Despite the fact that rare earth prices have declined over the past six months, prices still remain at historically high levels. While junior rare earth element (REE) companies have taken a significant knock in a fragile market, many are finding assistance from the very companies they provide with commodities.
While speculators dwell on the fact that REE prices are stumbling, it is important to put these figures into context. When reading the next sensational headline outlining how prices are struggling, be sure to cast your eye back to 2009.
In a recent interview with Rare Earth Investing News, Jim McKenzie, president and CEO of Ucore Rare Metals (TSXV:UCU), noted that current REE prices are still double, triple, quadruple, or more than what they were only a few years ago, reflecting what he referred to as an explosion of technologies requiring rare earths in what is now “the new normal.”
He added, “the run-up of prices over the past few years has been dramatic. Many observers had called for a correction prior to the fact, and the reset of 2012 has not been entirely unexpected. That said, it’s our opinion that the laws of supply-side economics are immutable in the long run, and diminishing access to irreplaceable materials can only mean higher prices in the mid term.”
It seems this theory is widespread. A new rare earth study by Roland Berger Strategy Consultants entitled The Rare Earth Challenge notes that more and more manufacturing companies are taking a wider range of measures to counteract high REE prices, preferring to opt for a balanced strategy as opposed to an all-out investment in securing a reliable source of supply.
It also states that 90 percent of those surveyed are currently securing a reliable supply chain for themselves, while 84 percent of participants confirmed they are actively engaged in trying to reduce their overall consumption of rare earths.
These responses are hardly surprising considering the increasing demand from global industries for high-tech products including permanent magnets for wind turbines and automobiles, LED lamps, catalytic converters, and batteries for the auto industry.
Earlier this year, Toyota (TSE:7203) announced that it has developed a method to manufacture hybrid and electric vehicles (EVs) without the use of REEs, while a team of researchers from Toda Kogyo (TSE:4100) confirmed that they have succeeded in creating a magnetic material without the use of rare earth metals. According to researchers, the material is made from readily available iron and nitrogen.
In another unique attempt to reign in costs, Japanese auto manufacturer Honda (NYSE:HMC) announced that it is developing what is being hailed as the world’s first mass-production rare earth recycling process. The company stated that this resource recycling process will allow it to increase its resource base. Until now, techniques for the extraction of REEs in this manner have been undertaken on a relatively minor scale and required highly-controlled conditions; however the manufacturing giant believes it has established the world’s first process to extract rare earth metals from various used parts, in an actual mass-production recycling plant. In May it began extracting metals from used nickel-metal batteries collected from hybrid vehicles at dealers inside and outside of Japan.
Direct to the source
While some manufacturers prefer to seek alternatives, others are going directly to the source. According to the study, half of those enterprises surveyed have already set up task forces dedicated to designing strategies aimed at securing the supply of raw materials.
In a struggling market environment, news of this strategy will be welcome for junior REE companies desperately seeking financing aimed at progressing exploration and production projects.
Matamec Explorations (TSXV:MAT) recently received a 25 percent payment of $8.5 million from Toyotsu Rare Earth Canada for the purchase of the first 25 percent of an undivided interest in its Kipawa heavy REE deposit. In a market where most juniors are struggling to secure financing, Matamec has successfully secured payment that will enable the ongoing feasibility study on the deposit to be accelerated, with results expected in the second quarter of 2013.
The joint venture agreement is the first of its kind within the junior REE sector, and its benefits extend well beyond financial assistance related to exploration. Matamec has also managed to secure a guaranteed client base, with Toyotsu agreeing to purchase 100 percent of the company’s mixed rare earth oxide concentrate once it reaches the production phase.
Matamec and Toyotsu’s agreement will almost certainly not be the only instance of this form of partnership moving forward. With many junior companies currently in dire straits, and even more falling victim to plummeting stock values, few will be willing to undertake financing at the current levels. Possible partnerships with end users that are able to guarantee financing, as well as a customer base, will appeal to many juniors and even the most skeptical of investors.
“In general, companies where production is heavily reliant on rare earths are basing their plans on a balanced mixture of activities. That is the only way they can protect themselves from massive price increases and remain competitive,” concluded Sebastian Durst, project manager at Roland Berger Strategy Consultants.
Like any healthy portfolio it seems that most REE consumers are moving in the direction of diversification. While methods such as seeking cheaper alternative materials and recycling are a step in the right direction, the time might also be ideal for investors to seek out junior companies that have the potential to lock in deals that include financing and to secure a guaranteed customer base with minimal risk and ample upside.
Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.