The Truth About Investing in Rare Earths (China vs USA)
Rare Earths experts, Jack Lifton and Jon Hykawy, discuss China's control over the REE market and how there is no way to remove China from the REE equation.
The Rare Earths Industry
First of all, a run-down of the REE industry. The Rare Earths are a specific group of 17 metallic elements, such as neodymium, lanthanum, cerium, and ytterbium. These metals are designated “rare” not because of their scarcity but due to the difficulties of finding them in a pure form. Another layer to the name “rare” stems from the challenge of separating the elements from one another.
However, their value derives from their wide variety of applications, from powerful Rare Earth magnets and catalysts for petroleum refinement to the production of LCD TVs and fertilisers. These materials play a significant role in high-demand electronics: cameras, smartphones, but perhaps most importantly, from a security standpoint, high-grade military equipment.
While the industry was originally centred in Europe, at the world’s first largest Rare Earth solvent extraction plant in La Rochelle, and the US, at Molycorp’s Mountain Pass mine, it has since declined. The outsourcing of Rare Earths processing to China from the late 1980s has shifted global supply to the East Asian state which now processes over 80% of the world’s Rare Earth Elements.
As a result of the decline of processing in the West, expertise has also transferred to the Chinese market, with the country dominating in both material terms and research and development. Such is the dominance of China that they are now importing over 40,000 tons of raw Rare Earth materials, partially to decrease domestic pollution and illegal mining, which has given them a strong grip on the global supply.
It is against this backdrop that we speak to our two experts on the current state of the industry, its future, and what it means for prospective investors.
Meet the REE Experts
Our first expert, Jack Lifton, witnessed first-hand the development of the REE industry from its beginnings in the 1960s. Beginning his career in 1962 studying the properties of Rare Earth metals and their alloys, he would become CEO of an OEM automotive supply company until the early 2000s. Since then he has been a Founding Principal of Technology Metals Research from 2010, a consultant and lecturer, and is widely renowned for his industrial expertise with experience spanning decades.
Jon Hykawy, our second expert, is a PhD physicist who entered the REE industry in 2009, at Byron Capital Markets. He is known for his research on batteries and his price projections on a range of critical materials, such as cobalt, vanadium, tin, and, of course, Rare Earth elements. Jon is now the President and Co-Founder of StormCrow, which provides research and analytics on the nature of building a supply of critical materials. Jon is also a recognised expert of critical materials, presenting at conferences around the world.
Can the West compete with China?
Both of our experts agree that the challenge for an individual private company to enter the Rare Earths processing market is immense. Jack Lifton highlights that the US has not produced Rare Earth metals in over 20 years, citing the significant degradation of domestic expertise and the lack of an existing supply chain. Consequently, any company that intends to enter the market will be forced to start almost from scratch in building the necessary infrastructure to succeed.
Jon Hykawy takes this further, even companies attempting to enter a niche of the market, focusing on a single Rare Earth element, can quickly be brought down by mere chemistry. As Rare Earth metals aren’t mined in a pure form, once processed there remains the issue of disposing of the less marketable elements. Hykawy describes “mountains of unprocessed Cerium in China”, a rare earth metal of which there is an overabundance, it would prove almost commercially impossible for any company to deal with the amount of industrial by-products.
Lifton and Hykawy agree that any new company would be at the mercy of the Chinese state companies who control the market, and therefore the pricing. Fundamentally, profit is not the impetus behind the Chinese industry, which is willing to sell its produce “barely above cost” a tactic that any privately owned venture couldn’t sustain.
Instead, China is seeking to fuel its own development rather than focusing on personal enrichment.
Western Governments need to get involved
Jack Lifton believes that cooperation could be the way forward, at least in Europe. Europe has almost all the necessary parts of a supply chain to be viable: vast processing facilities and the expertise and ability to produce viable products, all it needs are the mines. However, the issue is that these facilities are not integrated and it looks unlikely that they ever will be, due to the varying political agendas of the nations that would have to cooperate to make the venture a success.
Lifton also sees collaboration between Canada and the EU as a viable option, with Canada providing the raw materials and the EU managing processing. However, the idea has been rejected by Canadian politicians who would prefer to manage the entire process domestically.
Both of our experts agree that government involvement could radically alter the industry’s prospects. Jon Hykawy posits a governmental stockpile of processed Rare Earth Elements to support new ventures. It is important to note that this stockpile wouldn’t be a static state asset but could be traded on the market, which would provide a price buffer.
Jack Lifton suggests that governments issue purchase orders for specific Rare Earth products, such as military-grade magnets, to provide guaranteed business. These guarantees would supply financial institutions with the confidence to fund these fledgeling projects.
It is only through financial support that new ventures could survive the difficult stages of starting production. Any government commitment to the industry would also require a fast-track for licensing, which can take up to a decade in the UK and US, further increasing confidence and viability.
Can we do without Rare Earth metals?
Given the inherent difficulties surrounding the production of Rare Earth Elements in the West, it might be worth considering how much we need them. Despite the presumed necessity of Rare Earth metals, Jon Hykawy argues that the market isn’t as reliable or essential as we may think; the Rare Earth Crisis in the 2010s is his evidence for this.
When China drastically cut its Rare Earths exports the prices skyrocketed, making them commercially unviable, as a result, industries began to adapt. Industries began to design new technologies to circumvent the need for rare earth materials. He adds that “there are almost always ways to substitute around these materials”.
Perhaps then the solution to the lack of rare earth production in the West is not to increase it but to bypass it entirely.
Is Rare Earths recycling the way forward?
Fortunately for us, Jack Lifton has been researching and studying this avenue for the last 25 years. While it may sound like an attractive prospect, recycling is probably far too risky for any company to establish itself.
The fundamental nature of recycling is that it depends on a supply of redundant products to harvest usable materials; when you consider the widespread use of Rare Earth elements this seems like a fantastic opportunity, however, the supply is inherently unstable.
There is no way to accurately gauge the lifespan of individual products nor any way to source them in bulk, resulting in wildly fluctuating operating costs.
Volatile prices and an insecure supply of recyclable materials make this area, at least currently, unviable. Ultimately it comes down to Jack Lifton’s argument: “I don't believe the recycling stories because they won't tell me how they're going to get the raw materials at a fixed price.”
What do investors need to know?
So, the fundamentals for investors. Firstly, Jon Hykawy cautions any idea of any business proposing to “take the Chinese out of the supply chain”, this is far more complicated than people seem to believe. It’s not a matter of simply building mines or processing facilities but actual systemic change. To achieve an independent supply chain both of our experts argue that government involvement and cooperation is essential, it is only governments that have the leverage and power to support growth in this sector.
A major hurdle to new projects is financing, the significant time and investment needed to build a reliable supply chain requires confidence from financial institutions, especially as the payoffs will be long-term and risky. Unless a company has substantial financial backing or a government contract then it is unlikely to get off the ground, let alone begin production. This cannot be ignored by investors, despite the lucrative nature of the industry it is a hard nut to crack.
Both of our experts proposed radical alternatives, from the circumvention of rare earth elements altogether, instead relying on technical innovation and development, or recycling previously used rare earth elements. These are both fraught with dangers, but they may become increasingly viable in the future.
The companies that stand a chance
However, there are options for investors in the West for Rare Earth Elements, Jack Lifton highlights several promising businesses which have carved niches in the market. Energy Fuels, the only US company licensed to process Monazite, a Rare Earth metal-containing mineral, and is currently the leading producer of Uranium and Vanadium in the US.
Energy Fuels (UUUU)
Energy Fuels has the expertise and infrastructure to create a Rare Earths supply hub for America at their White Mesa location, according to Lifton. Again this would rely on cooperation from other companies to share technology and investment to extract and process the rare earths from Monazite, but Lifton believes that Energy Fuels is the “great hope of the American market.”
Neo Materials (NEO)
Potential partners for Energy Fuels include Neo Materials, a world leader in Rare Earths products, with processing facilities in the US, Canada, Estonia, South Korea, and China. Neo Materials specialises in neodymium magnets, a product Lifton also argues should be purchased by order by the US government, and also produces specialised Rare Earth oxides and chemicals for a variety of applications.
Less Common Metals
Less Common Metals, a British company based in Cheshire, is also mentioned by Lifton, “the only Rare Earth alloy maker operating commercially in this hemisphere”. A company specialising in samarium-cobalt and neodymium-boron-iron alloys for the production of Rare Earth magnets.
The Rare Earths industry is perhaps one of the most fascinating industries at the moment, with its intense ties to geopolitics and the opportunities it presents, however, both Jack Lifton and Jon Hykawy have stressed the importance of a broader understanding of the industry and, more importantly, the place for realism when it comes to investing.