A combination of growing demand for rare earth elements and supply uncertainty related to the ongoing trade war between the United States and China has reignited project investment, with rare earth producers betting that market forces will remain sustainable over the long term.
In May, Australia’s Lynas Corp. (ASX: LYC; US-OTC: LYSDY), the largest producer of rare earth materials outside of China, and Blue Line, a U.S.-based processor of rare earth products, signed a memorandum of understanding to develop rare earths separation capacity in Texas. The project would focus on medium- to heavy-rare earth elements (REEs) used in permanent magnets, catalysts, batteries, and electronics, providing much-needed separation capacity outside China.
The joint-venture would be the only large-scale producer of separated medium and heavy rare earths products in the world outside of China, the companies say.
Chinese mines produced 70% of total REE ore in 2018, according to the United States Geological Survey, but China controls nearly all refining and processing capacity in the world, giving it greater control over the supply of useable REEs.
“This is an exciting opportunity to develop local separation capacity for our customers in the United States and to close a critical supply chain gap for United States manufacturers,” Amanda Lacaze, Lynas’ CEO and managing director, states in a press release announcing the joint-venture.
Lynas and Blue Line’s announcement came the same month that China warned the U.S. of possible disruptions to the supply of processed REEs, in retaliation for U.S. tariffs on Chinese goods and restrictions the U.S. imposed on Chinese telecom giant, Huawei. China’s National Development and Reform Commission, the country’s top economic planner, stated that China “is willing to continue supplying rare-earth metals to the world markets but it is opposed to those who use the products made with such rare-earths to ‘supress and dampen China’s development’.” China specifically highlighted the United States’ action against Huawei in explaining its concerns. It also pointed to issues that could provide justification of future REE export decreases, including “rapidly decreasing inventory, inefficient production and environmental pollution.”
Regardless of whether China takes steps to stop, or reduce, REE exports to the U.S. – which most analysts say is unlikely – Lynas’ separation capacity in Texas would be a welcome alternative supply. In December 2017, the Trump administration issued an executive order to streamline approval and make it easier for mining and processing projects of 23 minerals deemed “essential to American prosperity and national security,” including REEs.
Molycorp’s Mountain Pass rare earth element mine, as seen in 2011. Mountain Pass is located on the south flank of the Clark Mountain Range in southeastern California. Photo by Trish Saywell.
The Lynas-Blue Line venture is not the only U.S.-based project under development this year. The Mountain Pass rare earths mine in California emerged from care and maintenance after affiliates of JHL Capital Group and QVT Financial acquired the asset in 2017. Previous owners had invested more than US$1.5 billion establishing the facility, which included a full separations process, but had to suspend operations at the site after REE prices fell in 2014 and the mine’s owner at the time, Molycorp, filed for bankruptcy protection.
MP Materials, the joint-venture entity formed to operate the project, has since invested over US$200 million and increased the number of employees from eight to 200 to get Mountain Pass underway again, including reworking the separations facility. Co-chair of MP Materials, Jim Litinsky, said in a June 2019 video posted on its website that the Mountain Pass mine currently sends 100% of its mined REE ore to China for processing, but that it expects “sometime next year, we will be a separated rare earths producer,” when its separation facilities enter production.
Litinsky said that Mountain Pass is profitable right now, despite a 25% Chinese tariff on REE ore imports, as its ore is well concentrated and does not have some of the radioactive element issues that many other REE deposits must address. However, it would be better to avoid the tariffs altogether.
The radioactive environmental impact from REE separation operations can be quite challenging and can impact supply. REEs are rare, not because they are hard to find, but because they tend to bond tightly with other elements. This is problematic when those other elements are radioactive, such as uranium and thorium, as those elements get caught up in the wastewater during processing and can contaminate surrounding environments.
China has been attempting to address such environmental issues by cracking down on illegal and small-scale REE mining operations. Roskill, which monitors the REE market, said in its 2019 Rare Earths Outlook report that China has reduced illegal production by almost 50% since 2016.
At the same time, requirements imposed by Malaysian regulators related to the radioactive waste at Lynas’ chemical processing plant in Kuantan drove the company to announce earlier this year that it will be moving its cracking and leaching operations from the Southeast Asian nation to Western Australia, where it will be closer to its high-grade mine and concentration plant at Mt. Weld.
Environmental issues aside, MP Materials and Lynas – the two largest REE producers outside China – and their hundreds of millions of dollars in REE investments, are somewhat reminiscent of activity earlier in this decade when China had reduced REE exports and threatened embargoes.
By the early-2000s, China was responsible for roughly 97% of global REE production. In 2010, after Japan detained the captain of a Chinese fishing trawler during a maritime dispute, China imposed quotas on REEs – slashing exports by nearly 40% – which sent prices soaring.
This led to a flurry of REE investment outside of China before tensions eased. China eventually removed the limits, returning exports and prices to normal levels. The resulting price decrease in 2014 led to several key bankruptcies. Mountain Pass was put on care and maintenance, and major development projects in other areas of the world were put on hold.
Avalon Advanced Materials (TSX: AVL) was one such victim. In 2014, it suspended its planned Nechalacho project in Canada’s Northwest Territories, for which it cites a “dramatic decline in REE prices” as the sole reason. Avalon started development work again in 2018, as prices began to revive, and is now moving ahead with scoping work and permitting work at the project. In January 2019, it signed a deal with Australian private company, Cheetah Resources Pty Ltd., under which Cheetah took ownership of the near surface light-REE resources in two key areas of the Nechalacho project for C$5 million. The deal leaves Avalon to focus on heavy REEs, while it continues to manage work programs onsite for Cheetah’s asset, for which it retains its 3% royalty.
From left: geologists Chris Pederson and Martin Heiligmann inspecting core at Avalon Advanced Materials’ Nechalacho rare-earth project in Thor Lake, N.W.T. Photo by Avalon Rare Metals.
Fellow Canadian developer Search Minerals (TSXV: SMY) is also investing in its Deep Fox and Foxtrot properties in Labrador, where it plans to begin permitting work next year with a view to start building in 2021, according to its March 2019 investor presentation.
These are just two of several other development projects underway outside China. This could be good news for global supply, but it could be another short-term boom that will again lead to suspended operations and bankrupt developers once tensions between China and the U.S. ease. MP Materials and Lynas, among others, are betting that this time is different.
“Ten years ago, Molycorp, that was hot air,” based on a promise of future demand and a short-term price strike, MP Materials’ Litinsky said in his video. “[This time] we have a real demand change that will unfold over the next decade that I think will make this cycle much more sustainable.” However, he noted it would continue to be difficult to compete against China with its lower costs.
Roskill, a U.K. consulting firm, has indicated the demand increase needed to sustain development will be there, as REE producers hope. In its 2019 Outlook, Roskill forecast that REE demand is expected to grow by 5% this year. At the same time, some of the elements may enter supply deficits due to China’s crackdown on illegal domestic production. However, some of that could be offset by recycling magnets from wind turbines, which are large, high-quality sources of REEs.
Frost and Sullivan, another market analysis firm, forecasts that electric vehicle demand and infrastructure development will see the REE market grow as much as 7% annually from 2018 to 2025.
The 17 rare earth elements clustered near the bottom of the periodic table are becoming increasingly important due to increased adoption of everything from smartphones to wind power. REEs are critical for the magnets used in wind turbines and the batteries in electric vehicles and smartphones, uses which together consume roughly one-third of all REEs. Other key uses include fuel cracking and other catalysts, glass polishing, and alloys.
