This appeared a day or so ago
Rare Earth Fire Rages On
A perfect storm of strong demand and tight supply which started to blow through rare earth stocks last year is building to cyclone strength, delivering double-your-money investment returns.
The share price of Lynas Rare Earths, the Australian leader of the industry, has risen by 126% since the start of the year to $14.76 an impressive increase but modest alongside the U.S. rare earth leader, MP Materials, which is up 314% at US$67.88.
Both, along with the rest of the sector, could go a lot higher. A late June study by Morgan Stanley, an investment bank, included a Lynas price forecast of $28.35 in the year 2028 based on the MP Materials historic enterprise value and pre-tax earnings multiple of 31-times.
Stretched further into the future and Lynas could be trading at $46.15 in the year 2032 based on long-term commodity price assumptions and the 14-times historic earnings multiple of Lynas.
There is no guarantee that those future prices will be reached with the bank's analysis best seen as a guide to the direction of the rare earths industry.
Driving Lynas and MP is a potent mix of government activity (positive and negative) which is underpinning prices for rare earths, which are really metals, and likely to keep them high for years.
China, the dominant producer for the material which has a wide and growing mix of industrial and military applications, is limiting supply.
The U.S., Australia and other western governments, are investing heavily in the development of a non-Chinese supply chain, with evidence of a bifurcated (divided) market already evident in some of the more exotic rare earths such as dysprosium (used in permanent magnets) and terbium (used in electrical displays and naval sonar).
The Morgan Stanley study demonstrated that a mid-year Chinese squeeze on the supply of dysprosium oxide, drove the price in Europe up from around US$250 per kilogram to US$700/kg before it slipped back to US$500/kg — double the price in China which remained close to USD$250/kg.
It was a similar story with terbium oxide which rocketed in Europe from US$1000/kg to US$3000/kg before easing slightly, while the China price remained close to US$1000/kg.
Control of supply, which China has been working towards for the past 30 years, means it can use rare earths, with their essential uses in modern technology, as a potent negotiating tool, especially in its trade war with the U.S.
The front-line fighter jet of the U.S. Air Force, the F-35, needs 420kg of rare earths, a mid-sized warship needs 2.3 tonnes, and a Virginia-class submarine, which Australia has signed up for ahead of the delivery of AUKUS-class vessels, needs 4.2 tonnes of rare earths.
It's the overdue recognition by western governments that they are being held to ransom by China for the supply of metals critical to their industries and militaries which has sparked a panicked reaction and a flood of cash from western governments to build their own rare earth supply chains.
Last month, the U.S. Government became the biggest shareholder in MP by investing US$400 million in preferred stock and underwrote US$1 billion in funding from Goldman Sachs and JPMorgan Chase to build a new rare earth magnet factory.
Perhaps more importantly for investors, the government, through the Defence Department, said it would buy all the unsold NdPr (a mix of neodymium and praseodymium) at a fixed price of US$110/kg, more than double the price at the time for NdPr of US$52/kg.
Australia is moving in the same direction as the U.S., with funding already provided for mineral sands miner Iluka Resources to build a rare earth processing plant at Eneabba, north of Perth, as well as funding a new mine being developed by Arafura Resources, a company which has iron ore billionaire Gina Rinehart as its major shareholder.
Iluka chief executive Tom O'Leary, said last week after the release of a lacklustre half year report which included a 31% fall in net profit, that developments continued to support the company's rare earth strategy, which is initially based on treating stockpiled monazite ore, which contains rare earths but for which there wasn't a market until recently.
He said the entire rare earth industry can expect higher prices after the U.S. Government deal with MP. "It is clear that a non-Chinese price for rare earths is emerging," O'Leary said.
Australia's Resources Minister Madeleine King said that plans by the Australian Government to create a critical metals stockpile (including rare earths) would help de-risk the industry and encourage private sector investment.
"Pricing certainty will mean that companies and investors are less exposed to markets that are opaque and subject to manipulation," King said.
Her unusually strong statement was a direct criticism of China's history of both squeezing supply to force prices up and then flooding the market to drive out competitors which is what it did to MP in 2016 and tried to do to Lynas which had to be rescued by a Japanese consortium in the same year.
Unusual price movements in rare earths are not solely a Chinese Government issue. Last week a small Australian rare earth company saw its share price explode for an unexplained reason.
Kaili Resources, which is exploring in a region adjacent to the Victorian and South Australian border rocketed from 4.8c to $3.18 on August 18 before crashing back to 21c and then rising to 82c before trading was suspended, sparking multiple investigations by market regulators.
Trading in Kaili, which has close Chinese connections, is warning that the rare earth sector is a red hot speculative playground of the sort seen in earlier Australian mineral boom, such as nickel in 1968, which ended in a spectacular bust.
Other rare earth stocks riding high on strong demand for the metals include:
- Arafura, up 58% to 19c since the start of the year.
- Lindian Resources up 200% to 24c since the start of the year thanks to plans to ship ore from its Kangankunde project in Malawi to Iluka's refinery in WA.
- Viridis Mining, up 255% to $1.25 since the start of the year after declaring a maiden resource at its Colossus project in Brazil, and;
- Great Northern Minerals, up 300% last week to 7c after acquiring an exploration tenement in the Mojave desert of California, location of MP's Mountain Pass mine, a fine example of the imprecise science of "near-ology".
Rare earths are not a sector for faint-hearted investors, but unlike earlier mining boom,s this one has full-blooded backing of western governments determined to create a non-Chinese supply chain, a process which will take years.
Because there is so much riding on the rare earth race, especially defence industry demands, it is highly likely that governments will continue to build their own supply chains even if China performs its past trick of flooding the market to kill competition.
Despite the opaque nature of rare earth mining and markets, there seems little doubt that the U.S. Government's price of US$110/kg for NdPr is a floor, not a ceiling.
Morgan Stanley said earlier this year (and repeated earlier this month) that it sees a long-term NdPr price of US$239/kg driven by demand from existing commercial and military markets as well as from new technologies such as "humanoid" robots for industry and households.
The bifurcation of the rare earth market to create a western supply chain and the willingness of governments to create a floor price for the material has significantly enhanced the outlook for miners and refiners of rare earths.
If the Morgan Stanley price forecast of US$239/kg is correct, or just half right, then companies such as Lynas and MP might have only just begun their rise
Here is the link:
https://www.intelligentinvestor.com.au/investment-news/rare-earth-fire-rages-on/154759
Australia is really lucky just how much of these we have in our soil!!! A wonderful gift for our children over the next 100 years or so!
David.
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