Rare Earths: The Compelling Investment Case for a Critical Minerals Market

Rare earth elements (REEs) may seem obscure, but they have become indispensable to the modern economy. Rare earths are critical inputs in everything from smartphones and defense systems to electric vehicles and offshore wind turbines. With burgeoning demand and strained supply, REEs present a compelling strategic case for investors. 

Interview with Geoff Atkins

Rare Earths Are Critically Important

The 17 rare earth elements have highly specialized properties that enable breakthrough technologies. Specifically, REEs have unique magnetic, catalytic, phosphorescent, and strength capabilities that have proven difficult to substitute. With applications across computing, clean energy, defense, and more, rare earths are essential to high-tech and green industries. Companies often stockpile REEs, highlighting their strategic value.

Demand Fundamentals Are Highly Favorable

‍REE demand is projected for robust growth in the coming decade, driven by rising uptake in EVs, wind turbines, consumer electronics, and defense uses. EV motors, batteries, sensors, and electronics require substantial rare earths. Offshore wind farms also rely on powerful REE magnets. With the global transition to EVs and renewable energy accelerating, demand projections remain strong despite near-term economic risks.

According to Adamas Intelligence, rare earth oxides demand could more than double from 190,000 tonnes in 2020 to 440,000 tonnes by 2030. This represents a compounded annual growth rate of 8.7%. Market leader MP Materialsprojects REE demand growing at a 10%+ CAGR through 2030. While the pandemic caused short-term dips, long-term trajectories remain clearly positive.

Supply Chains Are Highly Vulnerable

The rare earths supply chain remains heavily concentrated in China, which produces over 60% of mined supply globally. China also holds around 90% of processing capacity. This concentration increases supply vulnerability, as evidenced by past export restrictions. Major REE consumers like the U.S., E.U., and Japan are focused on establishing alternate supply chains to reduce reliance on China.

New rare earth projects in Australia, Canada, the U.S and Africa are underway to build a more geographically diverse supply base. Government initiatives are also spurring investment and helping offset the high costs of new REE mines and separation plants. Achieving commercially viable production outside China remains challenging but is a priority for western governments.

Execution Risks Must Be Carefully Assessed

While rare earth demand keeps growing, bringing new mines into production involves substantial risks and requires significant expertise. Rare earth mineralogy can be complex, and metallurgy is technologically challenging with few experts globally. Existing separation facilities also rely heavily on proprietary techniques.

Full-scale development of a new mine and processing pipeline typically requires capital investments of over $1 billion and 5-10 years to execute. Operational setbacks have impacted timelines and capital needs, even for seasoned management teams. When evaluating investments, technical capabilities, engineering depth, and management execution track records are critical.

Price Volatility Can Be Expected

Rare earths are not traded on major commodity exchanges, and pricing often occurs in long-term contracts and spot deals. While rising in recent years, prices have undergone major swings historically due to shifting supply-demand balances. Periods of oversupply, especially from illegal Chinese production, caused prices to plummet. Tighter markets have since firmed pricing, but ongoing fluctuations are likely.

Geopolitical issues heighten price volatility risks for rare earths. Trade disputes or embargoes could severely impact markets in the short-term. Across mining, cost inflation pressures may also create margin uncertainties going forward. Portfolio diversification provides some protection from rare earths price swings.

Conclusion: A Compelling But Nuanced Opportunity

Rare earths provide a highly compelling strategic exposure based on irreplaceable properties, strong demand growth, and supply chain vulnerability. However, intricate metallurgy introduces operational risks, and ∼90% Chinese processing market share fuels price instability.

For investors, thorough project evaluation, risk management, and prudent cash flow modelling will be essential to realizing rare earths’ long-term potential. Opportunities exist to position today in assets poised to provide the vital supply chains of tomorrow. But as with any commodity, rallies will require execution discipline and financial patience. For bold investors, rare earths offer a unique opportunity in minerals critical to the global high-tech economy.

Companies to watch

Energy Fuels

Energy Fuels is the largest uranium and advanced rare earth element producer in the United States. The company has significant uranium production capacity and long-term sales contracts with U.S. nuclear utilities that it expects to fulfil starting in 2023-2024. Energy Fuels is also quickly moving to establish a domestic rare earth element supply chain, with plans to produce high-value separated REE oxides by late 2023 or early 2024. The company additionally produces vanadium when conditions warrant, recycles materials to recover uranium, vanadium and medical isotopes, and is advancing capabilities for medical isotope production. Overall, Energy Fuels is a major U.S. producer of strategic minerals like uranium and rare earth elements that are critical for energy, technology, and medical applications.

Sovereign Metals

Sovereign Metals is an Australian mining company focused on developing its large, world-class Kasiya rutile and graphite project in Malawi, Africa. Kasiya is the largest natural rutile deposit and one of the largest flake graphite deposits globally. Expanded scoping studies indicate the project could become a leading low-cost producer of natural rutile and graphite, with exceptional economics including a post-tax NPV of US$1.5 billion and IRR of 36%. Sovereign Metals offers investors exposure to critical minerals rutile and graphite through the development of its flagship Kasiya deposit.

Ionic Rare Earths

Ionic Rare Earths Limited (IonicRE) is poised to become a key player in the production, refinement, and recycling of sustainable magnet and heavy rare earths essential for net-zero carbon technologies. Their main Makuutu Rare Earths Project in Uganda, in which they hold a 60% stake, promises to be a long-term, cost-effective, and scalable provider of high-value rare earth oxides. As of March 2023, the project's positive stage 1 Definitive Feasibility Study highlighted a 35-year operational span with a robust 71% magnet and heavy rare earth carbonate product potential. Additionally, their 2022-acquired UK subsidiary, Ionic Technologies, has pioneered techniques for extracting rare earth elements from both mining ore and recycled magnets, with a recently launched Demonstration Plant producing high-purity magnet REOs. Aligning with their integrated approach, IonicRE is exploring the establishment of a dedicated refinery to process their unique Makuutu product basket. Together, these strategies fulfill a sustainable circular economy for rare earth products essential in electric vehicles, wind turbines, communication, and defense. Importantly, IonicRE is a committed member of the UN Global Compact, upholding its responsible business principles.