Feature Stories | Aug 02 2012
This story features HASTINGS TECHNOLOGY METALS LIMITED. For more info SHARE ANALYSIS: HAS
By Greg Peel
“While some companies can point to good access, and a few can also claim to have ways to raise the money required, there remain very few that can talk a cogent gathering of sentences about how they intend to process their minerals AND do it profitably.”
Christopher Ecclestone, Hallgarten & Company
Ecclestone's statement sums up why last year we saw a rare earth element (REE) bubble, and this year we've seen a bust. I have often made note in past articles on the subject of REEs that the hysteria engulfing these elements has been more than reminiscent of the uranium bubble-and-bust of the last decade. Spot uranium traded at US$20/lb at the beginning of 2005, hit US$138/lb in early 2007, and fell to US$40/lb by 2009. There was no nuclear disaster to prompt the price collapse, no demand crash and no sudden supply surge. The run-up in price had simply been the result of speculative nonsense, and it was always going to end in tears.
The uranium price has not much recovered today, with Fukushima ensuring such. However, China's nuclear ambitions are back on track, and it was largely China's nuclear ambitions which drove the speculative bubble in the first place. Hedge funds began buying uranium, and the herd followed. Suddenly there was a global explosion of junior mining companies declaring uranium deposits in their mix, and so their share prices were sent to the moon. And, ultimately, back again.
The story has repeated with REEs. China is again involved, but this time in a reverse role. While the rest of the world was paying little attention to REEs at the beginning of the new century, China was providing around 95% of global REE supply. Modern technology has since extensively boosted global REE consumption and demand, prompting the rest of the world to quickly get in on the act. Not being one to miss an opportunity, last year China attempted to corner the market in processed REEs by imposing export restrictions. Already strong ex-China REE prices “went parabolic” as a result. Consumers were priced out of the market, prices peaked, and sensing a potential shooting-oneself-in-the-foot experience, China relented and eased export restrictions. The price of valuable heavy rare earth element dysprosium, for example, has fallen from a US$2500/kg peak to US$1200/kg.
It was easy for junior miners to claim uranium deposits in 2006 – it's very hard to mine anything without finding at least some small level of uranium. The share market did the rest. Yet large, commercially viable deposits of uranium are rare. So are large, commercially viable deposits of REEs very rare, but that's not why they're called REEs. The label “rare earth” is a scientific classification, not a qualification. Cerium, for example, is more abundant than copper. It's not that difficult to find traces of the more valuable and scientifically defined REEs either, but it's very difficult to find grades worth even considering. Yet as was the case with uranium, this fact did not stop geologists jumping out of their skin to inform the market their company's deposits contained REEs. Once again, the share market did the rest.
Ahead of the REE price peak, over 200 global mining companies of varying sizes were quick to declare REE deposits within their resources. As was the case with uranium, wild-eyed investors responded accordingly. It was not long, however, before investors came to realise that finding traces of REEs was one thing but that finding commercially viable traces was another, and that viability came down to composition of the relevant REE basket discovered. Furthermore, each REE must be processed out of the mineralisation in a very elaborate and costly process. Investors were soon to learn that the sheer extent of capital expenditure required was enough to kill off any less than ideally positioned REE aspirant. Notes Ecclestone:
“While the investing audience initially knew nothing about even the REE basics, the basics are now taken as given and corporate presentations have run to the end of the rails on processing platitudes. As we have said ad nauseum before, REEs are about 'chemistry, chemistry and chemistry'. That is all one needs to know and if one doesn't have the chemistry right, then grade, sheer quantity, a nearby highway or a friendly Japanese offtaker won't save a project from an ignominious fate.”
The analyst suggests a “sheer credibility gap” has opened up in the REE space over the last year, and it all comes down to three issues. Firstly, simple access. Some projects touted in Canada, for example, have proven so isolated they cannot be viable under “even the most rosy price scenarios”. Secondly, financing. Capex spend required can drift from the low hundreds of millions of dollars into the billions. Thirdly, processing. Plausible and cost-effective processing exists for only some of the complex mineralisations with which REEs are associated.
Ecclestone's statement, which opened this article, will now make more sense. Let's review:
“While some companies can point to good access, and a few can also claim to have ways to raise the money required, there remain very few that can talk a cogent gathering of sentences about how they intend to process their minerals AND do it profitably.”
It is now a commonly held belief among REE experts that of the 200-plus companies at some point declaring themselves in the REE race, only a handful will actually survive. Or at least continue to pursue REE ambitions. In FNArena's last REE instalment, Rare Earths, Lynas And Hastings, expert Jack Lifton cited Molycorp and Ucore in the US, South Africa's Great Western and Australia's Lynas Corp ((LYC)), along with a couple of others, as being in the race. He also singled out Australia's Hastings Rare Metals ((HAS)) and Northern Minerals ((NTU)) as contenders, albeit with some way to go.
Hallgarten & Company specialises in analysis of the global resource sector. Hallgarten had already culled its REE focus down to those companies which “might survive”, and now the analysts have gone a step further and are focusing on those they believe “will survive”. From 200 companies, they are now left with five – Molycorp, Lynas, Ucore, Great Western and Northern Minerals.
To that list we can also now add Australia's TUC Resources ((TUC)).
In 2005, TUC Resources went looking for uranium near Pine Gap in the Northern Territory of Australia, and pegged out tenements. Early success was not forthcoming, so TUC expanded its tenements and kept looking. By 2009 TUC had found what might be something of a uranium deposit, but by 2009 the uranium price had bubbled and burst. At another site, while looking for uranium, TUC found a prospective light rare earth element (LREE) deposit. By this stage REE prices were on the move up. Perhaps a change of tack was in order?
In 2011 TUC was revisiting earlier test sites, this time with REEs rather than uranium in mind, and what the geologists discovered would have required a few stiff drinks afterwards to absorb. REE prices had already peaked at this point, and so finance would prove a lot more difficult to obtain than only a short time earlier, but TUC had discovered a deposit of a mineral called xenotime.
Taking into account all that has been said above, xenotime represents somewhat of an REE Holy Grail.
Hallgarten has been convinced for some time that “the word” in the REE space is “xenotime”, which is what originally sparked the analysts' interest in Northern Minerals – the only other xenotime player in the heavily crowded REE field. Xenotime is an REE phosphate mineral, the major component of which is yttrium orthophosphate (YPO4). The rare earths dysprosium, erbium, terbium and ytterbium and radioactive elements such as thorium and uranium are all secondary components of xenotime.
The principal sources of REEs being touted by the bulk of REE companies are bastnasite and monazite. Loparite is the source for the Silmet plant in Estonia but it is the lateritic ion-adsorption clays found in China which are the “virtual magic elixir” of the industry, being “seemingly easy” to both mine and process. While this type of mineralisation has also been found in Vietnam, and may well be present elsewhere in the world, the Chinese have been “widely viewed as blessed” in laying claim to this peculiar resource.
Despite their high relative abundance, notes Hallgarten, REEs are more difficult to extract from host mineralisations and then to process into concentrates or oxides than equivalent sources of transition metals, making the REEs relatively more expensive. (“Transition metals” are all metals exhibiting malleability, ductility and heat and electrical conductivity, of which there are 38, including everything from copper, nickel, zinc and iron to precious metals.) The industrial use of REEs was very limited until efficient separation techniques were developed.
Ion-adsorption clays are the most sought after, yet most elusive and mysterious, source of REEs due to their ease of processing, and so far are seemingly geographically restricted to Southern China. Not only is the overall refining easier, it is more economical and theoretically more environmentally friendly. What TUC Resources has in in xenotime mineralisation is not, Hallgarten is quick to point out, ion-adsorption clay, but rather “ionic-like”clays. Hence TUC has not quite hit the jackpot, but has stumbled upon arguably the next best thing.
“Scant mention is made of xenotime except amongst the [REE] cognoscenti,” notes Ecclestone. “This is not surprising as TUC Resources and Northern Minerals are the only companies we know which have it”.
The significance of xenotime and its primary component, YPO4, is that your common-or-garden REE mineralisations contain high levels of abundant cerium and lanthanum (which have since collapsed in price) which must first be separated in order to get to the more valuable REEs that appear in much smaller proportions. With YPO4, on the other hand, one must first separate phosphate and yttrium before reaching a preponderance of the more attractive heavy REEs and the more obscure of the light REEs.
Phosphate is fertiliser, and hence has its own market. The primary use of yttrium is to make red phosphors, which were once used in television cathode ray tubes and are now used in LEDs, and other uses include the production of electrodes, electrolytes, electronic filters, lasers, superconductors and various medical applications. Yttrium is not strictly an REE (it has the atomic number 39 while the scientifically-defined REEs range from 57 to 71) but is included in the market's REE suite, and on that basis it is the fourth most used REE after lanthanum (high refractive index glass, camera lenses, battery electrodes…), cerium (polishing powder for computer/smart phone screens, yellow colour in glass and ceramics…), and neodymium (magnets, lasers, violet colour in glass and ceramics…). Yttrium represents a share of around 7.5% of total REE demand.
It is in yttrium that Hallgarten sees the strongest potential for ex-China producers to take a significant share away from the Chinese. The exalted group boasting this potential includes Malaysian tin miners, for whom yttrium is a by-product, and, once up and running, Northern Minerals and TUC Resources. Estimates suggest, with a 20% margin for error, that by 2015 annual demand for yttrium oxide will be 12,750tpa while supply will only reach 11,200tpa.
The upshot thus is that while other REE hopefuls are battling it out with their lanthanum and cerium production, the somewhat exclusive club of TUC and Northern will be all but controlling the ex-China yttrium market and producing marketable phosphate to boot. However, it is only once these primary products are removed that the real jewels are revealed.
The following pie charts from Hallgarten breakdown the xenotime components testing has revealed at TUC Resources' Stromberg project and at Northern Minerals' Brown's Range project respectively:
Outside of yttrium, each exhibit a large proportion of valuable heavy REEs, a proportion of “seldom spoken of” medium REEs (samarium and gadolinium), and a smattering of less valuable light REEs. Lynas Corp's Mt Weld project and Molycorp's Mountain Pass project almost exclusively contain light REEs, with a dash of the medium REE europium.
If the heavy REEs are the jewels, the diamond amongst them is dysprosium, according to many an industry expert, which is used in the production of super-magnets. But to put a selection of heavy REEs into perspective, a kilogram of dysprosium oxide traded for US$50 in 2005 and trades at US$980 today. In the same time frame, samarium oxide has risen from US$4.50/kg to US$120/kg and terbium oxide from $325/kg to US$1750/kg. Experts fear the world's prospective dysprosium production will never be able to keep up with demand, and the US military has already laid claim to everything Molycorp can produce.
The issue for any REE hopeful which can lay claim to medium and/or heavy REEs as well as light REEs is that proportions may be so small as to make production non-viable given the sheer amount of ore which would need to be mined. It's all very well for eyes to glaze over at the per kilo prices of these elements, but they are not elevated for no good reason. China found, to its brief detriment, that cornering the global market via export restrictions proved self-defeating when prices skyrocketed beyond the commercial means of consumers. It is true that a significant use of REEs, for example, is in the production of today's flat screens (television, computer, smart phone, tablet) and that global demand for flat-screened products has ballooned. However last year's bubble and bust for REE prices indicated flat screen producers have a price tolerance limit, and if they can't afford the REEs then the flat screens simply won't be built.
Flat screens are but one use of different REEs but the moral to the tale is that demand destruction through restrictive pricing translates into the non-commerciality of many an REE hopeful's deposit. And mining is not the really expensive part. The really expensive part is the processing. That is why industry analysts have reduced the potential REE producer pool from the over 200 who could merely lay claim to the existence of REEs to the handful who have a possible shot at commercial reality.
The reality check, Hallgarten suggests, comes from the more nuanced complications of REEs. Heavy REEs may attract better pricing but they appear in such small quantities that the amount extracted is very small for the amount mined. The real business is in the downstream processing. Many of the new up-and-comers in the REE space have uranium and/or thorium to deal with in their mix. Many of the projects are years away from production.
On the subject of the radioactive by-products, it should be noted that these are a curse rather than a saleable bonus, as they add to the environmentally unfriendly potential of REE mining and processing. Investors in Lynas Corp are desperately awaiting the approval of the Malaysian government for the Lynas Advanced Materials Plant (LAMP) to fire up, given Lynas already has two-year's worth of production ready at the Mt Weld mine. However a by-product of the process will be thorium. Amounts will not be significant enough to much trouble a Geiger counter, it is suggested, but it hasn't stopped the Malaysian opposition party screaming “The next Fukushima!”, and so forcing the government to hesitate due to popular concern.
As noted, if an REE hopeful is knocked out of the race by the cost of mining per kilo of product, it will be flattened by the exorbitant cost of processing of less-rich ore. Aside from the potential richness of xenotime, this is where TUC's potential value really becomes apparent.
The mineralisation at TUC's Stromberg prospect is situated at, or very near, the surface, in flat-lying tabular bodies hosted by sandy clay. The deposit stretches for about 2.5km and ranges from flat to gently sloping. Hence the prospect has several advantages, Hallgarten notes, being: reduced drilling time to the establishment of a “resource” (by industry definition); lower stripping ratios offering a potentially low-cost, a shallow mining scenario; and a greater physical ease of mining due to generally softer clay.
As noted earlier, TUC's prospects are similar to, but not identical to, China's favourable geology. The company's theory is that while the South China clays are waterborne in origin, Stromberg's REEs ascended through fissures from sources below and settled in layers near the surface. It is different to the Chinese situation, but also different from Northern Minerals' deposits which, Hallgarten points out, are hard-rock xenotime.
Stromberg's material may be suitable for “direct leach” of the heavy REEs from the clay without first undergoing any physical mineral processing. “This is where things start to get exciting,” exclaims Ecclestone, “as leaching may lower the upfront capex". Hallgarten sees the shots being called by some future trading partner/offtaker who will start steering the project to its own requirements.
TUC's own tentative schedule does not foresee production readiness until late 2016. Hallgarten's mantra is the winners in the REE race will not be the mines with the best grades but the mines which are up and running first. A few sizeable mines around the world would make the going tough for the latecomers if they can't trim their proposed time schedules. Hallgarten believes TUC is a contender in the race because it can “fill the slot” for heavy REEs which neither Molycorp nor Lynas can do, and do so at an affordable capex.
TUC's required capex will nevertheless still run into the hundreds of millions. Now that the hysterical REE bubble has burst, finding the financing will not be as easy as it was. But given so many REE wannabes have since been exposed for what they are, thus greatly reducing the pool, Hallgarten believes even latecomer TUC can get a foot in. Apparently the company is “on several radars” already.
It may yet come down to a race between TUC and Northern. Northern is more advanced but comes with existing stakes held by Lynas and individual investor Conglin Yue. TUC is a clean-skin, and Hallgarten suspects the company will look to do some sort of deal in which it retains at least some stake through to completion.
TUC's story is an exciting one but success is by no means a lay-down misere. The REE space may well go into prolonged stasis, Hallgarten warns. The resource may not live up to the promise of the testing. The company may suffer funding problems or on the other hand may sell out to a major player early in the game, for only a small premium. There may even be environmental issues regarding the thorium/uranium grades within the deposit.
TUC's potential lies not in its REE grades, which are not comparatively substantial, but in the company's Chinese-like clay-based deposits offering cheaper mining and processing. Hallgarten does not prefer TUC Resources over Northern Minerals or vice versa at this point, noting both are worthy of further analysis while both yet lack a “resource”. Metaphorically, Hallgarten perceives Molycorp and Lynas as being the massive textile mills of the REE space, churning out cotton sheeting by the mile, while TUC, Northern, Great Western and Ucore would be the silk-weavers with a specialist output.
Ecclestone's conclusion:
“We see the REE world being winnowed of its chaff over the next year with companies repurposing themselves in droves. This should leave a clearer view of who the survivors will be. As word gets out of TUC’s clay potential it shall be in a two-horse race with Northern Minerals in the ‘Heavy Stakes'. No-one else will be able to compete for the attentions of the few end-users so disposed to take strategic stakes or make full acquisitions. Thus it's either Northern falls first or TUC but whichever one goes the process will shine a massive spotlight on the survivor.”
Hallgarten has initiated coverage of TUC Resources with a “Strategy: Long” recommendation and a 12-month target price of 35c (last traded price 11c).
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