Rare earths a chance for Australia to lead the world

Mount Weld in Western Australia, the richest known deposit of rare earths in the world according to Lynas Corp. Picture: Bloomberg

• Paul Garvey

  Senior Reporter

  @PDGarvey

  
• 10:00PM November 14, 2019
• 7 Comments

Having spent years warning of the strategic risks at play in the global rare earths market, Arafura Resources managing director Gavin Lockyer has found a sure-fire way to grab the attention of government bureaucrats.

“When you talk to Defence, you just have to mention the F-35 (fighter jet) and that gets them all worked up,” Lockyer tells The Australian.

Rare earths — a basket of 17 elements from obscure corners of the periodic table, such as neodymium, praseodymium, dysprosium and yttrium — are a small but critical part of the modern world.

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They are used in everything from mobile phones and wind turbines through to electric cars, fighter jets and missile systems.

And the global rare earths supply chain is dominated by China, which controls almost the entire production of not just rare earths concentrate but also the metals, alloys and magnets made from them.

They have also become a potential weapon in the China-US trade war.

Earlier this year China flagged its capacity to limit the export of rare earths and rare earths products, reigniting the anxieties that have long simmered within the US bureaucracy.

The US Department of Defence has made it mandatory to reduce its dependence on China-based supply chains, and the rare earths industry has become an area of intense focus for the Australian government.

Scott Morrison and US President Donald Trump agreed to develop a US-Australia action plan for so-called “critical minerals” such as rare earths when they met in September.

And on Friday federal Resources Minister Matt Canavan is arriving in the US ahead of a series of meetings on rare earths with senior US government figures.

But for all the talk, unlocking the next wave of Australian projects still looks a long way off.

China’s control of the market has kept international prices low, and the next generation of potential projects has not been able to secure the level of support needed to develop the projects that would challenge China’s dominance.

China’s dominance

Many in the industry have had enough of the tweets and strategic papers. Instead, they want to see real action from those concerned governments that say they are serious about tackling dependency on Chinese rare earths products.

Northern Minerals chief executive George Bauk is no stranger to Washington, DC, having made several visits looking for support for his company’s plans.

Northern operates the small Browns Range rare earths mine in northern Western Australia but plans to scale up the operation significantly if it can perfect its processing methods and secure the necessary support.

Bauk is increasingly frustrated by the failure of the geopolitical uncertainty to translate into investment in the rare earths industry.

“There’s unquestionably demand, and the concerns about having the Chinese control the supply chain is front and centre,” Bauk says.

“But there is a big gap between those motherhood statements about the overarching geopolitical issues, and the traction in the market. Right now everyone wants to solve that, but prices are not stimulating it.

“The free market isn’t working.”

Part of the issue, Bauk says, is that the rare earths playing field is so uneven.

Environmentally damaging and often illegal rare earths extraction techniques in China, as well as generous tax concessions to companies that upgrade rare earths into finished products, make it extremely difficult for non-Chinese rare earths producers to compete.

The ore from Northern’s mine, Bauk says, runs at a rare earths grade of about 800 parts per million. Some Chinese operations run at only 20 to 40 parts per million, he says, but they are able to outperform Western mines thanks to lax environmental standards.

That distortion, he says, means governments around the world need to be ready to play a role.

“If you don’t break the situation and you’ve got a free market that’s not stimulating the development of the rare earths industry, you’re going to become more and more reliant on the Chinese rare earths supply chain,” Bauk says.

“The only way to avoid that would be government intervention.

“Whether that is a pricing mechanism or finance providers, I’m not sure what the move by the government has got to be, but there’s no question there’s a lot of people in Australia, the US and Europe who are very focused on the topic.”

GRAPHIC: Rare form

Lack of action

The only rare earths producer of scale outside China is the ASX-listed Lynas Corp, which mines ore from its Mount Weld project, 700km northeast of Perth, and processes it through its Kuantan advanced materials plant in Malaysia.

Chief executive Amanda Lacaze tells The Australian that while there has been plenty of rhetoric about rare earths, she has been frustrated by the lack of action.

“The West, over a 30-year period, has been asleep at the wheel on this matter,” Lacaze says.

“The West has sat by quite happily as China insourced not only the mining and processing but also the downstream production of magnets and components. Ultimately, their objective is to be in the business of only exporting rare earths when they are in a car, in a phone, in a wind turbine.”

Lynas owes its status as the only significant rare earths producer outside China in no small part to the 2010 dispute between China and Japan over the uninhabited Senkaku-Daioyu Islands in the South China Sea.

When the two countries clashed over the disputed territory, China retaliated by banning the export of rare earths products to Japan. In response, Japan stepped in to bankroll a large chunk of the $1.4bn Lynas needed to get Mount Weld and Kuantan up and running.

While Lacaze knows Lynas itself has benefited substantially from government assistance, she does not think there’s a role to play for governments bankrolling new rare earths projects.

Many of the rare earths projects waiting in the wings have been there for decades and, she says, simply do not stack up.

“There are areas where governments can certainly assist and facilitate, but propping up projects that may not have been able to attract investment is not the task of government,” she says. “Some projects in the rare earths space have been around for 30 years. Frankly, if they couldn’t get up in that period, it’s probably a reflection on the quality of the resource.”

Building a supply chain

On top of that, investing in new supply without addressing the lack of downstream rare earths processing outside China also does nothing to resolve the broader strategic problems in the sector.

Unless those next steps in the supply chain — the production of metals, alloys, magnets and components — are also properly developed in other parts of the world, developing new rare earths mines alone is pointless.

“It’s not just about digging more stuff out of the ground. It has to be the whole of the supply chain,” Lacaze says. “It’s no use starting a mine and then exporting the concentrate to China — then you’re back in the same situation.”

Nic Earner is managing director of Alkane Resources, which has been trying to get its Dubbo rare earths project in NSW off the ground for years. Earner says it will take a significant shift in conventional thinking by Western governments and corporations if the status quo in rare earths is to change. Western governments have been increasingly reluctant for decades to invest in or subsidise industry, while the days of fully integrated supply chains inside major manufacturers — think Henry Ford and his rubber plantations — have long disappeared from the modern Western corporate playbook.

Earner hopes the Lynas-Japan example could become a template that other rare earths-exposed countries can follow.

For about $500m in funding — which is steadily being repaid — Japan “completely removed the rare earths-based threat for their economy”, he says. On top of that, Japanese customers can negotiate with suppliers in China who know they have an alternative supplier if their prices are too expensive.

“That’s an incredibly good position to be in,” Earner says.

“No other government is doing that. I think eventually they will, but my fear is that more and more pain needs to happen before people act.”

Canavan’s plan

For his part, Canavan says the government wants to see Australia support new rare earths projects through taxpayer-funded mechanisms such as the Northern Australia Infrastructure Facility and Export Finance Australia.

But he argues the government’s biggest role can be in securing cross-border government co-operation to unlock projects.

“It will take two to tango. We do need to see commitments from customers as well, so that’s why I’m travelling to the US,” he tells The Australian. “We’ve had good, productive discussions, but we’d really like to partner with other countries to improve the diversity in the supply chains.”

He says there are signs the US is willing to take the steps it needs to stimulate supply that typical market forces are not delivering.

“For both of us, usually we let markets determine investments in commodities and finance the opportunities,” Canavan says.

“But there are some distinctive factors here in markets like rare earths, where there is a high degree of concentration and barriers to entry that give rise to the need for governments to be involved. That’s unusual and takes time for us to work through.”

One of the biggest rare earths projects on the drawing board is Arafura’s $1.1bn Nolans Bore deposit in the Northern Territory.

Arafura’s Lockyer has been a regular visitor to the US in recent years and helped provide briefings to the Prime Minister’s office and several other government departments in the weeks leading up to Morrison’s Trump visit.

But in September Arafura announced it had signed a memorandum of understanding to supply rare earths to China’s Baotou Tianhe Magnetics.

While the importance of rare earths is recognised at a high level inside Australia and the US, Lockyer says European groups and export credit agencies have a much better handle on their supply chain needs.

Chinese rare earths processors and magnet manufacturers also are starting to shift some of their production outside China to preserve their international customer bases into the future.

“They can see themselves that by 2022-23, when China becomes a net importer, the Chinese may very well say, ‘There’s nothing for export. We want everything inside because we need it for our own industry’,” Lockyer says.

“These magnet companies we are talking to have got big established multinational business that they need to protect as well, they’re as nervous about it as the rest of the world is.”

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Lot of talk, little investment action

For all the geopolitical rhetoric surrounding the rare earths sector, investing in the space has been a tough one for stockmarket players.

Converting the near-constant sparring between China and the US, and the spectre of major supply disruptions, into sustained share price gains has proved largely elusive.

Lynas Corp’s Mount Weld is widely acknowledged as the best rare earths deposit on the planet, but the company has endured a complex start to life. It has battled a prolonged slump in rare earths prices as well as persistent regulatory hurdles and activist opposition in Malaysia, while earlier this year it decided to stockpile some of its production rather than sell it into a weak market.

Its shares have proven a wild ride — they soared to more than $24 each back in 2011, when China cut its supply of rare earths to Japan amid a territorial dispute, but had crashed back to just 32c by 2015 as it battled balance sheet and operational issues and weak rare earths prices.

Today it trades around $2.32 a share but still faces pressure from soft rare earths prices.

Investors also have been scarred by the spectacular failure of US rare earths producer MolyCop back in 2015. MolyCop once had been worth billions of dollars but tripped in its rush to build its production as quickly as possible.

That historical baggage means the headline-grabbing geopolitical manoeuvring in the rare earths space is yet to spark a flurry of speculative investment in new projects that otherwise may be expected.

“There’s no doubt that the US intent is firm, they are deliberate and they’re looking to Australia. But it’s also fair to say that in general the US and Australia and the EU look for private money to take risks,” Alkane Resources boss Nic Earner says.

“What we’ve seen is that hasn’t actually worked yet.”

Private investors want higher returns to justify taking on the risk they see in the rare earths sector, but rare earths prices aren’t high enough.

Through it all, and despite the trade war sabre-rattling, China remains a reliable and professional supplier of rare earths products, Earner says.

That, combined with the relatively small amount of rare earths that wind up in finished products, means there have been no warning bells for procurement managers within big industrial consumers.

The risk of a disruption in supply is real regardless of any worsening in the trade war, Earner says, given China’s focus on building industries that will consume ever more of its rare earths products.

Paul Garvey

Paul Garvey

Senior Reporter

Paul Garvey has been a reporter in Perth and Hong Kong for more than 14 years. He has been a mining and oil and gas reporter for the Australian Financial Review, as well as an editor of the paper's Street Talk ... Read more