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