EDITOR: | August 2nd, 2016 | 12 Comments

Rare Earths Monthly – Is No News, Good News?

| August 02, 2016 | 12 Comments
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Well, here we go again with a basically rare earths space with no news month.

Some may say that the performance by Lynas in finally meeting its stated annual capacity is a bit of a boost to an otherwise quiet space. I would like to see their recently promised growth news first. If they are not going to return their at-best modest surpluses (post debt reduction) as dividends then where are they going to place those funds for growth? I am sure current and potential shareholders will also want to understand that.

Some ardent followers of Ucore may regale at the pilot plant success of the SuperLig®-One technology, but I am still to be convinced that a replacement of solvent extraction chemistry for a specialised ion-exchange is a fundamental game-changer. There are many other costs in rare earths development, just fixing the back end doesn’t quite do it for me. North America has more, bigger challenges to address before it can be considered as even a starter in the race with China.

So what are the things to watch?

Putin says “Import substitution unveil new opportunities for rare earth metals production”. Interesting. Should Russia develop more uses for rare earths, then the global demand will increase as others utilise the technology. More growth, higher prices, more opportunity for others to join in.

“Chinese firms develop rare earth based battery”. Now this is interesting. With the Rest of World quaking with the threat of reduced rare earths availability forcing industrial development with less or no rare earths, the Chinese are developing technology to use more. At this stage I can only presume they are targeting excess cerium, but I sure will be keeping my eyes (and ears) open.

TMM

So I will finally give you the financing theory that has been buzzing in my brain for a long while now. How does a junior exploration company in the Technology Metals space get finance to enable it to get into production?

Picture the scenario. Company “Blue Skies Mining” has some good ground in a mining friendly environment. They have been through their IPO and have $5 million left in the bank after some exploration and mineralogical assessment. They appear to have a rare earths project that could produce 10,000 tonnes per year of in-demand rare earth products for 20 years at industry comparable operating costs (OPEX), but with a capital requirement (CAPEX) of say, $750 million. The NPV of the project is $1 billion plus, but they cannot get the CAPEX. Why?

  1. They are too small to borrow the money from conventional sources. Interesting that gold projects with such economics would have no problems.
  2. They are unwilling to introduce a partner with the financing ability due to the large dilution of the current shareholders.
  3. They are unwilling to agree to an off-take arrangement that would satisfy any potential off-take partner.

Last month, I suggested if you are in this scenario to consider (or question) the wishes of your stakeholders. If you had done so, you would have discovered:

  1. The government wants this development to start so that it can get its royalties (or equivalent). It also wants the payrole tax etc from ongoing operations.
  2. Your shareholders returns are interesting to define. I am betting that 75% of the world’s investors would love 15% annual return. You?
  3. An off-taker wants all of his rare earths at a price he is happy to pay for.

So the solution. You have 10,000,000 shares on issue, and the IPO issue price was $1.00 but is now $0.20 (Australian example) since you have diluted to obtain funds for exploration and development etc. Your shareholders (10,000,000) now want a 15% return on their money. So that’s $0.15 for every $1 invested every year.

Along comes an interested off-taker. He wants all of your output. You want to keep some of the output to ensure you get a fair share of any upside. But where do you get the money from? Remember, you can’t get the money! So, gents, here’s the deal!

The off-taker gets all of the project output! That is simply because he takes all the risk! He pays for all the development costs – exploration, PFS, pilot plants, BFS, and all CAPEX, and as long as the project is still running he also pays all OPEX (including royalties etc.). And how much does he pay for the output? Well, since he is already paying for all of the costs, he can have all of the output for free! Oh and yes, he also has to pay the shareholders their $0.15 per share per annum to meet the current shareholders desire for a 15% return on his investment.

Too simple you may say. What if he backs off after BFS and before development commences? Well he loses all entitlements to any future output. All assets (especially an agreed minimum cash balance) revert to the shareholders. 100%. And that includes all Intellectual property!

Now obviously, your companies are all in different financial positions, and in different stages of development, and in different jurisdictions, but you all share one common pre-cursor for success. The Board of Directors is responsible to deliver to the stakeholders what they want. And if you can better a 15% return on funds invested, I will gladly write you up in my next month’s Technology Metals Monthly.


Steve Mackowski

Editor:

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>


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Comments

  • Tracy Weslosky

    This is what I get for publishing you a day late Steve — apologies. Yesterday, Northern Minerals announced entering into a $30M equity funding agreement and then there was the untimely passing of Ucore’s Ken Collison in the news today….

    August 2, 2016 - 1:35 PM

  • Tim Ainsworth

    Would have thought the major shift in RE mkt dynamics unfolding ATM worthy of note:

    “2016 January to May, China’s rare earth industry in the face of greater market pressures, the main business income continued to maintain steady growth, but profits fell. According to the China Nonferrous Metals Industry Association statistics, the first five months of 2016, China’s rare earth industry, the main business income of 33.04 billion yuan, an increase of 4.3%, a profit of 1.535 billion yuan, down 4.7%. Main business steady growth is mainly due to an increase in shipments, especially after the abolition of tariffs and export quotas, domestic rare earth products to enter the international market more convenient, therefore, a significant increase in exports, which had revenue growth of rare earth industry Significant influence. Profit fell mainly due to implementation of environmental protection on the one hand, a rigid labor and other costs rise, leading to high production costs; on the other hand is a rare earth prices running low, to bring greater pressure on business.”

    Interestingly the Lynas preso demonstrates the inverse, absorbing 30% fixed costs (incl sunk enviro controls) across 100% capacity, pre optimisation.

    “Improvement in the international market demand
    Exports surged
    First five months of 2016, domestic and international market demand for rare earth smelting products overall is better than the same period in 2015, rare earth metals, oxides, salts and export volume of permanent magnet material is higher than the same period last year, which to some extent, that the international market demand improved. According to customs statistics, from January to May 2016, China’s total exports of rare earth smelting separation products 19,300 tons, an increase of 81.7%; total imports of 06,500 tons, an increase of 41.6%. Rare Earth Functional Materials exports continued steady growth, total exports of rare earth permanent magnets 10,400 tons, an increase of 7.8%.”

    newmat.chinaiol.com/xtcl/q/0802/07171412.html

    Begs the Q, to what degree is Lynas catalyst/beneficiary, stimulating its own market? Given strong Chinese export growth what portion of the Lynas annualised 5kt NdPr supply is substitution/growth? Raw data could suggest potential ROW NdFeB CAGR 20%, effectively a 100% growth market share if sustained.

    Given the reported state of domestic demand, and the State’s refusal to pay stimulatory prices for excess inventory, what portion of 10ktpa Ce & 5ktpa La excess production does Lynas’ 5ktpa NdPr displace? Particularly given it can place those volumes into ROW catalyst mkt.

    Reasonable assumption we’re witnessing the strong reversal of ROW demand contraction into China initiated with the imposition of tariffs 10 yrs ago. Wood for the trees stuff I guess.

    August 2, 2016 - 2:39 PM

  • D

    “Some ardent followers of Ucore may regale at the pilot plant success of the SuperLig®-One technology, but I am still to be convinced that a replacement of solvent extraction chemistry for a specialised ion-exchange is a fundamental game-changer. There are many other costs in rare earths development, just fixing the back end doesn’t quite do it for me. North America has more, bigger challenges to address before it can be considered as even a starter in the race with China.”

    Ucore as of today do not care about the “other costs” of mining for rare earths. Their Bokan project is on the backburner due to major success of their pilot plant. Revenue expected short term. SuperLig agreements are already underway with major companies. What Ucore is focusing on is the cost of extracting rare earths without the use of SX. Not only that but Ucore has exclusive IBC rights to extract rare earths and other technology metals from Tailings that are already above ground. This concept already takes these “other costs” as not a factor. Ucore really needs to educate smart investors on what it actually has. Not to mention the next gold “Dysprosium” is another major revenue it will be pursuing with many interested companies already inquiring.

    A shame about Ken Collison passing. He was very enthusiastic about the company and helped Ucore thrive in a downward market

    August 2, 2016 - 9:54 PM

  • Steve Mackowski

    D, the majority of costs in REO production come from needing to get the REE into solution. Acid baking, caustic roasting and others. You can then get to extracting the REE. You then have to dispose of the residual REE depleted solution in an environmentally responsible way. The old SX was perhaps 10% of the total costs. I have not seen an overall cost presentation of SuperLig, but it appears only to replace the SX, ie 10% of the total cost.

    August 2, 2016 - 10:52 PM

  • Steve Mackowski

    Tim, when I comment with no news, it means I see nothing out there that significantly impacts the REO space. Business as usual in China (whatever form that shows itself), really doesn’t impact on ROW REO development. So that really leaves something big to happen ROW. I am as hopeful as you are, but do not see the signs yet.

    August 2, 2016 - 10:54 PM

  • Andrew

    It is not easy to have new space when it is talking above monthly.

    August 3, 2016 - 6:44 AM

  • WWHay

    Ucore has yet to provide 3rd party proof of the efficiency and effectiveness of the IBC technology related to rare earths. However, the ultimate indicator Ucore may have access to a viable technology is when they cut the cheque to pay IBC for the exclusivity.

    August 3, 2016 - 10:41 AM

  • Alex

    Dear Steeve
    I can not understand the strategy from off-taker in your examples.
    The variant with Lynas – off-taker give them loan but don’t have risk from production (CAPEX +OPEX) , if he take all output it means that he give them small profit just to keep possibility to pay interest to himself. So, they have working at zero profitability to keep strategick supply possibility.
    If as you suggest he pay (CAPEX +OPEX) + interest to shareholders – why he need to do it ? He just can wait when the project will died and buy it for 1 USD only if he want to have it.
    The projects without CAPEX and with risks to be not profitable can not consider as projects with cost, because they can not be realized.

    August 4, 2016 - 12:36 AM

  • Tim Ainsworth

    Well done Alex, you’ve managed to nail the whole RE space on the latest ACREI report:

    “July 2016 a market analysis of rare earth, rare earth market is running low before closing this month, six rare earth group of listed companies have released the first half of 2016 results notice, the market downturn to rare earth companies enormous pressure to survive”

    http://www.ac-rei.org.cn/portal.php?mod=view&aid=5273&page=3

    Perhaps begs the Q, how can Lynas still ship “Ice to the Arctic”?

    August 4, 2016 - 9:12 AM

  • Tim Ainsworth

    “nothing out there that significantly impacts the REO space”

    “July 2016 a market analysis of rare earth, rare earth market is running low before closing this month, six rare earth group of listed companies have released the first half of 2016 results notice, the market downturn to rare earth companies enormous pressure to survive”

    Assoc China RE Industry: ac-rei.org.cn/portal.php?mod=view&aid=5273&page=3

    Yet Lynas ships “Ice to the Arctic”?

    Perfectly normal day in RE land.

    August 4, 2016 - 10:28 AM

  • JOHN ROAKE

    I have been an active investor in Australian mining stocks – this for well over a period of 10 or more years. I was one of the idiots that blindly followed the tip sheet ‘ Diggers and drillers.’ I have been able to dig myself out of the mire but it has been a long up hill battle.

    The purpose of this treatise is to advise fellow investors in mining stocks that they should realise no mining stock I have known has from time of float to posting their first dividend HAVE ACHIEVED THAT GOAL IN UNDER 10 YEARS – 90% HAVE REQUESTED ADDITIONAL FINANCIAL SUPPORT AND THE OVERALL SUCCESS RATE IS ABSOLUTELY MINIMAL – Question:” Why would any prudent investor take up share offers in new mining projects?”

    August 4, 2016 - 7:32 PM

  • Alex

    Japanese need to have Lynas , so they will buy Nd/Pr from them with extra price just to keep them. so, they just let them to sale ace in Arctick.
    For safety Japanese need second supplyer. Best choice Molycorp because it is already in working possibility. May be another Works from Canada . Because if the will be conflict at China and Japan – Malaysha is too close to conflict and can be cut by one stap.

    August 5, 2016 - 1:51 AM

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