Seven Strategies for Rare Earths Hopefuls - Nov 2012 - Greenfields Research

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Seven Strategies for Rare Earths Hopefuls - Nov 2012 - Greenfields Research

  1. 1. SEVEN STRATEGIESFOR RARE EARTHSHOPEFULS:NAVIGATING THEUNCERTAINTIES OF THE RAREEARTHS INDUSTRYJohn P. Sykes, Director,Greenfields Research Ltd (UK) Image: Shutterstock
  2. 2. CONTENTS– Where now for rare earths?– Unanswered questions about geology? – “Geology” based strategies– Unanswered questions about mine project development?– Unanswered questions about delays? – “Development” based strategies– Unanswered questions about the future? – “Uncertainty” based strategies– How do you plan in the face of all these unanswered questions?
  3. 3. TWO FORMS: “LIGHT” & “HEAVY” • • • • • •21 39 57 58 Sc Y La Ce59 60 62 63 Pr Nd Sm Eu • •64 65 66 67 Gd Tb Dy Ho • • •68 69 70 71 • • • Er Tm Yb Lu • • •
  4. 4. …OR THREE: “LIGHT” “MEDIUM”& “HEAVY”• •• ••21 39 57 58 Sc Y La Ce59 60 62 63 Pr Nd Sm Eu • •64 65 66 67 Gd Tb Dy Ho • • • • • •68 69 70 71 Er Tm Yb Lu • • • •
  5. 5. …OR : “CRITICAL” & “NON-CRITICAL”• •• • •21 39 57 58 Sc Y La Ce59 60 62 63 Pr Nd Sm Eu64 65 66 67 Gd Tb Dy Ho • • • • • •68 69 70 71 • • • Er Tm Yb Lu • • •
  6. 6. …OR: BY END USE• •• ••21 39 57 58 Sc Y La Ce59 60 62 63 Pr Nd Sm Eu • •64 65 66 67 Gd Tb Dy Ho • • •68 69 70 71 • Er Tm Yb Lu • • • • • •
  7. 7. WHERE NOW FORRARE EARTHS?Entering “Phase 2” of therecent rare earth industry: mineproject development Image: Shutterstock
  8. 8. ENTERING “PHASE 2”: PROJECT DEVELOPMENT La Oxide 99% min FOB China (CN) / tonne200,000180,000160,000140,000120,000100,000 80,000 60,000 40,000 20,000 0 Aug Aug Aug Aug Aug 2007 2008 2009 2010 2011 Data: Metal Pages; Bloomberg
  9. 9. WHY IS MINING SO DIFFICULT?1. Relative crustal abundance.2. Degree of metal concentration by natural processes into mineral deposits.3. The mechanical ease of obtaining the ore from the earth.4. The ease of extracting the metal from the ore. Source: Gupta & Krishnamurthy (2005)
  10. 10. RARE EARTHS AREN’T THAT “RARE” Source: USGS (2002)
  11. 11. ELECTROPOSITIVITY & ELECTRONEGATIVITY Source: WebElements, Wikipedia
  12. 12. TWO PRINCIPAL TYPES OF DEPOSIT Carbonatites Alkaline IOCG Hydrothermal e.g. Mountain Pass, USA e.g. Thor Lake, Canada e.g. Olympic Dam, Australia Bear Lodge, USA. Placer Paleoplacer Laterite Ionic clay e.g. Chavara, India e.g. Elliot Lake, Canada e.g. Mt Weld, Australia e.g. Longnan, ChinaSource: BGS, USGS, Williams et al., Wikipedia, Encyclopedia Britannica, Goldavenue Encyclopedia, Kimberley Rare Earths, New York Times
  13. 13. WHERE WILL NEW SUPPLY COME FROM? Data: Intierra, USGS, Infomine, Technology Metals Research, Google Earth, IHC Merwerde, Panoramio
  14. 14. PLENTY OF PROJECTS: NOW TO DEVELOP THEM? Data: Greenfields Research, Company websites, Infomine, Technology Metals Research, USGS
  15. 15. MINING THROUGH STANDARD TECHNIQUES Images: Greenfields Research Ltd, BGS, Molycorp, Atlas Copco
  16. 16. WHY IS MINING SO DIFFICULT?1. Relative crustal 1. Rare earths are Now largely resolved abundance. abundant in the by “exploration” in crust. “Phase 1” (2008-11)2. Degree of metal 2. Rare earths do not concentration by readily concentrate natural processes into in the crust by mineral deposits. natural processes. 3. Rare earth ore are3. The mechanical ease easily extracted from Now entering “Phase 2” where of obtaining the ore the earth. “development” will be the focus from the earth. 4. Extracting the rare4. The ease of extracting earth metals from their ores is very the metal from the ore. difficult. Source: Gupta & Krishnamurthy (2005)
  17. 17. WHY ARE MINE PROJECTS DIFFICULT? • Quantity : size of the resource Geological Risk • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste Technical Risk • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products Market Risk • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue Completion Risk • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-patsHuman Resource Risk • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance Environmental Risk • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them Legal Risk • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country Political Risk • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns Capital Cost Risk • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project Delay Risk • Non-discretionary: unforeseen problem causing a delay to the project • Location: political or natural problems in your location i.e. war or flooding Force Majeure • Technical: sudden catastrophic technical failure at the mine project Based on: Trench (2011)
  18. 18. UNANSWEREDQUESTIONS ABOUTGEOLOGYThe heavy-light paradigm or“Grade is King” even in the worldof rare earths
  19. 19. THE “STANDARD” BASKET VALUE CHART Total Rare Earth Oxide Basket Value (US$/kg) 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 Hastings Kutessay II Norra Karr Kangankunde Strange Lake Bokan Thor LakeMt Weld (Duncan) Dubbo Kvanefjeld Zandkopsdrift Bear Lodge Nolans Bore Mt Weld (CLD) Heavy rare earth deposits Steenkampskraal Advanced light rare earth deposits Ngualla Mt Pass Early stage light rare earth deposits Data: Greenfields Research Ltd, Company websites
  20. 20. QUESTION: HOW MUCH HEAVY IN A LIGHT? Heavy rare earth deposits The highest grade 0.090 “heavy” rare earth Advanced light rare earth deposits deposits are actually the 0.080 advanced “light” projectsDysprosium Oxide Grade (%) Early stage light rare earth deposits 0.070 0.060 0.050 Some “heavy” rare earth projects actually have a very 0.040 low heavy rare earth grade 0.030 0.020 0.010 0.000 Data: Greenfields Research Ltd, Company websites
  21. 21. REDUX: ORE VALUE VERSUS BASKET VALUE Focus is on these Or perhaps 120.00 projects: mainly “heavy” 110.00 rare earth projects this one?TREO Basket Value (US$/kg) 100.00 90.00 Focus should be on these: mainly advanced “light” 80.00 rare earth projects 70.00 60.00 50.00 40.00 30.00 20.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00Gold ore equivalent: 26.3g/t 52.7g/t 79.0g/t 105.3g/t131.7g/t 158.0g/t TREO Ore Value (US$/kg) Data: Greenfields Research Ltd, Company websites; Idea for original chart from Technology Metals Research
  22. 22. WHY ARE MINE PROJECTS DIFFICULT? • Quantity : size of the resource Geological Risk • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste Technical Risk • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products Market Risk • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue Completion Risk • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-patsHuman Resource Risk • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance Environmental Risk • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them Legal Risk • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country Political Risk • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns Capital Cost Risk • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project Delay Risk • Non-discretionary: unforeseen problem causing a delay to the project • Location: political or natural problems in your location i.e. war or flooding Force Majeure • Technical: sudden catastrophic technical failure at the mine project Based on: Trench (2011)
  23. 23. THE BCG BOX OR “GROWTH-SHARE MATRIX”Market Growth (requiring investment) QUESTIONS STARS Also known as “problem Leading children”. High growth sector but large capital investment assets/products required. dominating fast growing markets, still requiring investment. DOGS/PETS CASH COWS Not profitable. Usually High market share in “pet projects” that slow growth industry – provide a non-financial “milked” to fund other benefit i.e. synergies, investments labour retention etc Market Share (returning investment) Based on: Boston Consulting Group (BCG)
  24. 24. THE BCG BOX FOR MINE PROJECTSMarket Growth (adding to the competition) PROBLEM CHILD STARS Challenging projects with World class assets with scale, that could be stars in a high grades and large scale. high growth industry, Will dominate future sector assuming some structural and be hugely profitable. changes. PET PROJECTS CASH COWS High grade, small scale Not profitable. Usually “pet projects, which are quickly projects” that provide a cash generative, allowing non-financial benefit i.e. access to an industry and synergies, labour retention providing cash for etc investment elsewhere. Market Share (beating the competition) Based on: Boston Consulting Group (BCG)
  25. 25. “GEOLOGY” BASED RARE EARTH STRATEGIES 120.00 110.00TREO Basket Value (US$/kg) 100.00 PROBLEM STARS 90.00 CHILDREN 80.00 70.00 60.00 50.00 40.00 PET PROJECTS CASH COWS 30.00 20.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00Gold ore equivalent: 26.3g/t 52.7g/t 79.0g/t 105.3g/t131.7g/t 158.0g/t TREO Ore Value (US$/kg) Data: Company websites; Idea for original chart from Technology Metals Research
  26. 26. STRATEGY 1A: THE CASH COWAdvantages– Assets very competitive– Most already very advanced– Geology and technology already known Examples: Molycorp, Lynas, Great– First mover advantage in geology as best assets picked first Western Minerals, MbAC Fertilizer?Disadvantages– Financial markets currently very tricky– First mover disadvantage – all R&D had to be done “in-house”– Currently not a viable strategy for non- first movers
  27. 27. STRATEGY 2A: THE “HEAVY” PROBLEM CHILDAdvantages– Attractive to the equity market– Seems to be a high growth market– No major incumbent competitors Examples: Hastings Rare Metals, StansDisadvantages Energy, Tasman Metals, Quest Rare– Projects currently low grade Minerals– Process routes unknown – R&D intensive– Capital costs will be high– Development timeframe very lengthy– Debt financing will be very tricky
  28. 28. VULNERABLE TO MAGNET SUBSTITUTION Source: USGS (2011)
  29. 29. THE R&D RACE IS ON! Likely to be > 10 years for a new material Likely to be > 10 years for a new mine Construction (Separation) Exploration Resource (Benification Finance (Extraction) Metallurgy Metallurgy Permitting Scoping Metallurgy Off-take PFS BFS s )Source: Richard Holliday, Material Value Consultancy Ltd
  30. 30. UNANSWEREDQUESTIONS ABOUTMINE PROJECTDEVELOPMENTWhy “quality” beats “scale” in thispart of the mining industry
  31. 31. WARNING ABOUT BASKET VALUES Total Rare Earth Oxide Basket Value (US$/kg) 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 Hastings Kutessay II Norra Karr Kangankunde Strange Lake Bokan Thor LakeMt Weld (Duncan) Assumes separated rare earth oxide prices Dubbo Kvanefjeld Assumes 100% recovery of all rare earths Zandkopsdrift No assessment of resource grade Bear Lodge Nolans Bore Mt Weld (CLD) Heavy rare earth deposits Steenkampskraal Advanced light rare earth deposits Ngualla Mt Pass Early stage light rare earth deposits Data: Company websites; Idea for original chart from Technology Metals Research
  32. 32. WHICH RARE EARTH PRICE DID YOU MEAN? La (US$/kg) Ce (US$/kg)45.0040.0035.0030.0025.0020.0015.0010.00 5.00 0.00 Carbonate (45% Oxide 99% FOB Oxide 99.999% FOB Metal 99% FOB Mischmetal (La REO) FOB China China China China 35%, Ce 65%) FOB China Data: Metal Pages
  33. 33. MORE COMPLICATED SUPPLY CHAIN Images: Wikipedia, Science Photo Library, Images of the elements
  34. 34. WHEN IS VALUE ADDED IN RARE EARTHS? Data: Metal Pages
  35. 35. CONCAVE VS CONVEX METALS [1] • • • • • • • • Source: Trench (2011)
  36. 36. VALUE ADDED LATER IN THE CHAIN Data: Metal Pages; Wellmer, Dalheimer & Wagner (2008)
  37. 37. CONVEX METALS & STRATEGY •Value extracted from metal • • • • • •
  38. 38. CONCAVE METALS & STRATEGY •Value extracted from metal • • • • • •
  39. 39. WHY ARE MINE PROJECTS DIFFICULT? • Quantity : size of the resource Geological Risk • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste Technical Risk • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products Market Risk • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue Completion Risk • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-patsHuman Resource Risk • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance Environmental Risk • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them Legal Risk • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country Political Risk • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns Capital Cost Risk • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project Delay Risk • Non-discretionary: unforeseen problem causing a delay to the project • Location: political or natural problems in your location i.e. war or flooding Force Majeure • Technical: sudden catastrophic technical failure at the mine project Based on: Trench (2011)
  40. 40. RECOVERIES: SOME ARE MORE EQUAL THAN OTHERS Recoveries range: 6.5% to 41.0% Recoveries range: 65% to 90% Remember: “basket values” analysis assume even 100% recovery Sources: Pele Mountain Resources, DNI Metals
  41. 41. RECOVERY: TURNING SOMETHING INTO NOTHINGRARE EARTHS 101 Resources x reserve recovery x mining recovery xgrade x processing recovery x cracking recovery (x separation recovery) = LOM production90% recoveries: 90% x 90% x 90% x 90% x 90% = 59%75% recoveries: 75% x 75% x 75% x 75% x 75% = 24%50% recoveries: 50% x 50% x 50% x 50% x 50% = 3%
  42. 42. THE MASS LOSS-RECOVERY PARADIGM Percentages indicate equivalent 30 96.7% mass loss to take ore to a 30% concentrateConcentrating Factor (multiple) 25 20 93.3% 15 90.0% 10 86.7% 83.3% 80.0% 76.7% 73.3% 70.0% 66.7% 5 0 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Ore Grade (%)
  43. 43. MINING = THE COST OF MOVING ROCK ~Mt Weld* Project X Same size Ore tonnage 250,000 tonnes 250,000 tonnes processing, cracking Ore grade 10% 2.5% & separation plants Total REO in ore 24,500 tonnes 6,250 tonnes required Conc. Recovery (x6 upgrade) 65% 65% Total REO in conc. 15,925 tonnes 4,063 tonnes Is this concentrate Concentrate grade 60% 15% marketable? Concentrate tonnage 26,542 tonnes 27,087 tonnes Cracking recovery (x1.5 90% 90% upgrade) Same cost to produce Total REO in cracked conc. 14,333 tonnes 3,657 tonnes x4 less REO Cracked conc. Grade 80% 22.5% Cracked conc. Tonnage 17,916 tonnes 16,253 tonnes Separation recovery 95% 95% Project X will cost x4 to operate and build Separation REO tonnage 13,616 tonnes 3,474 tonnes on a unit basis! Separated REO grade 99.9% 99.9% * Data for Mt weld is rounded and edited for purposes of clarity!– © Greenfields Research Ltd; Source: Lynas Corporation
  44. 44. WHY ARE MINE PROJECTS DIFFICULT? • Quantity : size of the resource Geological Risk • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste Technical Risk • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products Market Risk • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue Completion Risk • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-patsHuman Resource Risk • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance Environmental Risk • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them Legal Risk • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country Political Risk • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns Capital Cost Risk • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project Delay Risk • Non-discretionary: unforeseen problem causing a delay to the project • Location: political or natural problems in your location i.e. war or flooding Force Majeure • Technical: sudden catastrophic technical failure at the mine project Based on: Trench (2011)
  45. 45. CAPITAL COSTS: WHAT IS AFFORDABLE? Market Capitalisation Nolans Bore (equiv. US$10 million)Kvanefjeld (Arafura Resources) Project Capital Cost(Greenland Minerals & Energy) (equiv. US$100 million) Dubbo Mt Weld (Alkane Resources) Sarfartoq (Lynas) (Hudson Resources) Mountain Pass Strange Lake Kipawa-Zeus (Molycorp) (Quest Rare Minerals) (Matamec Explorations) Eco Ridge Zandkopsdrift (Pele Mountain Resources) (Frontier Rare Earths) Hastings (Hastings Rare Metals) Thor Lake (Avalon Rare Metals) Bear Lodge (Rare Element Resources) Data: Company websites
  46. 46. CONCAVE VS CONVEX METALS [2] • • • • • • • • • • • • • • • •
  47. 47. LIFE CYCLE OF A MINING PROJECT Source: Brent Cook / MarketOracle
  48. 48. MINE PROJECT DEVELOPMENT RISK Source: Trench (2012)
  49. 49. RARE EARTH PROJECT DEVELOPMENT RISK Source: Trench (2012)
  50. 50. WHEN DO RARE EARTH STOCKS and Mining permits RUN? contracts awarded Scoping study Independent review China Non-Ferrous completed completed Metals deal Feasibility study GFC cancelled Initial resource completed Rare earth prices announced take-off, not reflected in Lynas share price 1st technical study Resource completed Downstream plant moved to Malaysia upgrade China Non- Downstream 1st series of off-take Ferrous Metals agreement signed agreements signed deal proposed Malaysia reviews downstream operations
  51. 51. WHY ARE MINE PROJECTS DIFFICULT? • Quantity : size of the resource Geological Risk • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste Technical Risk • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products Market Risk • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue Completion Risk • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-patsHuman Resource Risk • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance Environmental Risk • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them Legal Risk • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country Political Risk • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns Capital Cost Risk • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project Delay Risk • Non-discretionary: unforeseen problem causing a delay to the project • Location: political or natural problems in your location i.e. war or flooding Force Majeure • Technical: sudden catastrophic technical failure at the mine project Based on: Trench (2011)
  52. 52. WILL SCALE INCREASE ENVIRONMENTAL ISSUES? “The Fear of a Toxic Rerun” New York Times, Keith Bradsher, 29th Jun 2011 “Taking a Risk for Rare Earths” New York Times, Keith Bradsher, 8th Mar 2011 Images: New York Times
  53. 53. WHY ARE MINE PROJECTS DIFFICULT? • Quantity : size of the resource Geological Risk • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste Technical Risk • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products Market Risk • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue Completion Risk • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-patsHuman Resource Risk • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance Environmental Risk • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them Legal Risk • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country Political Risk • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns Capital Cost Risk • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project Delay Risk • Non-discretionary: unforeseen problem causing a delay to the project • Location: political or natural problems in your location i.e. war or flooding Force Majeure • Technical: sudden catastrophic technical failure at the mine project Based on: Trench (2011)
  54. 54. WHY ARE MINE PROJECTS DIFFICULT? • Quantity : size of the resource Geological Risk • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste Technical Risk • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products Market Risk • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue Completion Risk • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-patsHuman Resource Risk • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance Environmental Risk • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them Legal Risk • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country Political Risk • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns Capital Cost Risk • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project Delay Risk • Non-discretionary: unforeseen problem causing a delay to the project • Location: political or natural problems in your location i.e. war or flooding Force Majeure • Technical: sudden catastrophic technical failure at the mine project Based on: Trench (2011)
  55. 55. WHAT IS A “DEVELOPABLE” PROJECT? 12.00 Major late stage light rare earth projects 10.00 Early stage lightTREO Grade (%) 8.00 rare earth projects Major early stage light rare earth 6.00 projects Heavy rare 4.00 earth projects 2.00 0.00 0.0 200.0 400.0 600.0 800.0 1000.0 Ore (Mt) Data: Company websites
  56. 56. WHAT IS A “STAR” PROJECT? 12.00 10.00 WHERE ARE ALL CASH COWS THE STARS?TREO Grade (%) 8.00 6.00 4.00 PET PROJECTS PROBLEM CHILDREN 2.00 0.00 1.0 10.0 100.0 1000.0 Ore (Mt) Data: Company websites
  57. 57. STRATEGY 2B: THE “LIGHT” PROBLEM CHILDAdvantages– Metallurgy / processing better known– Possibilities to leverage scale– Second mover advantage in development timeframe Examples: Rare Element Resources,– First movers success may make these projects more attractive for debt Arafura Resources, Peak Resources, financing Frontier Rare EarthsDisadvantages– Unattractive to the equity market– Capital costs still likely to be high– Light rare earths market has less attractive fundamentals
  58. 58. STRATEGY 3: AIMING FOR THE STARSAdvantages– Potential to a new Bayan Obo or Ionic Clay?– Lower short term cash burn– First movers may provide an exit Examples: Tantalus Rare Metals, TUC strategy Resources, Namibia Rare Earths, Vale– Examples of exploration success in rare earths existDisadvantages– Won’t provide cash flow– May miss the best years of the market– Exploration generally unattractive for equity investors currently
  59. 59. UNANSWEREDQUESTIONS ABOUTPROJECT DELAYSWhy rare earth“oversupply” may not beimminent Image: Shutterstock
  60. 60. WHAT IS A REALISTIC DEVELOPMENT TIMEFRAME? First mover rare earth projects Second mover rare earth projects • Delays due to technical problems at feasibility stage • Shorter development time, and lower development cost • Faced funding problems throughout due to lack of investor awareness • Maturing new market outside of China Typical development timeframe will be 12-15 years Targeting 5-10 years from purchase to production?COMPARISON OF AUSTRALIAN RARE EARTH PROJECTS1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 LYNAS: Mt Weld (Forecast 12 years from purchase to production) Project Resource Scoping Feasibility Project Refinancin Farm In Drilling Study Study Peer Review GFC Construction PRODUCTION >>> Funding gALKANE: Dubbo (Forecast 15 years from purchase to production) Project Definitive Expanded Financing /Purchase Feasibility Study Financing Definitive Feasibility Study GFC Feasibility Study FS Construction PRODUCTION >>> ARAFURA: Nolans (Forecast 12 years from purchase to production) Expanded Project Prefeasibilit Feasibilit Financing / PRODUCTION Purchase Scoping Study y Study GFC Feasibility Study Feasibility >>> y Study Construction Study Data: Company websites
  61. 61. TYPES OF DELAY AT MINE PROJECTS Project Delay Discretionary Non-Discretionary PortfolioStrategic Governmental Governmental Equipment People Finance Resource Sequencing Direct Indirect Cost Delays Skilled Unskilled Debt Equity Quality Quantity Source: Trench (2011)
  62. 62. RARE EARTH PROJECTS PRONE TO DELAYLength of delays at Australian rare Frequency of delays at Australian earth projects 1999-2012 rare earth projects 1999-2012 15 FrequencyNolans 10 5 Dubbo 0Mt Weld 0 2 4 6 8 Delay (years)
  63. 63. DEALING WITH ANUNCERTAIN FUTUREDeveloping future rare earthindustry scenarios to help guidestrategy Image: Shutterstock
  64. 64. THE BCG BOX FOR RARE EARTHS SCENARIOSIncreasing shortage of heavy rare earths HEAVY SHORTAGE SHORTAGE Chinese exports of heavy rare Chinese exports of all rare earths restricted (i.e. partial earths fall (i.e. smuggling Chinese WTO victory) AND/OR stopped, Chinese WTO continued strong demand victory, planned reductions) growth AND/OR higher than expected demand growth SURPLUS LIGHT China increases exports of all rare earths (i.e. SHORTAGE Preferential export of heavy increased smuggling or rare earths AND/OR loss of WTO case) AND/OR unexpected strong demand widespread demand growth (substitution?) destruction occurs. Increasing shortage of light rare earths Based on: Boston Consulting Group (BCG)
  65. 65. STRATEGY 1B: THE BY-PRODUCT CASH COWAdvantages– Primary commodity provides hedge against rare earth uncertainty– Potentially easier to finance– Potential earlier cash flow Examples: Greenland Minerals, Pele– Rare earths extraction remains an Mountain Resources, Alkane Resources, “option” CBMMDisadvantages– Metallurgy likely to be complicated– Won’t work as a co-product or rare earth “as a by-product” operation– Difficult to achieve scale– May be unattractive to equity markets
  66. 66. STRATEGY 4A: PET PROJECTS (THE “CASH DOG”)Advantages– Quick to implement, whilst market still attractive– Cash generative– Simple & cost effective Examples: India Rare Earths?– Lower riskDisadvantages– Not a long term solution– May be more trouble than it’s worth– Not many obvious opportunities– Rare earths not conducive to “quick & easy” development– May not be attractive to equity markets
  67. 67. STRATEGY 4B: DO SOMETHING ELSE!Advantages– Hedge against rare earth market risk– Potential for faster development & cash flow– Maybe cheaper / easier / lower risk Examples: Alkane Resources, Kimberley– Wider range of opportunities available Rare Earths, Avalon Rare MetalsDisadvantages– May be unattractive to “rare earth” focused investors– Skills may not transfer as planned– Loss of focus– Spreading resources too thinly
  68. 68. STRATEGIES FORSCENARIOS OR“HORSES FORCOURSES”Matching strategies to scenariosand trying to prepare for allpossible futures
  69. 69. THE BCG BOX FOR RARE EARTHS SCENARIOSIncreasing shortage of heavy rare earths HEAVY SHORTAGE SHORTAGE Positive for all rest of world (ROW) rare earth Positive for “heavy” rare mine developers earth mine projects. Negative for all ROW rare Negative for “light” rare earth consumers earth mine projects. SURPLUS LIGHT Negative for all rest of SHORTAGE world (ROW) rare Positive for “light” rare earth mine developers earth mine projects. Positive for all ROW Negative for “heavy” rare rare earth consumers earth mine projects. Increasing shortage of light rare earths Based on: Boston Consulting Group (BCG)
  70. 70. THE BCG BOX FOR RARE EARTH STRATEGIESMarket Growth (adding to the competition) 2a: HEAVY PROBLEM CHILD 3: FIND A STAR! 2b: LIGHT PROBLEM CHILD 4a: CASH DOG 1a: CASH COWS 4b: DO 1b: BY-PRODUCT SOMETHING CASH COW ELSE! Market Share (beating the competition) Based on: Boston Consulting Group (BCG)
  71. 71. THE RARE EARTH PROJECT SCENARIOS MATRIX BY- HEAVY LIGHT DO FIND A CASH COW PRODUCT PROBLEM PROBLEM CASH DOG SOMETHIN STAR CASH COW CHILD CHILD G ELSE!SHORTAGE        HEAVYSHORTAGE        LIGHTSHORTAGE       SURPLUS       
  72. 72. HOMEWORK: PUTTING STRATEGY INTO ACTIONNow implement the strategy-scenario grid:– Assign probabilities to each of the scenarios– Define the parameters of the target asset for each scenario– Determine where your assets fit into these strategies– Determine the entrance & implementation cost of each strategy– Select a blend of strategies that cover as many scenarios as possible for the resources & time available
  73. 73. CONCLUSIONS– Entering “Phase 2”: Mine project development– Geology: Ore value NOT heavy versus lights– Technical: Quality NOT scale– Delays: Oversupply may NOT be imminent– Future scenarios: Four possible futures– Potential strategies: Seven possible company strategies– Dealing with uncertainty: “Horses for courses”
  74. 74. POTENTIAL RESEARCH AREAS– Prices: What moves rare earth prices– Value Chain: Understanding its structure– Technical: Quality NOT scale– Environmental: Dealing with radiation– Financing: Concave metal financing– Delays: Project development risk– Strategy: Minor metals industry
  75. 75. CONTACT DETAILS & FURTHER REFERENCEJohn P. SykesDirector, Greenfields Research Ltd (UK)john.sykes@greenfieldsresearch.comwww.greenfieldsresearch.comCourse Leader, 3-Day MBA in Rare Earth Metalshttp://www.thembatrainingcompany.com/training/3-day-mba-in-rare-earth-metals Logo courtesy of The MBA Training Company

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