Technology Metals Monthly: A Significant Fundamental Shift at Play in Rare Earths?
For quite a while now, Tracy has been trying to convince me to write about individual companies; their releases, their technology, or their position in the REO (rare earth oxide) space. I have resisted. My articles have focused on the background science, the generic success factors that sort the wheat from the chaff when moving towards production, and talking about more general issues rather than company A’s technology breakthrough versus company B. So Tracy I’ll still focus on those issues fundamental to the REO space, but will utilise company names and material where it highlights the issue of import.
So first things first. If it looks like a duck, walks like a duck, you know the rest. I am only going to utilise information that is sound, that where possible is supported, provides fundamental value, or if not I will state as my opinion only. Pricing for REO will be tackled by quoting end of period estimates for one of the forms of that REO sold. For example, cerium prices are quoted as:
- Cerium Carbonate 45% REO China
- Cerium Carbonate 45% REO FOB China
- Cerium Metal 99% min China
- Cerium Metal 99% min FOB China
- Cerium Oxide 99.5 – 99.9% min China
- Cerium Oxide 99.5 – 99.9% min CIF Europe
- Cerium Oxide 99.5 – 99.9% min FOB China
I will leave others to provide you with that degree of detail. Import taxes, export duties, exchange rates etc should not really affect the fundamentals of pricing that impact on my thoughts on the REO business space. A 5 or 10% tax should not be a project breaker. Supply and demand should impact across all of the range of products. So, unless specifically stated, I will limit my monthly price statements to Oxide of typically traded quality and FOB China, US$/kg. So what does the last 12 months look like? A point of caution, there were a number of quality specification changes made during the time periods as well as impacts of exchange rates, duties and taxes. I have attempted to smooth those price impacts. So if you want very accurate prices against very accurate quality specifications at specific times, contact others. I am only trying to provide trends that can be used to indicate any shift in fundamentals.
So is there a significant fundamental shift at play? Of course there has been significant falls. The price fall across the suite of the REO group has continued through 2015. But fallen to where? The prices today are not significantly different to what they were pre-bubble. So has a fundamental changed? Only if you were looking at justifying your project on bubble prices! It is interesting to note that Lynas justified its project on pre-bubble prices and is now operating at a cash profit at today’s prices. So do I see a fundamental change in REO pricing moving forward? No! Supply and demand will affect REO prices. As the demand rises (as everyone keeps predicting) as technology becomes more all-encompassing, then prices will rise to encourage new production to come into the market. Will that price be the bubble-price? It may surprise you that I think the price will approach the bubble price, but, and it’s a big but, it will only be in that REO that the market is short of. That is, it will not be across the REO suite as it was in the bubble-years. From all present indications, it appears that the magnet REO suite are the most likely to rise. There is caution here. We hear all the time about illegal exports. We have guesses as to what the volume is. We have no data on which REO they are. Only supposition! The impact of co-produced illegal stockpiles of other REO is totally unknown. I am personally very watchful of the yttrium space as there are indications that historically stockpiled yttrium may be depleted resulting in a supply/demand imbalance. When? Too many unknowns to predict.
Important Events of the Period
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I am not going to produce a chronology of every stock market release, press article, TV expose or others that have occurred in the time period. That degree of data is available via InvestorIntel archives, company web sites etc. What I will try and do is present those information-points that either tell us or make us question the REO world and its fundamentals. Here goes for 2015!
The China consolidation of REO producers to the “Big 6”.
Is this having the desired effect? My view is different to most Western REO watchers. They see this consolidation as shutting down some players (presumably illegal), decreasing total supply and therefore raising price. Since the price has not gone up, they say the consolidation has failed! I say the point of the consolidation is not to waste REO resources; to keep China REO in China for China value add and to enhance future China prosperity. So, the “Big 6” approach looks on track to me, especially when you see the efforts now starting on tracking of supply as an additional tool in limiting illegal REO movements. Things to keep an eye out for? Anything to do with China REO.
The success or otherwise of non-China REO
It is important to consider non-China REO success as part of a very balanced and focussed process. Remember my success factors! Be systematic in your thinking! Is the dropping out of a hundred REO hopefuls a sign of failure? A lack of success? Or is the excellent progression of Alkane towards its targeted project start up and the “turnaround of start-up” Lynas showing a couple of very important successes in the non-China arena?
My view is that 2015 was very successful in eliminating those REO hopefuls that were only a possibility of success if you based their project around bubble-prices. The bubble prices are gone, get over it, good projects move forward. So what critical things did the non-China REO space show us?
Alkane Resources. Good resource, good technology, good people, good investment space. Key Success Factor – The ability to establish a production model and to deliver that production model to the market. Models for each of zirconium, niobium and rare earths that have identified the customers and delivered arrangements for sale. I have stated many times that this production model is a key success factor, without it you are just a dream.
Lynas Corporation Limited. The recent news that Lynas is now meeting capacity projections and generating cash is a very positive result. The corner is turned as they say. There’s a lot more to say than that. Lynas is proof that a non-China REO project can work at today’s prices. It’s not just today’s prices that are to be noted, but I need to stress that the Lynas project has been a first mover, high CAPEX project. That is about as tough as it gets, and is therefore a very positive demonstration on doing things the right way. With that said however, there was a period in mid-2015 that delays in start-up were looking ominous. Remember, Lynas is producing cash as today’s prices. So it’s not the price that could have knocked them over but the delay in start-up! (See comments on Molycorp later). I recently listened to the presentation of Amanda Lacaze and apart from all the successes I have summarised above, there was a very interesting statement made that set my mind abuzz! Lynas are selling into China! Why would this be so? (From a Chinese view point that is). Are Chinese customers trying to diversify supply? Why would they do that? Do they not have confidence in the ability of China to meet its own needs? Is that a short term issue while illegals are stamped out or is it a sign of a longer term shortage? This is a very important issue to be watched. I would love to know who in China the REO is going to. Answers on future supply shortages, implications of the “Big 6”, effectiveness of illegals crackdown could all be analysed. Watch this space!
Molycorp. It is never a good time to witness a business going under. Especially in our REO space, when we were looking forward to successes in the non-China space to boost confidence and to improve the chances of other struggling to keep afloat in difficult times. But there are lessons to be learned. Just as Lynas is generating cash at today’s prices, Molycorp should have too! They were approved pre-bubble in an era of lower prices. Their failure was not REO price but the ability to get their plant up on schedule and within cost. There is a lot of report out there so I will say no more, but, there is something very important to note out of the 2015 Molycorp story. In April 2015, Molycorp announced a very significant supply deal with Siemens. At the time, I saw and reported that deal in InvestorIntel as a game changer in the REO sector. Why? Because never before had a major end user been closely involved with the REO supplier, the miner. I again raise this now with the question: If Molycorp has gone, if Siemens has lost its future supply (of magnet material), where is the news? Who is filling this gap? Who will benefit from meeting Siemens long term future needs? It is in this space that the likes of Peak Resources, Tasman and others must be working. I’ll keep a very watchful eye on this space as these questions unravel.
Other North American projects. I can only concur with Jack Lifton that without a production model it is difficult to see a future for North American REO. To me it seems that the space has its thinking shuttered into only seeing technology replacing solvent extraction as the key to success. May be that’s because we do not yet get to see the eventual game plan. I hope so. I find it very hard to be optimistic about North America. I have said before, you need something similar to the JFK moment of putting a man on the moon vision. Then yesterday, Donald Trump acknowledged the lack of REO technology in the North American manufacturing space. Interesting.
What else to reflect upon? It appears that lithium batteries or in fact any batteries are not going to revolutionise our energy view of the world, but they are a significant player. Importantly then, there is still a major component of our energy supply to come from wind, and a major component of our energy savings to come from hybrid vehicles, not solely pure electric. The fundamentals of REO do not look like changing.
Well, as stated above, a mix of good and bad, encouraging and disquieting, but my view hasn’t changed. Technology is going forward and Technology Metals are required. Those Technology Metals are not on the resource-supply timeline. So sooner or later something has to give. I’ll keep you informed as things develop.
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>