The energy transition requires a greater and steadier supply of rare earths and other critical minerals to help with the build out of EVs (electric vehicles) and other renewable technologies. With China currently dominating the critical mineral space, companies around the world are noting opportunities to fill the supply gaps and to develop resources on a nationally-focused level.
The breakdown in supply chains has also highlighted the need for more domestic producers and processing plants for these key materials. To start, let’s set the scene, where historically have the world’s rare earths been mined and processed, where are they growing opportunities for miners and investors to get involved in the industry?
Matthew Allen: Permanent magnets are really the growth area and the demand space in this sector, and they are linked to the technologies. So, the neodymium, praseodymium elements are the real drivers of value and demand in the future in this space.
The supply chain is quite long and convoluted to generate a magnet, all the way from mining through processing and manufacturing. And that’s been dominated at most stages by China. A lot of other countries have given up their technological edge in the last 20 to 30 years.
Gavin Lockyer: China’s “Made in China 2025” strategy has been to secure the entire supply chain from an ore, all the way through to an EV or a wind turbine. They’re the only country in the world that has that complete supply chain and the rest of the world is now scrambling really to reinvigorate industries that have been neglected over the past 10 to 15 years.
Karina Bader: There’s a lot of nuances which lead into the complexity of the system. China has been able to dominate their deposits internally, both lower cost, lower CapEx deposits, that have been able to be deployed by China into that supply chain.
What have been some of the barriers to entry for the industry in places like Australia?
Karina Bader: There are two key types of deposits – granite and carbonatite – and then there are ionic clay deposits. An ionic clay has a more depositional model and the rare earths have already been deposited from the source into a form that makes them more easily readily available for converting into a powder that could be put into magnets.
With carbonatites, you need to roast up and crack the mineral to extract the rare earth. So, it’s actually quite a more complex, expensive processing route compared to the ionic clays. China has, predominantly, the ionic clay deposits. Whereas, the rest of the world has been processing rare earths from carbonatite or bastnasite sources.
Gavin Lockyer: Australia has a history of mining, which is dig it up, ship it out, and rare earth plays are not really mining expeditions. They’re actually minerals processing. So, they’re typically being developed by small market cap companies with an exploration flavour, but really, to commercialize them, they have a large capital demand compared to the market cap of the company. And so, traditionally, in Australia, it has an attracted capital, and it’s an industry which is capital-hungry. And so, I think that’s been certainly one of the barriers to entry over and above the complexities in actually extracting the critical rare earths away from the rest of the geology.
Matthew Allen: China achieves mine to magnet within a very short supply line. If you are trying to ship your material around the distances in Australia, one of the challenges is remote dirt road access. We don’t have dedicated haulage routes that are capable of taking heavy vehicles long distances without requiring significant capital to upgrade the road infrastructure.
Gavin Lockyer: I think the other angle too is, historically, prices have been directly linked to the cost of production in China. When you’ve got the state sitting behind you in terms of building the infrastructure and creating the industry it keeps your costs down.
Our off-takers who need to ultimately finance the projects aren’t prepared to pay up the curve for product that’s coming from a sustainable, reliable, friendly nation. And any new competition that’s come in has really faced this barrier to entry, which has been artificially keeping pricing down.
What we’re now seeing with the EV and renewable energy revolution is that demand is far outstripping supply. China will need all the material that’s producing for its own internal manufacturing. And so, now, the rest of the world is starting to realize that we need to find alternate sources.
Matthew Allen: The ultimate consumer of the magnet will be looking at the lowest unit cost for that product. They’re not necessarily looking six or seven steps back in the supply chain to see where that has been sourced or processed.
Looking at technology funding, approvals, location, and processing, all being the keys to success, how are governments, local governments getting involved? Is the financing and support coming from the government?
Gavin Lockyer: The current government in Australia has a critical minerals focus and has put in a place a range of initiatives through their Northern Australian infrastructure fund, Export Finance Australia, and other modern manufacturing grants.
So, the Australian government is certainly very supportive. And what we’re finding is that our key trading partners are also quite supportive in that space. So, it is important to show that there is sovereign support for an industry that is growing and that the world is demanding the product for. That certainly has been a big assistance.
Karina Bader: Projects still need to go out to the open markets and get investors to support the capital required to put those projects into operation.
And that’s traditionally been where a lot of these projects have struggled. Because the capital number is so large, traditionally, in Australia, it’s been very hard to raise the capital to progress the projects.
Gavin Lockyer: I think just an extension of that is that Australia is a well-regulated nation, and what we’re seeing now is because we do have such high ESG standards here in this country, that the customer is now starting to actually appreciate the fact that we are producing in a sustainable manner.
We’re also finding that fund managers are looking at the ESG green aspect to projects as part of their investment criteria.
Karina Bader: Over the last two years, we’ve had significant client focus on ESG and the importance of it in our investment decision making. We talk constantly to companies throughout resources and energy about ESG, and there’s many, many components of it.
Carbon emissions is the most topical subject, but there’s also the social, the governance, the other environmental aspects like water, and landholder approval. They’re always issues that mining faces every day in any step they take in their development. But it has absolutely become elevated in the clients’ minds.
Eventually, if you don’t have an ESG response, you won’t get funded.
Matthew Allen: There are various government-run projects in Australia and in the U.S. and various government-funded and financed opportunities for developing companies in the critical mineral spaces to work with.
But the challenge for critical minerals is that the typical project finance structure has a belt-and-braces approach. It usually involves a fixed off take, a reduction in risk around the commodity price, and a EPC fixed price lump sum contract. And they are very hard for a critical minerals project to provide the surety that a project finance bank would typically look for.
Critical minerals is an emerging space, and governments have had to step in and provide these cornerstone loan-type structures, because it’ll bring the balance of the finance with it that gets these projects off the ground. And it gives the off takers comfort that that project will be able to deliver a product to market in a given timeframe.
Looking at the environmental approval process, how does it work? How do you work with the higher emissions, or the higher environmental impact from these types of projects?
Matthew Allen: I wouldn’t say these projects are necessarily higher in emissions. There are key challenges in the environmental space that must be managed. The way we are looking at it is looking to involve as much renewable energy sources in the supply chain that we can.
We are working with electricity providers who have various degrees of renewable energy being built into their supply chain. We’re looking at off grid power sources that can involve solar as well to reduce energy intensity. But the environmental footprint of a project is, obviously, going from zero to a number as part of the development of the project.
There’s a full ESG horizon to consider, the interaction with traditional owner communities, the interaction with social communities, your supply chain, as well as the specific carbon footprint that comes with putting a new project into operation.
It’s very hard to line two rare earth projects up alongside each other and say one is better than the other on a cost or revenue metric
Gavin Lockyer: The environmental standards in Australia are extremely solid. Rare earth projects do come with a degree of naturally occurring radiation, and that has its own environmental challenges. But to be honest, it’s no different to a granite quarry in terms of its background radiation. And most of us have granite benchtops in our kitchens, and we don’t seem to be worried too much about it.
We do need to deal with the waste, and Australia has the appropriate protocols in place to do that. Its onerous to a point where it stops projects getting up and running, but I think it’s something that’s necessary to ensure that we’re operating in a responsible manner.
Is the cost of production significantly higher than other commodities? Can it compare with those types of resources being developed in China?
Gavin Lockyer: Yes, is the short answer. Our feasibility study shows that we’re in the lowest quartile of potential producers per kilogram of NdPr, and that’s even compared to the largest Chinese groups. But without the revenue credit, our cost of production is probably around 33 dollars per kilogram of NdPr.
Matthew Allen: The challenge with rare earths is in two dimensions, you must look at the CapEx, OPEX dimension, the cost base, the all-in cost base.
Rare earth projects are not ubiquitous. Each of them has a different flow sheet. And to deliver our intermediate product will be continuously mining our deposits with a relatively high strip ratio.
But you then need to look at how much revenue you can generate per kilogram of final product. And that’s a function of the endowment you have of the specific elements that are in demand. Unless you have a sufficiently high endowment of those key elements that relate to magnet manufacturing, your project won’t get off the ground.
So, it’s very hard to line two rare earth projects up alongside each other and say one is better than the other on a cost metric or a revenue metric.
So, all you can reference really is the ultimate benchmark price and how that fluctuates on the open market to get a gauge of where the supply demand and the market balance is sitting versus the price people are willing to pay for the final product.
The downstream processing and refining are very capital-intensive, which poses challenges for junior developers. Do you see any opportunity for consolidation in the downstream processing that may improve the commercial viability of projects?
Gavin Lockyer: When you ask about downstream, it depends on what point you’re breaking that downstream. So, once you’ve got a rare earth carbonate or a rare earth sulphate, or just a mixed rare earth product away from everything else, then, yes, that’s potentially where consolidation in the industry in terms of rare earth separation perhaps occur.
Matthew Allen: As a start-up, one of the challenges is knowing your limitations. Starting up a mining operation and, at least, preliminary intermediate stage processing has enough technical challenge, enough capital risk, and enough execution risk.
As a start-up looking for finance, you can’t sit there and convince people on the other side of the table that you can go all the way into the latter stages of processing from first commissioning. You have to know your limitations.
I wanted to look a little bit broader at the supply demand outlooks for the rare earths, their growing role. Also, how do you think the U.S. designation of critical industries or critical minerals and supply chains will impact availability moving forward?
Karina Bader: Government support is an incredibly important piece of the puzzle. But it’s not a straightforward process. And the investors need to be aware that these can take quite a long time.
Commodities are cyclical. You can get a project financed and started to construct at the best of the cycles. By the time they’re producing their powder, it could be the bottom of the cycle. And you’re trying to do payback on that capital that you’ve initially invested to stay alive. So, it’s a volatile area, and it can take time.
Matthew Allen: We’ve all started to realize the importance of critical minerals, and that’s why governments are designating a critical mineral supply chain in both in Australia and in the U.S. These materials are going to be significantly in demand growth and supply shortfall over the next two decades.
All the projections we see indicate that the demand for the magnet-related rare earth elements is going to grow. It’s something around 8% per annum compounded growth. A project of our size will deliver about 3,500 tons of those magnet rare earth elements into the global market when it comes online, and you’re going to need to build a new project of our size every year for the next 15 years just to meet the demand growth.
Gavin Lockyer: Governments also have a role to play because the financial markets have been broken in this space. So, until there’s an industry up and running with more than one or two suppliers, we are constantly going to face this challenge. The Australian government saw that and stepped in with their critical mineral strategy.
The industry has historically been going: “I can buy as much as I want as cheap as I can from a particular supplier”. But now, that we’re seeing pricing actually match more of a real demand supply analysis, we’ve got people coming to talk to us now about offtake, and price is not necessarily a big issue anymore.
Maybe we can take a quick look at the outlook in Australia or interesting developments that you see on the ground.
Karina Bader: The interesting thing over the last 12 months is we’ve seen several ASX juniors discover what we think are ionic clay deposits in Australia.
Traditionally, it was felt that there was a real geological bias in China, as China had a proliferation of ionic clay deposits, which is what’s given them the advantage over the last 20 to 30 years. But now, it really is starting to look like Australia.
This provides investors in this space with an opportunity to get invested at a very early stage. As I said, fair warning, it takes time and there’s no guarantees.
And it’s exciting because it’s new. We didn’t know of these things before. So, there’s a lot to play out in that space. And if we can manage to develop an ionic clay industry in Australia, that does change that capital requirement metric.
Gavin Lockyer: There’s a new wave of potential projects coming through, but historically, the ionic clays are also enriched in the heavy rare earths. Whereas Matt’s project and our project are more enriched in the lighter rare earths and the NdPr or neodymium, praseodymium, which is key to the magnets as well.
Matthew Allen: That’s the market that’s going to grow by the tens of thousands of tons per annum. The demand around the heavies, particularly dysprosium and terbium, is that they’re much smaller markets. They’re a few thousand tons per annum.
So, you don’t need a lot of those to add to the magnets, and they’re generally an additive, rather than the core ingredient of the permanent magnets. They’re used for particular heat treatment and specifications of magnets for high performance purposes.
