EDITOR: | July 16th, 2015 | 7 Comments

Another analyst picks rising rare earth prices — and sees Arafura riding magnet element recovery

| July 16, 2015 | 7 Comments
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Future-Rare-EarthsMaking predictions about any commodity price is a challenging business these days, says Tony Parry of Sydney-based Resource Capital Research. But he is prepared to forecast that rare earth prices will rise in the next six to 12 months – and particularly for magnet feed elements praseodymium and neodymium. (His analysis follows similar optimism expressed two weeks ago by Capital Economics of London, as reported here on InvestorIntel).

In a detail analyst report on Arafura Resources (ASX:ARU), Dr Parry does not underestimate the challenge the industry faces. For one, the massive price hikes in 2011 caused by the Chinese export bans clearly undermined confidence in the sector and motivated increased substitution in many applications.

Investment confidence has been badly hit by the performances of Molycorp and Lynas Corp. We have heard plenty about the former in recent weeks, but Parry notes that Lynas’s share price (A$0.034 when he wrote the report) is but a small fraction of its 2011 high (over A$2) and, in the past 12 months, the LYC price has continued in freefall, down by 74%. But even here Parry detects a light at the end of tunnel: there have been glimmers of hope in recent LYC releases with comments that the company is expecting to deliver free cash flow and that market price for its output has improved.

Parry adds: “This supports our contention that REE prices may have seen their five-year lows and investment sentiment in the sector could be starting to change”. But, on another page, he makes this point: “prices surely couldn’t get any worse with the Western world’s two REE producers both making large losses and unable to service their debts”.

In line with views expressed by commentators on InvestorIntel, Parry believes one of the main underpinnings of recovery is due to the non-China rare earth industry realizing the need to develop different product mixes with more focus on NdPr and less on cerium and lanthanum.

Of course, rising rare earth prices will help everyone with sound projects. Parry’s report is aimed at Australian investors, and so he emphasizes the fact that, of all four of InvestorIntel sponsors in the Australian REE space, Arafura’s share price has done the worst of the past 12 months (but better than have the share prices of Lynas or Greenland Minerals and Energy, which are not associated).

As of Thursday afternoon trading in Sydney, Arafura had a 12-month high of 11c against today’s 4.9c. Northern Minerals (ASX:NTU) saw a high of 30c against Thursday’s mid-afternoon price of 16.5c. Peak Resources (ASX:PEK) has fared the best in percentage terms, the respective prices being 10.5c and 8.5c. Then Hastings Rare Metals (ASX:HAS) has gone from a high of 10.5c to 7.9c today. And all are looking better than Lynas today on 3.8c. (Two points; All prices in Australian dollars, and Alkane Resources is excluded from Parry’s comparisons presumably because of the difficulty of separating the gold and REE valuations).

(Editorial comment: given the importance of rare earths, and the payoff for those who succeed, these share prices are astonishingly low. Moreover, the declines from the 52-week highs no doubt relate more to the general state of the market than to the merits of the rare earths story which, from the REE perspective, is another positive.)

So what is that Parry likes about Arafura?

He argues that buying ARU shares at present prices also buys potential future NdPr production at less than $1 per annual tonne of NdPr produced. Other ASX-listed rare companies are trading at close to $9 per annual tonne of NdPr produced. His other points include:

  • ARU’s Nolans project is, in his view, world class grading at 0.72% NdPr.
  • The combined NdPr content of the ore means that oxide will generate 77% of projected revenue. “This is of major strategic importance,” he adds.
  • Unit costs of producing NdPr are comparatively low.

Finally, ARU has a very supportive Chinese shareholder, with East China Mineral Exploration & Development holding 24.9%. Parry says ECE is playing an active role by introducing Chinese expertise in REE processing technology. And a REE producer, Shanghai-listed Shenghe Resources, is also providing key technical help.


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Comments

  • asrms

    Might want to take a look at todays quarter report from Lynas. Some very good news with continued positive guidance for the future and as you indicate at a time of trough prices for LREEs. Looks like the Japanese are beginning to home in on this company for their LREEs. Yes they have a major debt question looming but if as you mention prices do start to improve Lynas is in on the ground floor and may be worthy of some serious investor attention – we will really get a feel for this over the next two quarters.

    July 17, 2015 - 10:57 AM

  • charles.1

    No comments on the quality of the analysis Robin, but I think the missing comment on the RCR report is that it is paid-for research. A positive angle is to be assumed!

    Time frames remain substantial for all REE juniors, and metal prices are low. The highest capitalized pure REE plays (one working in Australia and one in the US) use 2 to 3 times the current metal prices in their most recent financial models. I’m less sure about an upwards re-rating, or at least as always, it is in Chinese hands.

    July 17, 2015 - 3:41 PM

  • Jeff Thompson

    Not just metal prices used in financial models compared to current low metal prices, the other highly relevant factor is the relative difference in metal prices used in the financial models of the REE companies relative to one another, for example:
    Dysprosium: $845/kg (UURAF PEA), $654 (REE PFS), $575/kg (TAS PFS), $528/kg (TRER PEA).
    Those companies with the more conservative price assumptions relative to each other will have a larger buffer to weather the storm of the current low market prices, and over time their market caps will reflect the more cautious price assumptions.

    July 17, 2015 - 7:33 PM

  • Billy

    Plenty of analysts have made forecasts and got it wrong time and again.

    Forget about price assumptions used in financial models, until it happens it’s all pure fantasy as Tim has often said.

    Input current rare earth pricing and those project(s) that are viable at current rare earth pricing will likely get funding and hence be the next producers.

    July 17, 2015 - 11:25 PM

  • Chris

    That’s the problem Billy, their are no REE juniors with a business model that is viable at current REO prices with current SX technology.

    July 18, 2015 - 1:41 AM

  • Billy

    Chris have a closer look at Northern Minerals – it appears to me it is viable applying current rare earth prices to their proposed production levels. Be sure to apply the current AUDUSD exchange rate with your calculations. There is a very good reason Jien Mining want to proceed with their AUD$50M investment in Northern.

    July 18, 2015 - 3:44 AM

  • asrms

    Just reread these comments and the article and still no one close to building out their mine and production facility or holding the financing already in hand (and we are not talking about some pilot project here) and that is after two more years have passed by – July 2015 – 2017. I am thankful I held onto my Lynas shares even though still under water. I think the Australians/Japanese have a long term winner here – look at the Aug 2017 NdPr pricing. If prices just rise slowly into the future, Lynas will be a cash cow and a major non chinese buyout prospect for any commodity conglomerate wanting an immediate dominant impact into the fast expanding REE/green space. Even the Chinese might become interested (though unlikely Aust/Japan would allow them a look into Lynas).

    August 25, 2017 - 6:19 PM

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