A word about metallurgy and REE economics

It’s a report about the achievement of one REE company which the analyst concerned thinks has a special story to tell, but we’ll come back to that tomorrow in a supplementary post. (Blog items are meant to be succinct; we’ll leave long-form journalism to Vanity Fair and magazines of its ilk.)

This two-part approach is because the analyst, David Rijkers of Perth-based brokers D.J. Carmichael has some important things to say about the fundamentals of the rare earths business – and which comments should be read as a scene-setter for his company analysis. His report in many ways concurs with the general tenor of the comments this week by Jack Lifton which everyone in the business will have read by now. Rijkers, along with Lifton, is providing a valuable service in deflating the rare earth bubble caused by too many projects for too small a market, and too little knowledge among the broad masses of investors.

First, metallurgy.

Rijkers writes that there has been a widely held view that the reason China is able to produce REEs so inexpensively is due to cheap labour and lax environmental regulations. This, he says, is incorrect: labour makes up a fractional portion of costs, while environmental controls are stricter than in most Western countries.

No, he writes, the reason the cost of production is so cheap in China is due to simple metallurgy coupled with commercial and technical infrastructure.

“If you have a look at all REE companies globally, with the exception of Molycorp and Lynas, none has been able to demonstrate the ability to produce a concentrate grade between 30-40%, and many are struggling to produce even a 10% concentration.” He cites Dudley Kingsnorth’s Industrial Minerals Co. of Australia as stating that light rare earths projects require a minimum concentrate grade of 30 per cent to be economic and heavy rare earths projects a minimum grade of 20 per cent.

With LREE prices declining, the cost of production has become a critical focal point as many companies may be unprofitable if the prices decline further. Most REE companies have capital cost challenges between $500 million and $1 billion.

But, wait, there’s more. Rijkers argues that, with declining REE prices coupled with strains building in the global credit and capital markets, it will become increasingly difficult to raise capital. Unlike gold, silver and mainstream metals, there are no hedging or forward sales mechanisms to help raise finance. He says this was evident in Arafura Resources cancelling its rights issue.

He makes the point that Arafura’s not being able to raise $74 million to finance the bankable feasibility study indicates future challenges raising the necessary $1 billion in capex.

The report says that this limited capacity to source capital is due not only to the size of the capital investment, but also the risks associated with downstream applications, uncertainty around the elemental demand, and the existing stages which projects have reached. Investment may also be constrained by uncertainty surrounding the future price of LREE once Lynas and Molycorp come into production.

Jack Lifton will be cheered to hear that David Rijkers is largely in concurrence, the latter writing that there are few other contenders who have a real chance of reaching production by 2015. “For the remaining companies, even those forecasts may turn out to be too optimistic with further delays likely and some companies never reaching production,” he adds.

In terms of HREE production, production is unlikely before 2017, he says.

Tomorrow: part 2, and the company Rijkers believes is an exception to his rule.

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