Lynas’s Success in Malaysia could be catalyst for REE rebound
Rare Earths and Critical Minerals Month in Review: The REE Leaders Index, which represents the 15 largest publicly owned global companies producing rare earth elements outside of China dropped 5.4% in April. The drop was reflected by the ProEdgeWire Rare Earths and Critical Minerals index, which dropped 15.16% for the same month. Only two companies showed gains. One was Frontier Rare Earths (Frontier, TSE: FRO), which gained 9.09% and the other was Medallion Resources (TSXV: MDL | OTCQX: MLLOF), which gained 5.88% in Toronto and 11.76% at the OTCQX. Frontier Rare Earths launched a new normal course issuer bid to repurchase some of its outstanding ordinary shares ahead of the expiry of the existing normal course issuer bid on May 28, 2013. Frontier is one of few rare earths juniors to have secured a strategic offtake partnership and it has some USD$ 53 million in cash. The Korean government owned Korea Resources (Kores) has invested USD$ 23.8 million, acquiring a 10% stake, and 10% off-take agreement, in Frontier’s flagship Zandkopsdrift rare earths project in South Africa. This stake was just the beginning as Kores indicated a strong interest in acquiring an additional 10% stake in Frontier. Kores’s investment is evidently a sign of confidence in Frontier’s ultimate success at Zandkopsdrift and the offtake was bound to terms stating that it had to demonstrate favorable results in a NI 43-101 Preliminary Economic Assessment (PEA). The closing of the deal indicates that Frontier has met this important condition, which should go a long way to indicate the Project’s low risk profile, boosting investors’ confidence.
Medallion Resources has been gaining steadily since last March 7, when it hit its lowest price of the year. There was no official news corresponding to the jump; however, Medallion is a different kind of rare earth explorer as it does not have a mine in the typical sense of the term. Medallion’s model is based on processing monazite from mineral sands, which in effect cuts out the ‘mining’ risk, focusing only on the processing and separation, the logic being that such a method ultimately saves many of the traditional miners’ development costs. Nobody else in the business has any comparable project and even if anyone were to start now, they would be three years behind. The highly experienced Medallion management is close to announcing the location for the mineral sands processing site, which is rumored to be in a strategic area of the Arabian Peninsula.
Apart from the two bright spots, the REE stock indices in April confirmed that the rare earths market has been in a turbulent phase in recent months with all or most company shares far away from their old highs. It was not enough for companies such as Arafura Resources (ASX: ARU) to announce they would cut AUD$ 1 billion in costs from its Nolans Rare Earths project, even though a boost in commodity prices in Australia caused a slight rally of REE stocks toward the end of the month with most ASX listed rare earths companies seeing some upward share movement.
The question is, then, where could prices go in the months ahead. One of the main REE market stimulants in 2011, when rare earths gained considerable interest, was China’s playing of the scarcity card. China continues to hold a virtual monopoly in the processing of rare earths, keeping the electronics manufacturing sector in many countries dependent on China for the production of their high-tech devices such as smart phones, flat screens or computers. Nevertheless, China’s monopoly has been eroding as new production sources come on line. The Chinese dominance in the market remains structurally strong yet reliant on investors’ confidence in a worldwide industrial revival. Rare earths, therefore, still have all the potential to make important gains when economic activity starts showing signs of steady growth. Indeed, Australia’s Lynas Corp (ASX: LYC | OTCQX: LYSDY) points out that the prices for rare earths have fallen again in the first quarter of 2013. Yet, Lynas believes that demand for rare earth metals will rise even faster than economic growth in the future due to demand for magnets and materials needed for catalytic converters for au tomobiles.
Lynas is very hopeful and it is in a position to start increasing its share of rare earth production today. The ruling Barisan Nasional Party’s electoral win in Malaysia has displaced the opposition’s threat to revoke Lynas’s license to operate its processing plant in the country. The election outcome was anything but certain and the polls leading to the vote showed that the opposition had a strong chance to overturn the ruling coalition. This did not happen and it is good news for Lynas and the rare earths sector. Lynas will be able to operate in a friendlier and more predictable regulatory climate, lowering the intensity of the political headwinds that have put so much pressure on its shares. Lynas has overcome its biggest regulatory hurdle and it is very significant for REE investors, who now have an opportunity to participate in Lynas as the major REE producer outside of China. Moreover, there is some consolation in shared misery. Rare earths are currently no better than other commodity groups. They suffer from the uncertain prospects of a prolonged debt crisis and slow growth in Europe and weaker growth in China, which has cooled down the prices of many industrial metals. Also the slump in gold has also shaken investor confidence in commodities. Lynas’s success in Malaysia could also serve as a boost to other REE explorers and producers, who can draw some inspiration that it is possible to start breaking China’s REE monopoly.
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