SEVEN STRATEGIES FOR RARE EARTHS HOPEFULS: NAVIGATING THE UNCERTAINTIES OF THE RARE EARTHS INDUSTRY John P. Sykes, Director, Greenfields Research Ltd (UK)

Image: Shutterstock

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?

TWO FORMS: “LIGHT” & “HEAVY” • • • 21

• • • 39

Sc 59

57

Y 60

Pr 64

Nd 65

Gd 68

Tb 69

Er

Tm

La 62

Sm 66

Dy 70

Yb

58

Ce 63

Eu

•

•

• • •

• • •

67

Ho 71

Lu

• • •

…OR THREE: “LIGHT” “MEDIUM”& “HEAVY” • • • 21

• •

39

Sc 59

57

Y 60

Pr 64

Nd 65

Gd 68

Tb 69

Er

Tm

La 62

Sm 66

Dy 70

Yb

58

Ce 63

Eu

•

•

• •

• •

•

• •

67

Ho

• •

71

Lu

•

…OR : “CRITICAL” & “NON-CRITICAL” • •

• • •

21

39

Sc 59

57

Y 60

Pr 64

Nd 65

Gd 68

Tb 69

Er

Tm

La 62

Sm 66

Dy 70

Yb

58

Ce 63

Eu 67

Ho 71

Lu

• • • •

• • • •

• • • •

…OR: BY END USE • • •

• •

21

39

Sc 59

57

Y 60

Pr 64

Nd 65

Gd 68

Tb 69

Er

Tm

La 62

Sm 66

Dy 70

Yb

58

Ce 63

Eu

•

•

•

•

•

• •

• • •

67

Ho 71

Lu

• •

WHERE NOW FOR RARE EARTHS?

Entering “Phase 2” of the recent rare earth industry: mine project development Image: Shutterstock

ENTERING “PHASE 2”: PROJECT DEVELOPMENT La Oxide 99% min FOB China (CN) / tonne 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Aug 2007

Aug 2008

Aug 2009

Aug 2010

Aug 2011 Data: Metal Pages; Bloomberg

WHY IS MINING SO DIFFICULT? 1. 2.

3.

4.

Relative crustal abundance. Degree of metal concentration by natural processes into mineral deposits. The mechanical ease of obtaining the ore from the earth. The ease of extracting the metal from the ore. Source: Gupta & Krishnamurthy (2005)

RARE EARTHS AREN’T THAT “RARE”

Source: USGS (2002)

ELECTROPOSITIVITY & ELECTRONEGATIVITY

Source: WebElements, Wikipedia

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, China

Source: BGS, USGS, Williams et al., Wikipedia, Encyclopedia Britannica, Goldavenue Encyclopedia, Kimberley Rare Earths, New York Times

WHERE WILL NEW SUPPLY COME FROM?

Data: Intierra, USGS, Infomine, Technology Metals Research, Google Earth, IHC Merwerde, Panoramio

PLENTY OF PROJECTS: NOW TO DEVELOP THEM?

Data: Greenfields Research, Company websites, Infomine, Technology Metals Research, USGS

MINING THROUGH STANDARD TECHNIQUES

Images: Greenfields Research Ltd, BGS, Molycorp, Atlas Copco

WHY IS MINING SO DIFFICULT? 1. 2.

3.

4.

Relative crustal abundance. Degree of metal concentration by natural processes into mineral deposits. The mechanical ease of obtaining the ore from the earth. The ease of extracting the metal from the ore.

1. 2.

3. 4.

Rare earths are abundant in the crust. Rare earths do not readily concentrate in the crust by natural processes. Rare earth ore are easily extracted from the earth. Extracting the rare earth metals from their ores is very difficult.

Now largely resolved by “exploration” in “Phase 1” (2008-11)

Now entering “Phase 2” where “development” will be the focus

Source: Gupta & Krishnamurthy (2005)

WHY ARE MINE PROJECTS DIFFICULT? Geological Risk Technical Risk Market Risk Completion Risk Human Resource Risk Environmental Risk Legal Risk Political Risk Capital Cost Risk Delay Risk Force Majeure

• Quantity : size of the resource • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-pats • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project • Non-discretionary: unforeseen problem causing a delay to the project

• Location: political or natural problems in your location i.e. war or flooding • Technical: sudden catastrophic technical failure at the mine project

Based on: Trench (2011)

UNANSWERED QUESTIONS ABOUT GEOLOGY The heavy-light paradigm or “Grade is King” even in the world of rare earths

THE “STANDARD” BASKET VALUE CHART Total Rare Earth Oxide Basket Value (US$/kg) 0.0 Hastings Kutessay II Norra Karr Kangankunde Strange Lake Bokan Thor Lake Mt Weld (Duncan) Dubbo Kvanefjeld Zandkopsdrift Bear Lodge Nolans Bore Mt Weld (CLD) Steenkampskraal Ngualla Mt Pass

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Heavy rare earth deposits Advanced light rare earth deposits Early stage light rare earth deposits Data: Greenfields Research Ltd, Company websites

QUESTION: HOW MUCH HEAVY IN A LIGHT?

Dysprosium Oxide Grade (%)

0.090 0.080

Heavy rare earth deposits Advanced light rare earth deposits Early stage light rare earth deposits

The highest grade “heavy” rare earth deposits are actually the advanced “light” projects

0.070 0.060

0.050 0.040

Some “heavy” rare earth projects actually have a very low heavy rare earth grade

0.030 0.020

0.010 0.000 Data: Greenfields Research Ltd, Company websites

TREO Basket Value (US$/kg)

REDUX: ORE VALUE VERSUS BASKET VALUE 120.00 110.00 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 0.00

Gold ore equivalent: 131.7g/t 158.0g/t

Focus is on these projects: mainly “heavy” rare earth projects

Or perhaps this one?

Focus should be on these: mainly advanced “light” rare earth projects

1.00

2.00 26.3g/t

3.00 52.7g/t

4.00 79.0g/t

5.00

6.00

105.3g/t

TREO Ore Value (US$/kg)

Data: Greenfields Research Ltd, Company websites; Idea for original chart from Technology Metals Research

WHY ARE MINE PROJECTS DIFFICULT? Geological Risk Technical Risk Market Risk Completion Risk Human Resource Risk Environmental Risk Legal Risk Political Risk Capital Cost Risk Delay Risk Force Majeure

• Quantity : size of the resource • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-pats • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project • Non-discretionary: unforeseen problem causing a delay to the project

• Location: political or natural problems in your location i.e. war or flooding • Technical: sudden catastrophic technical failure at the mine project

Based on: Trench (2011)

Market Growth (requiring investment)

THE BCG BOX OR “GROWTH-SHARE MATRIX” QUESTIONS Also known as “problem children”. High growth sector but large capital investment required.

STARS Leading assets/products dominating fast growing markets, still requiring investment.

DOGS/PETS

CASH COWS

Not profitable. Usually “pet projects” that provide a non-financial benefit i.e. synergies, labour retention etc

High market share in slow growth industry – “milked” to fund other investments

Market Share (returning investment)

Based on: Boston Consulting Group (BCG)

Market Growth (adding to the competition)

THE BCG BOX FOR MINE PROJECTS PROBLEM CHILD

STARS

Challenging projects with scale, that could be stars in a high growth industry, assuming some structural changes.

World class assets with high grades and large scale. Will dominate future sector and be hugely profitable.

PET PROJECTS Not profitable. Usually “pet projects” that provide a non-financial benefit i.e. synergies, labour retention etc

Market Share (beating the competition)

CASH COWS High grade, small scale projects, which are quickly cash generative, allowing access to an industry and providing cash for investment elsewhere.

Based on: Boston Consulting Group (BCG)

TREO Basket Value (US$/kg)

“GEOLOGY” BASED RARE EARTH STRATEGIES 120.00 110.00 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 0.00

PROBLEM CHILDREN

STARS

PET PROJECTS

CASH COWS

Gold ore equivalent: 131.7g/t 158.0g/t

1.00

2.00 26.3g/t

3.00 52.7g/t

4.00 79.0g/t

5.00

6.00

105.3g/t

TREO Ore Value (US$/kg) Data: Company websites; Idea for original chart from Technology Metals Research

STRATEGY 1A: THE CASH COW Advantages – Assets very competitive – Most already very advanced – Geology and technology already known – First mover advantage in geology as best assets picked first Disadvantages – Financial markets currently very tricky – First mover disadvantage – all R&D had to be done “in-house” – Currently not a viable strategy for nonfirst movers

Examples: Molycorp, Lynas, Great Western Minerals, MbAC Fertilizer?

STRATEGY 2A: THE “HEAVY” PROBLEM CHILD Advantages – Attractive to the equity market – Seems to be a high growth market – No major incumbent competitors Disadvantages – Projects currently low grade – Process routes unknown – R&D intensive – Capital costs will be high – Development timeframe very lengthy – Debt financing will be very tricky

Examples: Hastings Rare Metals, Stans Energy, Tasman Metals, Quest Rare Minerals

VULNERABLE TO MAGNET SUBSTITUTION

Source: USGS (2011)

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

Finance

BFS

PFS

Off-take

Permitting

Metallurgy

(Separation)

Metallurgy

(Extraction)

Metallurgy (Benification )

Scoping

Resource s

Exploration

Source: Richard Holliday, Material Value Consultancy Ltd

UNANSWERED QUESTIONS ABOUT MINE PROJECT DEVELOPMENT Why “quality” beats “scale” in this part of the mining industry

WARNING ABOUT BASKET VALUES Total Rare Earth Oxide Basket Value (US$/kg) 0.0 Hastings Kutessay II Norra Karr Kangankunde Strange Lake Bokan Thor Lake Mt Weld (Duncan) Dubbo Kvanefjeld Zandkopsdrift Bear Lodge Nolans Bore Mt Weld (CLD) Steenkampskraal Ngualla Mt Pass

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Assumes separated rare earth oxide prices Assumes 100% recovery of all rare earths No assessment of resource grade Heavy rare earth deposits Advanced light rare earth deposits Early stage light rare earth deposits Data: Company websites; Idea for original chart from Technology Metals Research

WHICH RARE EARTH PRICE DID YOU MEAN? La (US$/kg)

Ce (US$/kg)

45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Carbonate (45% REO) FOB China

Oxide 99% FOB China

Oxide 99.999% FOB China

Metal 99% FOB China

Mischmetal (La 35%, Ce 65%) FOB China Data: Metal Pages

MORE COMPLICATED SUPPLY CHAIN

Images: Wikipedia, Science Photo Library, Images of the elements

WHEN IS VALUE ADDED IN RARE EARTHS?

Data: Metal Pages

CONCAVE VS CONVEX METALS [1] • • • •

• • • •

Source: Trench (2011)

VALUE ADDED LATER IN THE CHAIN

Data: Metal Pages; Wellmer, Dalheimer & Wagner (2008)

Value extracted from metal

CONVEX METALS & STRATEGY • • • •

• •

•

Value extracted from metal

CONCAVE METALS & STRATEGY • •

•

• • • •

WHY ARE MINE PROJECTS DIFFICULT? Geological Risk Technical Risk Market Risk Completion Risk Human Resource Risk Environmental Risk Legal Risk Political Risk Capital Cost Risk Delay Risk Force Majeure

• Quantity : size of the resource • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-pats • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project • Non-discretionary: unforeseen problem causing a delay to the project

• Location: political or natural problems in your location i.e. war or flooding • Technical: sudden catastrophic technical failure at the mine project

Based on: Trench (2011)

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

RECOVERY: TURNING SOMETHING INTO NOTHING RARE EARTHS 101

Resources x reserve recovery x mining recovery x grade x processing recovery x cracking recovery (x separation recovery) = LOM production 90% 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%

THE MASS LOSS-RECOVERY PARADIGM Concentrating Factor (multiple)

30

Percentages indicate equivalent mass loss to take ore to a 30% concentrate

96.7%

25 20

93.3%

15

90.0%

10

86.7%

5 0 0.00

1.00

2.00

3.00

4.00

83.3% 80.0% 76.7% 73.3% 70.0% 66.7%

5.00

Ore Grade (%)

6.00

7.00

8.00

9.00

10.00

MINING = THE COST OF MOVING ROCK ~Mt Weld*

Project X

250,000 tonnes

250,000 tonnes

10%

2.5%

24,500 tonnes

6,250 tonnes

65%

65%

Total REO in conc.

15,925 tonnes

4,063 tonnes

Concentrate grade

60%

15%

26,542 tonnes

27,087 tonnes

90%

90%

14,333 tonnes

3,657 tonnes

80%

22.5%

17,916 tonnes

16,253 tonnes

95%

95%

13,616 tonnes

3,474 tonnes

99.9%

99.9%

Ore tonnage Ore grade Total REO in ore Conc. Recovery (x6 upgrade)

Concentrate tonnage Cracking recovery (x1.5 upgrade) Total REO in cracked conc. Cracked conc. Grade Cracked conc. Tonnage Separation recovery Separation REO tonnage Separated REO grade

Same size processing, cracking & separation plants required Is this concentrate marketable?

Same cost to produce x4 less REO

Project X will cost x4 to operate and build on a unit basis!

* Data for Mt weld is rounded and edited for purposes of clarity!

–

© Greenfields Research Ltd; Source: Lynas Corporation

WHY ARE MINE PROJECTS DIFFICULT? Geological Risk Technical Risk Market Risk Completion Risk Human Resource Risk Environmental Risk Legal Risk Political Risk Capital Cost Risk Delay Risk Force Majeure

• Quantity : size of the resource • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-pats • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project • Non-discretionary: unforeseen problem causing a delay to the project

• Location: political or natural problems in your location i.e. war or flooding • Technical: sudden catastrophic technical failure at the mine project

Based on: Trench (2011)

CAPITAL COSTS: WHAT IS AFFORDABLE? Market Capitalisation (equiv. US$10 million)

Nolans Bore (Arafura Resources)

Kvanefjeld (Greenland Minerals & Energy)

Project Capital Cost (equiv. US$100 million)

Dubbo (Alkane Resources)

Mt Weld (Lynas) Mountain Pass (Molycorp)

Sarfartoq (Hudson Resources)

Strange Lake (Quest Rare Minerals)

Zandkopsdrift (Frontier Rare Earths) Thor Lake (Avalon Rare Metals)

Kipawa-Zeus (Matamec Explorations)

Eco Ridge (Pele Mountain Resources) Hastings (Hastings Rare Metals) Bear Lodge (Rare Element Resources)

Data: Company websites

CONCAVE VS CONVEX METALS [2] • • • • • • •

• • • • • • • • •

LIFE CYCLE OF A MINING PROJECT

Source: Brent Cook / MarketOracle

MINE PROJECT DEVELOPMENT RISK

Source: Trench (2012)

RARE EARTH PROJECT DEVELOPMENT RISK

Source: Trench (2012)

WHEN DO RARE EARTH STOCKS RUN? Mining permits and Scoping study completed

Initial resource announced

1st technical study completed

Independent review completed Feasibility study completed

Downstream plant moved to Malaysia Downstream agreement signed

contracts awarded

GFC

China Non-Ferrous Metals deal cancelled Rare earth prices take-off, not reflected in Lynas share price

Resource upgrade

1st series of off-take agreements signed

China NonFerrous Metals deal proposed Malaysia reviews downstream operations

WHY ARE MINE PROJECTS DIFFICULT? Geological Risk Technical Risk Market Risk Completion Risk Human Resource Risk Environmental Risk Legal Risk Political Risk Capital Cost Risk Delay Risk Force Majeure

• Quantity : size of the resource • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-pats • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project • Non-discretionary: unforeseen problem causing a delay to the project

• Location: political or natural problems in your location i.e. war or flooding • Technical: sudden catastrophic technical failure at the mine project

Based on: Trench (2011)

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

WHY ARE MINE PROJECTS DIFFICULT? Geological Risk Technical Risk Market Risk Completion Risk Human Resource Risk Environmental Risk Legal Risk Political Risk Capital Cost Risk Delay Risk Force Majeure

• Quantity : size of the resource • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-pats • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project • Non-discretionary: unforeseen problem causing a delay to the project

• Location: political or natural problems in your location i.e. war or flooding • Technical: sudden catastrophic technical failure at the mine project

Based on: Trench (2011)

WHY ARE MINE PROJECTS DIFFICULT? Geological Risk Technical Risk Market Risk Completion Risk Human Resource Risk Environmental Risk Legal Risk Political Risk Capital Cost Risk Delay Risk Force Majeure

• Quantity : size of the resource • Quality : grade (metal content) of the resource • Scope: throughput, grade control; mining & processing type, recovery; waste • Operating cost: both initial estimate and difference between estimate and actual • Commodity price: forecast & sensitivity to primary, by- & co-products • Contracts: intermediate market conditions, realisation cost; counterparty risk • Fatal flaws: discovery of major geological, technical, political, financing or legal issue • Project management: cost overruns; delays; increased complexity • Professional: management with experience; recruiting & retaining; ex-pats • Labour: recruiting, retaining & training labour; labour unions during construction • Regulatory: difficulties, costs and delays associated with environmental compliance • Technical: problems in running an environmentally sound mine • Regulatory: changes in laws or problems complying with them • Corporate: legal issues with corporate partners, suppliers & other counterparties • Actual: problems with the government, legal & business environment of a country • Apparent: external reputation of a country affecting financing, recruitment, image • Spending: problems with initial estimate; capital cost overruns • Financing: problems raising the required capital • Discretionary: deliberate decision to delay a project • Non-discretionary: unforeseen problem causing a delay to the project

• Location: political or natural problems in your location i.e. war or flooding • Technical: sudden catastrophic technical failure at the mine project

Based on: Trench (2011)

WHAT IS A “DEVELOPABLE” PROJECT? 12.00

Major late stage light rare earth projects

TREO Grade (%)

10.00

Early stage light rare earth projects

8.00 6.00

Major early stage light rare earth projects

Heavy rare earth projects

4.00 2.00 0.00

0.0

200.0

400.0

600.0

800.0

1000.0

Ore (Mt) Data: Company websites

WHAT IS A “STAR” PROJECT? 12.00

TREO Grade (%)

10.00

CASH COWS

WHERE ARE ALL THE STARS?

PET PROJECTS

PROBLEM CHILDREN

8.00 6.00 4.00 2.00 0.00

1.0

10.0

100.0

1000.0

Ore (Mt) Data: Company websites

STRATEGY 2B: THE “LIGHT” PROBLEM CHILD Advantages – Metallurgy / processing better known – Possibilities to leverage scale – Second mover advantage in development timeframe – First movers success may make these projects more attractive for debt financing Disadvantages – Unattractive to the equity market – Capital costs still likely to be high – Light rare earths market has less attractive fundamentals

Examples: Rare Element Resources, Arafura Resources, Peak Resources, Frontier Rare Earths

STRATEGY 3: AIMING FOR THE STARS Advantages – Potential to a new Bayan Obo or Ionic Clay? – Lower short term cash burn – First movers may provide an exit strategy – Examples of exploration success in rare earths exist Disadvantages – Won’t provide cash flow – May miss the best years of the market – Exploration generally unattractive for equity investors currently

Examples: Tantalus Rare Metals, TUC Resources, Namibia Rare Earths, Vale

UNANSWERED QUESTIONS ABOUT PROJECT DELAYS Why rare earth “oversupply” may not be imminent

Image: Shutterstock

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 PROJECTS 1999

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 Farm In

Resource Drilling

Scoping Study

Feasibility Study

Peer Review

Project Funding

GFC

Refinancin g

Construction

PRODUCTION >>>

ALKANE: Dubbo (Forecast 15 years from purchase to production) Project Purchase

Feasibility Study

Financing

Definitive Feasibility Study

GFC

Definitive Feasibility Study

Expanded FS

Financing / Construction

PRODUCTION >>>

ARAFURA: Nolans (Forecast 12 years from purchase to production) Project Purchase

Scoping Study

Prefeasibilit y Study

Feasibilit y Study

GFC

Feasibility Study

Expanded Feasibility Study

Financing / Construction

PRODUCTION >>>

Data: Company websites

TYPES OF DELAY AT MINE PROJECTS

Project Delay Discretionary Strategic

Portfolio Sequencing

Governmental

Non-Discretionary Governmental

Direct

Indirect

Equipment

Cost

Delays

People

Skilled

Unskilled

Finance

Debt

Equity

Resource

Quality

Quantity

Source: Trench (2011)

RARE EARTH PROJECTS PRONE TO DELAY Length of delays at Australian rare earth projects 1999-2012

Frequency of delays at Australian rare earth projects 1999-2012 Frequency

15

Nolans

Dubbo

10 5 0

Mt Weld

0

2

4

6

Delay (years)

8

DEALING WITH AN UNCERTAIN FUTURE

Developing future rare earth industry scenarios to help guide strategy

Image: Shutterstock

Increasing shortage of heavy rare earths

THE BCG BOX FOR RARE EARTHS SCENARIOS HEAVY SHORTAGE

SHORTAGE

Chinese exports of heavy rare earths restricted (i.e. partial Chinese WTO victory) AND/OR continued strong demand growth

Chinese exports of all rare earths fall (i.e. smuggling stopped, Chinese WTO victory, planned reductions) AND/OR higher than expected demand growth

SURPLUS

LIGHT SHORTAGE

China increases exports of all rare earths (i.e. increased smuggling or loss of WTO case) AND/OR widespread demand destruction occurs.

Increasing shortage of light rare earths

Preferential export of heavy rare earths AND/OR unexpected strong demand growth (substitution?)

Based on: Boston Consulting Group (BCG)

STRATEGY 1B: THE BY-PRODUCT CASH COW Advantages – Primary commodity provides hedge against rare earth uncertainty – Potentially easier to finance – Potential earlier cash flow – Rare earths extraction remains an “option” Disadvantages – 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

Examples: Greenland Minerals, Pele Mountain Resources, Alkane Resources, CBMM

STRATEGY 4A: PET PROJECTS (THE “CASH DOG”) Advantages – Quick to implement, whilst market still attractive – Cash generative – Simple & cost effective – Lower risk Disadvantages – 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

Examples: India Rare Earths?

STRATEGY 4B: DO SOMETHING ELSE! Advantages – Hedge against rare earth market risk – Potential for faster development & cash flow – Maybe cheaper / easier / lower risk – Wider range of opportunities available Disadvantages – May be unattractive to “rare earth” focused investors – Skills may not transfer as planned – Loss of focus – Spreading resources too thinly

Examples: Alkane Resources, Kimberley Rare Earths, Avalon Rare Metals

STRATEGIES FOR SCENARIOS OR “HORSES FOR COURSES” Matching strategies to scenarios and trying to prepare for all possible futures

Increasing shortage of heavy rare earths

THE BCG BOX FOR RARE EARTHS SCENARIOS HEAVY SHORTAGE Positive for “heavy” rare earth mine projects. Negative for “light” rare earth mine projects.

SURPLUS Negative for all rest of world (ROW) rare earth mine developers Positive for all ROW rare earth consumers

Increasing shortage of light rare earths

SHORTAGE Positive for all rest of world (ROW) rare earth mine developers Negative for all ROW rare earth consumers

LIGHT SHORTAGE Positive for “light” rare earth mine projects. Negative for “heavy” rare earth mine projects.

Based on: Boston Consulting Group (BCG)

Market Growth (adding to the competition)

THE BCG BOX FOR RARE EARTH STRATEGIES 2a: HEAVY PROBLEM CHILD 2b: LIGHT PROBLEM CHILD 4a: CASH DOG 4b: DO SOMETHING ELSE!

Market Share (beating the competition)

3: FIND A STAR!

1a: CASH COWS 1b: BY-PRODUCT CASH COW

Based on: Boston Consulting Group (BCG)

THE RARE EARTH PROJECT SCENARIOS MATRIX

SHORTAGE

HEAVY SHORTAGE

LIGHT SHORTAGE

SURPLUS

CASH COW

BYPRODUCT CASH COW

HEAVY PROBLEM CHILD

LIGHT PROBLEM CHILD

FIND A STAR

CASH DOG

DO SOMETHIN G ELSE!

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HOMEWORK: PUTTING STRATEGY INTO ACTION Now implement the strategyscenario 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

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”

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

CONTACT DETAILS & FURTHER REFERENCE John P. Sykes Director, Greenfields Research Ltd (UK) [email protected] www.greenfieldsresearch.com Course Leader, 3-Day MBA in Rare Earth Metals http://www.thembatrainingcompany.com/trainin g/3-day-mba-in-rare-earth-metals

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