Rare Earth Investing Criteria: The Metallurgy and Mineralogy

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Recently, we made the case that those tracking rare earth metal miners may wish to distinguish the price outlook for some of the heavy rare earths from the light rare earths. Actually, the line blurs slightly as some of the lights behave more like the heavies from a price trend standpoint.

The main point comes down to this: for those rare earths in over-supply, the price outlook appears weak; and for those rare earths tightly controlled by China and where China has placed limits on mining those rare earths, the outlook appears rosier.

Price trends, of course, help tell the story for junior mining firms.

According to Don Bubar, President and CEO of Avalon Rare Metals Inc. (TSE, NYSE MKT: AVL), “The rare earth bubble of 2011 attracted hordes of promotional junior mining companies all making a lot of noise…some of those firms drowned out the early movers.”

But what other criteria should an investor use when evaluating some of the junior miners?

We have whittled the list of criteria down to a few in particular.

  1. Ore grade or metallurgy. Despite a near-obsession with ore grade (you will find each junior mining firm might privately bash the ore grade of another), great ore grades only get one so far – a mining company needs to have other things going for it to create a competitive cost structure.
  2. Mineralogy. Rare earths come from minerals. According to the USGS, “the principal economic sources of rare earths are the minerals bastnasite, monazite, and loparite and the lateritic ion-adsorption clays,” meaning that if the rare earth do not come from one of these minerals, the economic costs associated with extracting and processing it might not be as economical. Loparite exists primarily in Russia, whereas Molycorp and a couple of others work with bastnasite sources. Bottom line, mineralogy matters. If a company has multiple rare earth ores with high grades, but the ores remain locked in minerals that have not proven commercially viable, the project may have higher risk.
  3. Logistics, geography and permitting.  Environmental assessments represent one of the bigger project uncertainties. Operating permits and land permits come next and companies that can complete all of these have a greater chance of their projects coming to fruition. Many companies have significant disadvantages based on geography, or they face permitting challenges because they sit on federal lands.
  4. Cost. We would fail if we didn’t acknowledge that project cost is/was/will be the greatest impediment to any mining company bringing their project(s) to life. Ultimately, great ore grades will do nothing for a company if the mineralogy doesn’t support efficient rare earth extraction to make the economics work.
  5. Market Access. Last but not least, the company must develop customer relationships that can evolve into firm off-take commitments before project financing can be arranged.

Of course, other factors play a role in the overall value equation for any mining concern. A strong management team remains essential. Increasingly, we see companies pay greater heed to environmental concerns. In particular, companies such as Avalon file annual reports to comply with global sustainability initiatives.

At the end of the day, only by examining the total cost equation can investors drive toward sound decision-making.

FREE Download: The Monthly MMI® Report – covering the Rare Earths market.

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