Challenges of rare earths - Wright et al - Sep 2016 - Argus Rare Earths Conference
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Challenges of rare earths - Wright et al - Sep 2016 - Argus Rare Earths Conference - Greenfields Research / Rowton Ltd. / Centre for Exploration Targeting / UWA Business School / The University of Western Australia
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Challenges of rare earths - Wright et al - Sep 2016 - Argus Rare Earths Conference
- 1. The challenges of ex-China rare earth mine development (and how to overcome them) Joshua P. Wright Rowton Consolidated Ltd, United Kingdom: josh.wright@rowton-ltd.com John P. Sykes Centre for Exploration Targeting, The University of Western Australia (UWA): john.sykes@research.uwa.edu.au Greenfields Research Ltd, United Kingdom Allan Trench Centre for Exploration Targeting, UWA: allan.trench@uwa.edu.au Business School, UWA CRU Group, United Kingdom Argus Media Rare Earths Conference Hangzhou, China 25-27th October 2016
- 2. Argus Rare Earths Conference, Hangzhou, China The boom has been and gone… 0 10 20 30 40 50 60 70 80 Oct 06 Mar 07 Aug 07 Jan 08 Jun 08 Nov 08 Apr 09 Sep 09 Feb 10 Jul 10 Dec 10 May 11 Oct 11 Mar 12 Aug 12 Jan 13 Jun 13 Nov 13 Apr 14 Sep 14 Feb 15 Jul 15 Dec 15 May 16 PriceIndex1=1Oct2006 Selected Metal Pages rare earth oxide prices Oct. 2006 – Sep. 2016 La Oxide 99.5-99.9% FOB China (CN) Nd Oxide 99.5-99.9% FOB China (CN) Dy Oxide 99.5% min FOB China (CN) Rare-earth metal prices spike as China stockpiles supply - The Independent, 21 June 2011 Chinese Rare Earth Glut Triggers A Price Collapse And Environmental Crisis - Forbes, 15 May 2015 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 2 of 40
- 3. Argus Rare Earths Conference, Hangzhou, China …with limited progress (so far…) Molycorp files for bankruptcy as rare earth prices drop - Bloomberg, 25 June 2015 Malaysian rare earth plant decision delayed - BBC News, 4 Oct 14 Great Western Minerals is Bankrupt - Yahoo Finance, 4 Dec 2014 Year-end turn in rare earth prices seen as Lynas losses near $1b - Sydney Morning Herald, 10 Mar 16 Rare earths project in the Kimberley gets approval to build pilot processing plant - ABC Rural, 6 Sep 16 Frontier Rare Earths opts to delist from TSX - Pinnacle Digest, 25 Sep 15 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 3 of 40
- 4. Argus Rare Earths Conference, Hangzhou, China Why are rare earth mine projects so difficult? The challenges of ex-China rare earth mine development (and how to overcome them) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 4 of 40
- 5. Argus Rare Earths Conference, Hangzhou, China Typical mine project value accretion Concept Exploration Discovery Economics Development Mining Value Time High Risk – High Potential Lowered risk Full Value Speculation Orphan Period Speculators Leave Institutional Investment 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 5 of 40
- 6. Argus Rare Earths Conference, Hangzhou, China Project risk reduced early on Increasingrisk Exploration Feasibility Development Production De-commissioning 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 Corporate risk Project risk During operation project risk falls as it is better understood, whilst corporate risk is lowered by cash flows 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 6 of 40
- 7. Argus Rare Earths Conference, Hangzhou, China Convex metals accrue value early-on Sandfire Resources (copper) Sirius Resources (nickel sulphides) Gold Road Resources (gold) DeGrussa Nova Central Bore Gruyere 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 7 of 40
- 8. Argus Rare Earths Conference, Hangzhou, China But rare earths are ‘concave’ markets Exploration Scoping Feasibility Development Mining ValueRecognition Convex minerals: Gold, copper, nickel sulphide, oil, manganese?, platinum?, DSO iron ore? Concave minerals: Lead-zinc?, nickel laterite, vanadium, tantalum, tin, cobalt, molybdenum, magnetite, bauxite, silver, tungsten, gas, uranium, scandium, niobium, lithium, graphite, rare earths… 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 8 of 40
- 9. Argus Rare Earths Conference, Hangzhou, China -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 Apr01 Jul01 Oct01 Jan02 Apr02 Jul02 Oct02 Jan03 Apr03 Jul03 Oct03 Jan04 Apr04 Jul04 Oct04 Jan05 Apr05 Jul05 Oct05 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jul07 Oct07 Jan08 Apr08 Jul08 Oct08 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10 Jan11 Apr11 Jul11 Oct11 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 ‘Concave’ metals value is back-loaded 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 9 of 40
- 10. Argus Rare Earths Conference, Hangzhou, China ‘Concave’ underfunded & high risk Increasingrisk Exploration Feasibility Development Production De-commissioning Project risk Corporate risk Project risk is not geological so is not mitigated early-on meaning exploration does not add much value and makes fund raising difficult High project risk combines with high corporate risk to make very high risk projects, even whilst they remain underfunded, increasing difficulties further Finally, during operation project risk falls as it is better understood, whilst corporate risk is lowered by cash flows 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 10 of 40
- 11. Argus Rare Earths Conference, Hangzhou, China What makes a rare earth mine projects ‘concave’? The challenges of ex-China rare earth mine development (and how to overcome them) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 11 of 40
- 12. Argus Rare Earths Conference, Hangzhou, China 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) Farmin 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 product.) Purchase Scope PFS FS GFC FS Expanded FS? Finance& Construct? PRODUCE ? Concave projects are difficult to develop… 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 12 of 40
- 13. Argus Rare Earths Conference, Hangzhou, China 0 2 4 6 8 10 12 Strategic PortfolioMgmt. Government(Active) Government(Passive) Equipment People Finance Resource NB: Does not consider the magnitude or ‘cost’ of the delay, nor the interconnected nature of delays. No. Delays at Mt. Weld (2000-13) …with many non-geological challenges 0 2 4 6 8 10 12 Strategic PortfolioMgmt. Government(Active) Government(Passive) Equipment People Finance Resource No. Delays at Dubbo (1999-2013) 0 2 4 6 8 10 12 Strategic PortfolioMgmt. Government(Active) Government(Passive) Equipment People Finance Resource No. Delays at Nolans (2003-13) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 13 of 40
- 14. Argus Rare Earths Conference, Hangzhou, China …often with concave value chains too 0% 50% 100% 150% 200% 250% Ore in ground Mining (Mixed Oxide) Seperation (Single Oxide) Refining (Metal) Alloying (Mischmetal) ValueExtracted/Added Cerium Lanthanum 50-60% in mining 20-25% in separation 25-35% in refining Value extraction Value addition 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 14 of 40
- 15. Argus Rare Earths Conference, Hangzhou, China …and not helped by other issues Commodity is unknown to investors High political risk jurisdictions Inexperienced management & professionals …and many of these issues are interrelated! 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 15 of 40
- 16. Argus Rare Earths Conference, Hangzhou, China □ A twofold rare earth project problem 1. Maintaining long-term funding 2. Executing a challenging project √ 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 16 of 40
- 17. Argus Rare Earths Conference, Hangzhou, China Financing strategies for rare earth mine projects The challenges of ex-China rare earth mine development (and how to overcome them) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 17 of 40
- 18. Argus Rare Earths Conference, Hangzhou, China Funding strategy 1: Surf the wave • Raise money from fashionable commodity booms • Extra funding delays risk accrual • But no wave lasts forever (and is already over for rare earths) Delays risk peak Reduces risk Exploration Development Production 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 18 of 40
- 19. Argus Rare Earths Conference, Hangzhou, China Funding strategy 2: Strategic investor • A ‘strategic investor’ may be in it for the long term? • But be careful what you wish for… • Never be someone else’s ‘free option’ Delays risk peak Reduces risk Exploration Development Production 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 19 of 40
- 20. Argus Rare Earths Conference, Hangzhou, China Funding strategy 3: Convex first • Sequence a convex project (gold, copper, nickel sulphides etc.) before a concave project • Also fits with the ‘fashionable commodity’ approach Convex first project Concave second project Overall convex profile over two projects 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 20 of 40
- 21. Argus Rare Earths Conference, Hangzhou, China And avoid unnecessary country risk Taking a Risk for Rare Earths - New York Times, 8 March 2011 The Fear of a Toxic Rerun - New York Times, 29 June 2011 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 21 of 40
- 22. Argus Rare Earths Conference, Hangzhou, China Market entry strategies for rare earths mine projects The challenges of ex-China rare earth mine development (and how to overcome them) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 22 of 40
- 23. Argus Rare Earths Conference, Hangzhou, China ‘Concave’ problem to ‘convex’ solution Increasingrisk Exploration Feasibility Development Production De-commissioning ‘Concave’ Project Risk ‘Convex’ Project Risk Corporate Risk 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 23 of 40
- 24. Argus Rare Earths Conference, Hangzhou, China Entry strategy 1: First mover Aims • A version of the classic ‘low cost’ or ‘pioneers’ strategy • Typical ‘asset-focused’ mining strategy • Read the market before everyone else • Get hold of the best assets • The best assets are the most ‘forgiving’ to management Advantages • Assets very competitive • Sometimes already very advanced • Geology and technology sometimes already known • First mover advantage in geology as best assets picked first Disadvantages • Financial markets currently very tricky • First mover disadvantage – all R&D “in-house” • Not a viable strategy for non-first movers Examples • Lynas (Mt. Weld) • Molycorp (Mt. Pass) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 24 of 40
- 25. Argus Rare Earths Conference, Hangzhou, China Entry strategy 2: Fast follower Aims • Analogous to classic ‘focus’ or ‘settlers’ strategy • Acquire the ‘next best’ assets that have a good chance of overcoming the challenges discovered by the first movers Advantages • Metallurgy / processing / technical challenges better understood • Possibilities to leverage scale (projects tend to be bigger but lower quality) • Opportunity to learn from the first movers • First movers success may make these projects more attractive for debt financing Disadvantages • Unattractive to the equity market (projects often have weaker technical metrics) • Capital costs still likely to be high Examples • Arafura Resources (Nolans) • Peak Resources (Ngualla) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 25 of 40
- 26. Argus Rare Earths Conference, Hangzhou, China Entry strategy 3: Be different! Aims • Analogous to classic ‘differentiation’ strategy • Acquire assets that that can be orientated towards a specific under-served end market (e.g. heavy rare earths, coarse graphite, battery- grade lithium) Advantages • Focus on ‘fashionable’ end-markets often attractive to equity investors • Opportunity to ride rapid end-market growth • No major incumbent competitors Disadvantages • Projects currently low grade • Technical aspects unknown – R&D intensive • Lack of relevant industry skills & experience • Capital costs can be high • Development timeframe can be very lengthy • Debt financing can be be very tricky • Markets often don’t grow as fast as predicted Examples • Northern Minerals (Browns) • Hastings Tech Metals (Yangibana) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 26 of 40
- 27. Argus Rare Earths Conference, Hangzhou, China Entry strategy 4: Explorer Aims • Analogous to classic ‘disruption’ strategy • Usually exploration focused i.e. find a better asset than currently exists in the project pipeline and jump to the front of the queue Advantages • Potential for dramatic success • Lower short term costs (exploration is cheap) • Fast followers may provide an exit strategy • Aligns with typical ‘junior explorer’ capabilities Disadvantages • Does not provide near-term cash flow • May miss the best years of the market • Exploration generally unattractive for ‘minor metals’ equity investors who are end-market focused • Lack of geological capabilities in unusual commodities Examples • Tantalus Rare Metals (ionic clays in Madagascar) • Namibia Rare Earths (HREEs exploration) • Vale (Brazilian exploration) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 27 of 40
- 28. Argus Rare Earths Conference, Hangzhou, China Entry strategy 5: By-producer Aims • Analogous to a ‘real option’ (short put) • Produce new ‘speciality’ commodity as a by- product of a more traditional commodity, i.e. rare earths and uranium or phosphate; or lithium from tantalum-tin Advantages • Primary commodity provides hedge against speciality commodity market / project uncertainty • Potentially easier to finance • Potential earlier cash flow • Extraction remains an “option” and can be timed • Opportunity for trial and error Disadvantages • Technically even more complicated • Tends not to work as a co-product strategy • Difficult to achieve scale • May be unattractive to ‘fashion-focused’ equity Examples • Orbite Aluminae (REEs in red muds) • Alkane Resources (Dubbo Zr-REE) • Greenland M & E (Kvanefjeld U-REE) • Vale (PO4-REE in Brazil) • CBMM (Nb-REE in Brazil) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them) Image: Investopedia Slide 28 of 40
- 29. Argus Rare Earths Conference, Hangzhou, China Entry strategy 6: Boot-strapper Aims • Analogous to a ‘boot-strapping’ innovation • Find a ‘quick and dirty’ [sic] way of getting into production and move on from there Advantages • Quick to implement, whilst market still attractive • Cash generative • Simple & cost effective • Potentially lower risk Disadvantages • Not a long term solution • May be more trouble than it is worth • May have long term unintended consequences • Not many obvious opportunities • Technically difficult speciality metals projects generally not conducive to “quick & easy” development • May not be attractive to equity markets Examples • Orbite Aluminae (REE from red mud) • India Rare Earths (REE mineral sands) • Producing REE from tin smelter slags 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 29 of 40
- 30. Argus Rare Earths Conference, Hangzhou, China Entry strategy 7: The alternative road Aims • Another real option strategy • Develop an ‘easier’ traditional convex commodity (e.g. gold) project to give you time and resources to properly develop the more complex concave commodity project Advantages • Hedge against speciality commodity market risk • Potential for faster development & cash flow • Wider range of opportunities available • Aligns with convex-concave funding strategy • Opportunity to develop relevant in-house capabilities Disadvantages • May be unattractive to speciality metal focused investors • Skills may not transfer as planned • Loss of focus • Spreading resources too thinly (Reed Resources) Examples • Alkane Resources (Tomingley Au) • Avalon Rare Met. (East Kemptville Sn) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 30 of 40
- 31. Argus Rare Earths Conference, Hangzhou, China Capabilities are as important as assets and strategy The challenges of ex-China rare earth mine development (and how to overcome them) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 31 of 40
- 32. Argus Rare Earths Conference, Hangzhou, China □ □ Do you have operational capabilities? Which of the following rare earths miners is the ‘best-in-class’ operator? A) GWMG B) India Rare Earths C) Lynas D) Molycorp E) Other F) Don’t know√ ? □ □ □ □ 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 32 of 40
- 33. Argus Rare Earths Conference, Hangzhou, China □ Do you have development capabilities? Which of the following rare earths juniors is the ‘best-in-class’ project developer? A) Alkane Res. B) Arafura Res. C) Northern Min. D) Peak Res. E) Other F) Don’t know√□ □ □ □ □ 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 33 of 40
- 34. Argus Rare Earths Conference, Hangzhou, China □ Do you have exploration capabilities? Which of the following rare earths juniors is the ‘best-in-class’ explorer? A) Alkane Res. B) Arafura Res. C) Namibian R.E. D) Tantalus R.M. E) Other F) Don’t know√□ □ □ □ □ 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 34 of 40
- 35. Argus Rare Earths Conference, Hangzhou, China □ □ Do you have marketing capabilities? Which of the following rare earths miners is the ‘best-in-class’ trader / marketer? A) GWMG B) India Rare Earths C) Lynas D) Molycorp E) Other F) Don’t know√□ □ □ □ ? ? 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 35 of 40
- 36. Argus Rare Earths Conference, Hangzhou, China □ □ Do you have social capabilities? Which of the following rare earths miners is the ‘best-in-class’ communicator? A) Alkane Res. B) Lynas Corp. C) Northern Min. D) Peak Res. E) Other F) Don’t know√□ □ □ □ If the last questions were an exam, we would fail! 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 36 of 40
- 37. Argus Rare Earths Conference, Hangzhou, China Putting it all together: Funding, entry & capability The challenges of ex-China rare earth mine development (and how to overcome them) 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 37 of 40
- 38. Argus Rare Earths Conference, Hangzhou, China Coherent rare earth project strategy Aiming to convert a concave problem into a convex solution! Appropriate funding strategy • Fashionable commodities • Strategic investor • Convex-to- concave • Other? Viable market entry strategy • First mover • Fast follower • Differentiation • Exploration • By-products • Boot-strapping • Alternative path • Other? Matching internal capabilities • Technological? • Geological? • Marketing / trading • Communication • Relevant senior management • Project management • Other? + + 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 38 of 40
- 39. Argus Rare Earths Conference, Hangzhou, China 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them) Thank you 谢谢 Slide 39 of 40
- 40. Argus Rare Earths Conference, Hangzhou, China References • Sykes, J.P., 2014, The future of rare earths project development, Australia Resources & Investment, 8, 4:157-158. • Sykes, J.P., Trench, A., Greentree, M., Davies, R.S., & Wright, J.P., 2016, Entering complex concave commodity markets: Lessons from the previous lithium and rare earths booms for the current lithium and graphite booms, AIG Lithium and Graphite Seminar, Perth, 15 August. • Sykes, J.P., Trench, A., & Wright, J.P., 2014, The challenges in developing new rare earth mine supply outside of China, Metal Pages Rare Earths Conference, Chengdu, 11 September. • Sykes, J.P., 2015, Seven strategies for the rare earths industry, Australia Resources & Investment, 9, 2:90-92. • Sykes, J.P., Wright, J.P., & Trench, A., 2016a, Discovery, supply and demand: From metals of Antiquity to critical metals, Applied Earth Science, 125, 1:3-20. • Sykes, J.P., Wright, J.P., Trench, A., & Miller, P., 2016b, An assessment of the potential for transformational market growth amongst the critical metals, Applied Earth Science, 125, 1:21-56. • Trench, A., 2011, A Sharebuyer’s Guide to Investing in the Australian Mining Boom, Major Street Publishing, Highett, VIC, 475pp. • Trench, A., 2013, Strictly (Mining) Boardroom: Management Insights from Inside the Resources Sector, Major Street Publishing, Highett, VIC, 265pp. • Trench, A., & Packey, D., 2012, Australia’s Next Top Mining Shares: Understanding Risk and Value in Minerals Equities, Major Street Publishing, Highett, VIC, 336pp. • Trench, A., & Sykes, J.P., 2016, Strictly (Mining) Boardroom: A Practitioner’s Guide for Next Generation Directors, Major Street Publishing, Highett, VIC, 294pp. 25 Oct 2016The challenges of ex-China rare earth mine development (and how to overcome them)Slide 40 of 40