The rare earths business isn't unlike a Formula One race, according to Carolyn Dennis, vice-president and senior analyst with Dundee Capital Markets. Companies are speeding to reach production and find strategic partners to grease the wheels to the finish. While several companies are laps ahead of their competitors, Dennis is watching a few names that could come up from behind. In this interview with The Critical Metals Report, Dennis discusses which companies could see the checkered flag and reap big profits.
The Critical Metals Report: Carolyn, you caution that the rare earth elements (REE) business is still a very nascent industry. Do you sense a gap between investor expectations and market realities?
Carolyn Dennis: There is still a gap for some. Investors have learned a lot over the last couple of years about how complicated the sector is. These are not your average mining investments. Even with the increase in analyst and media coverage of the sector, it's easy to underestimate the risks and the required timelines for projects. For example, while most investors do know that metallurgy is a key risk, companies often explain their metallurgy as being a simple process when, in fact, it may still be an untested theory.
TCMR: In your coverage of companies in this space, you use four screens to separate the pretenders from the contenders: 1) rare earth oxide (REO) distribution; 2) mineralogy, metallurgy and processing; 3) mineability and 4) marketability. Please take our readers through each of those filters.
CD: First of all, I should clarify that at this point, we believe the light rare earth (LREE) market is going to be largely satisfied by Molycorp Inc. (MCP:NYSE) and Lynas Corp. (LYC:ASX), among a few others. The real crunch is going to be in the heavy rare earths (HREEs) neodymium and praseodymium, based on expectations of growing demand for permanent magnets and phosphors.
In our first screen, we look at the REO distribution by generating an index number that sums up the grades of the critical elements neodymium, praseodymium, dysprosium, terbium, europium and yttrium. We divide that by the sum of the grades of cerium and lanthanum. That determines which deposits have more of the "right stuff" and less of the elements that will be in oversupply, in our opinion. It's important to understand which REEs the companies will be exposed to in order to determine the long-term revenue assumptions and the viability of the project.
Next we look at metallurgy, starting with mineralogy. That's a determining factor, not only in the distribution of the rare earths, but in the economic viability of processing the deposit. The minerals in the deposit determine how long it's going to take to extract them. We also look at how far along the companies are in their engineering studies and whether or not they've started a development pilot plant. That's the key step to solving the metallurgy. Even if it's believed to be simple, we still have to test it. All companies deal with this hurdle, even if they have minerals that have already been processed commercially. Our analysis indicates that there are only five companies that have full-scale pilot plants, including Molycorp and Lynas. That underscores the risk in the sector. The other three companies with full-scale pilot plants include Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and two Australian companies, Alkane Resources Ltd. (ALK:ASX) and Arafura Resources Ltd. (ARU:ASX). Greenland Minerals & Energy Ltd. (GGG:ASX) also has a development pilot plant on a smaller scale.
The third screen is mineability, which is basic mining logic. It looks at capital and operating expenditures, deposit size, grade and the mining plan.
For the fourth screen, we look at the downstream supply chain and marketability. Industrial minerals are not commodities and are generally sold on contract. Therefore, companies with partnerships or those that are vertically integrated should realize value for their product.
TCMR: Some rare earth deposits include uranium and thorium byproducts and, if a company is not recovering those, it needs to dispose of them. Is that a challenge most REE miners face?
CD: It's a real risk across the board for rare earth companies. Each deposit, depending on the type of mineralogy, will have varying grades of uranium and thorium. The jurisdiction the deposit is in and how it approaches dealing with the uranium, thorium and radioactivity will dictate how much of an issue it is for the project. It can be a problem in processing as well. In a lot of cases, the thorium should be removed from the concentrate earlier in the process in order to improve processing downstream. Beyond that, radioactive waste material needs to be disposed of.