EDITOR: | June 7th, 2013 | 18 Comments

Lynas to delay ramp-up until prices improve; Gold miners’ soaring costs eat at margins

| June 07, 2013 | 18 Comments
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It looks as if it might be a while before rare earth prices start to tick upward. That is about the only message you can take away from the decision by Lynas Corp to delay ramping up its processing plant in Malaysia. And it is underlined by reports that China’s cut-backs in production have done nothing to boost those prices. And here on ProEdgeWire, Krucible Metals CEO Allan Branch this week wrote that he expected prices to remain subdued for a while yet. As we all know, the extraordinary prices achieved in 2011 seem now a distant memory.

The announcement from Lynas was certainly low-key. “The current rare earths market remains subdued,” it said. “Prices this calendar year have continued to fall, although there are now emerging signs of stabilisation in some categories. In response to this macro environment, Lynas is optimising production at the Phase 1 capacity level.” The company said it had implemented a program to reduce operating costs and expenditure, hence the plan to optimise production at its Malaysian plant’s phase 1 capacity level. “Lynas intends to continue operating at this level until higher market prices are reached,” it added.

So belt-tightening to ensure that the plant could operate profitably at these price levels and no moving on to expansion until there’s better market news. The plant is in a commissioning phase, in which equipment is being tested, but there was no immediate plan to increase production to its new capacity.

Nevertheless, Lynas is not shelving its long term plans. The company said Phase 2 expansion at the Mount Weld mine in Western Australia is complete and that the plant has produced at capacity. The construction and pre-commissioning of Phase 2 at the Malaysian processing plant is near completion. “The Phase 2 kilns at (the plant) are currently in the process of being heated up for commissioning”, it added.

The bottom line is that production will continue at the rate of 11,000 tonnes a year instead of the previous plan to get output up to 22,000 tonnes. At full capacity, Lynas’s Malaysian facilities could produce up to a fifth of annual global output, but weighted towards the lighter rare earths.

You only have to look at the Chinese experience after several plants were closed temporarily in late 2012 to try and force REE prices back up.

According to The Wall Street Journal, China country exported 6,112 tonnes of rare earths in the first four months of this year, double the volume year-on-year. But the value of China’s REE exports for the period was down 63%, the paper reported, quoting Chinese customs data. China exported 2,196 metric tons of rare earth in April, a 28% rise from March.

In a letter to shareholders this week, Allan Branch said rare earths were still high on Krucible’s agenda but he worries that there’s so much contradictory analysis of the sector. He says he wants to fully understand the market before the development stage. Branch made it clear that there will be no business profit model that is dependent on rare prices climbing to higher levels.

GOLD: The yellow one took another bad fall on Friday, losing $32/oz in New York to close at $1,384/oz. It means another bad week ahead for gold producer share prices.

And that’s rubbing their noses in it because these companies did not even get much glory from the metal when it was riding high. As global accounting firm PwC (formerly PricewaterhouseCoopers) noted this week in its latest mining report, in 2012 the market capitalisation of the world’s top 40 gold producers fell by $29 billion — almost 15% — while gold prices closed the year up 7% at $1676/oz.

But PwC says the story lies in costs — and these have been moving upwards, quickly and relentlessly — so share prices have remained sluggish even while physical gold prices were soaring. From 2010 to 2012, the top 40’s saw gross margins plummet from 49% to 29%. PwC sums up the problem: “While high gold prices are generally good news for gold miners, margins matter even more.”


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Comments

  • Veritas Bob

    “emerging signs of stabilisation”. Various folks have been claiming that going back at least to then Molycorp CEO Mark Smith’s similar assertion in September 2011, shortly after the price decline had begun.

    June 7, 2013 - 8:01 PM

  • Allan Branch

    Continued excellent reporting Robin, I had not heard the Lynas report and would have missed it, and thanks for referencing my article too. Your comment that China’s cut-backs in production have done nothing to boost rare earth prices is in line with my thesis. We would all love the prices to be high, but it is more important to face reality if they remain lower, and build strong business models on that. There is no debate about demand which is consistently strong. If a company is profitable at lower prices, and I am wrong and the prices go up, great!

    June 7, 2013 - 9:13 PM

  • Jack Wu

    1. Please list the non-Chinese ROW REE companies in the enviable position of having a production plant capable of producing REEs now?

    2. Common sense not to sell REEs at a cheap price when the REE is worth more than paper fiat currency?

    3. Keep production at a level that is profitable now, but “current over production” is not necessarily helpful to remain profitable.

    4. Chinese REE consolidation and “silo filling” a competent strategy for a “rainy day” or better yet the expected 10 fold increase in the usage of REE into the next decades.

    5. The lower prices and lack of capital availability (1,000,000,000USD) price tag to build a REE plant shall kill potential REE competitive projects that were not first movers.

    6. Gold: The Chinese do not allow the export of any gold mined in China. Wonder why?

    7. Russia a big net buyer of gold, trading petroleum/nat gas for gold.

    8. China, Russia, and other big net buyers of gold shall set a firm gold price near the current levels, in my opinion.

    9. Marginal gold producing companies with costs exceeding 1100USD shall stop production?

    Cheers

    June 8, 2013 - 8:37 AM

  • Bill Keenes

    Spot on Robin, spot on – rare earth prices appear to be going no where fast!

    The Chinese are fast leaners – and they now know about demand destructive pricing – so the sky high prices we saw in 2010 – I believe we will never see again.

    What this means for developers is If their project is not viable at current prices then their prospects are grim indeed.

    In fact I would go one step further and say you need to find projects in the west that is viable based on China domestic rare earth prices – they will be the next producers in the west, and yes they do exist.

    June 8, 2013 - 8:29 PM

  • Bill Keenes

    Jack Wu, you are always “stomping your foot demanding answers”

    and now you appear to be asking some questions you already know the answers to – now why would someone do that !

    “Common sense” and “Economics 101” are two very different things in the real world, but with your “biased views” what do you care about economics

    you said ….. [but “current over production” is not necessarily helpful to remain profitable] ………. now that’s stating the obvious …

    where were you when Molycorp was being put into production …. thus far Molycorp has proven to be a marginal proposition at best – not yet recording one quarter of profit

    now Lynas appears to be putting expansion plans on hold until rare earth prices improve

    The first movers you mentioned with the capex requirements of $1 billion plus were always going to find the going difficult with their exotic mineralization types and high capex requirement.

    Are you aware that only Bastnasite, Monazite and Xenotime mineralizations – have proven to be relatively trouble-free for rare earth development and processing.

    Also you say marginal gold producers with costs exceeding US$1,100 per oz shall stop production, but with rare earths you appear to want to protect the marginal operators by stopping over production …….. your anti Chinese views have been noted Jack

    Economics 101 will prevail – unviable operations will eventually go out of business, and viable operations with modest capex requirements will eventually come online

    Tasman will be one
    Northern Minerals will be another

    and don’t tell me Northern Minerals does not yet have a viable size deposit – with rare earth finding the deposit is the easy part, especially if your deposit has hydrothermal origins – cracking the metallurgy requiring modest capex is the hard part

    June 10, 2013 - 3:33 AM

    • Jack Wu

      Agree.

      I am bias.

      Chinese are “in it to win it”, both now and 20 years from now.

      China has supported it’s REE industry for decades and now the massive consolidation to Chinese State Owned companies is the amazing and right Chinese move to control the REE industry for decades.

      Agree: Northern Minerals shall be a “winner” as Conglin Yue et al (China) completes majority takeover of Northern Minerals.

      Bias, yes.

      Heavily invested in Chinese State Owned REE companies the true winners of the 21st century.

      Cheers

      June 10, 2013 - 5:40 AM

      • Jack Wu

        PS: I doubt with the China takeover of Northern Minerals that non-Chinese shareholders shall see the rewards.

        Case in point: Orion Metals (also an Australian REE Conglin Yue/Chinese takeover).

        Cheers

        June 10, 2013 - 5:48 AM

  • Bill Keenes

    …. that’s right Jack “just shoot off at the mouth” like you always do – and pay no regards to the facts

    Northern Minerals market cap is around $23m and Australian Conglin International Investment Group is underwriting a rights issue to the tune of $26.5M plus buying 16% of Browns Range project for $26M.

    So it would appear for the $52.5M Australian Conglin International Investment Group is putting up they could easily make a take over for all of Northern Minerals – right here and now and buy the lot.

    But economics is not your strong suit is it Jack – you have already proven that by advocating that the non-viable gold producers – those with costs exceeding $1,100 per ounce stop production – where as your solution for marginal rare earth operators is to stop over production. Jack you need a dose of courage.

    Only a strong man can stand up to his fate. His inner security enables him to endure to the end. His strength shows in uncompromising truthfulness with himself: courage to face reality without illusion or self deception.

    Only when we have the courage to face things exactly as they are-can we see the path.

    June 10, 2013 - 6:53 AM

  • Jack Wu

    Hi Bill Keenes:

    Precisely the Northern Minerals shareholder conundrum.

    “Northern Minerals market cap is around $23m and Australian Conglin International Investment Group is underwriting a rights issue to the tune of $26.5M plus buying 16% of Browns Range project for $26M.

    So it would appear for the $52.5M Australian Conglin International Investment Group is putting up they could easily make a take over for all of Northern Minerals – right here and now and buy the lot.”

    Conglin Yue (China) underwriting the sale of shares @20 cents whereas the current price is 11 to 13 cents. How many current shareholders shall buy up the underwritten Northern Minerals @ 20 cents?

    By underwriting the share offering Conglin (China surrogate) is obligated to buy the unsold shares underwritten by the offering.

    To my knowledge, this positions Chinese Government to take over Northern Minerals majority ownership.

    By gaining control of majority share position, China gains a coveted asset. The majority owner can then offer a “low ball” takeover offer to the minority owners, similar to the Orion Metals deal.

    Make no mistake. Northern Minerals has valuable assets. Just do not expect to see George Bauk et al sitting on the Board much longer, now expect a fat uptick from the Chinese (Conglin Yue) when China takes over the companies remaining shares.

    China attempted 3 or 4 years ago to takeover majority stakes in both Lynas and Northern Minerals. Via current SPP China is taking over majority interest in Northern Minerals this month.

    Cheers

    PS: How are you voting on the SPP this month?

    June 11, 2013 - 11:02 AM

    • Jack Wu

      Sorry misprint:

      Correction is Capitalized:

      “Make no mistake. Northern Minerals has valuable assets. Just do not expect to see George Bauk et al sitting on the Board much longer, NOR expect a fat uptick from the Chinese (Conglin Yue) when China takes over the companies remaining shares.”

      Cheers

      June 11, 2013 - 11:05 AM

  • Nevada George

    We can all speculate on what the outcomes will be.
    However, the fundamentals historically used to
    evaluate junior mining projects are being thrown out
    the window by geopolitical events/influences(My Opinion).
    If I do not see any real gains on my REE investments by
    2015 then I probably never will.(Started with 8 Juniors several years ago and am now down to 4 and holding long term)

    Gold…all in sustained costs…who knows what it will be next year.
    http://www.visualcapitalist.com/what-is-the-cost-of-mining-gold

    June 11, 2013 - 11:15 AM

    • Jim

      Nevada,
      Do you mind telling the 4 juniors your still holding?

      Thanks,
      Jim

      June 12, 2013 - 7:32 PM

      • Nevada George

        Lynas, Great Western, Ucore and
        Molycorp(I was frequency trading MCP and
        was not watching market for a few days..
        took a big hit…probably lost forever)
        I have my biggest positions in Lynas and Ucore…..not too optimistic at this point.

        June 13, 2013 - 8:58 AM

        • JohnH

          I think Lynas will recover over time and GW and Ucore are great long term holds each for their own reasons. I would think that once the demand picks up so will our share prices. I have never been one to call a bottom but I think we are seeing it now. Lynas, GW , and Ucore are my biggest positions so I feel for ya’ Nevada G!

          June 13, 2013 - 3:20 PM

          • Tracy Weslosky

            I like you JohnH and we could use more shareholders with long term vision….

            June 16, 2013 - 10:58 AM

        • Jim

          Thanks. My biggest position is with Lynas aswell. I also like Quest & Tasman, then Northern Minerals, all for their heavies. I’m hopeful that things will look up in a year or so. Warren Buffett always says to buy when there’s “blood in the streets”…I pray I’m not delusional.

          June 13, 2013 - 6:08 PM

        • Tracy Weslosky

          The market always turns around…

          June 16, 2013 - 10:54 AM

  • Bill Keenes

    Hello Jack Wu,

    Orion Metals had nothing but hope when it was taken over and still has most of that left, perhaps however Australian Conglin International Investment Group purchased Orion Metals because it’s tenements are right next to those of Northern Minerals.

    Are you joining the dots – interesting to ponder what the future may hold.

    It takes money to bring these projects into production, and securing this funding package takes Northern Minerals to the cusp of production – so I will be voting YES

    June 13, 2013 - 7:09 AM

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