Rare Earths Market 2016 Q&A With Ryan Castilloux

Friday May 20th the first annual European Rare Earth Roundtable, hosted by Adamas Intelligence and the Technology, Rare and Electronic Materials (TREM) Center. 

Speakers at the event included Ryan Castilloux, managing director of Adamas Intelligence, Gareth Hatch, founding principal at Technology Metals Research and president at Innovation Metals corporation, and David Abraham, author of The Elements of Power and director at TREM. Topics included the latest developments in rare earth exploration, production, processing, and geopolitics, as well as a forward-looking panel discussion with several European rare earth end-users.

Following the event, the Investing News Network reached out to Castilloux to get some updated insight into the rare earths market. In the interview below, he speaks about key trends for investors to watch for, and about some of the companies he sees doing well despite the difficult pricing environment for rare earth elements.

Here’s what he had to say.

INN: Adamas Intelligence and the TREM Center recently co-hosted the first annual European Rare Earth Roundtable. What were some of the key themes from the event?

RC: The roundtable turned out to be a great success. It was an intimate event with attendees from five nations and five facets of the rare earth industry—advisory, academia, exploration, processing, and end-use. We had some great presentations covering the latest developments in global rare earth exploration, production, processing, and policy. We also had an excellent panel discussion focused on past, present, and future demand for rare earth elements.

Some key takeaways from the roundtable were:

1.       There are a number of advanced exploration projects globally with potential to compete with China’s majors on profit margins;

2.       There are a handful of new rare earth processing technologies being developed with significant short-term potential to reduce costs associated with building and operating a rare earth separation plant comparing to conventional solvent extraction.

3.       While end-users have been successful in reducing the amount of rare earths needed for some applications on a per-unit basis, such as the use of dysprosium in magnets for wind turbines, the per-unit demand for such technologies is poised to grow rapidly in the coming years and will fuel continued demand growth for the rare earths they use overall.

INN: Which rare earths are performing the best so far this year in terms of price? The worst? Why is that?

RC: Price-wise, the rare earths used in NdFeB permanent magnets, such as neodymium, praseodymium, terbium, dysprosium, and sometimes gadolinium and holmium, have performed best so far 2016. The Chinese domestic and export prices of all the aforementioned oxides are up year-to-date anywhere from 5 percent to 30 percent with much of those gains posted in recent weeks. Due to fairly steady demand for these oxide, and a number of production stoppages in China since late-2015 due to low prices, the availability of these materials is becoming increasingly tight in China, boosting the pricing power of traders and producers. Lanthanum oxide has also performed well and is up almost 10 percent year-to-date. Molycorp’s (OTCMKTS:MCPIQ) shutdown in the US has steered a lot of US lanthanum demand back to China which has also tightened up the supply-demand situation since the start of this year.

On the other side of the equation, Chinese domestic and export prices of cerium oxide, europium oxide, and yttrium oxide have not fared so well. Overproduction and illegal production of these oxides in China in recent years has led to a build-up of inventories in the nation that continue to undermine prices.

INN: Where do you see prices headed for rare earths this year? When can we expect to see a recovery in rare earth prices?

RC: The prices of many rare earths in China—even those in major surplus—have increased in recent weeks following news of government-led buying to establish a commercial stockpile in the nation. Given the relatively small amount of rare earth products to be purchased under the directive, I think we may see some rare earths give up a portion of their recent gains before the end of this year unfortunately.

That said however, I think we will continue to see strength behind prices for lanthanum, neodymium, praseodymium, terbium, and dysprosium (the Neo-CREOs) going forward and believe we will begin to see a broader recovery in rare earth prices from 2017 onward. The forward looking supply-demand fundamentals support a price recovery—so long as China can continue clamping down on illegal production.

INN: What are the most important events in the market for rare earths investors to know about so far this year?

RC: The first five months of the year have been relatively uneventful but investor sentiment appears to be improving. I met with a number of rare earth explorers at the PDAC in March and heard from many that investor interest was on the rise.

From a contrarian-investor standpoint, there’s a lot of evidence to suggest that most rare earth prices have bottomed-out. China’s major producers have been losing money since early 2015. The challenge for investors now is identifying which emerging producers are best-positioned to capitalize as conditions improve. Now’s the time to roll-up the sleeves and dive in.

A more subtle development this year however was the COP21 conference in Paris in which representatives of 196 nations defined and agreed on taking measures to reduce greenhouse gas emissions in order to minimize global warming. This landmark agreement will accelerate global adoption of renewable energy sources and energy efficient technologies in the years to come – energy sources and technologies that will in turn drive growing demand for certain rare earth elements.

INN: China still controls most of the rare earths market. Could you give us an update on how regulatory changes in the country last year have played out in recent months? What does this mean for rare earth companies outside of China?

RC: At the European Rare Earth Roundtable, David Abraham of the TREM Center and author of The Elements of Power spoke a lot about recent political and regulatory developments in China and their current and future implications.

A key takeaway from that talk for me was that China sets very ambitious targets and timelines for industry reforms, but seldom reaches its targets on time, if at all. That said—while 2015 saw a number of policy and regulatory announcements, such as the elimination of export tariffs, resources tax reforms, and a push to consolidate the industry—many of these reforms are still unfolding in the nation, particularly with respect to consolidation, and were yet to see how it will all play out.

INN: It’s gotten more difficult for rare earth mining companies since Molycorp’s bankruptcy and the shutdown of Mountain Pass last year, with a number of companies refocusing on other metals or halting their projects. How can rare earth companies outside of China still succeed?

RC: At current prices even China’s major producers are struggling to make a profit, or just break-even. That fact adds long-term support for higher prices than those of today – particularly as China’s industry consolidation continues and illegal production is reduced. So that’s good news for a rare earth exploration company that’s currently 3 to 8 years from possibly starting up production.

Also, as I mentioned earlier, there are a number of new rare earth processing technologies being developed with potential to slash the capital and operating costs of emerging producers, enabling them to compete on cost and profit margin with China’s major producers, even at low price levels. These technologies are being developed by companies like Innovation Metals, Ucore Rare Metals (TSXV:UCU), Geomega Resources (TSXV:GMA), Texas Mineral Resources (OTCMKTS:TMRC), and Rare Earth Salts.

INN: Which rare earth juniors do you see still making advances despite difficult market conditions?

RC: There’s still around 15 projects that continue making promising headway, have made significant project-related announcements in the past 12 months, and for the most-part are intending to become near term producers in the coming 5 to 10 years.

In Canada, Commerce Resources (TSXV:CCE) is still making headway at its Ashram project and has identified potential to add a byproduct revenue stream and forged an agreement with a potential offtaker for that product. Search Minerals (TSXV:SMY) is also progressing with its Foxtrot project and announced completion of a PEA on the project earlier this year.

In Europe and Africa, advanced projects like Mkango Resources’ (TSXV:MKA) Songwe Hill in Malawi, Peak Resources’ (ASX:PEK) Ngualla in Tanzania, and Greenland Minerals and Energy’s (ASX:GGG) Kvanefjeld in Greenland are also still pushing ahead and have issued major announcements and/or technical reports within the past 12 months.

In Australia we continue to see advances and positive announcements from a number of explorers such as Alkane Resources (ASX:ALK) (owner of the Dubbo Zirconia Project), Arafura Resources (ASX:ARU) (owner of the Nolans Bore project), Northern Minerals (ASX:NTU) (owner of the Browns Range project), and Hasting Technology Metals (ASX:HAS) (majority owner of the Yangibana project).

Speaking of processing developments and news, Alkane recently announced its intent to toll-process rare earth material in Laos, and Arafura recently announced plans to explore the possibility of building a joint-venture processing plant in South Korea with OCI for its Nolans project.

INN: What should investors interested in rare earths be looking for right now?

RC: They should seek to identify projects with a high-degree of potential revenue exposure to ‘Neo-CREOs’—that is elements and oxides of neodymium, praseodymium, terbium, dysprosium, and lanthanum. We forecast demand for these rare earths will continue growing strongly in the coming years, and with limited new production globally, will enjoy higher prices as the market evolves.

Additionally, investors should not place undue emphasis on production costs alone, since rare earth producers, unlike single commodity producers, don’t compete on cost. They compete on profit margins.

Lastly, keep an eye on investment opportunities in companies developing new processing technologies because the market-need they are looking to capitalize on is far more scalable and far larger than that being targeted by just a single rare earth miner.