Resource developers, especially in the rare earths space, are suffering from the market's obsession with immediate results, says Byron King, writer and editor for Agora Financial's Outstanding Investmentsand Energy & Scarcity Investor newsletters and contributor to the Daily Resource Hunter. Nonetheless, he argues, large-scale demand for high-tech metals remains. The question is, which developers can weather the storm? Read more in this Critical Metals Report interview.
The Critical Metals Report: In the last nine months, poor stock performance has shaken investors' confidence in the rare earth elements (REEs) sector. What will restore their risk appetites?
Byron King: We need to see successful efforts from developers. Molycorp Inc. (MCP:NYSE) is not the success story it should have been. Molycorp presented itself as an all-American, mine-to-magnets resource, but when it joined forces with Neo Material Technologies (NEM:TSX), its research and development went to Singapore and its manufacturing to China. Its share price is down from a where it was a few months ago, let alone a year ago.
Lynas Corp. (LYC:ASX) was another great hope, but it has had trouble getting its plant in Malaysia up and running. Just as it was nearing the end of construction, local communities raised concerns about radiation in the materials the company is processing and bringing in from Australia. You have to wonder about the source of those problems. Cynics would say, follow the money. What do key Chinese players think about a new, Western player in the sector?
Looking at the smaller developers, their efforts have been slower and more expensive than expected. They prove the rule that nothing is easy in the REE space. It is a hard, technical space to work in. Many management teams are feeling their way through the maze.
TCMR: What other factors are putting pressure on the sector?
BK: There are larger issues related to the general pullback in the natural resource and energy spaces, and in the broader global markets. It impacts everybody, and certainly the resource players. China is slowing down, partly due to the unwinding European economy and the euro. As the euro comes undone, the dollar strengthens. Many companies working outside the US see their local currency declining in value, but their dollar-measured costs are going up. Things are becoming more difficult to do—more expensive and less economic.
TCMR: Has the European debt crisis impacted REE juniors?
BK: The European debt crisis is a constant drumbeat. Investors everywhere are concerned about waking up one morning to find Europe falling off an economic cliff. This does no good for the stock markets or the resource markets. The REE guys are caught in the suction along with many others.
TCMR: Is the resource sector more vulnerable than others to the economic climate?
BK: I think it is. Macroeconomic uncertainty definitely affects the developers. The big resource players – BHP Billiton Ltd (BHP:NYSE; BHPLF:OTCPK), Rio Tinto (RIO:NYSE; RIO:ASX) and Vale S.A. (VALE:NYSE) – live through ups and downs. In a recession, they know what to do: Shut the mine down and wait for prices to rebound.
Micro-cap or small-cap resource developers don't have that luxury. They lack the deep pockets. When the markets pull the rug out from under their stock, small developers have a problem.
TCMR: Can REE juniors raise cash in this environment?
BK: No. Absolutely not. Their share prices are down. To the extent that your share price is your currency, management will get into an awful dilution situation while trying to raise significant amounts of cash; in addition, companies will find themselves behind the cash-raising eight ball when the people with the money demand onerous terms. Funders will take shares, but will also want long-term, high-value warrants that will essentially put a cap on any upside to the share price. Right now, fundraising is equivalent to wrecking your share structure.
TCMR: How do you evaluate companies with little or no cash on hand?
BK: I look at the cash situation very carefully. There is no magic number that a company has to have for me to look at it. The burn rate is more relevant. If it has cash and is not spending it, then it's okay. I don't mind waiting for other developments to come around – for example, low-cost developments like completing a negotiation – that's fine. I can deal with a company that doesn't have a lot of cash, but whose drilling program or engineering program is completed.
But if a company has little cash but big ambitions to drill holes or hire a big-name engineering or chemistry company to do a lot of back office work? That's a very dangerous combination.