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Several Non-Chinese Rare Earth Mining Ventures Become members of a Billion Dollar Club. Is too much investment required for too little of a market?

Today's (September 30) announcement by Arafura Resources, Ltd.,(ARU.AX) , 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, Ltd., is the fifth rare earth mining venture to ring the "above US$500 million" bell in just the last two years. The first such was Greenland Minerals, (Other OTC: GDLNF.PK), which has said it will need (US$) 2.3 billion. Next was Lynas, Corp. Ltd., (ASX: LYC.AX), another Australian venture, which has raised or spent more than 2/3 of a US$ billion so far on its way to production The newest big spenders are America's Molycorp Inc., NYSE:MCP, which recently raised US$ 400 million in an IPO, but said it would need more than US$500 million, and, most recently of all, Canada's Avalon Rare Metals (AVL.TO), 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 all or most of the money required by all of them is admittedly 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 was 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 that 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 its, neodymium's, current high price. But common economic sense and the basic law of supply and demand tell us that if neodymium is overproduced 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. 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 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 either neodymium or lanthanum, the two most widely used of all of the rare earth metals, but even the Chinese believe that they, the Chinese, will not be able to meet the demand for dysprosium and terbium beyond this decade.

If that demand, 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 i would value them higher. I understand why the issuers of such letters want their identities kept secret-for competitive advantage-but I would fell that the letters were more valuable if I knew they were from Korean, Indian, or European stockpile agencies or industries.

This weekend I'll publish on the professional informational web site,, my thesis on "right-sizing' rare earth mining ventures. I hope you'll go there to look at that.


Disclosure: None