The Billion-Dollar Rare-Earth-Mining Club

by Jack Lifton on October 1, 2010 · 22 comments

in News Analysis, Permanent Magnets, Rare Earths

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Today’s announcement by Arafura Resources, the Australian-owned and Australia-based rare-earth mining venture that it is in funding talks to raise A$1 billion (US$964 million) to develop its rare-earth mine, served notice upon the world of natural resources’ supply that yet another non-Chinese rare-earth project would need a great deal of money to bring its product(s) to the market.

By my count, Arafura Resources is the fifth rare-earth mining venture to ring the ‘above US$500 million’ bell in just the last two years. The first such was Australia-based Greenland Minerals and Energy, which has said it will need US$2.3 billion. Next was Lynas Corp., another Australian venture, which has raised more than US$600 million so far on its way to production. The newest big spenders are America’s Molycorp, which recently raised US$400 million in its recent IPO, but said it would need more than US$500 million, and most recent of all, Canada’s Avalon Rare Metals, which filed required Canadian Securities Commission disclosures documentation, stating that it may need as much as C$900 million for its Northwest Territories project.

These ventures all have one thing in common, which is that most of the money required by all of them is admittedly required just to produce ore concentrates. The problem with this goal, is that, as for most mines in general, but for rare earth mines in particular, the ore concentrate stage is the lowest point in the value chain.

The Australian rare-earth expert commentator Dudley Kingsnorth, stated at the 6th Annual Chinese Society for Rare Earths Summit on August 3, 2010, that he estimated the total value of all of the rare-earth ore concentrates produced in the last calendar year to be south of US$1 billion. Let me point out here that it does not matter what the selling price of high-purity rare-earth metals may be, or may jump to, when you are valuing the ore concentrates from which they are produced. The value of the ore concentrates will rise much less than the price of the high-purity individual metals, because it is post ore concentration where most of the added costs arise.

If you believe, as I do, that the total demand for rare earths will no more than double in the next decade, then it is obvious that we are faced with a mining industry expansion which has probably too many new entrants competing to recover their cost of investment, from a relatively small total revenue pool. This means that there are already too many new entrants, and if all of them raise the necessary capital they believe they need, then some strategic investors will never see any profit.

Besides the problem of too many competitors chasing too small a pool of money, there is the problem that not all rare earths are as desirable as the others.

The most valuable rare earth in terms of total demand and total revenue, is the metal neodymium, the basis of 90% of the world’s rare-earth permanent magnets. Its price as a high-purity metal has been climbing lately, and almost all of the projected balance sheets and income statements of the rare-earth mining ventures are based on neodymium’s current high price. But common economic sense and the basic law of supply and demand tell us that if neodymium is overproduced, then its price at every point in the value chain will fall. If this happens, many of the business models of the members of the ‘billion-dollar cost club’ will fail to show a profit, no matter where in the value chain they are calculated.

The other economic curiosity among rare-earth mining ventures, is the belief by many of the miners that if they produce large quantities of the currently-highest-priced rare earths with commercial uses, the so-called heavy rare earths dysprosium and terbium, then the prices of those metals will stay high no matter what the excess of supply over demand might be. This is plain silly and misleading.

I have come to the conclusion that in rare-earth mining, outside of China, small is beautiful and the higher the proportion of heavy rare earths to total rare earths, the better for any venture.

There is no way that a non-Chinese rare-earth mine will be able to outproduce the Chinese mines in Inner Mongolia, in total production of eiher neodymium or lanthanum, the two most widely used of all of the rare-earth metals; but even the Chinese believe that they will not be able to meet the demand for dysprosium and terbium beyond this decade.

If the demand for dysprosium and terbium doubles, then there will be a major shortage of dysprosium and terbium beginning by 2015. I am betting that Chinese, Japanese and Korean investors will focus on neodymium and, perhaps, lanthanum only in the short term, but on dysprosium and terbium for the long term.

There are six rare earth mining projects being developed outside of China by Japanese companies, such as Toyota, Sumitomo, and Mitsui at the present time. I think that Japanese companies issuing letters of intent to rare-earth mining ventures in Australia and the USA are simply using the no-cost letters of intent as insurance policies, which they will allow to expire if and when their own mining ventures bear fruit. If the letters of intent are from Korean or Indian companies, then I would value them higher. I understand why the issuers of such letters want their identities kept secret – for competitive advantage – but I would feel that the letters were more valuable if I knew they were from Korean, Indian, or European stockpile agencies or industries.

This weekend I’ll write up my thesis on ‘right-sizing’ rare-earth mining ventures and post it here on the TMR Web site.

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1 Judy Sadlier October 1, 2010 at 10:11 am

I read that last week ACH bought, with 1 billion plus, a stake for the production of a Chinese rare earth mining company. I believe they do have that kind of cash. But now I see no mention anywhere of the transaction.
What do you know? Thanks in advance for your response. Judy Sadlier

2 fran October 1, 2010 at 10:48 am

MR. LIFTON–

GREAT ARTICLE.

i hope the many over zealous retail stock buyers heed your message.
i’m always amazed at the lack of use the public applies with the intracacies of basic arithmetmetic to understand all this.

3 Jack Lifton October 1, 2010 at 11:29 am

Judy,

Google “ACH and rare earths.” You will see that the press has confused ACH with its parent company, Chinalco, which, in fact, announced a 10 billion Yuan investment in a Jiangxi (province) company that is a tungsten operation but is apparently developing or has already developed a presence in rare earths. What i find interesting about Chinalco’s action is that it, Chinalco, was not originally annointed by the Chinese government to be a part of the consolidation of the Chinese rare earth industry. The originally named consolidators were BaoSteel, Jiangxi Copper, and China Min Metal. Chinalco has inserted itself in this process. If the 10 billion Yuan is only to develop the rare earths of the Jiangxi province company then it will be the largest single investment in developing rare earths ever anywhere in the world. This, alone, should give those who are investing in any one of the myriad of tiny rare earth companies outside of China some pause. It’s probably impossible to match that kind of firepower from private equity. Don’t say i didn’t tell you so.

4 Bahamian Mining Systems October 1, 2010 at 1:25 pm

Jack:

As you said in your article from “The Importance of Rare Earth Elements” we must industialize our own resources not have to depend on the World of Industry from other countries. That can hold a world at bay because a fishing trawaler was arrested by another country and stop the glbal market! Unlike DeBeers controling the diamond market, or the global oil barrens!

Your Quote “The USA must now re-industrialize to save ourselves and this means that we must produce domestically whatever we can to be self-sufficient. THIS IS THE ONLY PATH TO THE CREATION OF WEALTH. After we re-industrialize we can resume the path to helping keep ourselves and the world safe from self-immolation in resource wars.”

Amen

5 Kyle Mohamed October 1, 2010 at 3:05 pm

Mr Lifton,

I would just like to take this opportunity to thank you for your continued research and thoughts on the happenings in the REE world, I read everything with interest and it has really helped. I’ve been investing for a year and a half and following rare earths and yourself since the start of this year.

I wanted to comment today as I am one of “those who are investing in any one of the myriad of tiny rare earth companies”, and was wondering what your opinion is on the following: if the major indices crash,will it have a major effect on the share price of the small REE companies, given that they are, well, smaller?

Kind regards,
Kyle

6 Chris October 1, 2010 at 3:33 pm

” Professor Strange added: “I am sure that the demand for, and price of, rare earths is going to rise and so this is likely to become an increasingly profitable business. With this in mind I would certainly recommend that countries with such deposits build up their extraction facilities as soon as they can.
“The UK can’t do anything directly as we don’t have any rare earth deposits in our territory.
“The best we could do would be for a British company to go into partnership with an Australian or American one to accelerate extraction of their deposits.”
Read more: http://www.techeye.net/hardware/china-faces-fierce-competition-from-japan-over-rare-earth-supplies#ixzz118ZOPNix

To this day, i do not understand why Ucoreraremetals does not even attempt to get their name out there being they are moving to pre-production studies and would be a heavy rare earth deposit, not the soon to be over-supplied light rare earths.

7 DAN October 1, 2010 at 4:18 pm

Hi Mr Lifton,
How does these core samples compare with other companies and sites?
Great Western Minerals
Douglas River Project, SK, Canada
Sample 85121(ppm) Sample 85122(ppm)
dysprosium 8,998 7,609
terbium 1,183 1,590
neodymium 24 64
lanthanum 6 6
Thanks

8 John Petersen October 1, 2010 at 5:03 pm

Jack, It looks like you’ve joined me in the “I love this industry but think a lot of the players are doomed” club. It hard to draw that fine line where you praise the good and pan the silly without seeming like you’re panning everything. Maybe I can give you some pointers next time we meet.

9 Mustaque Ahmed October 1, 2010 at 5:15 pm
10 Rick Parton October 1, 2010 at 7:57 pm

Dear Mr. Lifton
An interesting article, and I would not quarrel with much of the commentary. In addition to the previous comments, it strikes me, however, that you have misrepresented the position of Lynas. Based on their published information, last years they raised A$800 million to complete the development of their mine and the construction of the refinery in Malaysia. They have reported that the projects are on time and budget, with refined product to be available towards the end of 2011. Additionally, they have reported signing a number of firm purchase/sales agreements with Japanese and other customers. If this is correct, it seems that you have indeed painted them with the same brush as Greenland Rare Earths, Avalon Minerals et al. Do you have information that I have not seen?
Rick Parton

11 Thaidiamond October 1, 2010 at 8:46 pm

“By my count, Arafura Resources is the fifth rare-earth mining venture to ring the ‘above US$500 million’ bell in just the last two years.”

How does this make Rare Element Resource’s Bear Lodge project in Wyoming look?.

Just this past week they released their PEA that estimated CAPEX mine start up costs at a measly $87 million.

Discounted cash flow analysis of this scenario, using the last 3 historical average REE bulk mixed concentrate prices and capital and operating costs, yields a 40% IRR and a NPV of US$213 million at a 10% discount rate.

Moreover , current “concentrate” is some 360% higher than this historical 3 year average. Not surprising John Kaiser noted they’re estimates employed in the scoping study were too conservative.

Nonetheless, their project is very robust—even give the admittedly too conservative parameters.

12 Regan October 2, 2010 at 2:25 am

Hi JL,
Interesting article. I know that no Australian companies hire you as a consultant, however I would have thought that factual reporting would be part of the ethos of the reporting industry that you work in rather than on a case by case or ‘working relationship’ basis.

I find that company announcements from ASX listed companies are reported through ASX.com.au, most reliably, and whilst I am sure that Bloomberg would love to be a front runner on company announcements, it seems that they haven’t quite got that right yet and still just report stories on companies that have been written by their journalists. So please stick to official company announcements when reporting what companies officially announce themselves and what are 3rd party stories written about companies. As of today ARU have NOT reported this, Bloomberg wrote a story that may or may not be right or wrong. The context of a quote about arranging a capital structure of financing and a throw away headline, do not imply that they are correctly linked or even factual.

“These ventures all have one thing in common, which is that most of the money required by all of them is admittedly required just to produce ore concentrates.”
This statement is factually wrong. Using Lynas and their Mt Weld project as an example, since it has the most accurately disclosed figures; approx. $100 million is for the Mt Weld concentrating facility and the rest is for their Malaysian Processing plant to produce high purity, separated RE oxides or other inorganic chemicals tailored to their customers requirements. I believe similar ball-park ratio’s of CapEx are emerging from MCP and ARU in order to produce separated, purifed RE inorganic chemicals, NOT concentrates.

Your statement may relate to Greenland Minerals (GGG.ax) however, one case does not make a rule that you can hap-hazardly apply to all other companies.

Please Jack you are an experienced, sector consultant. The media run with what you say, regardless. Please ensure that your comments are backed by facts and not biased towards professional consultancy fees.

Regards.

13 Kris October 2, 2010 at 5:11 am

Regan,

http://www.arafuraresources.com.au/
I see a A$1 billion headline there right away…. Maybe the company itself should be more careful to avoid misunderstandings? I agree with your 3rd alinea though.

Regards,
Kris

14 Regan October 2, 2010 at 5:34 am

Kris,

I’m not debating any figures as none have been released officially by the company via the ASX platform. The total economic cost of a project and the breakdown into ARU-spend and other stakeholder-spend is totally unknown and will not be known until an official ASX release is made. A 3rd-party news story is not an official company release and JL should know that.

Just as the latest 100’s of stories about Japan and Chinese diplomacy are not missives of the respective countries. They are 3rd party representations of here-say, of various levels of reliability.

Regards

15 Wendy D October 2, 2010 at 2:41 pm

I think it is unfair to denigrate Jack Lifton because he looks at the REE industry rather than at individual players.

You may be here to promote your own little pet, and I am happy with the progress of my little pet.

But Jack gives the overview which it is so easy to miss when focusing on just one or two REE juniors.

And at the end of the day, concentrate is concentrate and even refined and separated rare earths are only refined and separated rare earths. What we are missing in the west is not just supplies of rare earth elements and metals, but the added value supply chain which turns the REEs into something useful. The US used to have it all. They let it go because it was so easy to just buy from China….and now there is very little expertise left outside China to make useful things out of REOs and REEs. And THIS is where the profit is. Added value.

So forget the concentrate producers. You might equally forget the separated REE producers, because most of their market is in China.

What we need to be looking for is value add all the way down the line – the way it USED to be done in the US: mining, concentration, separation, manufacture.

Only one of the current crop of REE hopefuls can do it. Just ONE. And even that one struggles for funding, because no-one believes what they are doing is of any real significance.

And in the same market which reckons that Molycorp was too expensive at its IPO, what hope do any others have?

The West really ought to wake up. They really shouldn’t leave it until TV goes back to black and white, the Prius is no more, power stations have no option but to use fossil fuels and Blackberries are a thing of the past…

16 Jack Lifton October 2, 2010 at 4:39 pm

Wendy D (and everyone else)

Thank all of you for your commentary. Wendy D is, from my point of view, entirely correct. I try to take a holistic approach to my sector analysis. TMR is not biased towards any one company or any one approach to developing a business. We, the two founding principlals, operate by a single principle, which is that we are first and foremost an information site and that any analysis of our own or of anyone else published on this site will always be signed by the analyst who will always be required to tell all of us if he or she is being paid in any way by any person or company mentioned or implied in the analysis.

By the way being paid does not necessarily imply being biased. The disclosure is just another factor that a reader can utilize to judge the independence of an analysis for themselves.

I for example sincerely believe that at this moment too much money is chasing the large REE projects and too little the smaller ones. I think the emphasis is on the wrong rare earths. If this is a bias then I am indeed biased in my belief about what the future direction of REE production outside of China should be.

Ad hominem (i.e., personal) attacks do not phase me or merit a response. Disagreements with my conclusions based on numerical data or market intelligence are always welcome. I can and do change my mind when strong evidence of an appropriate kind is produced against my position. I ask you for the courtesy of doing the same.

Thanks for reading

Jack Lifton

17 Kris October 3, 2010 at 2:58 am

Wendy D,

I’m not sure if the market doesn’t want to invest in a Western REE value chain, though I do think the market really has a hard time to understand this whole REE-business. You only have to look at the differences in market cap of MCP/AVL/NEM/GWG to see what I mean. IMO there’s still a lot of work to be done for people like Gareth, Jack and others who know what they are talking about.

When I use my knowledge of eco 101 in the REE-sector I always say to myself: “Kris, be careful, the market can stay irrational longer than you can stay solvent and the REE-market won’t be an exception…”

18 Regan October 3, 2010 at 4:35 am

Hi Jack,

Thanks for your reply, you stated that you are open to further analysis of official facts and figures.

In contrast to your broad sweeping statement “These ventures all have one thing in common, which is that most of the money required by all of them is admittedly required just to produce ore concentrates.”

I am using Lynas Corporation Limited as an example as they are the most advanced and have the most accurate figures in the public domain. From slide 35 & 36 from the Lynas Presentation at the JP Morgan Australia Corporate Access Days, New York; http://www.lynascorp.com/content/upload/files/Lynas_Corps_J_P_Morgan_Presentation_September_New_York__FINAL.pdf.

You can see a breakdown of the costs involved in producing a RE concentrate and those required to further process this material into higher value, separated and higher purity rare earth inorganic chemicals. Both Operating costs and Capital costs are shown. The vast majority of these costs incurred arise from further processing of rare earth concentrates to specific rare earth chemicals and not those associated with just producing a low-value concentrate.

Also in rebuttal to your opening statement of your original text, “Today’s announcement by Arafura Resources”, which then contains a hyperlink to a 3rd party article written by an author at Bloomberg. This is not an announcement by the Australian-owned and Australia-based rare-earth mining venture, Arafura Resources Limited! This is an article by Bloomberg employee, Jason Scott.

I am not concerned with any analysts specific opinion towards their own interests. It is human nature to “talk one’s book”, at least Mickey Fulp says it directly and associated caveats.

What concerns me, is the basic misrepresentation of reality, either intentionally or unintentionally, by senior, respected consultants in the sector. This is especially true when you are in a senior position and other media sources without your natural levels of due diligence are want to use what you say as fact rather than as an individual’s personal opinion and further propagate the spread of mis-information.

Regards.

19 geoff October 3, 2010 at 7:30 am

It is important to go back a bit here.. from memory Jack mentioned a few years ago about the demand for REE’s is inelastic and an increasing price is not likely to be detrimental to demand.
Indeed some industries will pay almost anything to get supply or risk failure of their own technological advances.

If this is true; then the way our world is going increasing demand for REE’s will continue.

It will be first to production wins as companies may well have to sign long term agreements just to guarantee supply. To bet on small explorers at this stage is really betting that one of the larger ones will fall over, this is a brave punt (remembering that if it looks like an oversupply money will dry up).

China has shown, imho, that they are prepared to use REE’s as a leverage tool and they are not taking (or attempting to take in Lynas) stakes in majors for fun.

Having met the ECE people, I am firmly of the opinion that China Inc does want to try and manage global supply of REE’s.. the reality in my view is that the market will compete very hard to try and lock their own controls and the smartest way is to take stakes in some of the key players; this is where the action will be.

We also need to look back at Uranium a few years ago and the market reacted in supporting those with the earliest and most likely projects.

20 Jack Lifton October 3, 2010 at 9:41 am

Regan,

I have seen literally dozens of presentations by rare earth juniors over the last few years. I remember that I saw one in 2005 by Lynas, into which a company then called Sinogold had been morphed. That business model called for ore to be shipped to China for concentrating and processing.

As of today, it is my understanding that the current Lynas has at least the first year’s ore now above ground and awaiting the completion of a concentrating plant in Australia. That concentrate will be shipped to Malaysia, it is my undertsanding, when the Gebang operation is ready to receive it.

Only when the actual ore concentrate begins to run in the new not yet, as of this date, built separation plant will Lynas know if the process “scales up.” Then if it does scale up, only then will Lynas know how efficient its separation and purification processes are.

I have been the CEO of a chemical engineering/manufacturing operation, which was an automotive supplier, and I can tell you that Robert Burns would have made an excellent ore processing analyst, just from the fact that he said that the best laid plans of mice and men often go astray.

I weigh cost figures in company presentations carefully and assume they are wildly optimistic. Be aware that every institutional investor and every analyst does the same. It is predominantly small investors and company representatives that tell you that a process technology is “well-known” or that “they have a new process that solves the old problems” or that “their ore is just like that at Bayanobo and thus its process technology is well known.”

The evolution of Lynas’ presentations over the last decade shows that the company’s understanding of the rare earth mining problem was evolving. If you are certain that Lynas is now all set and all chemical engineering problems can be solved simply by stating that they are solved then, unless there is a currency inflation, or a strike or civil unrest in Maylasia or the Chinese, who clearly know how to do it, ramp up production then Lynas will have solved the world’s rare earth supply problem if there is an impending future shortage of lanthanum and/or neodymium.

Don’t forget that Lynas has also announced that “it is developing” nearby deposits that analyse for significant quantities of heavy rare earths. Perhaps then after the current deposits of light rare earths are brought into production, then the totally different ore bodies containing the heavy rare earths can be brought into production in another plant built on the Gebang site someday, and the “projected” shortages of heavy rare earths, which, in fact, seem more imminent to me than those of the light rare earths, will be solved providing that Lynas’ technology works economically. Or maybe someone else will bring a heavy rare earth operation into economic production first, and so on, and so on.

I still think that there are too many large scale rare earth mining operations being developed and that almost all of them are deficient in the key heavy rare earths, dysprosium and terbium.

The market will sort them out through the brutal process of the survival of the profitable.

21 Chris October 4, 2010 at 1:00 am

Mr. Lifton, i own UCU.V and after having saw your comments on it, i was even more comfortable of my choice. I understand exactly what your getting at with Lynas & i thank you for all the knowledge you share.

” In other news, I recently just returned from the Bokan Mountain project in Alaska, owned by Ucore Rare Metals (TSX.V:UCU). If I had both the capital and the stamina I would buy Bear Lodge and Bokan Mountain and produce from them the entire range of rare earth elements (‘lights’ and ‘heavies’) in amounts that would satisfy US demand in total. With the surplus I would export to Asia the heavy rare earths that the Chinese, Japanese, and the Koreans need today and increasingly will need in the future. I would construct two separation plants, one at each location, and one refining plant to serve both.

The USA would then be independent of the need for foreign sources of all of the rare earth metals, and its rare earth permanent magnet industry could be restarted.

In the near future I will tell you about my trip last week to Bokan Mountain, and my discussions there with Jim Barker and Tony Mariano, on the sites of some of the richest samples of heavy rare earths in the USA. The extent of those minerals and an appropriate metallurgy is to be determined, but I think that Ucore’s deposits, when fully explored later this year, could make the USA independent of the rest of the world for its heavy rare earths. ”

http://www.barnswood.com/tmr/wp/2010/08/some-thoughts-on-rare-element-resources-bear-lodge-project/

22 Chris October 4, 2010 at 10:42 am

” …America’s needs for light rare earths will be oversupplied by Molycorp as will Australia’s by Lynas in a massive way. For the heavy rare earths, America’s needs can be meet and exceeded by Ucore Rare Metals and Rare Element Resources. The needs of China, Japan, Korea and India for heavy rare earths can be met by the Canadian and African operations of Great Western Minerals Group, the Canadian operations of Avalon Rare Metals or Quest Rare Minerals, and the southern African operations of Frontier Rare Earths and Tantalus Rare Earths…”
http://climateerinvest.blogspot.com/2010/09/rare-earth-metals-chinese-institutional.html
———————————
Frontier Rare Earths Plans IPO :

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=afImIIhujT9g

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