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