State Of The Rare Earths Address [Molycorp Inc, Avalon Rare Metals Inc (US listing), UCORE RARE METALS, Quest Rare Minerals Ltd Common Shares]

rare earthsAs China’s rare earth production winds down, other sources worldwide could shape up to reward early investors. But there are different ways to play this (slowly) growing market. Zachary Schumacher, international market analyst with Asian Metals, tells The Mining Report how investors can go medium or long on rare earths, and why joint venture and offtake partnerships are the biggest factors in creating value.

The Mining Report: Zachary, it’s good to have you with us. Many rare earth element (REE) projects are uneconomic at current REE prices. Please give us your “state of the sector” address.

Zachary Schumacher: There are a lot of challenges in the market. There’s a good portion of projects that are uneconomic. Current REE prices make it difficult to justify projects. On top of that, there are some environmental issues with processing. Until we see a real change in the market, very few projects stand out.

TMR: Prices for heavy rare earths (HREEs), at least, have shown some signs of price recovery. What’s most likely to create shareholder value in REE equities: higher REE prices, joint venture(JV) offtake agreements, vertical integration or perhaps other factors that you deem to be relevant?

ZS: That’s a difficult question. There’s a timeframe for a lot of things. Long-term investors would be more interested in higher REE prices. If you’re looking for a project to go into production, JV and offtake agreements are important.

TMR: Interesting. Is that because there’s just not a lot of easy access to capital to develop these projects and JV partners provide that, or is it simply about confidence that a given name is on board?

ZS: JVs give access to more capital, which eliminates a huge barrier. Processing costs are a huge capital expenditure for REEs. It also provides somebody who arguably is going to be consuming or utilizing the material in some other aspect in the production chain. It provides a level of technical expertise that reassures investors.

Take Avalon Minerals Ltd. (AVI:ASX) partnership with Solvay. Solvay offers technical experience with processing. You have an opportunity to be outside of China. This partnership is a good way for Avalon to show that it recognizes the cost of doing it alone may be unfeasible. So you have a political, technical and economic benefits.

TMR: Avalon is hoping that this agreement with Solvay will ultimately result in a JV or offtake agreement with a much larger suitor. Does this deal get Avalon closer to a cash-rich partner?

ZS: It definitely improves its position. It shows that it has an option for processing. It’s got to put it high on the list of potential partners looking at sources outside of China.

TMR: The capex for Nechalacho means that a partner will have to be a big-time player. Avalon likes to tout is that it’s the only REE company that has a bankable feasibility study. Does that increase the chances?

ZS: The feasibility study helps. It shows its willingness and the realism of the project. Yes, the partner would have to be a company with deep pockets. The thing is that a lot of these companies need reliable sources of the material.

TMR: Are there any companies outside of China that you consider vertically integrated?

ZS: Molycorp Inc. (MCP:NYSE) is close, but its processing is in China. Rhodia Inc., which is part of Solvay, would probably be the closest. It does some of its processing out of La Rochelle in France. There is some internal consumption, and some is sold downstream. There are a few projects styled to be vertically integrated that aren’t active right now.

TMR: What about Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX)?

ZS: Great Western is selling the less-than-common alloys, which is driving its REE project. But it’s not in production for its rare earth oxide yet.

TMR: Which companies have shareholder-friendly offtake or JV partnerships?

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