Mackowski Success Factors for Rare Earths Development (Part 1: Funding)
In my previous series of articles of Rare Earth Oxides (REO) Art vs. Science series, I discussed the issue of separation. How different types of separation requirements can be viewed and understood in a manner suitable for the non-scientific readers of InvestorIntel. From the comments received, I see that the style, format and technology level of my writings met with your approval so I will continue this new series in a similar fashion.
At the outset; I want to emphasize that I am not trying to provide investment advice. That is for others. What I am trying to deliver are the fundamentals of rare earths processing so that you can understand what information is being presented (and what is not), and so you can then use that information in a more rational way, for whatever purpose you choose. I will use the term “Success Factors”, but these should not be used individually, and especially not in isolation. They need to be viewed as a suite of data that covers many aspects of the development. As a taster, the resource, the mineralogy, the impurities, the technology for extraction, the location and geopolitical setting, the management team, all can be considered success factors. And all can be ranked. Some quantitatively and others more qualitatively. I will not cover them all so you can understand why I state they should not be used individually or in isolation. They are all important considerations.
But what is THE KEY success factor of a REO business? The classic empirical answer is grade. Grade is king as they say. Well is it? I would challenge with “grade of what”? Classic theory implies that a 5 gm/tonne gold resource is better than a 1 gm/tonne gold resource. But what if the 5 gm resource is hundreds of metres underground? In a war-torn jurisdiction? How do you allow for other precious metal credits? Not simply a grade question therefore. REO is even more complex when you consider lights against heavies. So I would contest that grade is not THE KEY success factor. I am not saying that grade is not an important success factor; I just don’t consider it in isolation as the most important one.
I must also state that comparing success factors is not a once off exercise. That is, the factors and their relative significance change with time. The key success factor for a 1980 REO project would have most certainly been grade; and only the lights would have been relevant. Times have changed. In fact, a 1980 light REO project would have had no success factors because the chances of such a project being developed would have been pretty close to zero due to the accepted Chinese dominance. So this discussion on success factors is based on “today”. Not 2011 or 2012. Today!
You would have to think that the resource is THE KEY and you would be close; but not quite. The resource is a summary of a number of factors that individually can be looked at. Tonnage, grade, REO spectrum relativity (lights versus heavies), gangue (waste) constituents, REO mineral types etc. All of which are important, but for mine, one stands out. It is that factor that has the largest impact on Capital Costs (CAPEX) and also Operating Costs (OPEX). When you look at the multitude of REO development projects across the globe, they all share one common issue. They are all crying out for funds to develop. Be that flow sheet development, feasibility studies, EPCM (Engineering, Procurement, Construction and Management); they all need money and a lot of it. So those projects that have lower development costs, particularly EPCM (CAPEX), are those most likely to succeed (all other things being equal). And what is the success factor that most influences CAPEX and OPEX? The answer is mineralogy. Now before the proponents of the multitude of REO projects come out swinging, I am not saying that mineralogy different from the argument coming means a project cannot and will not be successful. It just means you are starting in a more difficult space.
Speaking of difficult places, I was once responsible for a proof of concept project that had immense operational problems. After two years, I came on board to sort it out or shut it down. The details are not important here, but the end of the story is. The retired Chief of Technology from the big international competitor who I brought in as the expert to “sell” the solutions to upper management told a story to the assembled senior project team. He was asked where do we go from here? He responded by comparing our position to his recent holiday driving through the green of Ireland with his wife. It got dark. They were lost. They had never been this way before. They saw in the distance a light and drove towards it. It was a lovely, small pub and he asked the bar keep for directions. The bar keep looked him in the eye and with that beautiful Irish tilt to his voice said: “Can I first give you some advice? If you ever want to go there; never start from here!”
Get our daily investorintel update
So, remember, there are other success factors to consider that can and do lessen the impact of mineralogy. In NPV (Net Present Value) terms CAPEX is mathematically not that critical. But, and this is where the today factor comes in, the difficulty in getting significant finance for that CAPEX out-balances everything else. Reduced CAPEX (and the mineralogy to get that) is vital. So why is mineralogy so critical in influencing CAPEX?
It is simple logic that the bigger the plant the more it costs. Conversely the smaller the plant the less it costs. So why does mineralogy have such an impact? Simple. The mineralogy dictates the effectiveness of beneficiation. That is the concentration of the valuable mineral whilst rejecting the gangue (waste). If you have a mineralogy with REO mineral of grade 60%, and you have gangue of zero REO content, and combined, the resource grade is X, where X depends on the relative proportions of the REO mineral and the gangue, and the gangue can be discarded 100%, the grade of the resulting concentrate is 60%. What if the grade of the concentrate could only be 30%? For the same output of REO, the plant needs to treat twice as much material, and therefore costs more. It is not double due to engineering and infrastructure savings, but let’s use double to make it simpler. So a 60% REO grade concentrate plant could cost $250 million, for example; the 30% REO grade concentrate plant could therefore cost $500 million for the same output.
Again, I wish to repeat that the more expensive plant still can succeed. It is just that CAPEX has become more of an influencer of a project than ever before. And do not forget that there are also the other factors to consider. I will continue the series through mineralogy, then go through those other success factors that need to be considered and balanced when trying to predict the success of any one project. Should you wish to suggest / prioritise your thoughts on success factors, let me know and I will try to cover as we go.
Mr Mackowski is a qualified engineer in mineral processing with over 30 years technical and operational experience in rare earths, uranium, industrial minerals, nickel, kaolin ... <Read more about Steve Mackowski>