An Update On The Rare Earths Sector And Some Promising Rare Earths Stocks To Consider

Jun. 19, 2020 4:56 AM ETALKEF, APAAF, ARAFF, AVLNF, DY, LYSCF, LYSDY, PKREF, REEMF, SHCMF, TMRC, UURAF, UUUU, Y, AVL:CA, EFR:CA, UCU:CA, SMY:CA47 Comments36 Likes

Summary

  • A brief review of the rare earths sector and latest news, including the US rare earths funding bill.
  • A look at some promising rare earths miners with projects in USA, Australia, and Canada.
  • Rare earth sector risks and further reading.
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This article first appeared on Trend Investing on May 19, 2020; therefore, all data is as of this date.

Last week, the rare earth's sector got a significant boost as US Senator Ted Cruz lodged a bill with the US Senate to support the US rare earths industry. Today, I take a look at what this may mean for the rare earths sector and what stocks may be possible winners should the bill be passed.

For a background on the rare earths sector, investors can read my past article:

A brief review of the rare earths sector and latest news

Rare earths are used in most modern day technology

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The EV boom is expected to boost demand for valuable NdPr used in magnets for electric motors

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Global rare earth miners (China dominates)

At this time, about 80%+ of rare earths come from China. China's major rare earth mine is Baiyun Obo, located in Inner Mongolia. It is the world's largest known REE deposit. Reserves are estimated at more than 40 million tons of REE minerals grading at 3-5.4% REE (70% of world's known REE reserves).

The giant Baiyun Obo rare earths mine in Inner Mongolia

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China's listed rare earths companies

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Outside of China, there are only two global rare earths producers - Lynas Corporation and MP Materials. They are discussed below. The rest of the rare earths companies discussed are still in the development stage, typically developing and/or waiting funding to make the next step to production.

Summary of major rare earth global projects

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China dominates global rare earths production

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US rare earths funding bill

As reported on May 13, 2020, by Reuters:

Aiming to thwart China, U.S. senator pushes rare earths funding bill. U.S. Senator Ted Cruz introduced legislation on Tuesday to help revive the U.S. rare earths industry with tax breaks for mine developers and manufacturers who buy their products, the latest attempt by Washington to break China's control over the strategic sector. China is the largest global processor of rare earths, a group of 17 minerals used to make electronics and military equipment. Cruz's legislation, if approved, would let mining companies deduct from their tax bill the costs of building rare earths mines, processing facilities and equipment purchases. It would also let electronics manufacturers deduct 200 percent of the cost of U.S. rare earth products, including magnets, a measure designed to entice companies to buy fewer of the strategic minerals from China and more from the United States.

Clearly, the bill has a good chance of success following on from the recent success of the S232 uranium bill which took almost 2 years for the successful outcome.

Who wins

The main winner would be the US rare earths miners/processors and a smaller win for US rare earths & magnet buyers. Australian and Canadian rare earth miners may also benefit.

A look at some promising US rare earths projects

MP Materials (private)

MP Materials owns and operates Mountain Pass, the only rare earth mining and processing site in North America. MP Materials extracts 50,000 tons of rare earth concentrate each year but still relies on China to process the materials. However, MP Materials plans to have its own Heavy Rare Earth separation facility and has been awarded partial US Defense funding for such a facility at their Mountain Pass Mine in California. The above-linked report states: "MP will have to solicit the Pentagon again for construction-related funds." Mountain Pass plans to have an output of 5,000 metric tons of neodymium and praseodymium (NdPr), starting in 2021. The Mountain Pass Mine has been a major US rare earths producer in the past; however, it included the failure of Molycorp in 2015.

The Company states:

MP Materials produces approximately 15% of global rare earth content.

Note: MP Materials is majority-owned by Chicago hedge fund JHL Capital Group and New York's QVT Financial LP, while China's Shenghe Resources Holding Co. Ltd. [SHA: 600392] holds a 9.9% stake.

Lynas Corporation [ASX:LYC] (OTCPK:LYSCF) (OTCPK:LYSDY) - Price AUD 1.88

Lynas is NOT a US rare earths miner; however, it recently won partial funding from the US defense for a heavy rare earths processing plant in Texas USA. Further funding along with their project partner (Blue Line Corp.) looks very likely. Lynas plans to ship rare earths from its mine in Western Australia for final processing at the Texas facility.

Lynas owns the Mount Weld rare earths mine (the Mt Weld concentration plant and the Malaysian advanced materials plant) which is currently in production. The company states:

The company's resource deposit in Mt Weld, Western Australia, is acknowledged as the highest grade rare earths mine in the world. The ore reserves are sufficient to sustain economic total production of 22ktpa REO for 25 years."

It also states:

they are the only miner and processor of rare earths outside of China, and the 2nd largest global producer of rare earths."

Current market cap is A$1.29b. 2020 PE is negative, and 2021 PE is 15.3. Analyst's consensus is a 'buy' with a price target of A$3.29, representing 78% upside.

Rare Element Resources (GR:R8V)(OTCQB:REEMF) - Price = USD 0.75

Rare Element Resources 100% owns the Bear Lodge Project in Wyoming USA, which has key critical rare earths as well as an estimated 40+ year mine life. The company states it has "unique and proprietary RE recovery/processing technology." Its grade is 3.05% total rare earth oxide [TREO].

The Company has successfully extracted NdPr from its ore using a Germany facility. The Company recently stated its plans for 2020 which include:

Additional testwork is planned for 2020 and will include the economic optimization of process steps, developing scale-up design criteria for a demonstration plant, and confirmation of operating and capital costs estimates."

Market cap is USD 78m. Investors can view the company presentation here.

The Bear Lodge Project in Wyoming USA

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Texas Mineral Resources Corp. ("(TMRC") (OTCQB:TMRC) - Price = USD 1.12/USA Rare Earth LLC

TMRC's flagship Round Top Project is located in Hudspeth County, Texas. The project is dominated by rhyolite ore enriched in rare earth elements (REEs), especially heavy rare earths (HREEs), as well as several other critical elements including lithium. It is reported that the Project "offers a 130-year supply of the critical minerals."

TMRC has a development agreement with USA Rare Earth LLC ("USA Rare Earth") whereby the partner will earn up to 70% interest in the Round Top project once its $10 million investment leads to a Bankable Feasibility Study. Thereafter, USA Rare Earth can earn an additional 10% interest with a $3 million cash payment to TMRC.

A recent Reuters report stated:

Texas Mineral Resources Corp and privately held USA Rare Earth said they will spend $10 million to $12 million to build the pilot plant in Colorado, near industry consultants and academics. The partners plan to move the pilot plant to Texas by 2021 and have full-scale production by 2023.

You can view an investor presentation here.

The Round Top Project in Texas has REEs, HREEs, and lithium

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Note: Another report explains:

USA Rare Earth is a privately held Delaware LLC that was formed specifically to develop the project to extract and process Round Top's valuable ore. One of the company's primary investors is Navajo Transitional Energy Company [NTEC]. Texas Minerals Resources Corporation had previously invested $25 million in the Round Top project, and is now a 20% junior partner in the endeavor.

Current market cap is USD 65m. Sounds a very promising multi-mineral project, noting TMRC will likely only be left with 20%, but dilution will be lessened due to having a development partner.

Round Top Project estimated source of revenues

Round Top Project PEA summary

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Ucore Rare Metals Inc. ("Ucore") [TSXV:UCU] [GR:U9U] (OTCQX:UURAF) Price = CAD 0.17

Ucore is a development-stage mining company focused on establishing rare metal resources with near-term production potential. With multiple projects across North America, Ucore's primary focus is the 100% owned Bokan-Dotson Ridge REE property in Alaska, USA. The Company states that its project has "the highest grade heavy rare earth project within the United States based on NI 43-101 standards... The Bokan property is particularly enriched with heavy rare earth elements, including the critical elements Dysprosium, Terbium and Yttrium."

Ucore has developed a new technology to process rare earths and other metals (lithium, cobalt, etc.) at a cost competitive basis. The potential exists also for recycling from scrap materials or tailings.

Current market cap is CAD 68m.

Peak Resources [ASX:PEK] [GR:M3U] (OTCPK:PKREF) - Price = AUD 0.02

Not a US project but plans for a US refinery. Peak Resources 75% owns its Ngualla Tanzania Rare Earth Project, which is one of the world's highest grade rare earth projects, currently at the funding stage having completed their BFS. About 90% of its revenues will be coming from NdPr, as it has developed a process to remove the less valuable rare earths such as cerium. The Ngualla project has ore reserves of 18.5 million tonnes at 4.8% REO; 22% of the total mineral resource, with an expected 26-year life of mine. CapEx is estimated at a total USD 366m (USD 201m for the mine and USD 165m for their US refinery). Production is forecast to be oxide - 2,810 tpa NdPr 2N; Carbonate - 7,995 tpa La; 3,475 tpa Ce, and 625 tpa SEG/HRE. The updated BFS resulted in a pre-tax NPV8% of USD 1.13b or USD 776m post tax and royalties, and a 24% post tax IRR. Forecast OpEx was USD 32.24/kg NdPr oxide for the life of mine.

Market cap is A$32m.

A look at some promising Australian rare earth projects

Back in November 2019, Reuters reported:

Australia, U.S., to cooperate on critical minerals, rare earths. Australian Minister for Resources and Northern Australia Matt Canavan and U.S. Commerce Secretary Wilbur Ross laid the groundwork for collaboration in financing such projects in talks in Washington, Canavan's office said in a statement. "This work will offer opportunities for new projects to get off the ground," Canavan said.

Alkane Resources [ASX:ALK] [GR:AK7] (OTCPK:ALKEF) - Price AUD 0.78

Alkane Resources Ltd has become a successful small gold producer; however, it also has a large rare earths project, known as the Dubbo Rare Earths Project, in Dubbo Australia. The Company has proposed a two-stage production start up so as to lessen the first stage CapEx from an estimated US$930M to US$480M. The Project is currently at the financing stage.

Market cap is A$484m, mostly attributable to their gold operation. You can read more here.

Arafura Resources [ASX:ARU] [GR:REB] (OTCPK:ARAFF) - Price = AUD 0.09

Arafura Resources 100% owns the Nolans rare earth project 135kms from Alice Springs in the Northern Territory of Australia. The Company states that "the Nolans project contains one of the world's largest neodymium and praseodymium deposits." The deposit contains a JORC 2012-compliant Mineral Resources of 56 million tonnes at an average grade of 2.6% total rare earth oxides (TREO). 26.4% of the mix is represented by NdPr. CapEx is estimated at $USD 680m for a 30+ year mine life with an estimated OpEx of US$6.23/kg TREO. The Company looking to raise funds to get the project started.

Market cap is A$88m. You can read the latest company presentation here.

Northern Minerals [ASX:NTU] - Price AUD 0.02

Northern Minerals owns the Browns Range heavy rare earth minerals project in Australia, currently in the pilot plant stage. Their majority rare earth is Yttrium, which is mostly used in LEDs and phosphors.

Market cap is A$73m.

A look at some promising Canadian rare earth projects

Appia Energy Corp. (CSE:API] (OTCQX:APAAF) - Price = CAD 0.17

Appia owns a high grade project in the Athabasca Basin area of northern Saskatchewan, Canada. The Alces Lake Rare Earths Project has average grade 16.65 wt% total rare earth oxides and a small but growing resource hosted 100% within 'monazite' ore, making it economic to extract. The Company is pursuing a low CapEx pathway to initial production via a third-party existing fully permitted plant and extraction facility in Saskatchewan. The Company also has its Elliot Lake Uranium-REE Project and its Saskatchewan Uranium Projects.

Market cap is only C$13m due to the early stage but looks to be very cheap given the projects it owns.

A grade comparison of global rare earth projects

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Avalon Advanced Materials Inc. (TSX:AVL) (GR:OU5) (OTCQX:AVLNF) - Price = CAD 0.06

Avalon Advanced Materials Inc. is focused on critical minerals including rare earths, lithium, tantalum, cesium, cobalt, nickel, tin. Avalon has adopted a strategy of using project partners to develop low CapEx, high value projects which can be put into small scale production quickly and cost effectively.

They own the lower Basal zone at the Nechalacho Rare Earth Elements Property in Thor Lake, Northwest Territories, Canada. On the upper zones (T-Zone and Tardiff Zone), it has a 3% NSR as it was sold to Cheetah Resources.

Current market cap is C$20m.

Avalon's projects

https://1wcm0741r5ad1d1r7j17fvxq-wpengine.netdna-ssl.com/wp-content/uploads/2020/05/Avalon-Advanced-Minerals-project-pipeline.jpg

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Search Minerals Inc. ("Search") [TSXV:SMY] (OTCQB:SHCMF) - Price = CAD 0.04

Search is still at the exploration and development stage with its flagship project at Port Hope Simpson (PHS) Critical Rare Earth Element District in SE Labrador. Within the PHS District Search's main discoveries are the Foxtrot Resource, Deep Fox, Fox Meadow, and Silver Fox deposits which contain rare earths including dysprosium (DY), neodymium (Nd), praseodymium (Pr), terbium (Tb), and yttrium (Y). The Foxtrot Resource covers a 70-km long and 8-km wide belt. At Foxtrot, the Total Indicated Resource is 7.392 million tonnes with grades of neodymium oxide (1,732ppm), neodymium (1,485ppm), praseodymium (397ppm), and dysprosium (191ppm). Other projects also have zirconium (Zr) and hafnium [Hf].

Market cap is C$9m.

Others

  • Rainbow Rare Earths [LON:RBW] owns the Gakara Project in Burundi, East Africa, which is the highest grade rare earths 'producer' in the world with in-situ grades in the range of 47-67% total rare earth oxides.
  • Steenkampskraal Monazite Mine [SMM] owns the Steenkampskraal Mine in South Africa. It has the highest grade rare earth deposit in the world. It has a resource of about 605,000 tons at an average grade of 14.4% total rare earth oxides for a total of 86,900 tons contained TREO.
  • Energy Fuels (UUUU) is a US uranium miner; however, its recently announced that it had been approached by several entities including the US Government to process certain uranium bearing rare earth elements at the White Mesa Mill. Energy Fuels state:

We can play a significant part in bringing rare earth element production back to the United States."

Risks

  • Rare earth prices may fall. China has a history of manipulation of the rare earth market due to its dominant role in the supply chain. China sometimes keeps prices artificially low, making it difficult for projects outside of China to be viable. This happened previously to the US at Mountain Pass (Molycorp collapse in 2015). New supply could oversupply the market, noting Japan has significant rare earths. Mines with no by-product credits can struggle.
  • Rare earths are not, in fact rare; however, because of their geochemical properties, it is difficult to find them in sufficient concentrations where they can be profitably mined and processed.
  • Technology change - Electric vehicle manufacturers may opt for cheaper lower performance induction electric motors, not requiring the valuable magnet rare earths (NdPr). Rare earths will still be needed for numerous other products, especially electronics.
  • The usual mining risks. Rare earth projects often require high upfront CapEx leading to funding difficulties, and the extraction process is not easy as rare earths are hard to separate from each other.
  • Environmental risk - The processing or rare earths is difficult and involves acids that can then cause environmental damage if not properly contained.
  • Currency and management risks.
  • Stock market risks - Liquidity, sentiment.

Further reading

Note: I would recommend serious investors watch the full four part video 'rare earths supply chain challenge' series, noting Part 1 is linked above. One point Jack Lifton was quoted:

If you want to have the total rare earths that you need, for example, rare earth permanent magnets, you will need more than what is produced in the United States. You need to have Canadian content and Australian content.

Note: US Senator Liza Murkowski is the number 1 US Senator supporting rare earths and critical elements (sample here). Please support her also.

Conclusion

The rare earths sector has historically been a tough sector for investors, with an exception during the 2010/11 boom as China halted rare earths exports to Japan sending prices higher.

Recent moves by the US Senate look like a new era of support for US rare earths projects may be around the corner. Added to this are recent discussions by the US with friendly suppliers (Australia and Canada) that may help finance some new rare earths projects.

Overall, I am somewhat cautious on the sector due to the intense China competition concern; however, I can see a place for a small number of rare earths companies to benefit if the US rare earth funding bill is passed. They will most likely be US companies and some very promising lower CapEx projects in Australia and Canada. Also, Lynas Corporation and MP Materials, the only two existing non-Chinese producers, will continue to have their place.

If I had to pick the most promising juniors, they would be Texas Mineral Resources Corp., Rare Element Resources, Appia Energy, Alkane Resources, and Arafura Resources.

As usual, all comments are welcome.

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Disclosure: I am/we are long LYNAS CORPORATION [ASX:LYC]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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