As the global rare earths industry
moves towards the end of what has been another torrid year for
the market, the number of junior miners in the sector is
greater than ever.
According to the online commodities
database Technology Metals Research, rare earths mining is now
the focus of more than 300 exploration companies with projects
as far apart as Africa, Australia, North America, Greenland and
Behind this growth in exploration
are a series of signals from China indicating that both its
mineral production and exports will continue to decline,
combined with predictions of market growth based on an
anticipated boom in demand for rare earth magnets.
But as prices continue to buckle
under downward pressure from weakening demand and excess
production capacity, particularly for light rare earths such as
cerium and lanthanum, explorers are finding it increasingly
difficult to justify their projects and secure the necessary
investment to develop them.
Molycorp and Lynas
The junior sectors financial
tribulations have not been helped by a flow of discouraging
news from the two front runners in the rare earths business;
US-based Molycorp and Australias Lynas Corp.
Although both of these companies
have now successfully achieved their targeted phase one
capacities of 19,050 tpa and 11,000 tpa respectively, each has
experienced costly problems which delayed production, with
Molycorp in particular raising concerns about its cash position
as a result of unsustainable debt obligations and falling rare
In the view of Dudley Kingsnorth,
professor at the Curtin University Graduate School of Business
in Western Australia, the rare earths exploration industry
needs Molycorp and Lynas to turn out success stories for
investors to see rare earths as a viable opportunity.
When you consider that there
are over 300 rare earths juniors out there, and that perhaps
only four or five of these will make it into production, the
chances of succeeding are only marginally better than 1%,
Kingsnorth told IM.
Investors need to see
Molycorp and Lynas make a return on their capital investments
and start generating steady, positive cash flow, he said,
otherwise financiers wont put their money into new
According to Kingsnorth and other
commentators from both the mining and financial sectors, there
are certain key credentials junior mining companies need to
have in place if they are to make it into production.
Offtake agreements are the
most important thing for a rare earths junior to secure, as
this demonstrates a customers confidence that a project
will be able to deliver a secure supply of rare earths in the
future, Kingsnorth said.
In addition, companies need
to have agreements for proven technology and an economic
deposit, he added.
Hunter Hillcoat, a London-based
analyst for Investec, agrees: Offtake agreements are
(...) becoming important, Hillcoat told
IM, as this provides mining companies
with guaranteed customers for mined material at a minimum
price, which reassures investors.
Other commentators hold different
views about what financiers prioritise when it comes to
choosing projects to invest in.
Above all, good management
and credible corporate strategies are the main thing investors
will look for, said Katya Kuznetsova, director of capital
markets for PricewaterhouseCoopers at a recent mining finance
conference in London.
Kuznetsova agreed with Hillcoat,
however, that underlying project quality and customer buy-in
are also fundamental to success, and urged companies to
demonstrate that their projects are robust, with good
infrastructure, efficient cost-management and, where possible,
have secure offtake agreements in place.
In the view of Catherine Raw,
co-head of BlackRock Inc.s $7bn World Mining Fund, in the
current financial climate, miners also need to show that they
are being responsible with shareholder dollars.
still feel that managements need to prove to them that, over
the long term, the discipline associated with capital
allocation is there, Raw said.
While assembling all of the assets
investors reputedly look for is a tough ask for junior miners
in what has arguably been the most difficult climate for mining
companies in a decade, Kingsnorth says that some companies are
proving more successful than others in laying the foundations
necessary for success - particularly when it comes to securing
Australia-based Alkane Resources,
which is developing the Dubbo zirconia and rare earths project
(DZP) in Toongi, New South Wales, is ahead of the pack when it
comes to establishing itself as a viable rare earths producer
of the future, Kingsnorth says.
Alkane has the advantage of
being able to produce rare earths and zircon as co-products,
and already has an agreement with Japans Shin-Etsu to buy
its production Kingsnorth explains.
The company signed a memorandum of
understanding (MoU) in July 2012 with Shin-Etsu Chemical Co.
Through this arrangement, Shin-Etsu will have priority to
purchase processed rare earths at commercial prices via an
initial five-year offtake agreement.
Alkane hopes to sell the remaining
separated rare earths to other companies with which it has been
discussing offtake arrangements.
Importantly, Kingsnorth adds, the
DZP also benefits from favourable grade and rare earths
distribution in terms of light and heavy minerals.
Approximately 90% of the light rare
earth revenue is slated to come from neodymium and praseodymium
sales, while 95% of the heavy rare earth revenue will be
generated by dysprosium, terbium and yttrium, Alkane
According to Alkanes
definitive feasibility study for the DZP project released in
April 2013, the Dubbo mine is expected to process 1m tpa of
zirconia and rare earths ore over a period of at least 70
years, with development scheduled for early 2014.
Despite the negative
sentiment directed at the rare earths industry over the last 12
months, the industry has underlying strength and significant
growth potential, the company says.
However it is also a diverse
business that has divergent levels of growth that are not
uniform for all the specific rare earth metals. This can create
difficult market conditions with demand strong for some and
significant oversupply for others, it adds.
Alkane points to Industrial Mineral
Company of Australia (IMCOA) estimates for growth rates ranging
from 10% to 15% for neodymium, praseodymium and
dysprosium-containing magnets, and 6% to 8% growth for
phosphors, which use yttrium and terbium, which Alkane believes
will drive the rare earth market in the next few years.
Selling the story
According to William Middleton,
analyst for London-based Somercourt Investments Ltd, junior
resource companies also need to have a credible
story that investors are willing to buy into.
Companies need a good story
that acts as a kind of hook to get investors interested,
Middleton told IM.
The problem that many face is
being able to differentiate themselves from all the other
companies out there, which are probably saying the same
things, he added.
While recent figures for commodity
financing suggest that Canadas TSX-Venture Exchange and
Londons AIM market will remain the exchanges of choice
for junior firms to sell their stories, CEO of
Canada-based Avalon Rare Metals, Don Bubar, says that
Germanys Frankfurt Exchange is a particularly receptive
market for rare earths.
Avalon, which has a German language
option on its website, has been doing investor relations
in Frankfurt for about five years now, Bubar told
Its a pretty good place
to market a story like [Avalons], he explains,
adding: Lots of investors here are interested in the rare
earths business, including many retail investors, so its
a good place to work on our investor relations and drum up
media interest [in the Avalon project].
Avalons flagship project is
the Nechalacho heavy rare earths project in Thor Lake, 100km
south-east of Yellowknife in Canadas Northwest
The company released the results of
its feasibility study on the property in April this year, which
outlined an initial mine life of 20 years, supported by a
measured and indicated resource of 69.1m tonnes grading at
1.64% total rare earths.
Bubar adds that the company has
made significant headway with environmental permitting and
pilot testing over the summer months, and is now looking to top
up its present cash reserves of Canadian dollar (C) $9m
($8.6m*) as it proceeds with the development of Nechalacho.
Avalon already has an offtake
agreement with an undisclosed Asian buyer for Nechalachos
enriched zircon concentrate, which is made up of a combination
of 80% zirconium, tantalum and niobium and 20% rare earths.
However, Bubar is concerned that
the company may be selling itself short by offloading a zircon
concentrate that also contains unseparated valuable heavy rare
We are looking at
alternatives to our present arrangement and investigating a
mixed alkali cracking process to unlock some of the [rare
earths] value in our zirconia ore, he explained.
Although Avalon is yet to secure an
offtake agreement for its rare earths production - something
Bubar hints is more likely to happen once it has figured out
how to separate its heavy rare earths from Nechalacho ore - the
company is confident of its position in the industry.
Weve got the attention
of the important players out there who need a secure supply of
rare earths (...) and we have demonstrated that we have a
management team committed to building a viable rare earths
business, he says.
Rare earths are relatively unique
in the mining industry in that, owing to the complexity of
processing and marketing the minerals in a Chinese-dominated
market, having some form of supportive partnership is almost
indispensible at an early stage in the development process.
According to Arafura Resources, an
Australia-based junior which is developing the Nolans rare
earths project in the countrys Northern Territory, the
benefits of having downstream input into new
Western projects should not be underestimated.
[During the late 2000s] we
had been building business relationships with a number of
Japanese, Chinese and European parties, whose interest was in
watching and, in some instances, modest participation in, the
ongoing development of our Nolans project, Arafuras
CEO, Gavin Lockyer, told IM.
This was long before the
spectacular rise in rare earth prices during 2010-2011 and the
emergence of a great number of exploration prospects for rare
earths around the world, he added.
The Nolans project is
underpinned by the Nolans Bore rare earths deposit, which hosts
1.217m tonnes rare earths grading at 2.6% rare earth oxides, in
addition to significant phosphate and uranium resources.
Arafuras efforts to establish
a profile in the global rare earths space attracted the
attention of the East China Minerals Exploration and
Development Bureau (ECE) and, in early 2009, ECE approached the
company regarding an initial investment of A$22.9m ($22m) for a
major shareholding in Arafura of 24.86%.
At the time, the investment
was the first by this Chinese entity into an Australian-listed
rare earths company, Lockyer says.
ECE were looking for
opportunities to expand their exploration reach into other
countries and the Northern Territory Government had been
exploring business opportunities to attract foreign investment
and Arafura was part of this process, he explained.
Arafuras relationship with
ECE has seen the size of the Chinese shareholding fluctuate
between 2009 and 2013, but the Bureaus funding has
continued to trickle in.
ECEs most recent
investment - A$10m to return its shareholding to its initial
level - was in October 2012. This would not have happened
unless ECE was confident in Arafuras direction,
management ability, and the quality of our Nolans Bore
asset, Lockyer says.
ECE has also provided Arafura with
access to key Chinese experts in the rare earths supply chain,
building on the relationships the company established prior to
2009. This includes current producers, processing
experts, financiers, and policy makers, according to
This led to the signing of an MoU
with Shanghai Stock Exchange-listed Shenghe Resources, a
Chinese company which was allocated about 4.5% of the total
Chinese rare earths export quota for 2013.
Although the MoU is presently
non-binding, Locyer says that both companies are committed to
building a definitive framework agreement for the future.
Arafura and the Nolans
project represent an opportunity for Shenghe to expand its rare
earths business internationally and Arafuras
long-standing relationship with ECE could mitigate some of the
risks inherent in Shenghe partnering with a non-Chinese rare
earths company, Lockyer says.
I expect the relationship
with ECE to remain strong and focused as we work to optimise
the Nolans projects capital and operating costs, and look
to secure financing for the operation. As to how that exactly
translates is not something I can spell out right now, he
In addition, Arafura has a letter
of intent with Germanys ThyssenKrupp, signed in August
2011, which Lockyer says is the basis for long-term cooperation
for project financing arrangements and a pricing framework for
the sale and distribution of rare earth products, and an MoU
with a South Korean partner on similar terms.
Chinas rare earth
While the junior industry is making
every effort to secure the credentials deemed necessary to make
their projects a success, there remains a tacit understanding
that, ultimately, the future of the industry comes down to
China, and how its national rare earths policy develops.
Recent rumours that the Chinese
government is planning to create a national stockpile of rare
earths caused a temporary turnaround in rare earths prices in
September and reinvigorated shares in junior rare earths
But at the time of going to press,
no official announcement on Chinese stockpiling had
materialised, and mineral prices had started to backtrack on
their September gains.
According to some experts, the
industry needs to be cautious about making predictions based on
Chinese policies, which often emerge from nowhere and can have
It is important to
differentiate between intentional stockpiling and an incidental
build-up of inventory as a result of overcapacity, Gareth
Hatch, founding principal of Technology Metals Research told
There is lots of lanthanum
and cerium still on the shelf, because demand for these light
rare earths has been so weak, he explained.
Hatch dismissed conspiracy theories
that the Chinese governments decision to reduce domestic
rare earths production was designed to manipulate prices.
There are a number of
pragmatic reasons why China would decide to do this, he
practices used by illegal rare earths producers have led to
genuine environmental concerns, and there are also tax revenue
benefits to be had by shifting large volumes of production into
the hands of sanctioned rare earths producers.
export quotas discriminate against international buyers, but if
the government can show that it is also reducing supplies to
domestic consumers, it will take some of the international
pressure off [the Chinese government], he added.
Dan McGroarty of the American
Resource Policy Network also believes that China is serious
about regulating its rare earths industry, not least because
the government has repeatedly indicated its determination to
crack down on smuggling.
If China wants to control the
rare earths sector, they cant have an open pipeline of
rare earths being smuggled out of the country, McGroarty
I think that they are serious
about reducing the amount of rare earths on the market, but
its not an easy thing to do, he said.
You can find stories back as
far as 2010 about the Chinese government authorising
crackdowns, usually couched in environmental terms, and this
has made people skeptical about whether or not it is actually
happening, he explained.
McGroarty is also prepared to give
credibility to the recent rumours surrounding Chinas rare
Ive seen some
indications that the Chinese government is planning some
ambitious stockpiling, he said.
He also said it was
possible that the China was looking to influence
global rare earths prices.
It is arguable, he says, that with
the pricing power China ultimately has, that the government is
trying to raise the gate for entry into the market for new
producers: But, he adds, this is a
possibility, and by no means a certainty.
*Conversions made October