Ryan Castilloux of Adamas Intelligence continues his rare earths market update in the second part of this interview.
Ryan Castilloux, founding director of Adamas Intelligence, spoke with the Investing News Network (INN) about a number of different factors affecting the rare earths market in 2015.
In the interview below, the analyst speaks about how Chinese rare earths producers are losing money at current prices, and answers questions about Molycorp’s (OTCMKTS:MCPIQ) bankruptcy and what it means for rare earths production in the US.
Castilloux also speaks about junior rare earths companies he’s seen making progress in 2015, pointing to Ucore Rare Metals (TSXV:UCU), Texas Rare Earth Resources (OTCMKTS:TRER), Tasman Metals (TSXV:TSM) and Alkane Resources (ASX:ALK) as examples.
In part one of his interview with INN, Castilloux spoke about what’s driving rare earths price forecasts and what to pay attention to when it comes to rare earths tax and tarriff changes in China. Read part one of the interview here.
INN: What’s the biggest misconception you’re seeing regarding all the changes in China?
RC: The biggest misconception I see is the belief by market followers that China’s major rare earth producers are sustainably profitable at current prices and thus can afford to hold prices down going forward. This is absolutely not the case.
In 2014, China’s largest producer, China Northern Rare Earth Group (SSE:600111), reported a net profit margin for the year of just 11 percent, a margin that has almost certainly been crushed in 2015 owing to a fall in rare earth prices and decreased production of more valuable light rare earth oxides and heavy rare earth oxides under the umbrella of the newly consolidated organization.
Moreover, China’s Minmetals Rare Earth (SZSE:000831) reported a net profit margin of -7.9 percent in 2014, which it attributed to weak downstream demand and falling prices. In the first half of 2015, Minmetals managed to eke out a net profit margin of 4.3 percent on the back of a rare earth price rally in the first quarter of the year, but we expect it is currently operating at a loss following the recent elimination of export tariffs in China and the subsequent price declines observed since.
These examples are not one offs. Other major producers have also reported sharp declines in profits in the first half of 2015. For example, Xiamen Tungsten (SSE:600549) reported a 76-percent drop in profits vs. the first half of 2014, while its subsidiary, Fujian Changting Golden Dragon Rare Earth, reported a loss of US$11.85 million over the first half of 2015 — a loss that we expect will widen in the third quarter on the back of today’s low prices in and outside China.
With China’s near voidance of international competition from other rare earth producers globally, it’s illogical for China’s producers and traders to not lift prices going forward so long as the nation can curtail and control illegal rare earth production that threatens to undermine any future price hikes.
INN: Molycorp declared bankruptcy earlier this year, but the company has said that its facilities will continue to operate as usual. Do you think there’s still hope for Molycorp?
RC: I do think there’s hope, but at current prices and those we forecast into 2016, the future looks increasingly grim for the company’s Mountain Pass mine. I believe that company management, creditors and shareholders all share the common interest of seeing Mountain Pass increase production as a means of driving down costs.
However, should the economies of scale realized by mid-2016 be insufficient to steer the mine toward profitability we believe the company and its creditors will opt to — at least temporarily — cease production from the Mountain Pass mine and focus resources on the company’s downstream business units, which tend to revolve around higher-margin activities.
INN: What does Molycorp’s bankruptcy declaration mean for the future of rare earths production in the US?
RC: It means that the future of US production could soon come to an end (again), although we could see production pick up again by the end of the decade from emerging producers such as Ucore Rare Metals, Rare Element Resources (TSX:RES) and Texas Rare Earth Resources, which all have advanced development-stage projects located in US.
We could also see a future in which Molycorp’s processing and separation facility in the US becomes a toll-separation facility serving emerging producers in North and South America, although the near-unprecedented drought that California is currently experiencing will pose a major challenge to the economics of this possibility.
INN: Finally, you’ve mentioned before that you’ve seen plenty of junior companies go “back to the drawing board” to come up with innovative strategies to create value in the current market. Which junior rare earths companies have you seen making progress with those types of strategies in 2015?
RC: In a March 2015 interview with The Gold Report, market analyst Gareth Hatch of Technology Metals Research said that 2015 would be the year of rare earth processing-related innovations, and I think he was spot on.
Early in July, Ucore Rare Metals announced that it had commissioned the construction of a pilot plant based on molecular recognition technology, which will ultimately be used to separate rare earths at bulk scale. The company intends for the plant to be used as a “test mule” capable of accepting concentrates and feedstocks from a variety of current and emerging producers globally.
Also in July, Texas Rare Earth Resources announced a definitive agreement to form a rare earth processing technology joint venture with partner K-Technologies. Under the agreement, the duo plan to market their unique rare earth separation and purification technology worldwide and are currently evaluating several opportunities to license the technology to other emerging producers. The joint venture may also look to build and operate its own processing facilities to separate and purify rare earth oxides from concentrates yielded by other emerging rare earth producers, in addition to Texas Rare Earth Resources.
In other cases, we continue to see companies exploring ways to optimize their flow sheets as a means of driving down expected production costs, whether it be through increased economies of scale, the addition of non-rare earth co-products to the production suite or methods of reducing consumption of reagents and/or power during production.
Among such companies are Tasman Metals, owner of the Norra Karr project in Sweden, and Alkane Resources, owner of the Dubbo zirconia project in Australia; both are exploring the prospect of producing hafnium oxide in addition to rare earths and other previously proposed products. In both cases, the prospective hafnium production significantly bolsters the economics of the projects and mitigates much of their risk exposure to future rare earth price fluctuations.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Ryan Castilloux is the founder of Adamas Intelligence, an independent research and advisory firm that provides strategic advice and ongoing intelligence on critical metals and minerals sectors. He helps investors, financiers, end users, emerging producers, and other stakeholders track emerging trends and identify future business opportunities in the critical metals and minerals sectors. Castilloux is a geologist with a background in mining and exploration and has a Master of Business Administration (finance) from the Rotterdam School of Management, Erasmus University. Subscribe for free updates from Adamas Intelligence at www.adamasintel.com.
At the time of interview, Ryan Castilloux did not, nor did his family or any other employee of Adamas Intelligence, own shares in any of the companies mentioned. Moreover, Ryan Castilloux was not paid by any of the companies mentioned in the interview for his coverage nor does he have a financial relationship with any of the companies mentioned.