audio/video signals directly to magnetic signals recorded on moving mylar tapes covered with a film of magnetic iron based particles, the size of which particles was critical to the fidelity of the recording as was the speed of the “tape” past the recording “head.” Today we have modern direct conversion of solid state sensor audio and video signals (replacing “film” for that use) to charges distributed through solid state electronic memories.
If you’re still with me I am trying to say that “RPM” no longer has any meaning in contemporary audio and video (and computer memory) recording so I am going to appropriate the term for use in due diligence analysis of junior mining ventures for the small investor, i.e., you, dear reader. The following discussion is about contemporary rare earth juniors and producers but it applies to all of the technology metals.
Let me define an RPM1 and an RPM2 as business operations goals:
The business operations goal, RPM1, is to be defined as Reaching Production Mode. By this I will mean that the company has begun to produce or has the existing capability and capacity to produce commercially saleable materials that meet customer specified metrics of quality, on-time delivery, reliability, and agreed PRICE.
RPM2, a separate business operations goal, is defined as Reaching Profitability Mode, and means that after achieving RPM1 a venture can produce revenues sufficient to meet ALL of its existing obligations.
The use of terms such as “positive cash flow,” in recent “announcements” by rare earth juniors which seems to be used to mean that for a given window of time the company has produced more revenue that its “cash burn” for that period is an emergency, misleading, response to a bad situation, in my opinion. A positive cash flow means only that for the period covered the patient is stabilized; it does not mean that he is assured to survive, not at all.
RPM1 is often used by juniors to argue that they have achieved a level that ensures RPM2; this is patently untrue.
Sustained and Regular Profitability — SARP is the only important goal and metric to watch for.
Molycorp and Lynas have both reached RPM1, so they tell us, and Lynas says its goal is to reach RPM2 while Molycorp keeps promising that RPM2 is just another quarter away. But only SARP can stave off bankruptcy once a company’s ability to raise capital through equity and debt are exhausted after reaching RPM1.
This is how I look at both Lynas and Molycorp:
Is there enough open market demand and firm and growing pricing that will allow either of them to achieve SARP in a defined time beginning now? I, for one, do not think so, but I admit there are some potential new uses for the light rare earth magnetogenic materials, praseodymium and neodymium, that could dramatically change all of that. The bad news is that this new demand is still several years away and that it will be necessary in order for that new demand to crystallize that substantial non-Chinese production of the heavy rare earths occur. In fact the prior production of heavy rare earths beyond current levels necessary for contemporary demand is itself necessary to kick off the demand for the new uses as well as to sustain any growth in existing ones.
There will be no demand “spurt” for the light rare earths unless and until an additional supply of heavy rare earths is brought to the market.
This is why there are Critical Rare Earth Companies — CRECs, whereas the light rare earth, only, producers are just companies.
Did I mention that widely available cost effective downstream processing of the critical rare earths is the remaining barrier to the rare earth sector’s survival and its revival outside of China? It is, you know.
We already know the costs of rare earth separation by solvent extraction (“SX”), processing by traditional means; it is high and it is too high to allow for competitive growth in many otherwise reasonable models of the future of rare earths demand.
But there is hope from existing solvent extraction separation technology due to the development in the USA and France of:
- New more efficient and more selective extractants, and of
- Accelerated processing through mechanical manipulation of existing technologies
In addition there are in advanced development and even deployment in the USA, Canada, the UK, France, and Australia for the separation of the rare earths:
- Newly applied existing technologies used in separating and purifying other technology metals, and
- New Technologies showing great promise and in beta testing (and beyond) already
The REMB, rare earth markets boom, has created many new processing schemes based on the above. Surprisingly the best of these technologies are American, European, and Australian.
This is because Capitalism both with and without Chinese characteristics has entered the phase of resistance to new ideas based on the inertia of the capital already invested in traditional technologies. This is the main barrier in China to the lowering of costs through developments in the four areas above.
It is also the principal barrier to the development of a viable heavy rare earth supply chain outside of China. But resistance to building plants using advanced or new separation technologies is not the same as resistance to replacing expensive plants based on existing technologies.
I predict that over the next one to two years most of the existing rare earth juniors will cease development and operation due mainly to the lack of the possibility of their achieving RPM1. Those that do achieve RPM1 must then achieve RPM2 rapidly after attaining the first goal, REPM1.
In any case it is unlikely that any of the current contenders for survival will do so by constructing and operating a “traditional” solvent extraction separation plant.
It is possible that one or more of the 3 large scale SX plants outside of China, Molycorp’s, Lynas’, or Solvay’s, will convert to full time tolling operations, but even so only one of the three has the capability of separating the critically necessary SEGs and HREEs, and even that one, Solvay’s La Rochelle facility in France, has only 9,000 tons per annum of capacity.
Therefore in order for any of the non-Chinese juniors with SEG/HREE themed deposits to come into production there will have to be built SEG and HREE separation capacity outside of China sufficient to create the additional supplies of SEGs and HREEs that the rare earth global supply chain needs to increase the supply of the truly critical rare earths.
Therefore the advanced SX or the newly applied or new separation technologies mentioned above MUST become the basis of lower cost specialized separation facilities for producing SEGs and HREEs outside of China.
And a junior’s survival must now be measured by how it intends to reach RPM2.
When you read or hear an explanation of how a junior is going to achieve RPM2 note carefully the downstream separation technology it says it will build or toll with. The cost and efficiency of that technology will be the key to the survival of the junior that has achieved RPM1 being able to achieve RPM2.
Next week I’ll look at the rare earth juniors that I think are going to achieve RPM1 and that are on the right track to RPM2…