The Impending Shakeout In The Rare-Earth Sector: Who Will Survive?

by Gareth Hatch on September 5, 2013 · 10 comments

in News Analysis, Rare Earths, Tools & Metrics

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Last month saw the publication of a new report by Adamas Intelligence, in which the company predicts a massive reduction in active rare-earth-element (REE) projects due to diminished investor interest, and a stark inability for most projects to be economic because of their inherent elemental make up, poor cost and pricing assumptions, and a lack of processing capacity outside of China. Adamas kindly provided TMR with a copy of the report for review.

Titled “Sifting The Winners From Losers Amidst The Impending Rare Earth Industry Shakeout”, the 121-page report connects these negative factors to the lingering effects of the 2008-2009 global financial crisis, and the recent spikes in REE prices.

With a dramatic reduction in the number of ‘live’ projects in the near future as its initial premise, the Adamas report attempts to determine just who the ‘winners’ and ‘losers’ in the REE sector will be, by using a set of comparative parameters that normalizes each of the existing advanced projects via a single price deck, and applying discounts to basket prices using a consistent methodology and cost factors for each project, as appropriate.

The result is a list of just 10 projects that Adamas believes are going to make it.

The report kicks things off with a Landscape section, providing a history of the REE sector from the 18th century to the present day, including industry development and the growth of REE demand. This section also includes some good background materials on the how and why of REE-bearing mineral formation, as well as a brief review of the 800 or so occurrences of REEs around the world, drawing mainly on US Geological Survey data. Particularly useful in this section is a description of over dozen different types of REE deposits.

Using 46 of the advanced REE projects present on the TMR Advanced Rare-Earth Projects Index on June 1, 2013 as its basis, the report then turns its attention to specific projects for subsequent analysis. Created in 2009 to help compare ‘apples to apples’ in the REE sector, the TMR Index was first published on our Web site in 2010 and has subsequently become the de facto industry standard for tracking such projects. To be included on the Index, a REE project needs to have a mineral-resource estimate that is compliant to internationally recognized guidelines such as Canada’s NI 43-101 (which uses the CIM framework), Australia’s JORC Code and South Africa’s SAMREC code.

The Adamas report divides the 46 projects into two groups. The first includes those at the so-called resource-exploration stage, where a resource has been defined but no further work has been completed. The second includes projects at the so-called project-development stage, ranging from those currently undergoing a preliminary economic assessment (PEA) / scoping study, to those at the pre-feasibility (PFS) and feasibility study (FS) stages. As it happens, there are 23 projects in each of the two groups.

The report then looks at the different forms of REE products that each of these projects is slated to produce, and how the project owners plan to derive revenues from them. Toll separation is the route that makes the most sense to me, given my involvement in the Innovation Metals initiative to develop an independent REE toll separation capability in North America.

It is quite remarkable, however, how many companies have given little to no thought  beyond the production of an intermediate mixed REE concentrate. A good number have completely unrealistic expectations of the revenues that they think that they will be able to generate from selling such concentrates. The Adamas report does a particularly nice job in breaking down the ‘sentiment’ of the various project owners on this topic, evaluating in detail the implications of the lack of processing capacity and demand for intermediate products outside of China (hint: it’s not good for the sector…).

Adamas subsequently builds here on its earlier premise that an industry shake out is inevitable, given the sheer number of projects in the pipeline – a premise that Jack Lifton and I share. As I frequently mention to our clients, TMR has always looked at this sector from the perspective of the technology supply chain, which is not necessarily aligned with that of the investment community. The supply chain is looking for raw materials with which to manufacture products, not a three-bagger in the next 12 months…

Though there are exceptions, in general the supply chain doesn’t care which REE projects will successfully come to fruition, only that enough come to fruition such that their ability to secure REE metals, oxides and other compounds from sources outside of China, at a reasonable price, is realized. Individual players in the supply chain will, however, want to have a good idea of which projects stand a chance of success, for the purposes of securing supply contracts and other arrangements.

From the investor perspective, however, there are simply too many projects chasing a finite amount of capital. As an accredited investor remarked to me only last week, there is a large volume of opportunities chasing capital right now, in a very tight money market. Valuations for individual companies continue to decline “which makes money very patient”.

Adamas rounds out the Landscape section with some interesting commentary on the “[m]isleading metrics and ambiguous reporting practices” that we see in the sector. The wide variations in the way that data is reported by junior mining companies is by no means unique to the rare-earth sector – it is however more egregious than pretty much any other sector out there.

To combat the various reporting discrepancies, in the Analysis section Adamas begins to lay out an approach for normalized metrics that allow for the appropriate comparison of one project to another. In general I like the approach that is used here. The free TMR Index keeps things pretty simple for REE projects, focusing on the most basic project information such as resource size, grade and distribution of individual rare-earth oxides and the like. TMR’s paying clients and subscribers get access to the dozens of additional parameters that we track, and about which any serious student of the sector needs to be aware (what TMR refers to as ‘probability of success’ metrics). Adamas does a good job of its own in collating these types of metrics, and in using them to help the reader make the ‘apples to apples’ comparisons that are absolutely required when evaluating the sector.

The report collates specific parameters such as project size, grade, relatively distribution and potential co-products. It also includes projected operating costs, capital costs, sustaining capital costs and contingencies, as well as projected head grade, production capacities and recovery rates. All of these parameters are used to paint the appropriate picture.

Analysis begins with the 23 exploration-stage projects, with Adamas comparing and ranking projects on the basis of four parameters that have a specific weighting:

  1. Total quantity of in-situ REOs in the mineral resource (40%);
  2. Quantity of in-situ critical REOs (CREOS) and their relative abundance in the resource (30%);
  3. Hypothetical value of the in-situ REOs (20%); and
  4. The relative abundance of total REOs (TREOs) minus the relative abundance of oxides of lanthanum and cerium (10%).

The 23 development-stage projects are evaluated with a different set of parameters, weighted as follows:

  1. Gross profit from REOs and REO equivalent over the life of the mine (40%);
  2. Total quantity of CREOs recovered over the life of the mine (20%);
  3. Capital expense payback period (15%);
  4. [Revenues from non-REOs / total cost] + [75% x [revenues from REOs / total cost]] (10%);
  5. Annual production of less-desirable REOs (7.5%); and
  6. Project capital cost per unit mass of REO and REO equivalent produced annually (7.5%).

This differentiation between the two types of projects is pretty useful and logical. However, the Adamas ranking approach does not allow for direct comparisons between projects in the exploration-stage group, and those in the development-stage group, since the latter relies on information that can only come from a completed PEA, PFS or FS report.

It should be further noted that Adamas does not include Molycorp’s Mountain Pass or Lynas Corp’s Mount Weld CLD projects in this report. At first glance this is probably because both of these projects are now in operation (though their run rates do not yet match their operational capacity), and in a sense have ostensibly ‘made it’. It should be noted, however, that anyone looking for data on these two projects of a similar type to that currently available for development-stage projects will have a surprisingly hard job doing so – especially for the Mount Weld CLD project. Because these two projects ‘came of age’ a number of years ago in terms of resource and reserve development, much of the information is simply not in the public domain.

Actually reaching the production stage is no guarantee of either profitability or strict adherence to either a previously assumed operational or business model. As the 19th century Prussian military strategist Helmuth von Moltke remarked, “no battle plan survives contact with the enemy”.

Adamas uses a proprietary projected 2015-2020 price deck for separated REOs, in order to put dollar values on product sales. It is similar to the one that I use in my own work, which I based on historical (pre-2010) prices, modified by a few relevant external factors. The Adamas numbers are refreshingly conservative, which means of course that a number of the junior mining companies are not going to like them. Swap these prices in for those in many of the PEA reports out there (and even in one or two PFS reports) and you’ll quickly find that such projects are not going to be economic – a finding that becomes readily apparent in the Adamas report.

In addition to REOs, Adamas has also developed a price deck for co-products of REE projects, such as zirconia, and oxides of niobium and tantalum. The report further normalizes project basket prices to account for the different types of mixed REE concentrates that each project will yield (e.g. carbonates, hydroxides, chlorides, oxides etc.).

The report includes some interesting charts that plot various parameters against each other. A selection of these charts is shown in the gallery below (they are fully labelled in the report itself).

So, after assigning rankings to each project based on the metrics above, within each group Adamas gives each project a final ranking, based on a final score using the weightings described above. I have to say that the final rankings for the exploration-stage projects contained a few surprises. There were fewer surprises in the development-stage project rankings; I am not at liberty to share specific details here out of respect for the proprietary nature of the Adamas report – get a copy of the report for yourself to see where the various projects stand.

It should be clearly noted that the final rankings obtained via the Adamas methodology depend entirely on the parameters chosen, and the weightings that were applied. Such an approach is necessarily arbitrary, and changing the parameters used, or the weightings assigned, will doubtless result in different outcomes. It goes without saying that the dollar-value assumptions made, are based on the data provided by project owners and their engineering consultants in the technical reports that they put out. Nevertheless, it is certainly an interesting and useful approach. If you’d like to look at alternative methodologies, Adamas provides all of the underlying data used to create the rankings, so that you can ‘roll your own’ if you so desire.

The Analysis section concludes with an acknowledgement that the ranking approach used may not suit the requirements of every investor or other users of the data. The report notes, however, that the top seven-ranked projects in the development-stage group account for over 90% of the total group’s gross profits, as represented in the chart below.

Exploration-stage project metrics

The report then turns to the fundamental question posed in the title of this review article – who will survive the impending shakeout? In the Outlook section, Adamas predicts that only 10 out of the 46 projects will make it. Of these 10, eight are in the development stage, with only two projects currently at the exploration stage making it through to the other side.

Adamas summarizes its findings as follows:

  • The top-five ranked projects in the development-stage group “offer robust profit margins, timely payback on pre-production capital, and the prospect of solid revenues from REOs and non-REO products alike. As proposed, these projects can endure REO price swings and will remain lucrative amidst a future marked by low REO prices”.
  • The sixth, seventh, and eighth ranked development-stage projects, “have what it takes to endure the impending bloodbath. Robust profit margins, timely payback on pre-production capital, strategic integration, REO separation plans, and/or promise of polymetallic revenue streams are just some of the pros that will keep these players alive”.
  • Adamas notes that five of the top-eight ranked development-stage projects are looking to produce separated REOs, whereas the other three plan to produce only mixed REE concentrates.
  • Sample project Profile from the Adamas reportAdamas believes that its third- and sixth-ranked exploration-stage projects will survive. “High relative distribution of CREOs and potential speed-to-production will keep the third-ranked project interesting, while polymetallic revenue potential, an expansive resource, and toll-separation arrangements will keep wind in the sails of the sixth-ranked project”.

The report goes on to warn of hurdles that will remain even after the herd has been culled.

For the remainder of the report, Adamas has produced one-page Profiles for each of the 46 individual projects that it reviewed, containing a multitude of data points and parameters that will be of interest. An example of the format that they’ve used is shown here (click to enlarge).

So now to getting access to the report; Adamas is offering two versions of the new publication:

1) The complete 121-page report, including the Landscape, Analysis and Outlook sections plus the individual project Profiles, is normally available for $2,997. I managed to persuade Adamas, however, to give TMR readers a 10% discount on that price for a limited time, which will drop it to around $2,697. To order the full report, click HERE and use the coupon code ‘TMR-REE‘ to get your discount:

2) Adamas is also offering the set of Project Profiles as a standalone product. The 58 pages in this offering include the set of 46 one-page profiles for each project, as well as the Adamas price decks for REO and non-REO products, and details of their basket-price discounting methodology and separation costs. Your investment for this offering is $997, and it can be ordered by clicking HERE.

Both offerings come with four quarterly updates, and will include any new projects that are added to the TMR Advanced Rare-earth Projects Index since the last update. The first update is scheduled to be published on November 1, 2013.

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1 Tim Starns September 6, 2013 at 8:57 am

$2,997.00 and121 pages to round out opinions on some ideas which have already been well discussed? I’ll stay with TMR (since they referenced you) and the other knowledgeable sites that have populated this scene since the beginning.
But, thank you Gareth.

2 Cris Burger September 6, 2013 at 9:53 am

I wonder if this ‘report’ is going to tout the tremendous opportunities of investing in ‘survivor’ Rare Earth companies for investors? Sooooooo many people/reports in the last several years did just that . . . before most of these companies lost a vast majority of their value.

3 Gordon September 6, 2013 at 10:25 am

The reason there is no investor interest is because of the lack of action to get some of the bigger projects up and running. An investor can only commit for so long before you have to move on. The industry make all kinds of noise about being tied to China, but does nothing back home. So this industry will continue to muddle along and in 2 years from now I will be reading the same type of articles as I ‘am today and did 2 years ago. Good luck.

4 Ryan Castilloux September 6, 2013 at 1:07 pm

As the author of the above-discussed report, I would like to chime in on a couple of the comments and clarify some of the misconceptions noted by commenters. I appreciate the thoughts shared thus far.

Tim: Our report does not simply round off well-discussed ideas, but instead puts quantifiable data and fact to much of the hearsay and unfounded opinions that float around the industry. For example, we don’t simply acknowledge the lack of processing capacity outside of China, we quantified it. We don’t just acknowledge the problems with junior’s basket price discounts, but instead propose separation costs for the different REE concentrates they will produce and discount their basket prices using a proprietary methodology. We don’t just acknowledge the misleading metrics and ambiguous reporting practices that have pervaded the industry, we detail each one specifically and highlight which ones are in discordance with NI 43-101 or other standards. All of this (and much more) are contained within the ‘stage-setting’ Landscape portion of the report whereas the real meat and potatoes are delivered in the Analysis. In the Analysis we offer a normalized cross-comparison of the projects, which is something you will not find anywhere else, especially on a free site. I appreciate your skepticism, however, and hope I’ve helped clear things up a bit.

Cris: Our report does not highlight opportunities to invest in survivors but instead ranks the landscape of projects on a set of comparative parameters to examine how each project stacks up. We acknowledge the existence of different flavored projects for different investor appetites. Our ranking does a nice job of highlighting which projects hold the greatest economic promise, and, recognizing that investors are as unique as the projects themselves, we provide all of the underlying data so clients can spin their own comparison if they so choose. If by ‘survivors’ you mean investing in the losers of the shakeout, which will be presumably low-cost, we do not propose this either. As the shakeout escalates the winners will seize the market’s limited demand thus even under new management or under the direction of a new PEA, PFS, or FS, the losers will find no demand in the medium to long-term (15 to 20 years). Not to say, however, that some of these projects won’t resurface in the distant future, so if you’re looking to go decades-long on one of today’s losers your grandchildren may thank you in 2030.

Gordon: Thanks for your thoughts – I agree and disagree. I believe the industry has reached a precipice of sorts and can no longer afford to keep it muddling forward. Take GWMG for example, which has decided not to invest further in Hoidas Lake as per its recent MoU with Star Uranium. Or Canada Rare Earth Corp. which has left the future of its three projects up in the air while shifting its focus to the development of rare-earth processing facilities with partner CEC Rare Earth Corp. Keep an eye on the juniors with multiple projects as we believe some of their projects could be the first to be shaken-off (or put into hibernation) as companies focus their limited resources on developing their flagships.

5 Tim Starns September 6, 2013 at 1:39 pm


Thanks you very much for your response and clarifications. But, you may understand my skepticism amid the myriad of reports and assessments that have been read and digested over the past 5 years or so, often causing much indigestion. And though this report may be within the financial grasp of some investors, I’m not one of them. Still, thanks.

6 Greenfields September 6, 2013 at 9:58 pm

Looking at the comments, I think there is some misunderstanding about the report. I have to say I found Ryan’s report one of the most honest and refreshing in the rare earths sector. One I wish I’d written myself.

It’s my view that the industry really has to focus much more aggressively on the end game – the production and cashflow. There is too much focus on resources etc, which is not really the issue. Ryan’s report makes an admirable attempt at doing this, taking each project through to its logical conclusion and really scrutinising the economics. Whilst there are many different ways of doing this, which would provide different results, this doesn’t mean it shouldn’t be done at all.

He addresses the elephant in the room that a lack of easily comparable metrics (in my opinion basket prices and costing methodologies are a particular concern) in the industry means a lot of information is misleading (if not intentionally) and unless this is sorted out investors and financiers will not have confidence in these projects. Again, there may be many alternate metrics that people prefer (I have some of my own, it appears TMR do too, and I assume most investors have there’s too), but the point is doing it in the first place.

This is not an investor stock picking report, its a serious piece of analysis, almost to academic levels in its analytical rigour. As an industry we need these kind of reports.

7 Allan Branch September 7, 2013 at 8:21 pm

Analyses likes these are invaluable and I for one appreciate the work done by Ryan to generate his list and by Gareth to summarize it for us. Congratulations to you both.

One missing factor, and critical to my perspective on who wins in the end, is the quality of management. In my opinion too many companies are run by good general managers instead of good executive managers. All companies need both, but they are different jobs and different people. A good general manager will take a $1,000 and make it last longer, go further, do more with it, than a poor one. Those people should run production plants. A good executive manager will take $1,000 and turn it into $1,000,000. Those people should run companies. (A bad manager of either kind with take $1,000 and turn it into zero.)

My prediction is that if the Adamas list turns out to be wrong in the future, it will be the CEO making the difference. We’ve seen some of this already in this sector. Quantifying the management is harder than the financial metrics traditionally used of course which is one reason they are missed off analyses.

That said, I repeat that the continued move from speculative reports and opinion, to solid analysis is fabulous to see.


8 David September 8, 2013 at 5:10 am

I have not seen the report but I thank Gareth for giving an insight into what is in it; and the authors for having the courage to come our with it. I have a feeling that I would find it very a compelling and refreshing reading.

For quite sometime you could tell the dishonest ones from the fact that they would try to hide the more common metrics as much as possible while touting the grade (at first they were touting the grade). You can now see them continue to reference their late 2011 or early 2012 PEA IRRs and NPVs even when within these, their current basket prices were considered too low, they did not even include them in their sensitivity analyses. I need to congratulate Matamec for being honest with their FS results because I am sure it is far much worse for many others.

It became a bit quite obvious to me, and I am sure to others as well, that the more potential by-products you have the more likely your are to survive. I can see, and I believe that so do many others, that those with more by-products can very easily have far much better economics (if they can technologically make it) even when they have – for example relatively very low grades.

What I am seeing now, and I guess so do many others, is this focus on very high grades of HREOs within the REOs mix when actually for many of these deposits, it is just yttrium oxide making the difference. Yttrium oxide which is for example currently 100-200 times less expensive than scandium! and maybe projected to remain at least 100 times less expensive in the medium to long term. What could happen to these projects, in the medium term, when there is a yttrium oxide glut – or when much cheaper yttrium oxide from those with many other by-products, becomes available to the markets? Or is this not all possible?

Given the calibre of the people contributing to this stream, I need not go further; and i hope that the Adamas report did address this as well as many more.

9 David September 8, 2013 at 5:35 am

I forgot to congratulate Arafura for their courage and honesty as well; which seems to be very largely lacking in the sector and is probably contributing to investors feeling being fleeced and fleeing the sector. Arafura has the courage, in these difficult times to show how its basket price is being affected by the prevailing REO prices and doing so regularly. This is the kind of total responsibility that lacks for many and, in my humble opinion, deserves being applauded.

I would like to share a rather interesting fact sheet I landed on recently. It is for a company in Burundi. I have no connections to them at all (though geographically I do not live far from them) and I do not vouch for the correctness / accuracy of what they are presenting. But it is

54.3% TREO, 1.1% HREO, 15.9% CREO and C$ 4.5M (four point five million) CAPEX!

Not only is the combination of their key metrics even ‘funny’, it becomes even more interesting because their “ore-value” and “capital intensity” parameters are actually magnitudes of desire-ability higher than for all the rest of the RE projects worldwide!

10 James September 8, 2013 at 10:20 pm

Having read the Adamas report, I congratulate Ryan on a job well done. Pulling together a very disparate set of information into a comparable set is both difficult and valuable. As Greenfields mentions above, its analysis, not stockpicking. I don’t agree with all the rankings, but I never do, and I can understand the methodology well.

On the theme of “survival”, the features that are picked as of most value in a project by conservative industrial consumers of REE’s are quite different to those picked by shorter term investors. The progress made by Matamec is a good demonstration – the Kipawa deposit is one of the lowest grade in the sector, yet they managed to attract Toyota as a partner.

REE consumers are seeking a low risk alternative to Chinese REE’s. So on top of deposit metrics, access to chemicals, access to skilled labour and access to sensible and robust transport routes are all key. Ability to finance is also a critical question for survival – companies with enterprise values in the low tens of millions have trouble with presenting a credible story to raise the billion needed for development.

Congrats again to Adamas for some well considered and presented work.

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