Looking back over the last few years, there has been a notable change in the rare earth company landscape as well as in pricing. But while the market has yet to show any significant recovery, it looks like market watchers have started to get a handle on what makes a good rare earth company.
Christopher Ecclestone, principal and mining strategist at Hallgarten & Company, recently shed some light on the current state of the rare earth market with Rare Earth Investing News, explaining, "one of the problems at the peak was that there were so many companies" — so many, in fact, that "most of the pundits couldn't tell the difference between one [company] and the next."
Ecclestone also said that the general consensus in the sector was "'the bigger the better,' because the bigger stock is going to be a $2-billion rare earth stock." Unfortunately for people invested in that mindset, "what happened is the ones that were really big have fallen just as much as the small ones."
But it's not all bad. Given the fact that so many rare earth companies have died off, the market now has a clearer idea of which of the ones still standing have a chance of reaching the end goal of production.
Size does matter
One of the interesting tidbits of information I gleaned from my conversation with Ecclestone was his view on the size of rare earth companies. As mentioned, in the past, much investor attention was focused on stocks that—several years ago—looked like they were set to go through the roof in terms of market capitalization. However, Ecclestone referred back to a comment from Jack Lifton about "right-sizing" rare earth mines, something he believes is starting to really take shape in the market given the high budgets of many rare earth projects.
Ecclestone raised an interesting question when he compared the mining process of China's illegal rare earth miners—which, granted, is the utter opposite of environmentally conscious mining and is entirely frowned upon—to the approach taken by larger companies.
"How is it that there were Chinese people in these little villages doing clandestine mining, taking it back into their backyards, sloshing it around in some troughs and some steel drums and extracting the rare earth elements in this entirely ad-hoc, artisanal fashion? You can't get a mining company that can actually replicate that on a larger scale. It's either $2,000 worth of steel drums or $200 million and nothing in between. It doesn't make sense to me."
Ecclestone explained that while some are making progress in the right-sizing direction, most have yet to figure out how to scale back the capital expenditures (CAPEX) on their projects to a reasonable, sub-$100-million figure. Perhaps, however, the tight financing landscape will help companies move towards mines that are simpler and more straightforward.
A company that Ecclestone used as a good example of "right-sizing" is Texas Rare Earths (OTC:TRER). "They had 80,000 tons a day. Incredible; 80,000 a day, massive, and they've shrunk it to 20,000 tons a day. Of course, CAPEX has shrunk a lot, but I think they should continue and learn from that. But that's a good example of counting it back and good."
Ultimately, Ecclestone thinks that bigger isn't necessarily better when it comes to rare earths.
Companies have "a penchant for bigger and better rather than thinking along the lines of, 'let's do it so we can make money,'" he said. That's because back when rare earths were hot, the idea was that it didn't matter how big the project was as ultimately someone else would buy it and mine it. "But the problem was there weren't even 20 buyers of rare earth companies, let alone enough to buy 200 of them."
Now that the rare earth sector has calmed some, perhaps there will be more activity somewhere on the horizon.
Where are they now?
Of the list of companies that were vying for the rare earth producer top spot, only two have managed to squeak ahead in the race with large projects: Molycorp (NYSE:MCP) and Lynas (ASX:LYC). And while those companies didn't have an easy road to the top, there is a significant gap between them and the runners up.
One of the companies that Ecclestone and I talked about was Medallion Resources (TSXV:MDL,OTCQX:MLLOF), which opted to go a different route with its project. Medallion has cast aside its rare earth deposit in favor of fine-tuning its processing procedures — that's because it is a well-known fact that getting rare earths out of the ground is the easiest part.
Back in 2009 and 2010, there was nary a rare earth conference in the world that didn't headline without Tasman Metals (TSXV:TSM). Despite being relatively quiet in the last few years, the company has been making headlines recently, and Ecclestone sees it as being very strategic in the grand scheme of things.
"They're merging with Flinders Resources (TSXV:FDR) (a graphite development company working out of Sweden), and I think they are serious people because Tasman is a serious company. They sort of merging together both their interest in Sweden to transfer cash, equities and bonds between the two, which in the current environment is probably the best strategy," he said.
Alongside Tasman, another company that rare earth investors should be familiar with is Great Western Minerals (TSXV:GWG). However, the question of when the company's Skeenkampskraal project in South Africa will start producing from its stockpile is still up in the air.
"Great Western actually was a vertically integrated company," Eccelstone said, adding, "they have a plant. They have an industrial business in the UK. Their mine in South Africa was really plain vanilla, had a really great grade, and we're sitting here now and we're saying, 'okay, that was three years ago. What happened three years ago?' Their mine of anyone's was the most plug and play after Molycorp."
The company recently produced rare earth carbonate from mini pilot plant testing, and is gearing up for its feasibility study.
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