As China's rare earth production winds down, other sources worldwide could shape up to reward early investors. But there are different ways to play this [slowly] growing market. Zachary Schumacher, international market analyst with Asian Metals, tells The Mining Report how investors can go medium or long on rare earths, and why joint venture and offtake partnerships are the biggest factors in creating value.
The Mining Report: Zachary, it's good to have you with us. Many rare earth element [REE] projects are uneconomic at current REE prices. Please give us your "state of the sector" address.
Zachary Schumacher: There are a lot of challenges in the market. There's a good portion of projects that are uneconomic. Current REE prices make it difficult to justify projects. On top of that, there are some environmental issues with processing. Until we see a real change in the market, very few projects stand out.
TMR: Prices for heavy rare earths [HREEs], at least, have shown some signs of price recovery. What's most likely to create shareholder value in REE equities: higher REE prices, joint venture [JV] offtake agreements, vertical integration or perhaps other factors that you deem to be relevant?
ZS: That's a difficult question. There's a timeframe for a lot of things. Long-term investors would be more interested in higher REE prices. If you're looking for a project to go into production, JV and offtake agreements are important.
TMR: Interesting. Is that because there's just not a lot of easy access to capital to develop these projects and JV partners provide that, or is it simply about confidence that a given name is on board?
ZS: JVs give access to more capital, which eliminates a huge barrier. Processing costs are a huge capital expenditure for REEs. It also provides somebody who arguably is going to be consuming or utilizing the material in some other aspect in the production chain. It provides a level of technical expertise that reassures investors.
TMR: Are there any companies outside of China that you consider vertically integrated?
ZS: Molycorp Inc. (MCP) is close, but its processing is in China. Rhodia Inc., which is part of Solvay, would probably be the closest. It does some of its processing out of La Rochelle in France. There is some internal consumption, and some is sold downstream. There are a few projects styled to be vertically integrated that aren't active right now.
TMR: What should an investor who is looking to gain exposure to this sector look for?
ZS: A lot of projects are suffering from being uneconomic at current prices and demand. There are two big issues: where you do processing and how you do processing. Also, how cost effective is your processing and how much material can you process-what volumes are you looking at?
TMR: What's a suitable capex range?
ZS: Projects can range from $300-400 million [$300-400M] or higher. Anything below $300M is more plausible.
TMR: I don't think a lot of investors know the story with Texas Rare Earths. Can you tell
TMR: Even with the poor performance of the REE sector during the past few years, new players continue to enter the space. Does that mean there's still money to be made?
ZS: Maybe it's the other way around. It may be that mining companies recognize that there is still interest in the market from investors. Is there still money to be made on the investors' behalf? Yes. There's definitely a level of opportunity out there, should a company get far enough to get into production.
But is there still room? The market is flushed with JV companies that are not quite in production, and even new ones. The difficulty of getting one of these companies into production may be insurmountable even for great projects with good management, good background and low capex. There may be a bit of overconfidence among some people going into new projects.
It's a two-sided coin. The REEs market is still suffering from the doldrums of the bubble popping. If prices were high, any of these projects would be plausible to come on-line. For the short term, it looks like a number of these projects have no chance.
There's a timeframe where you can see that there's growing demand for these products. Look at neo magnets: There's very few ways to avoid using them. That market's big in the U.S. The magnet market hasn't shrunk. They haven't had any incentive to leave now that prices are falling. It just makes their production cheaper. At a certain point you're going to see a flattening out of price. Long-term demand for magnets in a hundred industries will likely continue to grow. There's space for a company or two outside of China to produce, to do processing and to be a very promising investment opportunity for plenty of investors. It's finding the right one. That's been the game for the past two years.
TMR: If getting a mine into production was the only way to make money as a mining investor, there wouldn't be a mining sector. There's such a small percentage of any mined commodity that actually reaches production. If there was a sudden, dramatic swing again in REE prices, investors could make money on some of these names even if their chances of getting into production didn't increase at all.
ZS: That's definitely true. The perception that the market is not doing very well is driven by REE pricing. Consumption is still there. People who consume the material, they recognize that they need to use it. It's in their cost analysis. They anticipate long-term projections for these materials. Not because the market's going to flatten out and disappear, but because they need to use it and everybody else needs to use it. If you do see a turnaround in REE prices, there are a number of companies that could benefit investors-even without the project going into production. Investors can still tap into the growing market.
TMR: The message then to an investor is to be long REEs.
ZS: Yeah. Be long or find your moment. Wait for the moment when you see REE prices bottoming out. And we may be fast approaching that level. The future of REEs isn't bad.
TMR: Thanks, Zachary.
This interview was conducted by Brian Sylvester of The Mining Report.
Zack Schumacher joined AsianMetal Inc. as a rare earths and tech metals analyst in 2013. He covers fluctuations in the prices and consumption of these materials and manages several indices that list current market prices. Schumacher received his Bachelor's degree from the University of Pittsburgh in international relations and Chinese and completed his Master's of International Business from New York University.
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Namibia Rare Earths Ltd. Streetwise Reports does not accept stock in exchange for its services.
3) Zach Schumacher: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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