The rare earth elements sector is smaller than it was a few years ago, and Chris Ecclestone, mining strategist with Hallgarten & Co., thinks it needs to get smaller still. The only way to succeed, he tells The Gold Report, is by finding the right-sized project with the right REEs. He also shares his theories on China’s manipulation of REE prices and touts the mineral wealth of Spain and Portugal.
The Gold Report: In a March Hallgarten & Co. research report, you noted that rare earth elements (REEs) had “come out of hibernation.” Did they wake up happy or grumpy?
Chris Ecclestone: The REEs have run hot and cold since 2009. They had a run for about a year, went off the boil, then had another run.
At the peak, Molycorp Inc. (MCP:NYSE) had launched and everyone was excited about Lynas Corp. (LYC:ASX). Both had market caps in excess of $1 billion ($1B). An array of midtier stories, like Avalon Rare Earth Metals (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Rare Elements Resources Ltd. (RES:TSX; REE:NYSE.MKT), had market caps in the high hundreds of millions of dollars. Juniors proliferated. In total, there were 50–100 REE stocks listed on the TSX and TSX.V. That’s a big group considering the size of the total universe of specialty metals stocks.
Then, the sector was scorched. The price of REEs plummeted. Molycorp and Lynas both encountered cost overruns and Lynas had environmental issues in Malaysia, where it was building its processing plant. These two bellwether stocks became damaged goods. Investors began to think, if the two big ones can’t make money in REEs, who can?
This all coincided with the worst overall mining equity market in 10–15 years. Thus, REE stocks were doubly out of favor.
Beginning this year, there’s been a better vibe in the mining markets in general. REEs have started to pick themselves up off the floor. They look like a viable investment alternative again. However, I believe that we need at most 20 REE stories. Right now, two are in production. Another four or five will get into production over the next few years. We probably don’t need the rest. There will be a race to get into production. If you can’t win that race, you might as well pack up your tent and go home.
TGR: Do you see higher REE prices? Has the sector bottomed?
CE: Prices have bottomed, yes. Some people remain bearish on lanthanum and cerium, which are in massive oversupply. Those prices may go lower. However, I believe it’s not in the Chinese interest to see those two metals go lower. Lanthanum and cerium make up the bulk of what China produces in the REE space, but they’re not the value-added metals. Metals like europium may enjoy better prices, but they’re a small part of the whole REE complex.
China’s bread and butter comes from Bayan Obo, which is not a rare earth mine at all. It’s an iron ore mine that produces REEs as a byproduct. The Chinese can’t stop producing REEs at Bayan Obo because they’d have to stop producing the iron ore as well.
One of the intriguing things about REEs is that you can’t just take the ones you want and leave the others behind. You have to go through the whole chemical extraction process to get those with the biggest market or the best price. You can’t send a metal into the tailings pond because it doesn’t have a good price today. You have to do them all.
You’re stuck in a reverse economy of scale; the more you process, the more unprofitable it could be.
TGR: Given the margins on producing a concentrate or even an oxide, is vertical integration the only way to make money in the REE space?