This is the second part of a two part series. You can read the first post here.
MM: We have come out saying large parts of this sector appear to be in a “ bubble” yet in your report you state (and we would agree), “Investors have limited experience and knowledge of the technology minerals fundamentals to date as this is a complex new area.” First, do you agree the sector is a bubble (yes/no and why/why not) and second, can you explain some of the specifics (e.g. fundamentals) that you feel investors are lacking?
E&Y: From a company share price perspective, yes the market is probably a little frothy. There does appear to be a lot of hype in the market but not from a metal pricing perspective. Let’s face it, because the politics of rare earth metals specifically the disputes between China and Japan and leaders such as Angela Merkel and Hillary Clinton getting involved, the political agenda is creating the sentiment we are seeing in the market. This may be driving the stock prices of many of these companies. There are quite a few big projects specifically Molycorp, Lynas, Great Western, and one more in Australia coming on stream soon. The question is this – are the valuations of the companies in the sector too high at the moment? It’s possible.
The reality is that the pricing of rare earth metals, increased China demand, and supply chain bottlenecks with few processing plants for rare earths have led not only to an extraction problem but also a refining problem this point is not often made. Skilled labor has disappeared from this portion of the supply chain.
In terms of what investors are lacking, we definitely see confusion over the Rare Earths terminology and what it means. There is a big divide between light and heavy rare earths and confusion over how these metals are used in terms of end industries and their respective future demand.
MM: Do you think China back in the Ëœ70’s when Deng Xiaping famously said, “The Middle East has oil but China has rare earths specifically intended to drop the prices of these metals in the US to effectively take out the US domestic industry?
E&Y: No, we don’t believe China had a sinister point of view or intent to lower prices to sell into the US. They have a different way to operate in terms of profits but they were likely more motivated to create jobs domestically.
MM: You advocate for a number of steps that the EC should take to remain (or become) competitive with regard to REEs. To what extent do you feel the US is doing or is not doing the same series of recommendations?
E&Y: 13% of the world’s rare earth reserves are in the US and the US used to have the expertise to run the supply chain as well. Between the US and Europe, the US is likely better positioned than Europe in terms of reserves. In terms of recycling rare earth metals, Europe may have a greater emphasis than American companies. In the UK, today for example , if you want a replacement mobile phone, the mobile operator is likely to ask you to turn in your old one before you get the replacement, this was not the case 18 months ago, although I am not 100% sure that they can recycle it but there is a change in attitude. In the US, the focus is to keep phones out of landfills, but without those specific rules and regulations.
MM: How are you engaging your large multi-national corporate clients that rely upon rare earth metals to start thinking about this topic more seriously?
E&Y: To some extent, there is a lack of understanding in the US we had to re-start legislation. The DOD needed to get their arms around the issues. The federal government is now aware of the issues. It is just a matter of time before US corporations start looking at this issue. But the timing may still be a while. It takes time to develop these deposits and the associated downstream processing capabilities. Shortages aren’t all that acute right now. We don’t have many end users crying out yet. But these issues will come to the fore.
In addition, there is a question on the recommendations – there have been changes in federal policy to supplement the industry. Major multi-nationals need to secure their supply and look at ways to do that via purchase agreements and JV’s. However, it may take another 5-10 years for people to think about it.
One of the key messages comes back to end users actually understanding what is going on in the mining industry. We see our role as a bridge between end user and miners to help them with their network, so to speak. For these companies that don’t have the network, we can bridge that together with the end user industry. Fundamentally, the end users need to consider their “supply chains, understand that economic, social and political issues associated with their critical raw materials and plan accordingly.