What investors need to think about...
GEOLOGIST Alex Knox followed rare earths before they were Wall Street's darlings, and continues to do so, having seen stormy weather in this industry before. Demand for rare earths remains; it's just a question of who can supply them first—and at what cost? In this interview with The Metals Report, Knox tells investors what questions they need to ask management.
The Metals Report: Your last interview with us took place in July. Have there been any real significant industry developments in the last six months that investors should be aware of?
Alex Knox: There are, actually. The tenor of the rare earth element (REE) space has changed quite dramatically in the last six or seven months.
TMR: What are the biggest factors that have influenced the business?
Alex Knox: The general lack of ability to raise financing has severely affected the junior companies, especially those that didn't have a deposit or had a deposit at a preliminary economic assessment (PEA) stage. Investors have seemed to have lost interest, and certainly there is far less news about exploration for new deposits or developing deposits that hadn't reached a PEA stage by last summer.
The focus has shifted from exploration to development. Because of the drop in prices for the commodities themselves since that time, costs have become extremely important, and that includes the costs of doing a feasibility or a prefeasibility study as well as production costs.
TMR: What has been the cause in the drop in prices for the elements during this time period?
Alex Knox: I'm no economist, but the lack of projected world growth plays a part. It was expected that these commodities were going to be needed in significant additional quantities, and the lack of growth has slowed demand. China, though it's not in recession by any stretch, has slowed down its development.
TMR: China is now talking about tightening up its environmental regulations. Is that going to have a significant effect on either REE supply or prices?
Alex Knox: I think it's going to. China is still in the driver's seat, especially on the heavy rare earth element (HREE) side, it has said for years that it was going to try to reduce its output in order to conserve its low-cost sources of production of HREEs. Certainly, any spark that's been left in the REE market is on the HREE side. But because there is still no significant production of HREEs in the Western world and many of these deposits, half a dozen at least, have reached at least the post-PEA stage and are approaching a production decision, there is still a place for HREEs, despite the drop in prices and consumer attempts at HREE substitution or recycling.
TMR: Is the number of survivors in the industry going to be curtailed drastically?
Alex Knox: That was always going to be the case. Two years ago, when over 200 companies were exploring for REEs, the sensible companies were aiming to be low-cost producers. And when prices start to drop, the low-cost producer of any commodity, especially HREEs, is going to be the last one standing, and will be available to a) acquire additional sources of production from the failed producers or b) stay in production and wait for times to get better in this business. As long as we've been in this business, we know that prices fluctuate dramatically over the years. So investors have always been looking for the company that could either reach production and distribution first, and/or the company that had the lowest production costs so that when the free market price started to fall, this company would be able to hang in there the longest.
TMR: What's the ballpark range of capital expenditure needed to put a REE mine into production?
Alex Knox: Again, specific numbers are not my bailiwick; I'm an exploration geologist. But proximity to infrastructure is a big cost factor. If you have to transport your chemicals, raw materials and construction materials a long distance and then transport your product a long distance back to be sold, that's obviously going to be more expensive.
The second factor is metallurgy. You have to take these REE elements, break down the minerals that they occur in, get them into solution and then be able to precipitate them in a form that will allow them to be separated into individual elements so that they can be sold at a maximum profit. If your minerals are hard to break down, require expensive acid treatments or even an acid manufacturing plant at your site, which costs hundreds of millions of Dollars, these are going to carry price tags that many companies can't cover.
Another important cost factor is the cost associated with anomalous radioactivity. These deposits tend to accumulate uranium and thorium. That's just the nature of the beast. The key question is, are these radioelements occurring within the minerals that contain the REEs, or are they in subsidiary minerals, such as thorite? The common REE mineral that contains significant radioactivity is monazite, which is commonly found in certain LREE deposits. If you have monazite or other REE minerals that contain the radioelements, then these will have to be disposed of later on, as opposed to on site. That's going to be extremely expensive. If, on the other hand, the REEs are in a separate mineral, they can be left behind and put back in the tailings, which carries a significantly lower cost for the producer.
TMR: What is your general assessment and your forecast as to what's going to happen in the REE space?
Alex Knox: From the investor side, you have to look very critically and ask very tough questions if you're considering a company that's going to produce LREEs. They are going to be able to find their way into the market through a relationship with a consumer or significant cost advantages.
On the heavy side, this is going to be a fascinating year, because we're going to get a real shakeout. The market is open to significant production on the HREE side because there is no significant production outside of China. A number of these companies are forecasting that they'll have either detailed prefeasibility studies or full feasibility studies done by year-end. We'll also see if the Orbite process is going to be what it's touted to be, as companies are able to utilize its process. If it works, this could be a significant cost reduction that could propel them into a leadership role in the REE space.
Investors really have to focus on the cost side. How is the company doing on its costs of production? What are its recoveries like? That's an area that can be improved in theory dramatically. How are the companies doing in extracting the valuable byproduct credits that they all have? How effectively are they going to be able to utilize this additional source of revenue to keep their costs down and be the company that crosses the finish line first? The small benefit that's added by a small tweak in your metallurgical system or being able to utilize a different metallurgical system entirely could make or break a project. The one who picks the winner is still going to have a significant amount of upside potential to their investment.
REEs are a whole new ballgame, and potential producers are feeling their way along. The only deposit type that has any previous history of production is monazite, which has been extracted from mineral sands and provided a meager amount of REEs that were produced from the 1950s onward. This is brand new territory. Innovation and cost efficiency are going to be what separates the adults from the infants in this industry. I still think there's a significant amount of money to be made by investors in REEs, even though they may not be the shining commodity they were a few years ago.
TMR: We greatly appreciate your time today, Alex, and the updates on interesting developments on the horizon for later in the year.
Alex Knox: Thanks a lot.
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