2014-Sykes_et_al-Developing_New_Rare_Earth_Mine_Supply_Outside_China-Metal_Pages_Rare_Earths-FINAL

1. The Challenges in Developing New Rare Earth Mine Supply Outside of China John P. Sykes & Allan Trench Centre for Exploration Targeting, Curtin University & The University of Western Australia Joshua Wright Rowton Ltd CCCNC & Metal Pages Rare Earths Conference, Chengdu, China: 11th Sept 2014

2. CCCNC & Metal Pages Rare Earths Aims •An assessment of the challenges faced in developing new rare earths mine supply outside of China. •Risk progression in rare earth projects via study of ‘delays’ at Mt Weld, Dubbo and Nolans. •Value accretion in rare earth projects via share price movements over time at Mt Weld. •Introduce the concept of ‘concave’ project value accretion and assess how it interacts with corporate risk at rare earths projects •Show that theoretically value accretion and risk progression in rare earths mine project development are misaligned. •Suggest some potential strategies for mitigating ‘concavity’. •NB: Mt Weld, Dubbo and Nolans are used as examples, though the observations likely apply globally. 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 2 of 33

3. CCCNC & Metal Pages Rare Earths RISK PROGRESSION IN RARE EARTH PROJECTS: MT WELD Rare Earth Mining & Exploration: The Challenges in Developing New Rare Earth Mine Supply Outside of China 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 3 of 33

4. CCCNC & Metal Pages Rare Earths Mt Weld was a long, complex project 1st resource Scoping study FS Marketing / off-take agreements 2nd resource 3rd resource LAMP planning Malaysian permits Peer Review Farm in Mine & plant tenders Financing Australian permits Mining starts China JV Re- done LAMP tenders Plant starts Re-financing GFC: Project suspended Approximately 13 years from project purchase to production Timeframe estimated from archive of press releases on Lynas Corporation website and Infomine document archive 4th resource 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 LAMP construction LAMP starts Appeals 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Source: Sykes & Trench (2012) Slide 4 of 33

5. CCCNC & Metal Pages Rare Earths Mt Weld faced a variety of problems 11 Sept 2014 Project Delay Discretionary Strategic Portfolio Sequencing Government Non-Discretionary Government Direct Indirect Equipment Cost Delays People Skilled Unskilled Finance Debt Equity Resource Quality Quantity The Challenges in Developing New Rare Earth Mine Supply Outside China Major delay Minor delay Mt Weld Delays Summary (2000-2013) Based on: Trench (2011) Slide 5 of 33

6. CCCNC & Metal Pages Rare Earths Government problems most common 0 2 4 6 8 10 12 NB: Does not consider the magnitude or ‘cost’ of the delay, nor the interconnected nature of delays. 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Mt Weld Frequency of Delays (2000-2013) Slide 6 of 33

7. CCCNC & Metal Pages Rare Earths MEANWHILE ELSEWHERE IN AUSTRALIA… Rare Earth Mining & Exploration: The Challenges in Developing New Rare Earth Mine Supply Outside of China 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 7 of 33

8. CCCNC & Metal Pages Rare Earths 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 LYNAS: Mt Weld (14 years from purchase to production) Farm in Resource Drilling Scope FS Peer Review Finance GFC Re-finance Construct Permit PRODUCTION >>> ALKANE: Dubbo (Forecast 18 years from purchase to production) Purchase FS Financing DFS GFC DFS Expanded FS EIS? Finance & Construct? PRODUCE ? ARAFURA: Nolans (Forecast 14 years from purchase to production) Purchase Scope PFS FS GFC FS Expanded FS? Finance & Construct? PRODUCE ? Lynas was not suffering alone… 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 8 of 33

9. CCCNC & Metal Pages Rare Earths Dubbo was facing strategic challenges 0 2 4 6 8 10 12 NB: Does not consider the magnitude or ‘cost’ of the delay, nor the interconnected nature of delays. 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Frequency of Delays at Dubbo (1999-2013) Slide 9 of 33

10. CCCNC & Metal Pages Rare Earths Nolan’s was facing financing problems 0 2 4 6 8 10 12 NB: Does not consider the magnitude or ‘cost’ of the delay, nor the interconnected nature of delays. 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Frequency of Delays at Nolans (2003-2013) Slide 10 of 33

11. CCCNC & Metal Pages Rare Earths Aussie REE projects difficult to deliver 0 2 4 6 8 10 Mt Weld Dubbo Nolans Delay (years) Length of Delays at Australian Rare Earth Projects (1999-2013) 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 11 of 33

12. CCCNC & Metal Pages Rare Earths Facing a wide range of problems! 0 2 4 6 8 10 12 14 16 18 20 NB: Does not consider the magnitude or ‘cost’ of the delay, nor the interconnected nature of delays. 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Frequency of Delays at Australian Rare Earth Projects (1999-2013) Slide 12 of 33

13. CCCNC & Metal Pages Rare Earths Australian REE projects tells us: •Rare earth projects have long and complex histories; 15-20 years! •Vulnerable to technical, financial and government problems •Companies can be strategically indecisive. •Frequency of problems are beginning to be understood. •Magnitude and interconnected nature is not. –Government & financial delays maybe of greater magnitude? –Negative feedback loops with the financial sector? –Good starting ‘geology’ does however seem critical. •‘Non-technical’ risks cannot be engineered away – ever present! •Should concern governments interested in ‘strategic commodities’. 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 13 of 33

14. CCCNC & Metal Pages Rare Earths VALUE ACCRETION IN RARE EARTH PROJECTS: MT WELD Rare Earth Mining & Exploration: The Challenges in Developing New Rare Earth Mine Supply Outside of China 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 14 of 33

15. CCCNC & Metal Pages Rare Earths Brent Cook’s Life cycle of a mine project Concept Exploration Discovery Economics Development Mining Value Time EXPLORATION MINING High Risk – High Potential Lowered risk Full Value Speculation Orphan Period Speculators Leave Institutional Investment 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Based on: Marketoracle Slide 15 of 33

16. CCCNC & Metal Pages Rare Earths ‘Convex’ risk progression: Project vs Corporate •Project/Technical risk versus Corporate Risk in the Minerals Sector Project Risk Corporate Risk Increasing risk Exploration Feasibility Development Production De-commissioning Source: Trench & Packey 2012 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China A high chance of project related problems at this stage, but little at stake so not of concern to the overall company A lower chance of project related problems at this stage, but if they do occur they could be life-threatening to the company Based on: Trench & Packey (2012) Slide 16 of 33

17. CCCNC & Metal Pages Rare Earths Value accretion at Lynas was ‘concave’ -15.00 -12.50 -10.00 -7.50 -5.00 -2.50 0.00 2.50 5.00 7.50 10.00 12.50 15.00 Apr 01 Jul 01 Oct 01 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Lynas vs ASX vs Cerium Rare earth resource announced HofA with Gansu Rare Earths for downstream plant Purchase of Mt Weld completed Pilot plant work completed successfully Scoping Study completed Feasibility Study completed Downstream agreement with Rhodia Downstream plant moved to Malaysia Mining approved by WA govt & mine contract awarded GFC: financing problems China Non- Ferrous deal announced More permit approvals China Non- Ferrous deal cancelled Rare earth prices soar – not reflected in share price Off-take contracts awarded Permit approvals in Malaysia 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Based on: Sykes & Trench (2012) Slide 17 of 33

18. CCCNC & Metal Pages Rare Earths Rare earth value accretion is concave Value Recognition Convex minerals: • Gold • Tin • Copper • Nickel sulphide Concave minerals: • Lead & Zinc • Nickel laterite • Vanadium • Rare earths 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Based on: Trench & Packey (2012) Slide 18 of 33

19. CCCNC & Metal Pages Rare Earths CAUSES OF CONCAVE COMMODITIES Rare Earth Mining & Exploration: The Challenges in Developing New Rare Earth Mine Supply Outside of China 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 19 of 33

20. CCCNC & Metal Pages Rare Earths Value is added downstream in REE’s 0% 50% 100% 150% 200% 250% Ore in ground Mining (Mixed Oxide) Seperation (Single Oxide) Refining (Metal) Alloying (Mischmetal) Cerium Lanthanum 50-60% at the mining stage 20-25% in separation 25-35% at the refining stage © Greenfields Research Ltd; Data: Metal Pages 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Source: Sykes (2011) Slide 20 of 33

21. CCCNC & Metal Pages Rare Earths Convex & concave value chains can cause convex & concave commodities Exploration Mining Processing Refining Marketing Value Recognition Convex minerals: • Gold • Tin • Copper • Nickel sulphide Concave minerals: • Lead & Zinc • Nickel laterite • Vanadium • Rare earths 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Based on: Trench & Packey (2012) Slide 21 of 33

22. CCCNC & Metal Pages Rare Earths Other reasons for ‘concaveness’ •Cost is in downstream processing stages. •Geological and exploration challenges not significant compared to later stage technical and non-technical challenges. •Potentially lengthy development timeframe. •Commodity is unknown to investors. •High political risk jurisdiction. •Inexperienced management. 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 22 of 33

23. CCCNC & Metal Pages Rare Earths MITIGATING CONCAVE RISK Rare Earth Mining & Exploration: The Challenges in Developing New Rare Earth Mine Supply Outside of China 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 23 of 33

24. CCCNC & Metal Pages Rare Earths Make the ‘concave’ problem a ‘convex’ solution Increasing risk Exploration Feasibility Development Production De-commissioning Source: Trench & Packey 2012 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China ‘Concave’ Project Risk ‘Convex’ Project Risk Corporate Risk Solve concave problems early: •Experienced management? •Technological (not geological) focus? •Inform the investing public? Based on: Trench & Sykes (2013) Slide 24 of 33

25. CCCNC & Metal Pages Rare Earths DELAYS risk peak REDUCES risk Input of extra capital: •Strategic investor? •Take advantage of fashions? Exploration Development Production Extra funding delays risk accrual 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Based on: Trench & Sykes (2013) Slide 25 of 33

26. CCCNC & Metal Pages Rare Earths Convex to concave sequencing Value ‘Staircase’ becomes: •‘Convex’ project first i.e. gold then rare earths •Raise money from a fashionable commodity 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Based on: Trench & Sykes (2013) Slide 26 of 33

27. CCCNC & Metal Pages Rare Earths Focus on whole of value chain 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Four Key Elements to Value Realisation If we do not satisfy 1, 2, 3 and 4, then the positive value realisation at 5 is impossible : the project cannot progress – e.g. we have no social license – or there is value destruction – e.g. some combination of 2, 3 and 4 renders the operational cash-flow insufficient to deliver positive NPV. Production Rate kWh/tonne Depth Geometry Social Licence Recovery Future Commodity Prices Geometallurgy Capex Opex Geological Factors Financial Engineering Future Energy Prices Operating Factors Mineral Deposit Value Realisation 1 2 3 4 5 Water and Geotech A high quality deposit successfully links these elements to deliver value Source: McCuaig, Vann & Sykes (2014) Slide 27 of 33

28. CCCNC & Metal Pages Rare Earths Opportunity Realisation: Front End Loading VALUE Front End Loading 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Source: Bell (2014) Slide 28 of 33

29. CCCNC & Metal Pages Rare Earths Mitigating ‘concave risk’: going convex! •Resolve downstream technological problems causing concavity. •Integrate downstream to capture late accruing value. •Consider strategic investors, who support the project from early stages. •Public information (industry bodies etc) about the commodity. •Take advantage of fashions - hot commodity goes from concave to convex. •Stay away from high risk jurisdictions. •‘Experienced’ management teams (i.e. ‘experience of commodity’). •Front End Load projects, do not overspend on exploration. •BUT good geology is critical! •Develop a convex commodity first, then the concave project. 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 29 of 33

30. CCCNC & Metal Pages Rare Earths IN SUMMARY Rare Earth Mining & Exploration: The Challenges in Developing New Rare Earth Mine Supply Outside of China 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 30 of 33

31. CCCNC & Metal Pages Rare Earths In summary •Rare earth projects have long and complex histories; 15-20 years! •Vulnerable to technical, financial and government problems •Frequency of problems understood. Magnitude and interconnection is NOT. •Rare earth projects are ‘concave’ – value accretes late. •Exploration & ‘geological risk’ mitigation is NOT a driver. •Technical, governmental, environmental & financial risk mitigation ARE value drivers. •Other causes of ‘concaveness’ include value chain structure, investor unfamiliarity, inexperienced management and ‘country’ risk. •Value accretion and risk mitigation are not aligned for rare earth projects. •Strategies exist for converting ‘concave’ projects to ‘convex’ of which ‘front end loading’ and ‘whole of value chain’ thinking are the most critical. 11 Sept 2014 The Challenges in Developing New Rare Earth Mine Supply Outside China Slide 31 of 33

32. THANK YOU For more information: Centre for Exploration Targeting: www.cet.edu.au Greenfields Research: www.greenfieldsresearch.com Rowton Ltd: www.rowton-ltd.com Contact information: John P. Sykes: johnpaul.sykes@postgrad.curtin.edu.au Joshua Wright: josh.wright@rowton-ltd.com Allan Trench: allan.trench@curtin.edu.au

33. Learn more on “Mineral Economics for Geologists” Date: 2nd December 2014 Website: http://www.cet.edu.au/education-and- training/short-courses/mineral-economics- for-geologists Contact: Centre for Exploration Targeting info-cet@uwa.edu.au Prof Allan Trench allan.trench@crugroup.com Mr John Sykes johnpaul.sykes@postgrad.curtin.edu.au

2014-Sykes_et_al-Developing_New_Rare_Earth_Mine_Supply_Outside_China-Metal_Pages_Rare_Earths-FINAL

2014-Sykes_et_al-Developing_New_Rare_Earth_Mine_Supply_Outside_China-Metal_Pages_Rare_Earths-FINAL

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