Evaluating rare earth projects is a tricky business, and the ambiguous reporting methods some companies use don’t make it any easier. In this interview with The Mining Report,Ryan Castilloux of Adamas Intelligence examines misleading metrics that hide the devil in the details. He also explains the complex, objective methodology he uses to rank the world’s 52 most advanced rare earth projects, and names five development-stage projects and three exploration-stage projects with lucrative upside potential. A must-read for anyone interested in rare earth elements.
The Metals Report: What implications will recent news of China’s rare earth element (REE) industry consolidation have on prices in 2014 and beyond?
Ryan Castilloux: In the near term, it will firm up REE prices in China and elsewhere. This consolidation is part of Beijing’s larger efforts to stamp out illegal REE production, phase out inefficiencies and secure China’s position as the world’s lowest-cost REE producer and supplier.
TMR: How significant is illegal REE production in China?
RC: China has two competing REE industries: legal and illegal. This results in an abundance of REE suppliers. End-users are aware of this and exploit it by shopping around. They use the last guy’s offer to negotiate a lower price with the next supplier, and ultimately, the spread between prices widens, and prices trickle downward.
China’s consolidation plans aim to remedy this situation. The Baotou Rare Earth Products Exchange shares this goal. In the long term and in the context of the recent World Trade Organization (WTO) ruling against China’s REE restrictions and tariffs, consolidation is a power play. It aims to drive down production costs, so that China can undercut emerging suppliers, should it find its grip on the industry weakening.
TMR: How powerful is that grip?
RC: China yields separated rare earth oxides (REOs) at costs that no one else can match. In the mid-1990s, China exploited this fact to dramatically undercut global REO prices, which resulted in the end of production from most other regions—most notably the U.S. with the closure of Molycorp Inc.’s (NYSE:MCP) Mountain Pass mine.
For almost a generation, China has enjoyed an enduring monopoly on global REO supply. It has also absorbed most value-added production capacity in the supply chain by attracting foreign manufacturers to set up facilities in China. It’s secured its monopoly against the emergence of foreign competitors through the use of export restrictions and taxes. But China now faces the possibility that the WTO ruling could lead to a softening of its industry policies. Its strongest defense without these policies is to cement itself as the global cost leader so it can undercut foreign producers if it feels the need.
The outlook was much different in 2010, when many were predicting REO demand would double by 2016. At that time, I do believe China wanted to see the emergence of foreign producers, but demand hasn’t grown much since then. As a result, any new producers that emerge in the near term are going to take a significant bite out of China’s market share. If its market share begins eroding too quickly, China may again slash the competition by cutting REO prices. So while prices are likely to strengthen in 2014, they could head lower over the long term.
TMR: Do current REO prices provide the support necessary for new REE projects?
RC: Generally, REO prices are about where they were before the 2011 spike, with the exception of the critical REOs (neodymium [Nd], dysprosium [Dy], Europium [Eu], terbium [Tb] and yttrium [Y] oxides), which are slightly higher. There’s been a lot of groaning from investors since then about how prices have come down to levels that challenge the feasibility of many projects. But in actuality, prices are quite similar to what they were in 2007–2009, when many of these projects emerged.
TMR: After the 2011 price spike, many REE end-users began looking for substitutes. Have they found any?
RC: Many end-users have been trying to replace or reduce the amount of REOs or REEs they use in their products, since even before the 2008 economic crisis. However, rather than substituting REEs entirely, they have instead reduced the amount they use in many applications. A car, for example, can have as many as 50 electric motors in it, most of which utilize REE-bearing permanent magnets. Substituting some of these with motors that don’t use REEs can go a long way toward reducing costs and supply risk. For instance, BMW’s Mini E electric car and Tesla’s Roadster are both powered by induction motors, which don’t use REE permanent magnets.
TMR: To what extent is an optimistic outlook for REEs dependent upon explosive growth in the adoption of new technologies such as electric cars?