Jim Rogers
Investor and Financial Commentator
Dylan Kelly
Terra Capital
John Forwood
Lowell Resources Fund
Graham Howard
VP Minerals
Roscoe Widdup
Triple Eight Capital
Gavin Lockyer
Arafura Resources
Carlo Ambesi
Author
In our Rare Earths Summit series, we have invited fund managers, analysts and industry insiders to give their views on rare earths, how to identify potential investment opportunities and what investors should be aware of.
Introduction
In light of the market’s positive long term thematic on rare earth elements due to their critical position in the green energy transition, Reach Markets have written Rare Earths Explained. This Industry Review delves into what rare earths are, where they come from, their place in net zero ambitions and geopolitics, key ESG considerations and supply/demand factors.
The decline in rare earth prices since the start of the year, combined with a bearish macroeconomic environment, has seen many explorers, developers and producers get brutally sold down. This opens up an opportunity for investors to participate in a sector that may be poised for a strong rebound sustained by powerful demand drivers over the long term.
What are Rare Earths?
Formed by supernova explosions, rare earths are chemical elements found in the earth’s crust. The commodities are an indispensable strategic resource for countries all over the world to transform traditional industries and develop high-tech and cutting-edge national defence technology.
There are 17 different types of rare earths which are typically broken up into two categories – light and heavy – based on their chemical properties. The elements have varied uses and pricing dynamics. Heavy rare earths are generally more valuable than light ones, due to being less abundant and more difficult to mine and process.
For a group of substances whose title insinuates scarcity, rare earth elements are actually some of the most abundant materials on earth. The issue is with their geochemical properties that result in a level of dispersion that in most cases makes them difficult and expensive to mine. Discovering a deposit that is of high enough grade to mine cost-effectively is such an irregular occurrence that they have been rendered “rare”.
Rare earths form a crucial part of many of the devices considered essential in modern society and are seeing heightened demand in the green energy transition. These mineral resources are critical in a wide array of applications, from electric vehicles and wind turbines, to next generation MRI machines and innovative military technologies.
Neodymium and praseodymium (NdPr) in particular is critical to the creation of some of the strongest permanent magnets in the world, found in products such as electric vehicles, wind turbines and aircrafts.
Rare earth elements and uses. Source: Geoscience Australia
Extreme pricing swings
Rare earths have had a few particularly volatile years, with most of the main minerals experiencing extreme swings in prices on monthly, quarterly and yearly bases.
NdPr gained 243% from October 2020 until February 2022, then lost 62.2% from February 2022 until July 2023, before regaining 14.6% from July 2023 to September 2023.
While Neodymium and Praseodymium (NdPr) prices were down 35% from January to May 2023, this has been largely attributed to a higher than expected output from China, built up inventory from 2022 and a weak global economic outlook.
The global rare earths sell off that has shocked markets over the last few months may have finally found a base, and could be gearing up for another steady push upwards. NdPr prices have improved to US$63/kg after bottoming out around the US$55/kg mark, which is expected to be a support level which triggers large producers to step in and buy physical supply.
UBS holds a longer term price outlook of US$95/kg and expects a recovery over the next 2-3 years to reach this target. Their rare earth analysts expect to see a US$75/kg NdPr price by the end of the year.
More broadly, global total rare earth oxide (TREO) demand is expected to grow at 6% CAGR all the way through to 2035, driven primarily by the permanent magnet sector. This is forecast to be 5 times the amount that China can supply.
Source: Lynas Rare Earths
While unpacking numerous factors that influence rare earth prices, Terra Capital’s Dylan Kelly attributed a portion of these volatile price movements to the ebb and flow of supply from Myanmar into China.
“The key variable during a lot of these times and where we see a lot of the volatility is from the importation from Myanmar into China being effectively turned on and turned off, usually based upon issues at the border. Whenever the border closes down, the supply of raw material coming from a lot of these unregulated markets in Myanmar effectively stops the supply of raw feedstock into the southern China processing and separation plants.”
“There tends to be a correlation between the disruption of that sort of trade and prices overall, whenever that occurs. Whenever the market has been hit with local issues, that’s been a key driver in pushing the price around, and over the past 18 months we saw prices spike on the back of the initial coup, then the supply chain was effectively disrupted for several months. At the same time, the demand was taking off – so in my mind, it’s a pretty simple story of supply and demand.”
Indeed, a similar set up could be forming now. Upwards pressure on rare earths prices have been once again propelled after Myanmar’s Kachin State halted mining. Increasing suspension of mining activities in Myanmar have reduced the country’s exports of rare earth materials to China to around 50% of their capacity, which is significant given they account for 38% of rare earth imports into China during the first six months of 2023. This has sent prices for some rare earths skyrocketing, with dysprosium oxide leaping from its August average of US$290/kg to US$356/kg on September 6 – the highest level since May 2022. Terbium oxide prices also pushed through US$1,174/kg, up from its August average of US$897/kg.
There are many different options for rare earth price forecasting, and incorporating a diversity of opinion from independent research houses is a worthwhile tactic – one that is often employed by developers at the behest of their financiers.
Arafura Rare Earths CEO Gavin Lockyer stated that: “There’s a number of independent external analysts that we use, such as Wood Mackenzie, for price forecasting. They are extremely up to speed with what’s going on in electrification and both on-shore and off-shore wind turbines, so they’ll be looking at commodity requirements in lithium, cobalt, graphite – all of those things that go into electric vehicles or other applications, which obviously have a natural affinity with rare earth magnets.”
Some of the most critical minerals in the world function in obscure markets, without regulated exchanges and with liquidity that is dependent on private deals. Rare earth elements are no different. China is the largest importer of rare earths, owing to their processing dominance.
China controls 63% of the world’s rare earths mining, 85% of the processing and 92% of the magnet production. At the end of 2021, the country merged their major rare earths operations from a variety of different entities into one big conglomerate called the China Rare Earth Group Co. That accounted for over 62% of the national heavy rare earth supplies.
With its increasing pricing power, production efficiency and global competitiveness, China’s mining and processing quotas continue to form the backbone of rare earth pricing around the world. They have hiked the output quota for 5 years in a row to keep up with rising demand. This trend continued in 2023 with the first quota of the year increasing by 20% for mining as well as smelting and separation.
China’s dominance of the market is prompting a strong supply response from the West, which has its upsides and downsides. T8 Capital’s Roscoe Widdup characterised it by stating:
“The clearly observable geopolitical friction between China and the West, amounts to both risk and opportunity. It will necessitate a degree of independence between those supply chains. That means the world could end up with more capacity in this industry than it would need in a harmonious world.”
“This presents a range of opportunities and threats for resource owners and industries consuming these critical minerals. Opportunities on the basis that without geopolitical friction there may not be an economic basis to develop certain resources – turning pasture into a productive mine really is the essence of value creation. The risks include geopolitical interference and possible leakage or dumping between the geopolitically separated supply chains impacting margins at different points in the supply chain.”
China’s supply monopoly has prompted a global outreach for new producers to enter the market. There are a few high-quality projects that are development-ready in Australia and are heading towards production, but the questions around how much of the mined material will be processed domestically still remain.
The US used to have a dominant position in the rare earths market, which was borne out of their arms race with the Soviet Union throughout the latter half of the 20th century. Their position drastically dissipated towards the end of the 90’s, as the rise of China took the global economy by storm.
The crown jewel in America’s rare earths crown is MP Materials (NYSE: MP), the largest producer of rare earth materials in the western hemisphere that currently accounts for 15% of global supply.
The US government has shown an increasing willingness to work with Australian companies in order to diversify the sources of rare earths away from China, with the strongest move so far being the almost $400 million in direct funding for the construction of Lynas Rare Earths’ (ASX: LYC) heavy rare earths refinery in Texas. The facility, which will be right next door to their light rare earths processing plant, will be specifically focusing on producing dysprosium and terbium, which are almost exclusively produced by China. Despite being on the other side of the world, the facility will still be supplied with feedstock from LYC’s West Australian Mt Weld mine.
Lynas is in the process of putting the finishing touches of its new processing facility in Kalgoorlie, which is set to produce 9,000tpa NdPr once it reaches nameplate capacity. The company recently announced to the market that their Malaysian processing facility, which is currently being expanded to be able to accommodate 10,500tpa NdPr production, has had its licence extended until March 2026. This too is being supplied by Mt Weld, and it appears that the company is willing to send their mixed rare earth carbonate (MREC) feedstock all around the world to meet market demand without involving China.
Critical minerals are such a crucial part of global supply chains that they are able to be used as political bargaining chips – and China’s dominance of their processing sees them continue to hold a strong deck of cards. The significance of this influence has been likened to the Middle East’s oil stronghold.
The likelihood of wars, terrorist attacks and state tensions are all measures of geopolitical risk and contribute to the potential panic that may arise among nations as a consequence. An instance of this was observed during a September 2010 territorial dispute that resulted in China delaying rare earth exports to Japan, which sent prices soaring. Beijing insinuated the export hold up was due to environmental concerns, but the market clearly took it as a message of China’s willingness to weaponise their dominance in the industry.
Further instances of rare earth price spikes were also observed during other geopolitical events such as the US elections, Brexit and the US-China trade war, while a significant surge in prices was seen during the Russia-Ukraine war.
Rare earth prices are strongly correlated to the price of renewable energy in a high-volatility market, and changes in rare earth prices are also strongly correlated to renewable energy indices. Trade embargoes between China and the US place additional pressure on renewable energy as a whole. Given how entrenched China is in not only downstream but upstream supply chains of these critical minerals, any negative perception of relations between China and the western world can result in rare earths spike prices, regardless of if they directly fall into political crosshairs.
The market got a solid dose of China’s dominance in a very direct matter just a few months ago. In July the country slapped export controls on some gallium and germanium products in response to the US’ restriction of technology sales to China. The two critical minerals are widely used in semiconductors and electric vehicles, and the new restrictions that threaten net zero targets around the world saw companies rushing to bulk up inventories which caused prices to spike once again.
To be completely clear, there is no green transition without rare earths. The nuts and bolts of it rest with transitioning to zero-carbon renewable energy and storing that energy in batteries that are plugged into extensive infrastructure capable of transporting it to newly electrified sectors. One of those sectors are transportation vehicles, which up until a little over a decade ago consisted entirely of combustion engines.
Driven by Electric Vehicles
The world is rapidly shifting to electric vehicles. As it currently stands, the powerful permanent magnets that allow these vehicles to function depend on rare earth neodymium to achieve sufficient strength. Quite often, dysprosium and terbium are added to improve the magnets’ high temperature operational capability. On average, 0.5kg of rare earths are used in each electric vehicle (EV).
Total global EV and plug-in hybrid sales jumped 109% in 2021 to reach 6.8 million cars, followed by another 55% jump to 10.5 million cars in 2022. 2021 saw a year of extremely supportive monetary policy around the world that sparked a significant economic recovery in the wake of the pandemic. This new breed of transport was no exception. Global subsidies for EVs reached US$30 billion that year, double that of 2020. China accounts for more than half of EV sales growth, and is rapidly expanding their use of electric buses and trucks.
There are now over 27 million of these cars on the road, 5 times the amount that were around in 2018. In a net zero by 2050 environment, all combustion engine sales cease in 2035. EVs will account for 60% of total vehicle sales in 2030 – bringing the total amount of EVs on the road to a whopping 350 million during that year.
The energy required to charge these EVs will be no small feat to achieve. There were 1.3 million EV charging units in 2020, which need to grow to 40 million by 2030 and 200 million by 2050 in order to adequately cater to the EV sales required for net zero.
There has been some talk recently about companies such as Tesla considering designing out rare earths from their electric vehicles, but there are many unanswered questions surrounding the motives and practicality behind such a move.
Arafura Resources CEO Gavin Lockyer noted that “It’s interesting that Elon Musk made comments on moving away from rare earth reliance around the same time that they were in China negotiating with their rare earth magnet supplier on price. There was obviously a little bit of gameplay going on there.”
In discussing the utility of rare earths in cars in general, Gavin explained that the trade-off between switching to another form of magnet that does not require rare earths would sacrifice too much efficiency and require an amount of extra battery power that is unnecessary. He noted that it is in the opposite direction manufacturers are moving, in terms of reducing battery size and weight in order to reduce costs. Hypothetically, even if this were to occur, there are so many other parts of electric vehicles outside of the drivetrain that are being electrified that there would still be significant demand for rare earths. These parts are expected to account for 13% of 2032 demand.
Put simply, Gavin says that the “performance of magnets that rely on rare earths are so significantly better than anything else around, I think substitution is pretty unlikely anywhere in the near future.”
Wind power
Wind power is a crucial factor in where the world’s energy will come from, and a 3MW direct drive wind turbine consumes close to two tonnes of rare earth permanent magnets. The addition of rare earths into wind turbines was revolutionary for the industry because it removed the need for a gearbox, enabling cheaper manufacturing and maintenance while also being lighter and more reliable.
In a net zero by 2050 scenario, the world needs to reach an annual capacity of 350,000MW by 2030 – requiring a boatload of rare earths for all of those onshore and offshore wind turbines.
Mining in general is usually associated with a litany of environmental, social and governance concerns that give the industry a bad rap. Rare earths in particular have significant environmental challenges due to the methods in which they must be mined and processed.
Techniques used include removal of topsoil to extract ore that is leached with chemicals, and drilling into the ground to pump chemicals into the earth to create a mixture that is able to have the rare earth elements separated in a leaching pond. There are also all of the usual issues with tailings storage, which in rare earths are often slightly radioactive due to the presence of uranium and thorium.
Water scarcity is always a factor in rare earths mining, as is the toxic waste that is produced. The Harvard International Review reported that mining to produce one ton of rare earth elements results in 2,000 tons of toxic waste.
All of these factors are further compelling drivers for the need to diversify rare earths mining and processing away from China and towards jurisdictions with higher environmental standards and regulations. Most of the incidents of chemicals leaching into groundwater, destruction of habitat without rehabilitation, onerous use of scarce water resources and failure of tailings management have occurred in China due to a lax approach to environmental practices. Most notably the world’s largest rare earth mine, Bayan-Obo, had 70,000 tons of radioactive thorium waste in a tailings facility that leaked into groundwater.
ESG due diligence is a critical part of T8’s investment evaluation process, and Roscoe Widdup delved deep when considering the operations of MP Materials – the only operating rare earth mine and processing facility in the United States.
“There are historic issues associated with rare earths mining at Mountain Pass, especially in relation to waste contamination and storage, so this was prioritised in our work and engagement with MP Materials. Water usage, particularly in the later stages of their processing, was also a focus area and one which we expect to become clearer in the medium term. We’re also mindful that weather patterns and specific weather events can result in periods where there is too much water, which can pose risks to containment as well as periods where there is risk to having sufficient water for processing. These sorts of issues require specialised work to identify and properly evaluate.”
Arafura Resources CEO Gavin Lockyer has developed a plan to not only alleviate many of the standard environmental concerns surrounding rare earth mining, but also to create a net zero production process.
Gavin explains: “We’ve got a whole team working on our path to net zero, and one of the initiatives we’re looking at is solar. We’ve got a gas pipeline that runs straight through our deposit, so we will start the plan using gas as our energy supply. But we do have clear plans to go to net zero, and that includes the building of a solar farm. We’re also currently measuring wind speed, velocities, directions and sustainability out at site to figure out if the technology is suitable. So it is certainly part of our mantra, and it’s also part of what our customers are expecting. If we can deliver a green product to an automaker that’s making electric cars, that goes a long way to marrying our product to their ESG requirements.”
The environmental damage that is being caused by rare earth mining in Myanmar is catastrophic, specifically with the methods used to mine and process ionic clay deposits. In situ leaching with ammonium nitrate by effectively throwing bucketloads of acid onto hillsides, and collecting it in tarps and buckets at the bottom, results in chemical runoff from the use of reagents in the ore. Terra Capital’s Dylan Kelly states that:
“Unfortunately, the negative environmental externalities have just been exported to poorer countries, like Myanmar, which is getting absolutely destroyed ecologically. Just have a look at some of the stuff that comes out of Global Witness. What this stuff is doing to the environment locally, it’s shocking.”
Australia’s abundant rare earths reserves could spark a new frontier of sorts, where strict environmental regulations combined with clear net zero targets usher in a new era of sustainable mining. Improved practices are already being seen in the majors, with Lynas Rare Earths (ASX: LYC) building a state-of-the-art tailings storage facility at their West Australian Mt Weld mine, which includes the capacity to recover water from tailings that is then retreated and reused. Iluka Resources (ASX: ILU) has implemented similar strategies, and is building a fully integrated rare earths processing plant on the West Australian coast that it intends to be fed solely on tailings left behind by mineral sands mining.
With a strong pipeline of development ready rare earths projects, and a spate of recent discoveries that stretch from Victoria to WA, Australia has a chance to position itself as a world leading producer of rare earths. Continued strong support from state and federal governments bode well for the country to be a strategic source of rare earths for the rest of the world.
The Australian government recently doubled down on their commitment to make the country a significant player in the global rare earths sector, with an additional $2 billion worth of subsidised loans and credit guarantees now being committed to domestic critical mineral miners and processors – on top of the $2 billion already available.
The Critical Minerals Facility, which now totals $4 billion of taxpayer funds, will go towards getting projects off the ground that were struggling to attain bank finance, and is expected to create many jobs across the clean energy, manufacturing and defence supply chain sectors.
Conclusion
As a strategic resource that is essential to modern technologies, investors would do well to stay informed on rare earths and the investment opportunities they present. With a litany of complex influencing factors that drive rare earth prices, careful analysis of all macro and micro economic developments is required to stay on top where the market is at.
The first part of this Industry Review is a good starting point to gain an understanding of important market drivers. It is clear that the green transition, China’s continued dominance and the Western world’s supply response will continue to be the significant factors for rare earths going forward.
The brief commentary by experts in this first part will soon be significantly expanded upon. Reach will be publishing a second part to this report – Rare Earths for Investors – which lays out crucial insights from geologists, fund managers and industry veterans on what they are looking for in the sector.
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