The worst is over, postulates Luisa Moreno. But is modest appreciation in rare earth stocks a symptom of across-the-board improvement in equities, or have fundamentals in the space changed for the better? To tackle these questions, the Euro Pacific Canada analyst gets elbow-deep in metallurgical data. In this interview with The Critical Metals Report, Moreno lends her razor-sharp analysis to determine the frontrunners as metals prices stabilize.
The Critical Metals Report: Luisa, the share prices of a number of leading companies in the rare earth elements (REEs) space have started to trend upward again. Where is the sector headed in 2013?
Luisa Moreno: Brian, it is likely that we have seen a bottom for these stocks. I'm not sure that it necessarily has to do with developments in the REE space, however. It is much broader than that. Overall, there is somewhat better performance in the equities market, including the commodities and REEs. However, I believe that REE prices will continue to go down, which is a positive event because some end users had to find less efficient alternatives when prices were very high.
Recent news out of China indicated that the price of didymium, which is praseodymium and neodymium together, is trending lower. The light rare earth elements (LREEs) are especially likely to fall flatter as Lynas Corp. (LYC:ASX) and Molycorp Inc. (MCP:NYSE) come into production. And as LREEs continue to fall, prices for heavy rare earth elements (HREEs) will likely stabilize. That will be an important development for junior companies in this space. They will have a much clearer idea of the economics of the projects.
TCMR: What's Euro Pacific's investment thesis when it comes to these companies?
LM: Euro Pacific has a great deal of focus on strategic metals. We believe that they are and will continue to be important. Because REE prices were so high last year, some end users were forced to find less efficient alternatives, but there are many avid applications where the price of the elements is not as important and substitutes are very hard to find. The end users are not going anywhere, and neither is the REE story. Going forward, it will be important to have sustainable supplies of these elements.
TCMR: You recently produced a report titled "Who's the Heaviest?," where you try to clear up some of the misconceptions about Molycorp and its ability to process heavy rare earths (HREEs) at Mountain Pass. Can you share your bullet points to our readers?
LM: There is not a significant amount of HREEs at Mountain Pass. It does have HREEs, because rare earths occur altogether, so when you find LREEs, you'll find the HREEs as well, and vice versa. The proportions in which they occur can vary from location to location, however.
Molycorp has a high-grade deposit. Proven reserves' grade is 8.5% TREO, which is significantly high compared to others. Most of that is LREEs, however. It has a very small grade and percentage of HREEs, and that's why some people in the REEs space were very surprised when they heard Molycorp was planning to separate it.
It is able to separate samarium, europium, gadolinium and all the HREEs from its top-four elements, which are lanthanum, cerium, praseodymium and neodymium. It ends up with a HREE concentrate, which is also known as the SEG stream. This SEG stream usually comes from light deposits because it has a very small percentage of the heavies and it is not economic for them to focus on that small percentage of elements.
Molycorp is planning to produce 19,500 tons (t)/year, but it's only going to produce a SEG stream that is 254 t. Most of that is samarium. It's about 1.3% of everything that it's producing.
TCMR: How will falling LREE prices affect Molycorp?
LM: Molycorp has a mine-to-magnet strategy, meaning it wants to vertically integrate and potentially use everything it produces to transform it into metal, alloys and, ultimately magnets and other engineering products. If it is successful in allocating internally all or most of its mine production, it probably is not going to be affected that much. But I believe it is not yet there. To the extent that it does not fully consume all of its production, it will be hit by the fall in prices.
TCMR: Let's get into the deposits a little bit. Critical metals expert Jack Lifton recently told The Critical Metals Report that many investors do not understand that 50% of the concentration at the average REE deposit is not worth anything. The composition of the ore matters more than the grade. Would you agree?
LM: Yes I agree. Molycorp, for instance, has all the light and heavy elements, but the heavy elements, including samarium, are only 1.3% of the yield. Jack was probably trying to explain that it is important to not just look at the grade. A company may have a very high grade, but if more than 50% of what it's selling will end up being priced at, say, $10/kilogram (kg), how material is it if only a tiny portion of the output is worth $1,000/kg or higher? Project economics are highly affected by the composition of the ore.
In my report, I introduced a table (below) that shows the potential production per ton of total rare earths produced for a number of companies. Because the rare earths are all recovered at the same time, is not the grade but ultimately the average proportion of each element that determines how much of each element is produced per ton of output.
TCMR: If half the material at an average REE deposit is not worth much, does that make it difficult to calculate a project's net present value (NPV)
LM: It's definitely more complex than modeling a simple gold project, as various products have to be taken into account. Analysts usually break down a deposit based on a company's rare earths distribution. We want to know how much of each element the company could extract, and we calculate the total potential production per element. Most of us actually tend to assume that some of the elements that occur in very small percentages are not separated. We give zero value to those, which are usually erbium, thulium, holmium, ytterbium and lutetium. When we do an NPV, we're basically forecasting the production and prices for several elements, assuming that several elements are recovered and each will have its own price and its volume. Determining the NPV is a complex process, and the fact that half the ore or more may have low value, it is indeed taken into account in our calculations. Also important is the recovery rates, production costs and capex, which are also included in our forecasts.