Comparisons are useful in evaluating a company, but in the rare earth market, it's not as simple as a spreadsheet. With so many variables in the mix, no two projects are exactly alike, and each has its relative strengths and weaknesses. But out of hundreds of juniors digging for rare earths and graphite, how can investors evaluate who is likely to be among the handful to finally sell their minerals to end users? In this interview with The Critical Metals Report, Technology Metals Research Founding Principal Gareth Hatch examines the supply chain to identify advanced companies with good odds for success. He also shares some telling metrics that help show how companies measure up to their peers.
The Critical Metals Report: In your November interview with us, you said you were tracking more than 390 rare earth element (REE) projects, but probably only 8-10 of those would come onstream in the next seven years. Have those numbers changed? Why are the odds so long?
Gareth Hatch: The number of companies exploring for REEs in the past two years has actually crept up to over 440 projects. However, that estimate of the number of companies that will be successful in the next five to seven years may be generous. REEs occur all over the world, but only a handful of high-quality projects have what it takes both in the ground and above it to come to fruition. Couple those physical limitations with the fact that the capital markets are not an infinite source of funds, and you can see why the percentage is so low. It takes lots of money to bring these projects online and it has become pretty difficult in the last year to raise money. That means that some of these projects will wither and die for lack of capital. We are starting to see companies fall off the radar, leaving behind only a website with an error message. We are also seeing some companies changing their name to the next mineral of interest. Many such companies are early-stage prospect generators. They might only be interested in doing some exploration, finding something interesting and then moving on to the next project rather than starting with a world-class, phenomenal mineral resource and then building a company and long-term project around that.
Some prospectors explore with the supply-chain perspective in mind, focused on particular technology metals with the goal of developing a project, somewhere, for those metals. Taking the supply-chain point of view is one of the best ways to determine if a project will be successful, where success is defined as the economic production of metals and compounds, not the finding of a ten-bagger.
TCMR: Do you see end users' participating in exploration in an attempt to build out a reliable supply chain?
GH: It's not happening much in this sector, but we are starting to see some end users linking up with some of the more viable or advanced projects through partnerships, joint ventures or investments. That is definitely happening.
TCMR: You produce the TMR Advanced Rare-Earths Project Index that lists 42 projects in 13 countries with NI 43-101- or Joint Ore Reserves Committee (JORC)-compliant mineral resource estimates. Which of these projects are more advanced?
GH: One way to do an immediate first cut is to look at which projects not only have a resource estimate, but which also have an estimated mineral reserve. That's the portion of the mineral resource that has been analyzed and deemed to be economically viable. Only a handful of companies have done the significant work required to get to that point. Those would include names that everyone will be familiar with, such as Molycorp Inc. (MCP:NYSE). The company's Mountain Pass project in California is scheduled to come onstream imminently. It has already started some aspects of upgraded production there.
Lynas Corp. (LYC:ASX) has the Mt. Weld Central Lanthanide Deposit in Australia and has experienced political problems and protests at its processing facility in Malaysia, but a series of recent decisions have been made in Lynas' favor. It is taking a lot of time, but it looks like things are heading in the right direction.
Alkane Resources Ltd. (ALK:ASX) has the Dubbo Zirconia Project in Australia. That might be in production in a couple of years. The company recently announced a memorandum of understanding (MOU) with Japan's Shin-Etsu Chemical Co. Ltd., a big chemical producer in Japan, to process concentrates. As I understand it, in addition to tolling the material on behalf of Alkane, Shin-Etsu would have an option to purchase the end products. It potentially makes sense for both parties because tolling arrangements realize the value from separated materials without selling the concentrate.
TCMR: Is it easier for companies to obtain money from the capital markets if an agreement of this kind is already in place?
GH: What you ideally want is a binding contract, preferably with specific offtake quantities and values. This is not a binding MOU, but it certainly helps when talking to an institutional investor. If this turns into a more formal agreement, then clearly there will be more value for Alkane there.
TCMR: Which other companies are in advanced stages?
GH: The other two that have reserves are Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A) with a project in Wyoming and Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) with a project in the Northwest Territories of Canada. Rare Element Resources has the Bear Lodge project with decent grades of material. It is doing further exploration and drilling work on zones that contain higher concentrations of heavy REEs (HREEs).
Avalon, which has the Nechalacho project, is considering the construction of a separation plant in the southern U.S. Its project has had some delays; the company announced in May 2012 that its metallurgical studies would take longer than expected, pushing out the expected start date for production. Avalon took some heat for this, but REE processing is a complex business, and as further studies and analyses are completed, technical challenges will be discovered. Avalon certainly won't be the last company to encounter this, and the shoe will be on the other foot for some of the other players in this sector soon enough.