Statisticians can make a wonderful living, but sometimes statistics can skew the real story. The statistical misrepresentation that will be reviewed here is the light rare earth elements [LREE] vs. heavy rare earth elements [HREE] story, or more importantly the critical vs non-critical rare earths story. In order to keep this article concise, it will be focused only on the two large players: Molycorp (NYSE:MCP) and Lynas (OTCPK:LYSCF) that are closest to market. Similar analysis can be applied to any of the remaining smaller scale or longer horizon miners.
LREE vs HREE, why does it matter? Price, price, and price. The whole reason investors care about limited supply and critical demand (Military Defense/Technology/Green Energy) is due to its effects on the REE’s price. Since LREE’s are more common and less critical, their fundamental price will be lower than HREE’s. This broad division of REE’s based upon where they fall in the periodic table, however, does not fully coincide with price. LREE’s, Neodymium and Praseodymium are critical to a number of technologies and are in growing demand. This is why their prices are double that of other LREEs. In some ways, they are a mid-REE. Their critical nature brings them higher than LREE value, but their greater abundance keeps them below HREE value.
Truth be told, all REE production will be valuable to miners. While some substances may generate high margins, the others will be paying all the bills. This can be seen by comparing Molycorp and Lynas. For this example, both companies' phase 1 production rates were used, Molycorp at 19050 mt/yr and Lynas at 11000 mt/yr. A quick and dirty statistical analysis would show Molycorp with 16.2% and Lynas with 24.5% of total magnet critical and heavy rare earths.
Once an investor looks at the total volumes produced, the story becomes clearer. Molycorp would produce 3086 mt/yr of critical and heavy rare earths, and Lynas will produce 2690 mt/yr of critical and heavy rare earths. Not only will Molycorp produce 15% more critical and heavy rare earths, but they will be able to produce all of their production for 1/2 the cost of Lynas.
To show this point a bit clearer, let's try look at statistical apples to statistical apples. Step one to making an apples to apples comparison is to shrink Molycorp down to Lynas’s size. Since Molycorp will produce more than Lynas, let’s remove 8050 mt/yr of light cerium and lanthanum from their production so that both companies now produce 11000 mt per year. Step two is to recalculate each company’s magnet critical and heavy rare earth percentages. Looking at Molycorp’s remaining production, they would be producing 28.1% (not 16.2%) of total magnet critical and heavy rare earths. Lynas would still be at 24.5% of total magnet critical and heavy rare earths since there size did not change. Not only would MCP now appear to beat Lynas by 15% when matched head to head, but they would still be producing at half the cost of Lynas, and they would still have an additional 8050 mt/yr of light rare earths to sell and generate additional profits.
- Molycorp will have more critical and heavy rare earths by 15%
- Molycorp will have more light non critical rare earths by 92%
- Molycorp’s TOTAL production cost will be half
- Only their statistical LREE/HREE percentage will be lower
LREEs are like odd jobs, bonuses, and overtime pay. At first they do not look like a lot of extra money, but at the end of the year once all the bills have been paid, they added up to almost all of your profits and you were very glad to have them. The statistics may make Molycorp look like an LREE play, but these are the folks who will be providing the world with the largest portion of magnet critical and heavy rare earths outside of China during the early phase of this long term rare earth run.
Disclosure: I am long MCP.