Testing time for rare earths and metals

Japan’s economic crisis following its devastating succession of earthquakes, tsunami and nuclear fallout has posed a conundrum for investors in rare earths, rare and ‘strategic’ metals and the companies developing deposits of these prized commodities. Japan has been a prime consumer, absorbing as much as 50 per cent of world supply of some of these materials, which have been enjoying an unprecedented boom for the past five years, stimulating an estimated $1.1 billion (£690 million) of corporate capital raising last year, according to Intierra Resource Intelligence.

The question now taxing the market is whether the dislocation that Japan is suffering will choke off demand for rare earths and metals or whether, instead, the eventual rebuilding of Japan, combined with possible further supply constraints from China (hitherto the key source of many of them), will deliver a new lease of life, to some at any rate.

The possible implications of Japan’s crisis for future nuclear power projects have wiped millions off the value of previously buoyant uranium company shares, but, although rare earths are often found near uranium deposits, their market dynamics are different.

There are 17 narrowly defined rare earths, most with crucial applications to modern life, from disk drives and i-pads to wind turbines, hybrid vehicles and smart bombs. They range from terbium, used in lasers and fluorescent lamps, and praseodymium, used for magnets, arc lights, welding goggles and glass colourants, to cerium, used in ceramics, catalytic cracking in oil refineries and self-cleaning ovens, promethium, used for nuclear batteries, and yttrium, used for high-temperature semiconductors and microwave filters.

Despite their name, most ‘rare’ earths are fairly plentiful. But they tend to be dispersed and occur only infrequently in commercially exploitable forms.

Replacing China
In the past, rare earths were seen as a mug’s game from an investment point of view, as were rare metals, such as tungsten, used to harden steel. China, origin of more than 90 per cent of world supply from its Baiyun Obo mine in Inner Mongolia and elsewhere and reckoned by Intierra still to host around 60 per cent of world resources, had the disobliging habit of periodically dumping supplies onto world markets, upsetting the economics of projects elsewhere.

Since the mid-1980s, however, China’s own growth and requirements for these materials have altered the balance. Last year, the People’s Republic imposed quotas on exports of many rare earths and metals because of their ‘strategic’ qualities, a move that was accompanied by a sevenfold price rise in six months for cerium oxide, with several others more than doubling.

Many of the key players from around the world assembled in the City of London recently for an ‘investment summit’ on rare earths, speciality and strategic metals, organised by equity research concern Objective Capital. The consensus view is that, while the hectic upsurge of recent years may have run its course, the medium-term outlook remains fair, because of the global supply and demand position.

Some, such as vanadium, could prove better placed than others. And several of the companies in this sector still face exciting prospects.  
     
The search for non-Chinese sources is this year bringing the reopening of Mountain Pass in California, an open-pit mine that used to be a major supplier until environmental restrictions and then low rare earth prices forced its closure in 2002. Colorado-based Molycorp Minerals, which raised £245 million by floating on Wall Street last year, has acquired and is on track to open the mine again this year.

Also aiming to start production this year is Australia’s Lynas Corporation, currently sitting on what it claims to be the richest known rare earths deposit in the world at Mount Weld in Western Australia, with an estimated 1.4 billion tonnes of ore holding almost 17,500 tonnes of rare earths, measured, indicated and inferred. The company reckons it has stolen a march on competitors with first output projected for the third quarter of 2011.

Elsewhere, another nimble mover has been Toronto-quoted Stans Energy, which has obtained control of a former Soviet rare earths mine at Kutessay in Kyrgyzstan. The company recently pleased the market with a formal resource estimate for part of this deposit, the Kutessay II open-pit mine, of nearly 43,000 tonnes measured and indicated at an average grade of 0.264 per cent, and an additional inferred resource of 3,560 tonnes at 0.204 per cent.

Looking to London
Many of the quoted players in rare earths and rare metals are listed in Canada, the USA or Australia. But several are now eyeing the London market.

Hugh Mackay, chairman of Avannaa Resources, says he is ‘actively considering’ floating the company on AIM or the Toronto Stock Exchange to fund development of the company’s Karrat rare earths deposit in Greenland, which he suggests could contain 26 million tonnes at an average grade of 1.3 per cent with a potential value in the ground of some £600 million. If Copenhagen-based Avannaa decides on the London flotation route, the company could find itself jostling for attention with several others keen to exploit what has been one of the most buoyant sectors in the mineral market for several years.

Paul Burton, an experienced Australian mining figure now heading antipodean mining hopeful TNG, is considering a float for the company on AIM this year, with a 140 million-tonne resource of vanadium, with titanium and iron ore as well, at Mount Peake in Australia’s Northern Territory. TNG now trades at the equivalent of 8p a share Down Under.

A former colleague of abrasive mining entrepreneur Robert de Crespigny, Burton argues that vanadium, a key component in steel production, batteries and motor vehicles, whose price has halved to around $17,000 a tonne in seven years, is now poised for a boom like that which rare earths themselves have enjoyed over the past half-decade. He cites a new independent scoping study suggesting that £425 million of capital spending at Mount Peake could generate annual production of five million tonnes for nearly 24 years with cash flow of £105 million a year over that time.  

Among companies already quoted in London, wheeler-dealing David Lenigas, the Australian boss of Africa-focused mini-conglomerate Lonrho, has changed the name of AIM-quoted would-be music publisher Zest Group to Rare Earth Minerals. The plan is for the company to build up a portfolio of direct and indirect interests in rare earth minerals exploration and production assets, and it says it has already identified a possible first target.

Rare earths have a tendency frequently to occur near uranium deposits. Forte Energy, an AIM-quoted Australian uranium explorer that earlier this year raised £9.35 million to develop projects in West Africa, is working to establish a parallel estimate of rare earth deposits at its Firawa project in Guinea, already estimated to hold a potential 11.6 million lbs of uranium oxide U3O8.

China-linked AIM counter Creat Resources has cheered investors of late with an increased resource estimate of resources of lithium, used for mania-countering drugs, at the Mount Cattlin mine in Western Australia, owned by Galaxy Resources, in which Creat owns 18 per cent. Another Greenland play, Aussie-quoted Greenland Minerals and Energy, which has suggested its potentially rich Kvanefjeld rare earth, uranium and zinc project has the potential to supply more than 20 per cent of global rare earth demand, is also thought to have toyed with the idea of seeking an AIM quote.
                
Tantalum teasers
Tantalum, a hard, refractory rare metal used in alloys and electronic capacitors, is the focus for Noventa, which, as recently foreshadowed by Growth Company Investor, has raised nearly £7 million in 10 per cent preference shares, convertible at nearly 263p a share to upgrade its processing plant and expand its operations in Mozambique. The Jersey-based company, steered by engineer and company doctor Eric Kohn, targets production at an annual rate of 600,000 lbs in the near future, with break-even in sight.

AIM-quoted Noventa, which lost £6 million last year, had been offered £11 million of loan finance but instead has tapped the market with £7 million of convertible preference shares into ordinary shares at a 25 per cent premium to their market price. The company, which has offtake agreements for a major portion of its projected output, suggests £19 million of capital expenditure, partly loan financed, could achieve payback by 2013 and leave it with nearly £14 million in the bank.

Noventa has three mines in Mozambique’s Zambezi province – Marropino, Morrua and Mutala – and is now producing at the rate of 50,000 lbs a year from tailings left over from past mining operations. Kohn stresses the benign mining policy of the Mozambique government.

He envisages cash costs of $37 a lb, against a market price for tantalum that has risen from a $32-per-lb low to more than $130 today and is likely, he suggests, to settle down to a long-term $70 a lb. Tantalum, used in capacitors for mobile phones and a wide range of other applications, enjoyed a boom during the dotcom bubble before collapsing, but has recently been recovering strongly in anticipation of a developing world shortage.

Noventa shares have had a similar experience since floating four years ago at 175p. They have rallied over the past year and, now 197p, could go further if Kohn’s plans bear fruit.   

By contrast, tantalum, rare earths, niobium and iron ore projects in Saudi Arabia have brought scant joy to Tertiary Minerals, long a stock market dog. Recently, however, the company’s shares have perked up on possibilities for its fluorspar projects at Storuman in Sweden and in Norway.

Tertiary plans a formal resource estimate next month for its key Storuman fluorspar project in Sweden after encouraging drilling results. The Macclesfield-based company says latest drilling has shown further thick intervals of shallow mineralisation, suitable for open-pit mining, with grades including 22.2 metres with 11.6 per cent fluorspar and 22 metres at 15.3 per cent fluorspar.

AIM-quoted Tertiary indicates that the drilling also reveals more higher-grade intervals, which might be suitable for mechanised underground extraction, including 7.5 metres grading 19.7 per cent and 2.35 metres grading 21.9 per cent. The company has been bullish on the outlook for fluorspar, which produces hydrofluoric acid with uses ranging from plastics and refrigeration to electroplating and stainless steel, and believes the era of periodic dumping by China is well past.

Steered by indefatigable executive chairman Patrick Cheetham, Tertiary raised £1.8 million at 6p in December to develop Storuman, which was then reckoned to hold around 3.5 million tonnes of fluorspar. A scoping study suggested that the project could itself pay back capital investment of £29 million in three years.