Investing in rare earths is not for the faint-hearted

Rare earths are not rare, nor are they earths, but they are certainly political, and it’s the politics of an increasingly aggressive China which has made the 17 metals in the rare earth family a profitable, but high-risk sector for investors.

Lynas Rare Earths (ASX: LYC), the leading Australian player in the game, is also a survivor of past bouts of political games played in China and Malaysia.

The boom-bust-boom story of Lynas is both an incentive to invest and a warning about the hazards of becoming involved in an industry which is enjoying strong demand but is highly specialised, and has a lot more to do with chemical processing than mining.

For investors there is the added problem of picking a winner out of a big field of players keen to follow Lynas which, at a market value of $6.4 billion, is a mid-cap miner, and getting bigger by the day.

What Lynas has achieved is remarkable for an Australian company – first by surviving Chinese manipulation of the rare earth market a decade ago and then by building a world-class mining and processing operation in Australia and Malaysia with a US arm to come.

Back in 2011, during the first rare earths boom, Lynas shares traded up to $24.50 thanks to China slapping an embargo on its exports during a dispute with Japan over fishing rights, before plunging to $0.30 five years later when China unleashed a flood of surplus material.

What China did rattled Lynas as much as it did Japanese technology companies, which use rare earths in most of their devices.

This resulted in the technology companies creating a special purpose funding deal to help Lynas develop the Mt Weld mine in WA, followed by a processing facility in Malaysia.

What looked like a neat solution to dodge total Chinese control of the rare earths business then ran foul of Malaysian politics and a fear of radioactive waste in the rare earth residue, leading to the current phase in the extraordinary history of Lynas, which involves building a first-stage processing facility close to Mt Weld and an advanced processing centre in the US.

Investing in rare earths comes with risks

The history of Lynas serves as a warning for potential investor in rare earth stocks because it is not an easy business and despite the publicity associated with the essential nature of some metals in the family (especially neodymium and praseodymium) the world doesn’t want a lot.

Total global rare earth oxide production today is running at about 150,000 tonnes a year, roughly enough to half fill a bulk carrier of the sort which calls into Australian coal and iron ore ports.

Even the annual value of the material consumed amounts to around US$5 billion which is modest by mining industry measures, and explains why the mining majors such as BHP (ASX: BHP) and Rio Tinto (ASX: RIO) are not interested in rare earths.

Once you layer on the challenges, starting with the fact that rich deposits of rare earths are hard to find, often contain environmentally challenging elements such as uranium, are devilishly difficult to process, and require specialist marketing skills while all the time China has the power to dictate prices, and the risks become more obvious.

Undeterred by the challenge there are a number of emerging rare earth success stories in different stages of evolution with all encouraged by the latest quarterly results from Lynas which included a 44% increase in sales and a $112 million rise in the company’s cash balance which stands at $680.8 million.

An emerging rare earth success story

If Lynas is definitely not a small cap the next stock in terms of market value is also heading for the small cap exit.

In the same way Lynas leveraged its growth off a “China-dodging” deal with Japan, Australian Strategic Materials (ASX: ASM) is leveraging a similar deal with a consortium of Korean companies keen to secure their own supplies of rare earths.

The Koreans are paying US$250 million for a 20% stake in ASM’s Dubbo project in western New South Wales and while the Dubbo orebody (which was discovered more than 30 years ago) is rich in a variety of elements, including zirconia and niobium, it’s the neodymium that’s the main attractions.

Since the start of the year, ASM’s share price has risen by 33% from $6.58 to $8.70, valuing the business at $1.2 billion.

Smaller rare earth plays on the ASX

A step down in rare earth pecking order reveals an assortment of companies for an investor to consider, including:

Hastings Technology Metals (ASX: HAS), which is planning the development of the Yangibana rare earth deposit in the Gascoyne region of WA.

Rich in high value neodymium and praseodymium, the project is the subject of ongoing sales and financing negotiations with the aim of being in production in late 2023. The stock is up 45% on its share price at this time last year, but has been stuck at $0.19 since January – a price which values the business at $321 million.

Another rare earth player which has been in the planning stage for a long time is Northern Minerals (ASX: NTU).

The company has now achieved limited production at its Browns Range project in the north of WA and is now working on an ore-sorting system as it moves towards commercial scale ore processing. A $20 million capital raising earlier this year means the share price has been flat at around $0.04, valuing the business at $193 million.

Arafura Resources (ASX: ARU) has also take advantage of investor interest in rare earths by successfully raising $40 million last month to help pay for front-end engineering and design work on its Nolans project in the NT.

An updated definitive feasibility study was released in May which indicated it would cost $1 billion to develop Nolans, a heavy lift for a stock valued at $177 million on its latest share price of $0.13 – the same price at the start of the year.

Vital Metals (ASX: VML) attracted attention earlier this month when it reported limited production of rare earths at its Nechalacho project in the Northwest Territories of Canada, a move which allowed the company to claim the title of Canada’s first rare earths producer.

The next stages of work include ore sorting and the transport of material to processing facility in Saskatchewan. On the market, Vital has moved up from $0.03c at the start of the year to $0.049, valuing the business at $207 million.

Another advanced explorer is Peak Resources (ASX: PEK), which has completed a bankable feasibility study into its Ngualla rare earths project in Tanzania. It plans to process a locally made concentrate at a refinery in Britain where it will be close to customers. On the market, Peak has risen from $0.07 at the start of the year to $0.12 – giving Peak a market cap of around $219 million.

RareX (ASX: REE) has just reported a major resource upgrade at its Cummins Range project in the Kimberley region of WA with the orebody containing high levels of neodymium, praseodymium and scandium.

Exploration is continuing with the potential for further growth by one of the smaller rare earth players which is trading around $0.092, giving the business a market cap of around $43 million.

A new listing, which proposed to break fresh ground in the Australian rare earth sector is Australian Rare Earths (ASX: AR3).

The company is exploring the potential for extracting rare earths from clays in a region close to the border of South Australia and Victoria. In theory, clay-hosted rare earths are cheaper to mine and lower in radioactive elements. Since floating at $0.30 on 1 July (with first trades at $0.55), the stock has risen to $0.76 giving the entity a value of about $33 million.

Other stocks with rare earth interests include Ionic Rare Earths (ASX: IXR) which is exploring the Makuutu project in Uganda (share price $0.028, stock value $98 million), and Eclipse Metals (ASX: EPM) which is working towards a revival of the Ivittuut cryolite mine in Greenland.

The historic mine closed in 1987 after 120 years of production and is believed to host rare earths (share price $0.021, market cap $41 million).