Commodities | Jul 31 2013
This story features LYNAS RARE EARTHS LIMITED. For more info SHARE ANALYSIS: LYC
In response to the publication of our update on rare earths elements (REEs) yesterday, we received a follow up from Molycorp, which is mentioned inside the story. Molycorp wishes to clarify that:
"Molycorp has announced that it will move to production beyond our initial target run rate (~20,000 mt/year) if market demand, product pricing, capital availability, and financial returns justify such production. This not the same as declaring that "Molycorp has placed its Mountain Pass mine development on hold for now, in the wake of falling REE prices, awaiting further funding."
FNArena believes some of the confusion following the release of our story might have been caused by the fact our story was only partially accessible to non-subscribers. Which is why we haven't made any changes to the original story, other than the inclusion of Molycorp's follow up, and we now make the story available in full to everyone who wants to read it.
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– REE prices continue to fall
– China in control
– Demand expected to grow
– Difficult balance for Lynas
By Greg Peel
Only a couple of years ago, industry experts suggested that if your rare earth deposit did not contain marketable quantities of dysprosium, your mine could never be commercial. Light rare earths cerium and lanthanum would likely end up in oversupply, they said, but neodymium magnets would become essential to mankind. In 2011 the global rare earth picture looked a lot different to 2009, and in 2013 it looks a lot different to 2011.
China produces around 90% of the world’s rare earth metals and consumes around 70%. Rare earth mining is environmentally destructive, and rare earth processing is highly complex and very expensive. “Rare” is a scientific classification and not a reflection of abundance, although commercial deposits of rare earth elements (REE) are indeed few and far between across the globe. There are many companies around the world sitting on REE deposits of varying viability, but in 2013 only two boast a combination of the right deposit and sufficient progress towards target production to realistically provide any ex-China supply growth in the foreseeable future. They are Molycorp in the US and Lynas Corp ((LYC)) in Australia.
Molycorp has placed its Mountain Pass mine development on hold for now, in the wake of falling REE prices, awaiting further funding. Lynas made the decision a few years ago to outsource the processing of its Mt Weld production to cheaper Malaysia, and has no doubt rued that decision ever since. Local environmental/political ructions have ensured development of the Lynas Applied Materials Plant ((LAMP)) has been an on again, off again affair now for about three years, costing the company not just money but lost earnings opportunity from ore already stockpiled. And REE prices have done nothing but fall in the meantime. With prices wallowing, production is up and running in Malaysia, but high balance sheet gearing remains a concern for Lynas.
REEs are strange beasts. Base metals are usually found in combinations with each other and/or with precious metals in varying orebodies yet all of these metals are scattered about the periodic table. REEs, on the other hand, are an insular bunch. Find one and you can pretty much guarantee to find all of them together in varying grades, despite all bar one running consecutively from atomic number 57 to 71. Yttrium (39) is the adopted cousin.
We talk of “rare earth metals” but few REEs are metals in the common sense, and their individual usage varies considerably. A use has been found for just about all of them, and a fairly specific use to boot, but in commercial terms there are really only six which matter at this stage. They are the four “light” REES, lanthanum, cerium, praseodymium and neodymium, the “heavy” REE dysprosium, and country cousin yttrium.
Lanthanum is used in fluid cracking catalysts. Cerium is used to polish glass (sounds trivial, but is actually very important in today’s screen-based world). Praseodymium and neodymium are used in permanent magnets (hybrid cars, wind turbines) and dysprosium is used in high temperature magnets (mostly military applications). Yttrium is significant in phosphor applications (LED lights, electronic devices), providing the colour red, while other REES are used for other colours. But application volumes are tiny, recycling technology has advanced, and ongoing improvements in lighting efficiency and longevity are proving self-defeating on a demand basis.
Major producer China was happy to supply the world with REEs up until 2010. The West had earlier decided there was simply not enough demand for REEs to justify the cost of production until the twenty-first century gave us “smart” devices on the one hand and “green” considerations on the other, very suddenly bringing REEs into their…ah…element. Demand raced ahead of supply. But two developments in China brought the global REE market to a head.
Firstly, Beijing woke up to general environmental issues and as a result constrained destructive Chinese REE production. Secondly, China was exporting REEs to, for example, Japan for use in the manufacture of televisions, and Japan was enjoying the high margins. China was also now producing televisions on a mass scale, so why hand over margins to Japan? Export quotas were also introduced.
By 2011, REE prices had shot up by as much as 600%. This forced ex-China into rapid technology improvements and greater efficiencies in consumption, recycling and substitution. Realising it had just shot itself in the foot, China eased its quotas. The subsequent fall in prices met a slowing global economy, and prices fell further. In 2013, the general REE basket price is down some 80% from 2011 and China is still controlling production and export. Today’s prices are still above those of pre-2010, but low enough to threaten the future of Molycorp and Lynas, let alone any other hopefuls.
It all depends on what happens from here.
Current global REE supply is running at around 110ktpa, notes Deutsche Bank. Molycorp and Lynas expect to have a combined 40ktpa of capacity available by 2014. China’s current production quota is 93.8ktpa, with domestic consumption looking likely to exceed this rate, suggests Deutsche, by 2016. The issue, therefore, is as to whether Beijing’s determination to restrict domestic production will ease once consumption levels suggest a domestic shortfall.
The global demand-supply balance then depends on ex-China consumption. To evaluate such numbers, one can no longer simply talk of REEs as a single entity on “basket” pricing but must look at individual REE demand stemming from specific application growth. Deutsche forecasts 9-11% per annum growth in the REE magnet industry ahead driven mostly by wind turbine (forecast 26% compound annual growth rate) and hybrid/electric vehicle (24%) growth. The analysts also see 5-6% growth in glass polishing powders given growth in electronic devices.
The next problem is that if one wishes to extract a particular REE from the ore fed into a processing plant one must extract them all anyway. Cerium is typically the most abundant element within REE ore while on the other end of the scale, dysprosium is typically only present in small quantities. The result is that in order to exploit the demand for dysprosium one must keep producing more and more cerium, which then becomes oversupplied.
Weighing up this demand-supply conundrum, Deutsche sees strong demand for neodymium, praseodymium and yttrium ahead, suggesting prices rises of over 40% to 2018. Cerium and lanthanum, on the other hand, will be oversupplied.
JP Morgan agrees on a general basis but the analysts’ view varies slightly on a specific basis. JPM is forecasting overall REE demand will grow to 133kt by 2020, representing 3% compound annual growth, but expects the majority of demand growth will come from neodymium, praseodymium and lanthanum, while cerium will see the biggest surplus.
The surprise here is that neither broker includes dysprosium in their growth mix. Only a few years ago, the US government placed dysprosium on its “strategically critical” list and set about locking in Molycorp’s entire future production. As noted at the beginning of this article, the suggestion once was that if an REE orebody did not contain sufficient levels of recoverable dysprosium, walk away. In the meantime however, necessity has again proven the mother of invention. China’s heavy-handed and hasty quota policy of 2010 forced technological advances which now include a reduced need for dysprosium as the constituent in high temperature magnets.
Such technological advances also include those in the tricky business of recovering the phosphor elements such as yttrium from discarded smart phones et al, and the exponential growth of such devices has now led to equivalently exponential growth in recyclable discards. And also as noted above, highly efficient lighting is now being produced by replacing incandescent household bulbs with long-life varieties (each containing a speck of REE) and neon has given way to LED which again much increases longevity and thus reduces ongoing demand.
Lanthanum demand, JP Morgan suggests, depends a lot on swing producer Molycorp. If the company chooses to shelve or delay its phase two development at Mountain Pass, lanthanum will land in global deficit.
REE producers are thus faced with this difficult issue of wheat and chaff, and just exactly which is wheat and which is chaff. Copper miners typically end up with gold as a by-product, which they can sell as a sideline to reduce the net cost of producing copper. By contrast, in attempting to exploit a global deficit in neodymium, REE producers will only continue to fuel a global surplus in cerium, restricting the net value of their processed ore and thus their mining/processing operation. If the global price of the REE basket keeps falling, there may not even be any REE producers outside China.
But Chinese producers have also suffered as a result of their own government’s policies, and a slowdown in global growth to which China is contributing. Quotas aside, on current pricing many Chinese REE producers will be forced to shut down, if they haven’t already. It must always be remembered that reliable information is difficult to extract from behind the Bamboo Curtain. Either way, there is an implicit REE price floor just as there is with any commodity, at which production shutdowns reduce supply and thus prices rise once more. Similarly, there is a cap price at which REE consumption is commercially unviable, leading to greater substitution, recycling and technological diversion.
Despite the inherent lack of clarity in the global REE market, JP Morgan believes there are reasons to be optimistic with regard the medium-term outlook.
For one, it appears there were a few savvy Chinese consumers of REEs who saw the writing on the wall and began stockpiling ore before Beijing stepped in with its quotas, sending prices sky-rocketing. Those stockpiles must soon run out. On the other end of the equation, “green” is good whether coal is cheap or not and the world is shifting towards cleaner technologies irrespective of political interference. The demand for REE magnets will grow. The demand for “smart” things, one assumes, is still in its early stages, hence the need for glass polishing powders, colour phosphors and so forth will not disappear completely.
In between we have both Chinese and non-Chinese producers curtailing REE production, and sensible industry discussions are now being conducted with an eye to setting price floors. Add this all up and JP Morgan forecasts that the global price of the REE basket will rise from US$16kg now to 18 by 2014, 22 in 2016 and 27 in 2018.
That’s the macro picture. For producers such as Molycorp and Lynas there are also micro pictures to consider. In the case of Lynas, a lack of industry clarity, political risks in Malaysia, high gearing and low prices have proven enough for Deutsche Bank to downgrade to a Sell rating this month.
JP Morgan has sufficient faith in its macro view to have upgraded Lynas to Buy (Overweight) this month. The only other two brokers in the FNArena database game enough to cover the stock are both sitting on Hold (Neutral), while 12-month target prices range from 30c (Deutsche) to 60c (JP Morgan) against a current trading price of around 40c.
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