EDITOR: | May 3rd, 2016 | 4 Comments

Technology Metals Monthly: Where has all the Rare Earths News gone?

| May 03, 2016 | 4 Comments
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April 2016 may, hopefully, be acknowledged as the start of the rare earths recovery. Why? Because it’s the first month for a long while where the month has closed and there has been two consecutive weeks of no falls and some raises in the suite of rare earths traded. May not be much; may not be statistically significant; but it’s certainly a possibility worth watching. Also I promised to continue my thoughts into the financing “issue” that is surrounding not just rare earths developers but also in many other endeavours as well.

Table1

Tracking back to last month’s introduction into the risk:reward conundrum and the apportioning of NPV, we discussed that:

 “Rio Tinto funds its capital either from cash flow or by borrowing money. It can safely divert cash to new capital works (with an ROI of +15%) rather than directing that cash to dividends because the shareholders are long term dividend focussed and see long term value in growth. I repeat, note what is occurring here. Rio Tinto is risking either it’s own money or is borrowing from banks. It is taking almost all of the risk. So what proportion of the profits (NPV) of that capital works should go to Rio Tinto. Well, all of it of course. They (Rio) risked it, they (Rio) deserve the reward.

Now look at a small cap exploration company looking to develop a REO project. Company capitalised at $25 million; has $5 million in cash; and needs $1 billion to develop a +20% ROI project. Things are very different. The money doesn’t come from within; there is no chance of shareholder funding (public equity); there is no chance of borrowing the money; so what is the solution to the conundrum?”

Now I do not attest to being a financial/economic guru, but it would seem logical to me that the apportioning of the NPV should be different in the above two scenarios. A self-funding major should get the majority of the NPV, and, if so, could the converse be true? Would the small cap exploration company perhaps majority funded by a downstream user get a significantly lessened part of the NPV? I think the answer to this conundrum; the risk : reward apportioning of the NPV lies at the heart of the project financing situation. That is, you can’t do a financing deal unless both parties share the same view of that risk : reward apportioning of the NPV.

I am trying to get an understanding of what the market (you) expects (is happy with) about the value (apportion of the NPV) that the downstream user (or private equity provider) should get if it provides some, or the majority of the project development capital. I would like your help. As residents of the investment space, I would like you to imagine small cap rare earth development company, ABC, has a good project – NPV $2 billion, but CAPEX $1 billion. ROI 20%. Downstream user, XYZ, has a lot of money and wants the REO output, and sees the only way to get that output is by taking a share in the project. Not in the ABC company, but the project itself. Query: in the following table are varying amounts of that $1 billion CAPEX paid by XYZ, please think about what the answers are to the empty boxes in the table.

Table2

Important Events of the Period

Readers and researchers of the rare earth space would be dismayed at the minimal volume of materials going over the air waves in the last month or so, particularly when you only focus on outside of China.

Lynas reported a 10% decrease in sales which was to be expected due the price situation, but they have stated that the current “murky” outlook is expected to improve as the final commissioning of the increased capacity of line 5 comes up to full production. And if the price rises a little…….

Alkane Resources Limited has announced one of my success factors! They have signed a toll processing deal with a Vietnam separation plant for their REO upgrading. Now together with the arrangement for zircon and niobium previously reported, the production AND marketing model is now complete. Well done to all involved. Cannot wait to see the time line to production.

The debate around lithium-ion batteries, cobalt cliffs, and zinc – manganese oxide batteries is gaining heat. I will not debate individually, the articles are available on InvestorIntel, but it does show how technology evolves. The fundamental, though, is that advances in technology need advanced materials. And the more widespread the expansion of the uses of that technology, again, the more of those advanced materials are required. So technology metals continues to improve when looking at medium to long term fundamentals.

I have been asked to provide comment on China where I can say the volume of information is considerably more that ROW. The following (for April) are searchable via Google.

  1. China announces North Korea trade restrictions, bans rare earth import
  2. China outlines plans for rare earths production controls and storage
  3. Chinese rare earth prices to increase
  4. China to set new Standards for rare earth producers

Now these four reports do not show anything too significant until you read into the detail. Now number 4 is newsworthy, needs highlighting and can be learnt from. Standards for REO products will be no different to standards in other fields. They provide clear data on what the product has to achieve. But when you control the majority of the supply chain, as China does, there are some important issues to be noted. The Chinese REO products have been improving in quality year on year to meet their own specific product quality development needs. For example, as the phosphor powder specification in LED lighting has become more stringent, so the specification on the source yttrium has become more quality targeted. Why is this important, or should I say of concern? It is that as a developer you cannot sell a 2016 produced REO with a 2011 quality. At least not to a 2016 user at a 2016 price. The 2011 version is 5 years behind in its technical development (because of the change in the downstream need and hence change in specification). It also means that if you are thinking about going into the LED business outside of China you had better be sure what quality of REO you designed around, and is it available. So for anyone in REO project development keep an eye on the customer standards as they will change your process flow sheet, both in terms of CAPEX and OPEX. And for anyone in the investment analysis space keep an eye on the prices used in the NPV calculations. They need to reflect both the current product standards and relevant price, and the flowsheet capability of the project under review.

The above paragraph discusses those articles available outside of China accessible via Google. It appears that not a great deal is happening in the REO space. But when you look at what is happening inside China, it’s a completely different story. Believe me, “Where has all the Rare Earths News gone”? It’s alive and well, and it’s inside China. Let’s look at Research and Development.

  1. Real time detection system based on rare earth nanometer up-converting phosphor technology and it’s multidisciplinary applications.
  2. Clean separation of bastnasite and rare earth sensitized organic light emitting device.
  3. “State key laboratory of Research and comprehensive utilization of Baiyun Obo rare earth resources” of Baotou Research Institute of Rare Earths approved.
  4. Baotou Rare Earth Research and Development Centre of Chinese Academy of Sciences was established.
  5. “Rare earth industrial pollutants emission standards” and “Heterogeneous catalytic oxidation treatment of VOCs in rare earth industry and the equipment” were awarded the first prize of China Non-ferrous Metals Industry Science and Technology award.
  6. “Development of high performance rare earth luminescent material for white LED” by Fujian Institute of Research on the Structure of Matter.
  7. High coercive sintered NdFeB with trace content of heavy rare earth.
  8. Popularization of preparation technique of Ce-rich and Ce magnet.
  9. Effective extraction of ion adsorption rare earth resource and green preparation of rare earth materials.
  10. Guangdong Province opens Research and Development Center of Special Fiber Optic Materials and Device Engineering Technology.

Ten clear indications that R&D is alive and well in China. And let’s look at rare earth business news.

  • Two rare earths projects with investment over 100 million yuan will be constructed in Damao County of Baotou.
  • A rare earth lithium-ion battery project will be built in Xinjiang.
  • Baotou puts forward the “rare earth +” strategy to promote healthy development of the rare earth industry.
  • Production of new energy automobiles exceeded 100,000 units in December 2015 (read as EV or hybrid)
  • Corun together with Chang’an Automobile and other two companies invested in hybrid vehicles.
  • Baogang Tiancai put into production and produced for its first LED order in 2016.
  • Ganzhou Municipal Bureau of Land Resources took ten measures to build Ganzhou rare earth valley and to promote the upgrade of rare earth new materials and the application industries.

Most certainly, rare earths is a full steam ahead industry in China. I will keep you posted as the months go by.

Remember to give me your views on the apportioning of NPV.


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

  • ann bridges

    Steve, I think you bring up an important question. The problem I see is that Private Equity has been enamored with Silicon Valley tech based in apps and services, not physical investment. The ROI has been ridiculously high for the winners, at least in terms of liquidity events. In other words, an early investor has been able to sell to another VC, then to a pension fund, possibly to IPO investors, at ever-increasing valuations. Why take a risk on something as mundane and un-sexy as mining? However, as “unicorns” no longer exist, and IPOs dry up, perhaps the real-world equivalent will look good to some. The problem I see is that there is no way to deliver equivalent returns, so it may take some years for investment dollars to flow again–or a crisis.

    The fact that China continues to forge ahead with R&D and deliver innovative technologies with rare earths simply cements their key role in the global market place. With the decision from The Hague expected in May, it will be interesting to see if China plays hardball with embargoes in order to make the point that all of our economies are now reliant on their REE production and processing, even if simply through their ability to depress prices and dissuade investment.

    On a lighter note, perhaps May is so bereft of news because my novel Rare Mettle is coming out this month, and people want to see if the fiction matches reality? I can only hope!

    May 4, 2016 - 10:21 AM

  • jeff stufsky

    Interesting points and questions.

    My longstanding definition of mining remains as follows: Promise a 20% IRR, hope for 12%, deliver 6%.

    This broadly reflects that mining is complex, combining the risk of many separate industries. It also involves a longer-and-longer timeline from find to production; heterogeneous rather than homogeneous deposits and projects; few “finds” advancing to anything resembling a construction decision; not uncommon construction overruns, start-up delays, and subsequent operating under-performance; continuously declining grades and requirements for more complex processing chemistries; volatile commodity prices; a relative inability to economically shrink (or expand) “production runs” as at widget factories or service companies; and frequent negative local sentiment.

    The fiction of 43-101 reports that are purported to “protect” equity investors (from themselves) aside, these investors (and creditors) are – rightfully – licking their wounds after the latest cycle of “never ending halcyon days”. This dates back to Dutch tulips and before.

    For rare earths, an absence of the sort of foundation information found for many other commodities such as precious metals and base metals or even iron ore, including basic supply/demand and true usage figures from mine mouth through end-user plus somewhat transparent pricing information for volume or otherwise, simply exacerbates the mining problem. Throw in unfamiliar processing technology and the fact that some end-uses are either mere hopeful future projections without much if any history or are actually happening but subject to rapid substitution, and investment can feel more like buying a Powerball ticket than a scientifically analyzed proposition.

    As we have evolved from granting large values to mining companies for their in situ “resources”, instead of – like in other sectors – assessing whether and how these “resources” can be turned into positive cash flow, bigger being better in and of itself has – prudently – fallen by the wayside.

    So, as creditors (e.g., banks) have pulled back along with retail equity providers, while generalist private equity shops promise a lot of capital but deliver relatively little, the door opened several years ago to streaming and equivalent prepaid or off-take structures for project development. They are providing otherwise hard-to-find (credit-based) equity, and as such are demanding related returns (portions of NPV). The only difference is that they are not merely waiting for the promise of a dividend or a higher share price, but rather baking their returns right into the funding structure. Mining is essentially reaping what it has sown.

    May 4, 2016 - 11:50 AM

  • Alex Karypidis

    Hello,

    I am really out of my depth here, but I still think I can provide an interesting view (exactly because I’m completely clueless about this sector).

    Some background: I’m new to this, opened my first account a month ago, and started exploring options. Although I am quite familiar with markets due to my job in investment banking, I am still just a completely inexperienced small investor.

    My education and occupation lead me to start with software/semi-conductor/electronics companies where I am comfortable reading product specifications, looking at road-maps and making ‘educated guesses’ about where to risk my money.

    Inevitably, I started looking at rare earths. I choose the word ‘inevitably’ because I think I’m not the only one who will come down this path: if you understand even a little bit regarding electronics and their manufacturing, you’ll soon reach the conclusion that rare earths might be worth looking into for investment.

    Here’s the thing though: the resources I’ve come across are really poor-quality. Your series of articles is the most informative source I’ve come across. In any case, what I found was not pretty. In fact, I was surprised with how bleak this sector is.

    For one thing, production is concentrated in China, which is able to manipulate prices and act as a barrier to entry for new ventures. New ventures are very hard to create as they require huge amounts of capital.

    I looked toward Australia hoping to find success stories, due to its significant mining industry. I thought that maybe there’s successful operations there even as a by-product from mining for something else. Nothing. Lynas being able to make money at today’s low prices (but having by now a huge amount of debt) is hardly a success.

    But with R&D concentrated in China I expect developments and improved processes to come from there, leaving competition from the rest of the world lagging further and further behind.

    In fact, with most end products now assembled in China, it even makes sense to integrate as much of the chain as possible locally. Australian (and other countries) mining would have to compete with an added transportation cost and inferior mining/refining technology.

    In conclusion, it seems to me that for the small investor, rare earths are a really bad idea. Even if we’re talking about one willing to make a long-term high-risk bet (I am working with 10% of my savings and have absolutely no problem losing all of it).

    I’d be interested to see other people such as myself post comments about their experiences with rare earths.

    May 15, 2016 - 9:23 AM

    • Tracy Weslosky

      As someone who founded this site out of interest in rare earths, and who just coordinated a global conference on Cleantech and Technology Metals last week: my conclusion is that the time has never been better…in fact – I believe that you are very sharp to be investigating the interest level and associated companies….ALKANE, SEARCH, PEAK, UCORE….and note that we will have these examples in video presentations published in the next several weeks. For the record, I am the founder of InvestorIntel — and I am not a licensed investment advisor….so do your own due diligence….

      Thank you for visiting InvestorIntel – and yes, the best and brightest players in the rare earths industry – write for InvestorIntel.

      May 16, 2016 - 2:54 PM

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