Western rare earth companies are in a conditioning period, optimizing on every front to get the leanest capital costs possible. In the next six months, Geologist Alex Knox expects a big shakeout across the rare earth space as companies release amended PEAs and feasibility studies. "That," says Knox in this interview with The Metals Report, "is when smart investors will be able to look at the numbers and pick out the winners." Knox helps us jump the gun by identifying companies with lean, mean stats.
The Metals Report: Alex, what is your overview of the rare earth element (REE) space?
Alex Knox: The highlight is that two large deposits of light rare earth elements (LREEs) are coming into production: Molycorp Inc.'s (MCP:NYSE) Mountain Pass and Lynas Corp.'s (LYC:ASX) Mt. Weld deposit. The considerable increase in LREE production has eliminated the need for any market niche for these types of deposits, at least for the short-term.
I see a dramatic need for development of heavy rare earth element (HREE) deposits in the western world, now that China's crackdown on illegal mining has presumably cut into its production of HREEs. A number of companies have reached prefeasibility or preliminary economic assessment (PEA), and one already has a feasibility study. Overall, I believe this space offers the most potential growth and the most potential to add new deposits.
TMR: Can investors make money in REEs?
AK: Certainly. On the HREE side, the deposits coming on stream will be profitable. At the present prices of the companies that own these deposits, there is substantial upside. I think the market will pick two or three of these companies and make them the winners in the HREE space.
TMR: Rare earth expert Jack Lifton has written that, "non-Chinese sources of heavy rare earths must now be brought into production under all circumstances. Non-Chinese manufacturing centers and regions need to attain self-sufficiency as soon as possible." What's your view?
AK: I totally agree. The Chinese will protect their low-cost resources, the South China ionic clays. End users operating outside of China will need to secure supplies elsewhere. There is a good market opportunity for companies that can get these deposits to market in a profitable state.
TMR: Yet in 2012, half of China's export quota on REEs wasn't used. The 2013 quota is 5 tons higher than 2012. Doesn't that suggest there is less demand?
AK: Again, there is a distinction between LREEs and HREEs. Given China's crackdown on illegal mining and illegal export of HREEs, those exports are volumetrically small compared to the LREEs. There is not a lot of tonnage, but there is high value. The tonnage mainly comes from the LREEs.
The fact that the overall quota has risen doesn't mean that the output of HREEs will increase. I believe the supply of HREEs from China may actually decrease, while the overall quota for all REEs increases.
TMR: Can illegal Chinese exports meet the world's supply needs for HREEs?
AK: The South China clays are a finite resource. They lack vertical extent. Some are only 10 meters thick and are often fairly low grade. To extract significant quantities requires immense surface disturbance because you have to strip off a lot of land to take out the top 10 or so meters. This surface destruction is unsustainable. The Chinese recognize that and are trying to eliminate illegal mining to save these resources for themselves.