Tom Hayes’ Trio of Rare Earth Project Contenders [Molycorp Inc, Rare Element Resources Ltd, Avalon Rare Metals Inc]

rare earthsIt’s not the size of a rare earth elements project resource that determines its success, declares Tom Hayes of Edison Investment Research. In this interview with The Mining Report, he explains that companies will win based on their holdings of heavy and strategic rare earths and their ability to secure funding. With the race on to develop non-Chinese REE sources, he suggests three projects likely to end up on the podium.

The Mining Report: It is now known that China’s State Reserve Bureau intends to begin stockpiling medium-to-heavy rare earth elements (REEs), and that China will also strengthen REE export quotas. Will these actions lead to a race to get non-Chinese REE projects into production?

Tom Hayes: It will. One shouldn’t view the general tightening of heavy rare earth elements (HREE) export quotas in isolation, however. It’s more relevant to look at actual demand for particular REEs. About 30–40% of Chinese supply is subject to an export quota, but Western demand does not currently meet the amount of REEs approved for export. Reduced export quotas will probably result in Western demand meeting Chinese supply. This, along with China’s reform of its REE industry, will probably aid rare earth prices in the long run.

Alkane Resources Ltd. is well-positioned for the recovery.

TMR: What is the nature of this reform?

TH: China’s central government aims to exert control. Lack of central control has resulted in large, illegal REE operations, which have had a widespread negative effect on the environment.

TMR: Does the scale of these illegal operations suggest some level of political support?

TH: This support is likely local and not national. It is local corruption that has allowed illegal mining of REEs to expand to its present level.

TMR: What’s your forecast for REE demand for the rest of the decade? And how will changes in demand and supply affect prices?

TH: Edison doesn’t have specific growth forecasts for REEs, but the industry consensus is annual growth anywhere from 3–8% until 2020. What will that mean for the supply and demand of particular REEs? This is an industry that is plagued by misnomers. When REEs were first in the limelight in 2011, when the bubble was forming, there was a complete lack of understanding of what “rare earths” meant.

Namibia Rare Earths Inc. is one of my favorites because of the actual strength of its resource.

Since then, people have begun to understand the difference between light rare earth oxides (LREOs) and heavy rare earth oxides (HREOs). The industry has now become an even more granular and complex story about the actual supply and demand drivers with regard to particular REEs. When we talk about REE demand growth, we must consider specific minerals among the 16 REEs. To comment on where REE prices are going is not particularly useful.

TMR: What is it about the heavy and strategic REEs that make them particularly valuable?

TH: It’s really their use in particular applications such as green technologies. Wind turbines are a case in point. Political support for renewable energy sources drives further development of wind farms and, by extension, boosts actual demand for the metals used in those applications.

TMR: If the average initial capital expenditure (capex) of an REE project is $700 million ($700M), how much of that is the optimum amount companies should have to raise themselves, outside of offtakes and other deals?

TH: There’s a burgeoning strategy behind financing these projects, considering that the equity markets are pretty much dry. Companies are looking for funding from governments, from offtake loans and from strategic partnership loans. From the figures that I’ve seen, REE projects might expect to get one-quarter to one-third of capex from government agencies and export quota agencies, and maybe another one-quarter to one-half through strategic partner loan agreements.

This still leaves a considerable shortage, and this is a real challenge for REE projects. It could mean they will remain unfunded until the equity markets pick up and/or investor interest in mining picks up.

TMR: Can you name a REE project that has recently cut initial capex significantly?

TH: Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX), which has the Nechalacho project in Canada’s Northwest Territories, recently announced a 10-year partnership with the Belgian company Solvay SA (EBR:SOLB). Avalon had planned previously to build a $400M refinery in Louisiana.

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