EDITOR: | March 23rd, 2021 | 10 Comments

Jack Lifton on Rare Earth Supply Chains and Value Chains

| March 23, 2021 | 10 Comments
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Rare earth sector analysts have finally recognized that a project’s place in a total supply chain is very important to its economic viability. Before a junior mining deposit goes into (usually expensive and time consuming) development into a producing mine there must first be an evaluation of what possible product(s) of that mine are demanded by the next step in the supply chain and what price(s) they may bring when the mine begins production. Most such evaluations are at best extrapolation and at worst pure speculation due to unpredictable commodity price cycles. Even for producing mines like MP Materials Corp. (NYSE: MP) and Lynas Rare Earths Limited (ASX: LYC) their places in the total supply chain differentiates them from each other because of the different value of their current respective delivered products.

The sale of rare earth permanent magnets brings a majority of the revenue in the total rare earth products supply chain. But no non-Chinese company has ever been vertically integrated from a mine to a magnet maker. The closest that a Western owned company (Canadian) has come to being a total rare earth permanent magnet supplier is Neo Performance Materials Inc. (TSX: NEO), which has everything (in the total rare earth permanent magnet supply chain) but a mine. Neo Performance sells rare earth products (oxides and chemicals) as well as rare earth enabled products (e.g., magnets) and has been consistently profitable with revenues exceeding $500,000,000 per year. This year, 2021, Neo will shortly begin taking delivery from America’s Energy Fuels Inc. (NYSE American: UUUU | TSX: EFR) of 70 tons per month of clean mixed rare earth carbonates (MREC) extracted from domestic American monazite. Energy Fuels is the first American company to produce rare earth concentrates free of radioactive elements and interfering ions in at least 25 years. The MREC can be put into solution directly at Neo’s European rare earth separation plant and fed into the system as a pregnant leach solution (PLS). Thus, Neo Performance can deliver to its customers downstream products, such as separated oxides, metals and magnet alloy powders and bonded magnets (made at its Thailand operations) that are produced by a total rare earth supply chain with no Chinese involvement.

Energy Fuels reports that its monazite extraction/purification system to produce clean MRECs is profitable. MP says that its bastnaesite ore concentrates now sold exclusively to China’s Shenghe Resources are profitable. Lynas says that its in-house separated rare earth oxides are sold at a profit. For rare earth juniors, the successful (I.e., profitable) sale of ore or clean mixed rare earth carbonates is the key metric and few of them succeed.

The total rare earths’ (enabled products) supply chain has the following composition:

  1. Mining,
  2. Extraction of the rare earths from the mining concentrates and the preparation of a clean, pre-PLS, mixed rare earths product,
  3. Separation of the mixed rare earths into individual oxides and blends,
  4. Manufacturing of chemical products, such as phosphors and catalysts, and of individual metals and alloys forms, and
  5. Manufacturing of rare earth permanent magnets from rare earth alloys.

Historically mining companies have done steps 1,2, and sometimes 3, while specialized smaller companies have done steps 4 and 5 as separate ventures.

The rare earths’ value chain is not the same as the supply chain. It is very difficult to make money mining, extracting, or even separating mixed rare earths into individual rare earths and blends. Lynas, for example, has become profitable by reducing the costs of separation to where they are comparable to those of the Chinese. Lynas’ monazite ore body is much richer than, for example, MP’s bastnaesite or even that of China’s Bayan Obo. Lynas is now profitable selling individual rare earth salts and blends, but it has taken a decade and $2 billion to reach this point, and the company’s survival was actually due to long term low interest loans from a Japanese government agency designed solely to give Japan a backup to Chinese sourcing.

MP Materials is today only an ore concentrate producer, and its original capital needs were only to re-open a relatively recently closed large-scale well-run mining and ore concentrating operation. MP basically acquired some $2 billion of sunk costs for about 1% of that. The real challenge now is for MP to (attempt to) match the Lynas model, and deliver separated rare earths and blends just as the original Molycorp did until 20 years ago. I am told that Molycorp II’s Project Phoenix ran first just before the bankruptcy, but I only get silence when I ask if it was running economically and efficiently. I am very skeptical about MP’s announcements that they will be separating rare earths at Mountain Pass in 2022 if by that they mean economically and efficiently.

Lynas has never advanced beyond separation in the supply chain, and I have never heard it said that they plan to do that or want to do it. The Lynas 22,500 tpa operation in Kuantan, Malaysia, took seven years and $1.3 billion to begin commercial operation, and it is limited to processing monazite to extract and separate light rare earths only. If Lynas chooses to build a light rare earths separation plant in the USA as has been announced I suspect it will take 2 to 3 years to build and burn-in and that if it is to be a 5000 tpa system as announced, and that it will cost far more than $60 million on a greenfield site in Texas.

Project Phoenix was to be a 20,000 tpa system. It never ran commercially even though well over a billion dollars was expended on it over a four-year period. It is extremely unlikely that Project Phoenix can be resuscitated and brought into profitable operation in just one year, if ever.

Molycorp II, in its attempt to vertically integrate bought the rare earth permanent magnet alloy making operations of Santoku, America, in suburban Phoenix, Az. In 2011 for $17 million. Within two years the operations were shut down as the necessity to buy Chinese metal as feedstock made profitability impossible.

Energy Fuels is buying monazite concentrates and removing the uranium and thorium as well as non rare earth elements in its existing White Mesa uranium mill in Utah. Less than $2 million was needed in additional equipment to give the mill the capacity to process 2500 tpa of monazite to recover the contained 55% of total rare earths.

Neo Performance can distribute costs across its almost total in-house supply chain. It can thus maximize profits in its highest margin end-use products. MP is literally a start-up beyond the mine, and the jury is out on its potential for success. Lynas’ operations were designed by former Solvay chemical engineering managers with the longest continuous experience in rare earth separation in the world. The chemistry chosen for Kuantan was that proven by experience and use by Solvay, China. Neo Performance Materials is the successor in interest to Neo Materials, which was founded in the 1990s and is helmed today by one of its original founders. Neo Materials perfected the bonded rare earth permanent magnet and is today the supplier of 80% of the world’s supply of them.

Energy Fuels has been in business since the late 1980s, and is America’s sole licensed uranium mill and thorium storage site. From the inception of the plan to process monazite until commercial operations took just one year. Uranium is purified by solvent extraction, and Energy Fuels has more than 500 man-years of experience with solvent extraction. The company is doing a scoping study on a dedicated rare earths solvent extraction system and has been awarded a contract by the US Dept of Energy to study the separation of rare earths derived from coal and phosphate-acid residues.

MP and Lynas are the largest, rare earth miners outside of China. Lynas and Neo Performance are the largest processors of rare earths to separate them by solvent extraction outside of China, and Energy Fuels is the sole producer of clean mixed rare earth carbonates in the Americas.

I am watching the following juniors: USA Rare Earths, Rare Element Resources Ltd. (OTCQB: REEMF), Vital Metals Limited (ASX: VML), and Appia Energy Corp. (CSE: API | OTCQB: APAAF).

The next five years will be the critical time for the development of a domestic American or European total rare earth enabled products supply chain. Canada is at a crossroads; it may build a domestic supply chain anchored on mines and going downstream with licensed European separation, metal and alloy making, and magnet making, or it may build a trans-Atlantic one with the EU.

The game’s afoot.


Editor:

Jack Lifton is the CEO of Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. “Technology metals” ... <Read more about Jack Lifton>


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Comments

  • Rare Earths Investor

    An interesting overview/recap on the several leading ROW RE companies over the last decade and their involvement in present-day RE sector moves.

    I agree that (for investors) it is not just about the value of a company project that must be considered, but how such an entity would even ‘fit’ into any new RE value chain. In fact, MO is that we will have a much clearer idea in the next 3 years, about any new value chains and the companies that will dominate. This contention is based on my belief regarding the impact of US political action on the sector that is going to come from the Biden Admin’. In particular, as this relates directly to the Democrat need to meet their political, climate, new energy and redirected employment goals and promises for reelection.

    Question, you write “…domestic American or European total rare earth enabled…” Do you feel it will be one or the other region or is their room for both having full chains? Further, I agree CAD is ‘…at a crossroads…” However, IMO, potentially the US and CAD may team up re., US funding friendly borders facilities; especially, if the Biden Left presses its environmental agenda.

    Finally, it will be very interesting to watch if USA RE can get its billion $ SPAC. MP was mining and contracted to Chinese processing as well as having US DoD funding, before it got its SPAC. USA RE has no such contracts/backing so can they attract such large-scale private financing? The answer to this question should be an indicator for investors in the RE sector re. the potential for both strategic and private backing, at least in N. American Re sector movement.

    Again, thanks for the article.

    March 23, 2021 - 7:51 PM

  • Samir

    Hi Jack, I am an avid reader of your articles, and confess to becoming more so after ignoring your advice on Molycorp several years ago!
    Once bitten twice shy, so with regard to The Round Top Mountain mine, some experts say that the in-situ grade is quite low and may even qualify the site as just dirt. What are your thoughts on this? Are we on the brink of another fiasco?
    Also will be very interested in your thoughts on Leading Edge Materials which operate a rare earths and graphite mines in Sweden.
    Very kind regards.

    March 24, 2021 - 8:23 AM

  • Jack Lifton

    Samir,
    I am going to risk the wrath of my contemporaries by saying that I think that the most important metric is the cost of goods sold at the point in the supply chain where the company sells its product(s) to the next step. If and only if USARare Earths can sell separated individual forms of the various chemical elements it chooses to produce at a profit when they enter the marketplace then it will be a solid company. The further downstream a producer goes the more likely that distributed costs can make the overall company profitable even if some upstream operations are not. This is the real problem in the rare earth “industry.” Mining and separation are often ow margin or no margin operations. Thats why vertical integration is so important an issue for domestic producers of rare earths, lithium, and cobalt.

    March 24, 2021 - 8:58 AM

  • dan sullivan

    A Junior recently had some financial support from U.S .rare earth. They have a patented proven extraction method and are currently involved with their program in mining friendly Labrador.

    March 24, 2021 - 1:05 PM

  • rob dubeck

    Jack, I would like to know if you have any thoughts on 2 (two) other Canadian rare earth co’s. The 1st is Canada Rare Earth Corp. who recently had RareX buy a 10% share in it (note: RareX has a potential MoU with Shenghe Resources). The 2nd co. is Defense Metals (note: Technical adviser Alex Knox who had early ties with Unocal Canada Ltd., the exploration arm of Molycorp) that is has received requests from two interested third-part Rare Earth Element (REE) processors for samples of high-grade REE mineral concentrate for the purposes of evaluation prior to entering discussions with respect to the negotiation of an initial memorandum of understanding (MOU) and subsequent potential mineral concentrate offtake agreements.

    March 26, 2021 - 11:04 AM

  • Nick Mastrippolito

    Like all of you I realize the RE companies are in the lime light of discovery and sciences now days.
    Is there a listing of RE companies that pose the most highlight and the most usual to be targets for investment. There is a number of names in this article however is a a list of investment targets highlight.

    April 21, 2021 - 7:41 PM

    • Tracy Weslosky

      Yes, there is – you can find this on our Rare Earth Watchlists on InvestorChannel.com. Jack is part of our core team on determining the Top 20 companies we follow in this space daily.

      Go here for daily updates on the #RareEarths sector – WATCH: InvestorChannel’s Rare Earths Watchlist Update for Thursday, April, 22, 2021 https://youtu.be/iLKF3k7nx9o via @YouTube

      April 22, 2021 - 7:17 PM

  • Peter Trapp

    IMHO, UUUU will win the race with collaboration from NEO CN and Chemours inter alia

    April 24, 2021 - 7:31 AM

  • Chico

    Jack you should read the geo-resource economists’ analysis on RE https://www.publish.csiro.au/ex/ASEG2018ABT4_3E

    July 17, 2021 - 3:09 AM

    • Chico

      Jack you should read the geo-resource economists’ analysis on RE https://www.publish.csiro.au/ex/ASEG2018ABT4_3E

      “Resource estimation of REE presents no special difficulties provided care is taken to avoid over-domaining and definition of domains based on rigid grade-based criteria that are close to the lower reporting cut-off grades. These are likely to result in overstated grades and understated tonnages. ”

      “In general, cut-off grades used to report resources for many REE deposits of a similar style are unrealistically low and significantly less than those used by the only two recent Western operations. These cut-offs result from over-optimistic assumptions mainly relating to the use of:  notional values applied to all the REE  projected metal prices from periods of unstable price hikes and  unrealistic low costs associated with production and sales.”

      July 17, 2021 - 3:15 AM

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