The Rare Earths Industry Is Only Just Beginning: Jon
Source: Brian Sylvester of
The Critical Metals Report
Is the rare earths space an industry in decline, a bubble
popped? Not so, according to Jon Hykawy, head of global research
and a clean technologies analyst at Byron Capital Markets. Hykawy
The Critical Metals Report
in this exclusive interview that establishing a supply outside of
China could breathe new life into this exiled market. While the
winners in the industry may be as rare as the elements they mine,
Hykawy believes that the financial community is going to have to
revisit rare earths once companies start to produce meaningful
The Critical Metals Report:
Most analysts outside the rare earth elements (
) space suggest steering clear of this industry. To some extent,
even you are suggesting that-except for a handful of players. Can
We've been fairly adamant from the moment that we initiated
coverage that the space would have, at most, a few winners and a
very large number of losers. We refined the number down to a
select few because we're right about that. If you have more than
a few companies producing, especially in the light rare earth
(LREE) space, they will absolutely crush the market and some will
go out of business. Very few companies in the LREE space will
succeed in coming to market.
Why is the market punishing LREE equities?
Just about every LREE junior ran up dramatically through 2011,
whether they had anything resembling a winning hand in the space
or not. Now, every company in the space is getting punished, even
What's going to turn this sector around?
Well, in spite of the sector's grim general performance, our
picks have performed well. We initiated coverage on
Great Western Minerals Group Ltd. (GWG:TSX.V;
at around $0.18/share and the stock is trading up around
$0.50/share. We initiated coverage on
Molycorp Inc. (MCP:NYSE)
when its stock was down around $16/share; the stock is now near
$24/share. Granted, neither has done well in the last six months,
considering all resource stocks have been taking a bit of a hit
and LREE prices are dropping off significantly.
In order for the sector to turn around, companies need to
start making money. We need to see
Lynas Corp. (
come to market and show that it can actually produce meaningful
cash flows out of an LREE business. We need to see Molycorp come
to market, start producing alloys and magnets, and demonstrate
that added downstream processing contributes dramatically to both
revenue and profitability. We need to see Great Western complete
the reopening of its mine, the construction of its
hydrometallurgical and solvent extraction facilities, and
demonstrate that moving those materials into Less Common Metals
in Birkenhead allows it to dramatically improve its cash flows.
If those things happen, investors will start to concentrate on
the metrics and on the names that matter in the space.
In other words, we're now in the "don't tell me, show me"
Yes. The names that are able to actually translate the capital
that they have on hand into an operation that generates
substantial cash flow can't be ignored.
Rare earth oxide (REO) prices shot up in 2010 after China
curtailed exports, but you argue that those prices should be
largely dismissed when determining valuations for equities.
China imposed a quota that spiked REE prices. But the pre-quota
prices matter much more. If you assume a Western supply chain is
going to be developed and supply sufficient material, then the
prices will be based on a freely trading market. To say that
we're suddenly in a different world because of the quotas, that
the quotas will never be taken away and the higher prices will
last until the end of time, is a pretty facile and erroneous
A better approach would be to conduct a proper economic
analysis, which almost no one has done. That involves actually
looking at the individual REEs.
Currently, we only price the seven that we're able to obtain
sufficient data on. Heavy rare earths (HREEs) will drop down in
price, but will still be well above historical levels because
they're rare and will remain rare no matter what we do.
The prices of lanthanum and cerium, which are fairly prevalent
in all deposits and are the most commonly available REEs, are
going to crater to prices below their historic, pre-quota
The price of neodymium will stay above the historical range,
because high-quality REE magnets are in demand for a number of
industries, but prices are likely going to be nothing like where
they are trading today. We forecast $80/kilogram (kg) for
neodymium and praseodymium because that is the economic threshold
for the wind turbine industry.
If you're building models based on that conservative price deck,
don't you risk missing a couple of players that might succeed if
you were slightly more generous in your pricing?
A number of metrics are important. A company might be the most
economic player in the space, but if it comes to market three
years after five other companies, it doesn't matter. That is why
we prefer less expensive, less complicated, relatively
faster-developing companies to those that are going to spend very
large quantities of money to develop what could be very large
projects in the middle of nowhere.
For example, if
Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE;
is going to need $1.3 billion (
) to bring a project to market and it really isn't going to come
into serious production until 2017, investors better be darn sure
that there aren't six or eight smaller projects entering the
market before that.
It's not just a matter of which company is going to produce
when, or which is going to produce at exactly the right price
point, or which is the cheapest stock. When a company actually
comes to market is a major factor, along with how well they fit
into the demand curve.
You have a Sell rating on Avalon. Is Avalon's biggest fault
simply its timing, and not its deposit?
The problem is definitely not the deposit itself, though the
timing and the money required are a function of the metallurgy.
In our estimation, with our admittedly conservative price deck,
Avalon is a bad place for investors to put their money. There are
a large number of potential HREE projects that have shorter
development horizons and are much less expensive to bring to
market that could fill the gap that Avalon wants to fill.
The other company that you have a Sell rating on is
Orbite Aluminae Inc. (
. It's created quite a stir, as there were some questions raised
around its preliminary economic assessment (PEA) and its ability
to extract REEs from its alumina clays. You looked at it more
closely and decided that the numbers didn't add up.
Every company has risk associated with it. The issue that we saw
with Orbite is that the perception of risk within the broader
market was far more optimistic than we believe the actual
situation to be. The PEA noted that natural gas would be the
primary source of energy for the project, yet even the PEA quite
plainly stated that there is no natural gas available in the
area. There is no development available to provide natural gas to
that project site-and there may not be for a substantial period
We believe that the pricing of alumina as well as the REEs and
rare metals in the PEA were optimistic. Using
higher-than-rational pricing for these materials inflates a
company's net present value. We felt that needed to be
There was also technical risk. The process is not a slam dunk.
There is a substantial amount of work to be done. Even some of
the developers of some of the technology that's required to
execute the plan in the PEA acknowledge that. Combining all of
those things, we questioned whether a value of about $3/share was
justified. A price of $0.90/share would make us more
Let's move on to some of the companies you do like. One of your
long-time favorites is Great Western Minerals, but its share
price has continued to trend lower since July. What's going to
turn Great Western around?
There are three things that will certainly help. One of the
long-time criticisms of Great Western is that there hasn't been
an NI 43-101 available on the deposit. There haven't been that
many people who've actually visited the Steenkampskraal project.
However, geologists who have visited Steenkampskraal tend to come
away with far less concern about the abundance of monazite
available there, primarily because of the way the deposit is
structured and the visible extent of that structure.
We should see an NI 43-101 published relatively soon, however,
likely before the end of May. Drilling has been largely
completed. The company has indicated that it may be able to
report higher grades on the historical material than what was
earlier reported because the historical testing tended to
underestimate the amount of REEs available. The company may also
be able to report a superior elemental distribution. That will
obviously be very positive for the story.
If the company completes the refurbishment of the mine and
reopens, it would be a very positive step. The company has
indicated mine operations will recommence within Steenkampskraal
before the end of the year.
It also needs to commence construction of the
hydrometallurgical and solvent extraction plants in South Africa.
A finalized design from its partner, Ganzhou Qiandong Rare Earth
Group Ltd., for the solvent extraction plant would be a very
welcome step for the company. Ganzhou Qiandong is well known as a
leader in the solvent extraction space.
You wrote in a recent report, "Great Western Minerals will, we
believe, be producing magnet alloy for customers from its own
material near the beginning of H2/13." Is that soon enough?
I believe so. It's probably going to be a bit of a horse race
between Molycorp and Great Western Minerals in trying to get
those home-produced magnet alloys into people's hands. Lynas,
assuming the political situation in Malaysia and its permitting
situation is resolved, is going to be producing material for sale
to companies like Hitachi Inc. (HIT:NYSE), Shin-Etsu Chemical Co.
Ltd. (SHE:Fkft) and others.
One of the big issues causing the reduction in demand for REEs
has been the insecurity of supply. If a global auto manufacturer
is contemplating whether it's going to use an REE motor or an
induction motor in a new hybrid vehicle, the fact that it really
can't count on Chinese supply for those REEs has to weigh on its
decision. It's likely pushing a number of manufacturers into
using induction motors because they can't afford the possibility
that they won't be able to source material. Having producers
outside of China would make a big difference in purchasing
What are some of the other companies you favor in the REE
Matamec Explorations Inc. (MAT:TSX.V;
is an interesting name. We have a $0.50 target and a Speculative
Buy recommendation. Its pending partnership with Toyota Tsusho
Corp. (TYHOF:OTC; 8015:JP) is a solid indication that this is a
fairly tractable project in a good jurisdiction. It's not the
absolute cheapest-per-ton of total REOs produced, but it's fairly
inexpensive in terms of its capital spending and should be
relatively quick to come to market.
We have a Speculative Buy on
Ucore Rare Metals Inc. (UCU:TSX.V;
and an $0.80 target. Ucore has exactly the right address. It has
an HREE project located in the U.S. It's of interest to a number
of players like Molycorp that want to produce their own magnets
and are going to require a reasonable amount of dysprosium to do
so; automotive companies that want their own magnets for use in
drives; and a number of other potential end markets in Western
Europe. Its location near deep water in Alaska, with the backing
of the Alaska state government and the U.S. federal government,
speaks well of the company.
Ucore had a 93% success rate using x-ray sorting technology (
) to recover REEs. Does that change the economics of that
It definitely improves the economics. Generally speaking, the
economics of an REE project are not defined by mining. A bigger
factor is the cost of processing that material. The use of x-ray
fluorescence as a method of determining which particular pieces
of rock contain the minerals they're interested in and which ones
can be safely rejected without losing anything of value is a very
Texas Rare Earth Resources Corp. (TRER:OTCQX)
is about to put out a PEA later this month on the Round Top
project in Texas. What are you expecting from that?
I'm trying to temper my expectations. I've been very impressed by
some things at Texas Rare Earths. A lot of us comment that the
most important thing within any mining company is its management
team. Marc LeVier, chief executive at Texas Rare Earth, is a guy
who's been recommended to me by a number of people whose opinions
I trust. He has a pedigree to back that up. He knows what he
needs to do to declare this an economic deposit. He is practiced
enough to know it's not a perfect deposit.
The PEA's results are going to be pinned on the head grade,
acid consumption and reagent consumptions going into the mill.
This is a relatively low-grade deposit. If the company can
separate out the minerals it needs, it may still have a very
positive economic result. It's a bit of a dice roll still.
Is there another company that has your attention?
I'm going to actually discuss one that I have a Sell rating on,
although that rating causes me a few headaches.
Quest Rare Minerals Ltd. (QRM:TSX;
is a name that has been problematic for us in the sense that we
like the potential of the deposit and we're positively disposed
toward management. The biggest issue is that it's a project
that's rather isolated and that will be fairly expensive to
build. The company has also had issues with its plan and has
taken some of the comments we've made to heart. It has started to
move toward incorporating a solvent extraction plant and moving
downstream. It is not just trying to produce concentrate
Are there any companies with plans to just produce concentrates
I don't think there are any companies left that have plans to
only produce concentrates, with the possible exception of some
ionic clays outside of China. Everyone else has started to
realize that it's going to be expensive enough to develop the
project and that nobody is interested in buying another problem.
The companies have to provide a finished product-an end
product-and that means separated and purified oxide at
There was a recent article in
The Globe and Mail
about Quest in which you were quoted as saying, "I hope they
realize they're in a race." Can you express your thoughts behind
When I do the analysis with my admittedly conservative price
deck, I end up with about a $1.75 target. We're starting to bang
on the door of that level here. There have been delays in the
project, which is unfortunate because the faster it can get to
market with something that's tractable, the more likely it's
going to be in the market long term. By the same token, it's a
good deposit. It could be economic. For the most part, Molycorp,
Lynas, Great Western Minerals, Quest, Avalon and so on produce
positive cash flow even with my conservative estimates for future
rare earth prices. It's really a question of whether that cash
flow justifies all the up-front expenditure. Quest, to me, is a
borderline call. That $1.75 point is a very interesting one.
Would a partner change that for you?
It could certainly help. There is no shortage of interest within
the broader industry and within the end-user markets for at least
obtaining an off-take agreement for a meaningful amount of the
REEs. But if a company can't produce an economically viable,
relatively simple flow sheet, it's probably not going to convince
a partner that it has something that's worth its money and time.
Quest is on the bubble for me. If it gets down toward $1.75 or we
see anything that indicates that it has the potential to come to
market sooner, it's something we'll have to revisit.
Some precious metals companies, such as
South American Silver Corp. (SAC:TSX;
, have found their way into your coverage universe. Does this
have more to do with the Street's lack of interest in REEs at the
moment or are these companies being considered legitimate
electric metals plays?
It's not a case of running off after a "borderline" electric
metal like silver because we're not getting any love on REEs.
This company is filled with projects that are going to produce
what are definitively electric metals. It produces not just
silver from its Malku Khota project in Bolivia, but indium and
gallium. It also has copper in its Escalones project in Chile.
That company is replete with electric metals. Even silver,
whether most people realize it or not, has an extremely large
industrial component of demand, made up primarily of conductive
pastes that are used in things like the solar photovoltaic
industry and solder used in electronics worldwide.
Do you have any parting thoughts?
We've said from day one that we're not subscribers to the beliefs
that REEs are essential, irreplaceable or anything of the sort.
I've always told people that REEs are very nice to have at the
right price. It looks like there may be a viable supply chain for
REEs developed outside of China. That is going to improve the
security of supply, reduce reliance on Chinese manufacturing and
production and allow companies to reliably get materials without
worrying about what next year's quota is going to look like. It
could have the positive effect of bringing the prices down to the
point where many manufacturers and end users are going to be
willing to look at using REEs again. The industry is just
beginning to develop, whereas a lot of the financial community is
looking at it as a popped bubble. That's not the case. The
financial community is going to have to revisit REEs down the
line, when some of the companies start to produce really
meaningful cash flows from their operations.
is currently with the research team at Byron Capital Markets,
with a specialized focus in the lithium and clean
technology/alternative energy industries. Jon holds both a
Ph.D. in physics and an MBA from Queen's University and has
been working in capital markets as a clean
technologies/alternative energy analyst for the last four
years. He began his career in the investment industry in 2000,
originally working as a technology analyst. His current area of
focus is the electric metals sector, ranging from availability
and production of various metals to lithium battery technology.
He has extensive experience in the solar, wind and battery
industries, conducting significant research in the areas of
rechargeable batteries-ranging from rechargeable alkaline to
lithium-ion to flow batteries.
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1) Brian Sylvester of
The Critical Metals Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Critical Metals Report:
Matamec Explorations Inc., Quest Rare Minerals Ltd., South
American Silver Corp., Texas Rare Earth Resources Corp. and Ucore
Rare Metals Inc. Streetwise Reports does not accept stock in
exchange for services.
3) Jon Hykawy: I personally and/or my family own share(s) of the
following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise
Reports to do this interview.
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