A flood of companies scrambled to capitalize on the rare earths space, overpopulating the sector with too many losing bets, according to Chris Ecclestone, a mining strategist with Hallgarten & Co. in London. Now, a downturn in the sector should reveal which companies have the pedigree to make it to production, Ecclestone says. In this Critical Metals Report interview, learn which other metals and minerals are getting the market's attention with positive fundamentals.
The Critical Metals Report: With so many players entering the rare earth elements race, you've said it's gone from the Kentucky Derby to something akin to the Gypsy Horse Fair. How can investors make sense of it?
Chris Ecclestone: Well, the next phase after the Gypsy Horse Fair is the glue factory. There are more than 300 rare earth companies listed on the Toronto Stock Exchange. Even 200 would be too many. This space should really have 30 public companies, with probably five in production in the next five or six years, while the rest fiddle around exploring. I think there will be a rush of these companies tacking "Gold" onto the end of their names and saying, "Hey, look! We're a gold story now." All the better, too, because the space is overcrowded with non-serious people with very mediocre properties.
The amount of capital that was sucked into the vast number of rare earth stocks that have gone nowhere has detracted from the few that are serious players and that are going to get into production. The legitimate companies have been rather capital-starved in recent times because of the bad odor that has surrounded the rare earth space.
TCMR: Which companies are among the handful that you do like?
CE: Molycorp Inc. (MCP:NYSE) is doing all the right things. Vertical integration is key. Molycorp was able to use what was probably an overvaluation in its stock price to acquire Silmet and Neo Materials. Those were very clever deals.
Another good example is Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX). I like the Steenkampskraal Mine in South Africa a lot. The mine is not in production right now, but Great Western has been processing for years with its wholly owned subsidiaries, Less Common Metals Ltd. and Great Western Technologies Inc.
People say that Frontier Rare Earths Ltd. (FRO:TSX) is likely to get into production. All that really depends on getting a partner. Frontier looks OK from that point of view.
Then you have companies in Australia involved in xenotime, which is a rare earth phosphate mineral that's used for coating jet engines due to its heat-resistant element. There's a whole magnet culture in rare earths, but there are a lot of other rare earth applications other than magnets. Magnets are not the only way forward. There's a list of products that are made from the whole group. Seventeen elements make up the rare earth suite.
TCMR: With rare earths generating less investor interest compared to 2011, some of those companies have started to promote their secondary projects, for example tantalum or niobium properties. How does this work, and what do investors need to be aware of in evaluating these projects?
CE: Some of these companies actually start off as tantalum stories. In fact, the tantalum or niobium property may have once been its main property, which is obvious if you look at the grades. It's similar to some uranium producers that located a small amount of rare earths and said, "Oh, we're not uranium now. We're rare earths because uranium is in the dumpster."
But tantalum has an interesting dynamic. The problem is: Is it going to be economic to mine these really low-grade deposits? Is having a really big resource at a really low-grade a compelling property?
The niobium market is totally dominated by two mines, one of which is the Niobec mine in Québec, which is owned by Iamgold Corp. (IMG:TSX; IAG:NYSE). Between Iamgold and CBMM's Araxa mine, they've got a little more than 90% of the market, which they've kept really well serviced. The end users feel pretty comfortable about the way it's managed. Nobody is going to upset the apple cart by promoting other niobium properties.
TCMR: With rare eqarth elements on the backburner, you're looking more closely at other critical metals and minerals, such as tungsten, fluorspar and antimony. Starting at the top, what does an investor need to know about tungsten?
CE: Look for companies with past-producing properties. Tungsten mines can last for 50, 60, or even 80 years. Malaga Inc.'s (MLG:TSX) Pasto Bueno mine in Peru has been operating since the turn of the century. With tungsten, it's better to go with the tried and true.
TCMR: Ammonium paratungstate, which is the raw material from which tungsten is separated, was priced at about $450/ton (t) this time last year. What's it trading at now?
CE: It's come off, but it hasn't come off that much. It's under $400/t at the moment. Industrial demand may be sort of sloppy, but it's still a great price – enough to justify production of some of these old mines that have been closed down.