VANCOUVER (miningweekly.com) – Higher prices for critical rare earth elements (CREEs) are marking a return of confidence to the industry, and the end of the so-called “hand-to-mouth” market, as users increasingly turn to contracting to secure long-term security of supply.
“For several years users were unsure about the market direction, prompting them to only buy about three months' supply of CREEs at any given time, since they were looking to capitalise on potentially lower prices. But now, early-stage demand is taking off and we are seeing the light at the end of the tunnel,” said Sudbury, Ontario-based industry observer Adamas Intelligence founding director and exploration analyst Ryan Castilloux, who spoke to Mining Weekly Online on Monday.
The analyst has seen prices for the most important REEs, such as neodymium and praseodymium, jump more than 50% since the start of the year, which will especially benefit junior companies, since the Western world’s reliance on China as the main processor of rare earth oxides has deepened since the demise of US-based Molycorp and its Mountain Pass mine and processing facility.
“If you strip out [Australia-based] Lynas, which has successfully expanded its rare-earth processing capacity, the world excluding China now relies more on Chinese REEs than before. However, the market is at a tipping point, with prices now favouring those late-stage project developers with at least a prefeasibility study, or a feasibility study in hand,” said Castilloux.
The US Department of Energy has identified neodymium, europium, terbium, dysprosium and yttrium as CREEs for both the short and long term. These rare elements include praseodymium because of its ability to be substituted for neodymium in high-intensity permanent magnets.
Spot prices are currently at three-year highs as the availability of spot material in China is diminished on the back of government intervention to curb the illegal production of rare earth materials.
Castilloux points to the latest round of Chinese domestic rare earth supply chain inspections as part of Beijing’s ongoing effort to reduce illegal rare earth production and enforce environmental standards.
In what has been perhaps the most thorough and comprehensive review to date, the ongoing inspections have covered more than 400 companies operating in 23 provinces, with an explicit focus on 180 companies involved in the mining, processing and trading of rare earth products.
“Despite the lack of publicised busts, illegal rare earth production in China appears to have declined so far in 2017, suggesting that a substantial share of illegal output in past years may have been the result of over-production by authorised producers, many of which are currently operating under the microscope of central government inspectors.
“The ongoing inspections follow the recent consolidation of China’s rare earth enterprises into six large groups – a move that has done little to reduce the number of rare earth businesses operating in China – but has been effective in centralising industry control, increasing government oversight, and strengthening the pricing power of China’s major rare earth producers,” Castilloux explained.
While 2017 has seen an accelerated crackdown on illegal production in China, authorities have in fact been actively working to remedy the issue since 2011 and, in doing so, amassed a substantial inventory of illegally produced rare earth concentrates that have been streaming into the supply chain in recent years, contributing to a glut that has undermined prices.
“Recent conversations with market participants suggest that inventory levels in the nation are trending towards historic norms in 2017, tightening the balance between neodymium and praseodymium oxide supply and demand, and thereby increasing the pricing power of domestic suppliers,” he stated, adding that this would have a cascading effect downstream that will impact on compounds markets along each step of the value-add industries.
According to Castilloux, demand for neodymium and praseodymium is growing at about 10% a year in China on the back of fast-growing demand for neodymium iron boron (NdFeB) permanent magnets, used in electric vehicle (EV) traction motors, wind turbine generators and industrial robots, among an ever-expanding list of other uses.
“With the outlook for EV demand continuing to surprise on the upside, and with increasingly aggressive targets being put forward by governments and automakers alike, we believe that Chinese and foreign automakers and OEMs [original-equipment manufacturers] are actively pursuing long-term binding supply agreements with China’s major producers, reducing the amount of ‘unspoken for’ material available on the spot market and lending support for higher spot prices,” noted Castilloux.
RETURN TO CONTRACTING
Consolidation of mining and processing companies into large groups over the past two years has reduced the number of major neodymium and praseodymium oxide suppliers in China to just a handful, and these suppliers are increasingly entering long-term offtake agreements with companies of the same group, limiting the quantity of material available to the spot market.
For example, China’s largest neodymium and praseodymium oxide producer, China Northern Rare Earth Group (CNRE), is the committed supplier (via Bayan Obo) to Inner Mongolia Baotou Rare Earth Magnetic Material, which now has the capacity to produce 30 000 t/y of NdFeB, following consolidation.
Outside of China, Lynas, the world’s second-largest producer of neodymium and praseodymium oxide, is a contracted supplier to virtually all of Japan’s major rare earth trading houses and magnets manufacturers – namely Sojitz, Daido Steel and Showa Denko – and is also a supplier to Shin-Etsu in Vietnam, leaving little to no capacity available for the spot market,” Castilloux pointed out.
“As confidence around EV demand continues to mount, and long-term offtake agreements continue thinning availability of neodymium and praseodymium oxide on the spot market, we expect continued strength behind neodymium and praseodymium oxide prices, given that the dominant suppliers to the spot market are large vertically integrated enterprises that reap compound benefits by pushing cost (and price) increases down the supply chain,” Castilloux explained.
In expectation of this demand growth – several of China’s largest NdFeB manufacturers have announced capacity expansion plans in the past 12 months that, when realised, will lock-up neodymium and praseodymium oxide supplies that would otherwise be available on the spot market. JL Mag Rare-Earth, for example, is planning to increase NdFeB production from 6 000 t to 10 000 t in the near-term, thereby increasing its allocation of neodymium and praseodymium output from the Maoniuping mine by more than 60%.
“With company inspections ongoing in China, and no production quota increases allotted to the industry for 2017, we expect neodymium and praseodymium oxide prices to remain strong through year-end, with potential for a downward correction in early-2018 on account of the Chinese holiday season. We expect that any downward corrections in the near-term will be followed by a return to strength because of a tightening supply-demand balance,” Castilloux advised, declining to provide further insight into Adamas’ subscription-only CREE price forecasts.
Castilloux expects the number of smaller magnet manufacturers – particularly those unaffiliated with China’s six large groups – will be “shaken off” in the coming months, increasing ‘Big 6’ control over China’s permanent magnet supply chain.
“With annual neodymium and praseodymium oxide production of approximately 5 400 t, and high profit exposure to neodymium and praseodymium oxide, Lynas is well positioned to capitalise on higher neodymium and praseodymium oxide prices and reduced spot supplies in the near term,” he stated.
Lynas currently supplies an estimated 3 000 t/y of neodymium and praseodymium oxide to Sojitz, in Japan, under a long-term supply agreement, and supplies the net of its output to Daido Steel, Showa Denko, Shin-Etsu, and a handful of metals and magnet manufacturers in China – both independent and State-owned.
Higher near-term neodymium and praseodymium oxide prices will provide a significant boost for late-stage rare earth exploration companies – particularly those with a high level of potential revenue exposure to neodymium and praseodymium oxide, along with heavy rare earths used in high-grade NdFeB permanent magnets, such as terbium and dysprosium.
Such companies and projects include, among others, Peak Resources and its Ngualla project; Mkango Resources and its Songwe Hill project; and Rainbow Rare Earths and its Gakara project, all in Africa. In Canada, CREE companies to watch include Commerce Resources and its Ashram project; Matamec Resources with its Kipawa project; and Search Minerals with its Foxtrot project, in Canada.
Greenland Minerals & Energy is also advancing the Kvanefjeld project, in Greenland, while Minera BioLantanidos is advancing the El Cabrito project, in Chile. Other notable projects include Alkane Resources and its Dubbo project; Arafura Resources and its Nolans project; and Northern Minerals, which is developing the Browns Range, all located in Australia.
Traditional explorers aside – companies with low-cost, nimble business strategies that enable them to go to market quickly also stand to benefit. Such companies include, among others, Medallion Resources, Rare Earth Salts, Innovation Metals, Ucore Rare Metals, and REEtec, said Castilloux.
In South Africa, the Steenkampskraal CREE project may contain the highest grade of total rare earth oxides, but the company will need to grow the reserves to make a meaningful impact on the market, Castilloux believes. Steenkampskraal Holdings chairperson Trevor Blench on Monday noted that "some manufacturers see the supply as so critical that they have indicated interest in buying a share of the mine to secure supplies".
Castilloux is surprised that investors have not entered the CREE “energy metal frenzy” that was first observed in the lithium industry, and now also the cobalt industry, as manufacturers scramble to secure materials at the market low. He foresees investment demand for the CREEs heating up in the medium term, and it being “game on” for the advanced project developers.