Australia Rapidly Dominating Global Rare Earths Supply 2017-12-15
China’s environmental crackdown is, by now, extremely well-documented, but the consequent changing landscape is very much still taking shape. The rare earth element (REE) space (rare earths as we refer to them) is looking at a future in which China may be forced to import REE stock rather than monopolising global exports, and the answer to the question of who will fill this supply gap is fairly obvious. Australia being endowed with some of the highest grade REE deposits known, combined with its proximity to Asian ports, makes it a clear contender to deliver the necessary materials.
Interestingly, dysprosium has failed to track alongside its lighter counterparts neodymium and praseodymium (NdPr) since Siemens led a charge to alter the recipe for permanent magnets with the aim of reducing dependency on what was the most expensive REE concerned, placing increased focus on NdPr production. These changes have come too little too late for the vast majority of juniors in Australia; over the last decade, over 500 REE hopefuls on the ASX have been reduced to fewer than 10 today, but the deposits currently under development are of a considerable standard.
While some of these are already producing and growing, I’m more interested in near-term juniors which can provide better price action. Arafura Resources Ltd. (ASX: ARU) (“Arafura”) are currently completing a major portion of the Nolan project’s metallurgical testing; with the bulk pre-leach already out of the way, the company is conducting acid bake testing into Q2 2018, and the final pilot stage, a REE separation, is expected to complete in Q3, meaning the final decision on whether to advance the project will come before the end of next year.
Nolans is a highly competitive project and so I fully expect it to go ahead. It is one of the world’s largest and more advanced undeveloped NdPr projects, with the potential to provide meaningful production in the lowest cost quartile due to its high NdPr enrichment. The likely 2019 launch of the deposit is planned to coincide with the projected supply gap, and by-product sales mean that the company will enjoy some of the lowest production costs, allowing them to remain competitive in any future cyclical downturns; something that, however predictable, kills often.
Right now, the world is consumed with sourcing battery materials such as lithium and cobalt, but in order to produce the associated energy to charge these devices, REEs must necessarily be the next global mineral craze. We simply cannot continue to power the world with old dinosaur bones, and the wind turbines and generators of the future are to be built around permanent magnet motors. The Nolans resource is long-life and low-risk with planned output that can support more than three decades of production, meaning that the resource should come online during peak pricing and continue until after 2050.
Given that the majority of state and corporate promises to move entirely to renewable energy sources and electric vehicles focus on completion by 2040-2050, Arafura is in a very good position indeed. Additionally, the buyer trend at the moment is for longer term fixed contracts for NdPr supply in almost unanimous anticipation of continued price escalation into the medium term, so customers will not be difficult to come by. NdPr as a segment is expected to have a CAGR of around 8% or more through to 2025, but personally, I think this will become an accelerating growth rate from around 2021. Arafura stock is currently trading at AUD$0.084, an absolute bargain considering the next decade will likely see Australia become a global leader of REE exports.