Nearly a year has passed since Molycorp hit the US stock markets with its IPO. And considering this stock’s popularity today, it’s astounding that this IPO had flown under the radar for most investors. Last July MCP shares debuted below the pre-IPO targeted price range, and traded on the low side of that range for weeks before it finally caught a bid. MCP didn’t quite have the fanfare as say LinkedIn or other IPOs in the US over the last year.
Though the rare-earth sector was getting some play in commodities circles, with the mainstream media even providing a bit of coverage, investors weren’t all that familiar with the strategic importance of Molycorp’s end product. Most investors didn’t think twice about its unique niche, and by its name they presumed MCP was just another base-metals miner.
But boy how quickly things have changed with some light now shined into Molycorp’s corner. Over the past year more and more investors have been educated on the significance of what is contained in MCP’s booty, and this understanding has translated into some serious gains in the rare-earth-stock sector. I doubt even LinkedIn will be able to boast a 400%+ gain after only 10 months of trading like Molycorp!
So what is so special about Molycorp’s product? Molycorp produces rare-earth elements (REEs), and these minerals are special thanks to their growing importance in high-tech manufacturing. REEs are indispensable in gadgets ranging from iPads to laser-guided missile systems. They are also essential in the growing “green technology” movement, with usage in such things as hybrid vehicles and wind turbines.
As an investor, knowing REEs as “tech metals” will get you by. But if one truly wishes to be successful in leveraging the newly-illuminated bull market in these exotic commodities, a deeper understanding of REEs is imperative. And this understanding is as unassuming as knowing what a rare-earth element actually is.
In scouring the markets for REE stocks I’ve seen many investors mistakenly buy or waste time researching companies that they thought were REE-centric, but actually weren’t. Countless folks have been fooled by the “rare” tag, mistakenly thinking a company’s “rare-metal” deposit is a “rare-earth” deposit. Now I can see how this may be confusing since rare-earths can in fact be referred to as rare-metals. But interestingly a rare-metal is not necessarily a rare-earth. Confused yet?
Various mining companies tag their lithium, beryllium, niobium, tantalum, and even platinum-group-metals deposits as rare-metals deposits. While this isn’t necessarily incorrect, none of these are actually rare-earths. Rare-earth elements (often referred to as rare-earth minerals) hold a specific place in the periodic table of elements, something most of us are familiar with from our high-school chemistry days.
Specifically this REE group is comprised of the entire lanthanide series (atomic numbers 57 through 71), along with two other elements that were added to the mix based on their similar chemical properties. Most folks have probably never heard of the individual REEs. In fact, if they were shown the list they’d probably think they were fabricated names from comic books (neodymium, promethium, europium, ytterbium).
Most folks would also be amused to find that rare-earths are not actually rare. Provocatively many REEs are as common as the base metals. According to the U.S. Geological Survey, even the least-abundant REEs are nearly 200x more common than gold! “Rare” comes into play in these elements’ geological concentrations. Oddly enough, it is quite difficult to find a deposit with a high-enough concentration of REEs that is economically feasible to mine.
This rarity is one reason why Molycorp’s Mountain Pass deposit has been getting so much attention. Mountain Pass is one of only a handful of REE deposits in the world that has proven economics. And this deposit is even more special because it is one of the only sources of reliable REEs outside of China.
For many years China has essentially been the world’s only source of REEs. This transpired as a result of its ability to completely price out the competition in the small rare-earths market. The low-cost and unregulated production from China’s large deposits had forced the closures of nearly all non-China REE mines in recent decades. As a result, China is now responsible for over 95% of the world’s REE supply.
Interestingly China’s global rare-earth monopoly hadn’t presented too much of a problem on the consumption front. There were plenty of REEs to go around, with the demand appetites of high-tech countries like Japan, the US, and others well-satiated. But this happy balance has recently come to a grinding halt, and folks are now clamoring to figure out where they will get their next dose of REEs.
Over the last several years a perfect storm of fast-growing demand and China supply cuts has sent shock waves through the once-reliable REE market. On the demand front, this modern age of technology has quickly made REEs quite-relevant commodities. To put this in perspective, consider that global demand has grown from about 1k metric tons per year in the 1950s to about 135k metric tons in 2010.
And this demand growth doesn’t look like it will let up anytime soon. I’ve seen estimates that annual REE demand will rocket by another 50%+ by 2015 (to around 200k metric tons), and then to 250k metric tons by 2020. This huge increase in demand puts a lot of pressure on the sole source of REE supply. Unfortunately, China doesn’t have the production bandwidth to meet these needs.
But China’s infrastructure and capacity limitations are only part of the problem consumers are faced with today. The biggest problem is China itself, as this mineral-rich country has recently decided to place a stranglehold on the rare-earths market by slashing exports. And we’re not talking a modest pullback here. In 2010 China dropped its annual REE export quota by a staggering 37%. It then announced an additional 35% haircut in the first tranche of its H1 2011 export quota.
So why did China do this? Well, it depends on who you ask. If you ask China, it’ll tell you one of the big reasons for these export cuts is to preserve its own natural resources, which allows it to stockpile for its own consumption. And this seems reasonable since China’s internal demand growth is actually rising at a faster clip than the rest of the world’s.
China also claims it wants to get its arms around the environmental damage REE mining has caused, while in unison cracking down on illegal mining. And indeed some of its mines have laid waste to their surroundings. Even its “permitted” mines are notorious for poor environmental management, which is of course one of the big reasons why it was able to produce its REEs cheaper than the rest of the world.
Though I’d like to believe China cares for its environmental welfare as much as it claims, most folks are able to read between the lines. There may be some smidgen of truth to its official REE-export-reduction rhetoric, but let’s be honest. China recognizes the growing strategic importance of REEs, and also understands that it’s going to take years for other countries to stgelop enough REE mines to remove dependence on its hoard. So why not take advantage of the situation by strong-arming the rest of the world?
China’s massive reduction in exports has produced two main effects that have certainly been to its benefit. First, REE prices have gone through the roof. In February 2011 China REE exports had fetched north of $100k per metric ton, an all-time record and a 600%+ price increase over just 7 months. And prices are still going higher today!
The second effect is that China now has a major strategic advantage over its high-tech competitors. The consumers that have relied on China’s REEs for new-tech manufacturing and R&D are in dire straits. Not only are they forced to pay the going rate for REEs since most have no substitutes, many are finding reduced inflow and/or an outright cutoff. These consumers must either throttle back their production or build their factories/products in China.
Overall China has effectively usurped control of all facets of the REE market. And regardless of the reasons, not much can be done about it. Unfortunately many non-China REE consumers are dead in the water. All they can do is snatch up China’s export scraps, and anxiously await supply from newly-stgeloped REE mines elsewhere in the world.
The first of these newly-stgeloped mines will come from the likes of Molycorp and Australian miner Lynas Corporation. But while the REEs from their operations will provide much-needed relief, they will only partially fill the widening supply deficit. And because the cat is already out of the bag on these mines, the investor in me is particularly interested in the next generation of mines that will follow.
Fortunately higher prices always entice new players onto the scene, players that will take on the task of stgeloping these next-generation REE mines. And with a whole slew of miners that have recently added REE projects to their portfolios, stock investors now have a lot of choices.
Unfortunately the REE supply that some of these emerging miners will deliver can’t get to the markets soon enough. Developing any mining operation takes a lot of time and capital. And due to their complexity, REE mines tend to fall on the right side of the time/cost bell curve. Not only is it harder to find economically-feasible deposits, even at today’s prices, it is much more difficult to process the ore. It is going to be a long and hard journey getting these next-gen mines online.
REEs are a fickle group by geological standards. Interestingly one big hurdle that must be overcome is an REE deposit’s inherently-radioactive nature. All REE deposits contain some level of thorium and/or uranium. And since many have higher-than-desired levels of these contaminants, they require extra permitting from a national nuclear regulatory agency for disposal, storage, and transportation. This extra step is of course time-consuming and expensive.
Rare-earth deposits also tend to have very complex metallurgy. REEs are found in different rock types, with each deposit housing a unique composition of the individual elements. And it is quite difficult to crack a deposit’s metallurgical code to where the processing recoveries are high enough so there is minimal loss of the individual elements. Once a workable concentrate is produced, then comes the arduous task of actually separating it into individual oxides. Finally the REE oxides must be refined into alloys that consumers can actually use.
Unfortunately there aren’t many metallurgical facilities outside of China that are capable of doing this complex separation and refining. Therefore many of the miners are forced to build their own facilities, which requires significant capital. Considering these challenges, most newly-discovered REE deposits won’t see the bottom side of a shovel. The miners either won’t be able to figure out the metallurgy, or they won’t be willing to commit the capital it takes to stgelop a vertically-integrated operation.
Another factor vexing the miners is saturation. Provocatively even though the REE market is desperate for more supply, there’s only so much room for it. Demand is indeed skyrocketing, but the raw volume required to meet this demand isn’t all that much.
Unlike larger mining sectors where volume from new mines hardly makes a dent in the economic balance, any volume from new REE mines will be material in closing the gap. In actuality it will only take a handful of new REE mines coming online to catch up with demand.
And it is this reality that is absolutely essential for investors to understand if they seek to successfully leverage this REE bull market. Even though there are hundreds of companies around the world entering the race to stgelop the next generation of REE mines, only the first handful to cross the finish line will thrive.
It’s also important to realize that outside of Mountain Pass and a couple of other mines that will achieve commercial production in the near term, these next-generation mines are still 5+ years out. Investors must exhibit keen foresight in choosing the companies that possess the right combination of quality and timely projects.
As mentioned REE deposits vary greatly in their individual element weightings. And interestingly Mountain Pass’s resources have a greater than 99.5% weighting in what is called the light rare-earths (LREEs) category. These light elements (by atomic weight) are more common, and are thus less expensive. The real sweet spot of REE deposits are those that contain a higher concentration of the rarer and more expensive heavies (HREEs).
Though Mountain Pass’s lights are still in high demand, there continues to be a huge void in HREEs available to the market. This means those next-gen mines that hold higher concentrations of heavies will have off-take customers lining up at their doors. And we don’t overlook this fact in our report, with several of our favorites rich in HREE resources. Buy your report today to learn about some high-potential next-gen REE-mining companies that should deliver both LREEs and HREEs to market.
The bottom line is with fast-growing demand and major disruptions in the supply chain, REEs have quickly become hot commodities. And the alarming economic imbalance that has emerged has caused prices to skyrocket. These higher prices, strong future demand-growth prospects, and the desperate need for non-China REE mines has brought REE-mining companies out of the woodwork that are now in a fast-and-furious race to bring new supply online.
Even though the next-generation REE mines are still well out on the horizon considering the complexities that go into mine stgelopment, some well-executed research should bring investors to those mining companies that are best-positioned to capitalize on this REE bull.
For more on Australian Rare Earths companies, see last week’s article “Rare Earths In The Spotlight”
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