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What do LED televisions, hybrid cars, iPhones, aircraft engines, wind turbines, cubic zirconias, loudspeakers, commercial lasers, and cancer drugs have in common?  All these products need rare earth element minerals in their manufacture.

Rare Earth Elements (REEs) have unique properties that are ideally suited for high tech products in a wide variety of fields, with energy efficiency applications seen as perhaps having the greatest potential.  Currently China dominates the world both in terms of demand for REEs and their supply.  The following chart shows supply and demand levels for China and the rest of the world from 2005 to 2015:

As the chart suggests, rare earth elements are on track to more than double in the decade from 2005 and 2015 in both China and the rest of the world; supply from sources outside China will also increase.  Currently China provides between 90 and 95% of the supply and has exerted tight control, claiming protection of their own natural resources.  This control along with the rise in commodity prices of all kinds drove up the price but global economic jitters have contributed to a price drop.  The following year to date price chart for the Rare Earths MMI® (Monthly Mining Index) from MetalMiner shows the current state of affairs:

 

 

The perceived demand for rare earth elements coupled with the Chinese stranglehold on supply sent the share prices of any miner in the hunt for rare earths into overdrive.  Then, Goldman Sachs issued a research report in May last year questioning the viability of the surge in rare earths.  According to Goldman the entry of Western companies like US based Molycorp and our own Lynas Corporation (LYC) would lead to oversupply when projects at both companies came fully online in 2013.  The miners disagreed but investors got nervous.  

 

Australia is still without a producer of rare earth elements but Lynas is tantalisingly close.  However, you wouldn’t know it from the performance of the stock price.  Below is its two-year chart compared to the ASX 200 index, the XJO.  Note the drop in share price around the time the Goldman report was released:

 

Lynas has the lofty goal of becoming a fully integrated provider of rare earth minerals from mine to market.  The strategy calls for extraction of rare earth minerals from the company’s facility at Mount Weld in Western Australia to be transported to a processing plant – the Lynas Advanced Materials Plant or LAMP – in Malaysia. Investors eagerly awaited the coordinated effort coming online in 2012 – and they’re still waiting.

The LAMP part of the effort faces regulatory problems from the Malaysian government; on top of this there are concerns about funding the project.  LYC is not the only Australian miner in the rare earths space, but it is the only company with coverage from all of Australia’s major brokerage houses.

On 11 October this year a Malaysian court ruling delayed completion of the LAMP refinery yet again, and the share price fell 15%.  Analysts were not far behind with downgrades.  Deutsche Bank cut the stock to SELL from HOLD and Macquarie cut LYC to UNDEPERFORM from OUTPERFORM and both slashed target prices.  JP Morgan and UBS maintained NEUTRAL ratings but cut forward earnings estimates.  All analysts expressed concern that the lack of cash flow the company had anticipated from a March 2012 commencement of operations at LAMP will force LYC to seek additional funding in 2013.

With a forward P/E of 5.31 and a 5 Year expected P/EG of 0.50,  LYC still deserves a spot on the watch list of investors with higher risk appetites.  

 

If you believe in the potential of rare earth elements as a commodity whose demand will grow with global thirst for high tech stgices of all kinds, LYC is not your only investment alternative.  Here is a table of 6 ASX listed rare earth miners by market cap with year over year price movement:

 

Company

Code

Market Cap

Share Price

52 Wk Lo

52 Wk Hi

Yr over Yr  %

Gain/Loss

Lynas Co.

LYC

$1.1 billion

$0.65

$0.52

$1.62

-40%-

Greenland Minerals and Energy Ltd

GGG

$165 million

$0.30

$0.29

$0.65

-46%

Arafura Resources Ltd

ARU

$71.2 million

$0.18

$0.64

$0.14

-71%

Peak Resources Ltd

PEK

$50.9 million

$0.20

$0.15

$0.62

-41%

Hastings Rare Metals Ltd

HAS

$14.9 million

$0.12

$0.10

$0.20

-28%

Victory Mines

VIC

$8.52 million

$0.19

$0.18

$0.20

N/A

 

The most interesting prospect in the table is Greenland Minerals and Energy (GGG).  While you may have seen references claiming the REO (rare earth oxides) at LYC’s Mount Weld operation is the largest in the world outside of China, that information may be out of date.  A 2011 report issued by the United States Geological Survey (USGS) entitled The Future of Rare Earth Elements lists REO capacity at Mount Weld by 2015-2016 at 22 million tonnes while the Kvanefjeld site in Greenland is projected at 37 million tonnes.  

According to Thompsons/First Call data there is only one analyst covering GGG with a STRONG BUY rating. Below is a two year price chart for the stock:

 

 

Greenland lags behind Lynas in bringing product to market, but the company’s progress to date is impressive. Originally a 61% owner of the highly regarded Kvanefjeld site in Greenland (which includes uranium deposits), the company recently reached an equity deal with minority owners and now GGG has 100% ownership.  A recently completed Kvanefjeld Pre-Feasibility Study claims the site can be cost competitive with assets of rare earths and uranium with an NPV (Net Present Value) greater than US$4b before taxes.  This projection assumes current prices for REOs and could approach US$8b should commodity pricing rise by as little as 20%.

The government of Greenland eased regulatory requirements in 2010 and the gradual melting of the permafrost could help with production costs.  

 

With the ownership issue put to rest, funding is the major concern.  A recent successful capital raising fully funded the buyout of minority holders with working capital left over.  A Definitive Feasibility Study is underway involving licensing and environmental impact statements.  The company has no debt so debt funding is an option and with 100% project ownership GGG could also take on a junior partner to raise the capital.

Geological surveys and product costs projections can be a difficult read for the average investor.  But one thing we can all understand is management confidence in what they are doing as evidenced by insider buying.  GGG’s managing director Roderick McIllree recently paid A$59,000 to buy an additional 200,000 shares.

While Lynas may be the closest to generating sales and Greenland Minerals has excellent prospects, Arafura Resources (ARU) is another Australian rare earths exploration company with a project in late stages of stgelopment.  The company’s northern Australia based Nolans Project got a boost of confidence with a government tax refund of A$22.5 million to fund further stgelopment.  In today’s dismal economic environment, funding concerns are outstripping project potential and the refund is evidence the local government believes in the viability of the Nolans Project.

Government confidence stems from Arafura’s expertise in the extraction process under stgelopment since 2006. The company also received an A$9.9 million investment from East China Mineral Exploration Co, subject to approval from the Foreign investment review board.  The Nolans project has a mine life expectancy of more than 20 years with yearly production capacity of 20,000 tonnes of REE products along with phosphate, uranium and gypsum.

Peak Resources Ltd (PEK) has copper and gold projects in Australia and gold and rare earth assets in Africa. In February of 2012 the company released it first estimates for the Ngualla Rare Earth Project in Africa, claiming the reserves rank as the 5th largest rare earth deposit outside of China, projecting 1.6 million tonnes of production beginning in 2016.  Additional geological surveys are underway as well as a “Scoping” study, which involves cost estimating, commercial route stgelopment, and planning for a Pre-Feasibility Study.  Given the early stages of the project and potential sovereign risk, PEK is a higher risk investment.

Hastings Rare Metals Ltd (HAS) has two rare earth projects here in Australia; one in Western Australia at 100% ownership and another in Western Australia with 60% ownership.  This company is also very early in the stgelopment process, having only recently released its Scoping Study, showing a viable project, especially in light of a heavy concentration of HREOs.  There are 17 different rare earth elements, some called Light Rare Earth and some Heavy Rare Earth or HREO.  The difference is technical but HREOs are considered more valuable.  Hastings is far too early in the feasibility process to qualify as anything other than a highly speculative investment.  

Finally, there is Victory Metals (VIC), which made its debut on the ASX a few days ago.  It has a rare earth project called Jungle Well in the vicinity of Mt Weld with 70% ownership.  The Company also has projects in copper, base metals, uranium, and gold.  The company is still at the sample taking stage so this is one to watch.  

 

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