Ryan Mee, CEO of Fulcrum Metals, reviews FY23 and progress on the Gold Tailings Hub in Canada. Watch the video here.
ChinaSyndrome, it seems that the further down the value chain you go, the more complex the processing technology becomes. Reading the LCM study, it doesn’t sound at all easy to make magnets, even if you put the complex IP situation to one side.
PRE did mention their desire to have a metals plant at Saltend, but it’s not clear from where they would source the expertise to build and run this plant. The tone of yesterday’s document suggests that it would not be from LCM.
PRE have been able to progress to this point by relying on the technical capabilities of Wood, who have provided both the MRES and Oxide process designs. Many other projects around the world are also targeting oxide production, so I suspect that knowledge of processing to this point in the value chain is fairly well distributed.
Assuming that Wood do not have a process for metal production, PRE will either have to: agree a tolling arrangement for metal production with an existing metal producer, as ARU are doing with metal producers in Vietnam; somehow persuade a metal producer to help them build a new metal plant at Saltend, which seems low probability given the objections to working in UK that magnet producers have so far raised; or accept that they will be selling oxide along with a number of other new entrants into a highly concentrated downstream market.
SunDrum, true, that's fair enough, PA did of course mention 3x NDAs and could say no more. ARU have perhaps been more explicit about progress.
Nonetheless, offtakes is the key area where I'd like there to be evidence of firm progress, preferably a result. I don't think we or any of our contemporaries have cracked this part yet so it remains a critical unknown.
Joe, for me, FEED is another step down the technical path. Personally, I have no doubt about PRE’s technical competence.
Instead, it’s the commercial context that’s of concern. Until we have offtakes agreed this may be an area of high risk. I suspect that banks and other funding parties may have similar concerns.
That said, I believe ARU have mentioned that they are at the stage of discussing price and volume with their offtake counterparties, so hopefully the same can be said for PRE, or could be soon.
Taking a quick glance at the LCM report, some of the content might be concerning from a PRE standpoint. Worth noting that this is the report writer's view only, other perspectives exist, of course.
Page 3, 8 – Pricing
“In addition, proposed upstream prospects outside of China often have unrealistic expectations of the achievable prices for intermediate materials such as separated rare earth oxides.”
“These high price expectations for intermediate materials are fed by Chinese misinformation on true market prices.”
“Acceptance [required] by upstream participants that their intermediate carbonate and oxide products need to be supplied to the downstream processors at price lower than those indicated by Chinese information”
Page 6, 7 – LCM suggest using zero cost by-product rather than primary mining
“The primary feed, i.e., the source of rare earths must be available at very low and ideally zero cost.”
“Primary feed for the supply chain model is… generated as a by-product of heavy mineral sands processing.”
Page 9 – Comment in Junior Miners
“For many junior miners, the understanding of market dynamics in the rare earth industry is weak.”
Page 15,16,17 – Established magnet manufacturers not yet interested in setting up in UK
“Given the complexity of magnet production technology and the need for detailed know-how, enticing an existing global magnet producer to set up a facility in the UK may be an effective way to establish domestic production.“
“The small size of the current UK market and concerns about access to the larger EU27 market were regularly cited as reasons for the lack of interest.”
Tony, it's certainly true that we don't yet have a complete picture of how economics will be impacted by tariffs and subsidies. However, if an industry can only survive with government support, it seems quite unlikely that the same government would allow industry participants to make anything more than economic profit off the back of that support. As an impartial taxpayer, at least, you would hope not!
In other words, we should expect governments to provide a level of support that allows the industry to exist in the long run, and no more. Such a subsidy-dependent scenario implies a limited return for shareholders.
In the alternative, free market scenario, the China Domestic ex-VAT price is the best benchmark for us to use in planning.
ChinaSyndrome, if we can supply to ROW customers exclusively, and they are willing to accept a price that gives them a 13% cost disadvantage versus China PM competitors, then the inc VAT position would be the benchmark to use.
Of course, the final price paid by the customer will depend on negotiation, including, implicitly, how much of the VAT differential would be borne by PRE versus its customer. Likely that the customer will ask for this to be shared by PRE. At planning stage, the more conservative approach would be to assume that PRE will take 100% of the VAT cost.
Analyst, needless to say, the forecast of company value hinges on price assumptions, assuming you have customers to whom you are able to sell. In spite of all the new technology involved in this space, PRE is largely a commodity play, like other miners.
Applying the baseline $87/kg that Arafura used, I estimate an NPV of £1.50 per share.
If you believe the narrative that there will be persistent year on year price increases as per market research, the NPV would be higher. Although you may also want to temper that expectation for the likely increased competition deriving from other new mining projects, many of which are due to land around the 2024 mark (ARU, HAS, ASM, RBW, to name a few). Many would argue that these will still not fill the supply gap, of course. However you also have high risk of competition from alternative production technologies, such as that described by Hogsnipe, or recycling, for example. Risk of substitution of RE PMs in end user products also exists. So, there are many risks to price; it may be appropriate to limit expectations of price increases, settling on a base case with any upside landing as a bonus.
"Rare earth prices continue to rise and have pushed through US$100,000 per tonne "
Checking versus the data on Metal website, which I believe has historically been used for price reference by PRE, prices appear to be at US$100k only when VAT is included. To be certain, we would need PRE to clarify their source. General disclaimer: I could be wrong, please DYOR.
Assuming I'm correct, I just hope our business planning uses the ex-VAT price. I estimate the difference is worth around £1 on the NPV per share.
Hogsnipe, very interesting, but I'm not sure that's going to reduce any anxiety levels; if the method you describe is viable, doesn't it risk rendering Longonjo obsolete? The all in cost of processing fuel ash would presumably be far lower than that of full scale mining.
It took HZM a year to go from draft debt proposal to final - one would hope that PRE will be quicker! HZM are of course still in the process of finalising their complete funding package, including off-takes and equity.
Off-takes are the critical element for PRE, given the concentrated nature of the downstream market.
China, both PRE and ARU reference China Domestic prices in their NPVs. ARU seem to have excluded VAT, hopefully PRE did also. Lynas include a table on China Domestic ex-VAT price in their public reporting and reference this extensively in their commentary. This is the global benchmark price. If there was another market where you could obtain a 40-70% premium, implied by the prices you quote, then everyone would just sell there, and the difference would be arbitraged away. ESG price supplements are yet to be clarified, but Lynas mention they currently secure only a small premium for their ability to provide an “ethical and environmentally responsible source of production”. As with Lynas, we should expect PRE contracts to be closely linked to China Domestic ex-VAT price.
Aside from that, it is interesting that PRE and ARU are looking to secure contracts now, before any subsidy or tariff regime is confirmed. This is perfectly sensible, since policy could of course take years to resolve, but does this action imply that these companies don’t need government support in order to survive, thereby reducing the likelihood that subsidies will be offered? Requires a longer discussion, of course.
You seem not to accept that ARU are a direct competitor to PRE? They are selling the same products to the same markets, while having the advantage of being in a lower risk jurisdiction. Please do take a look at any of the recent ARU presentations or videos. PRE should have the advantage of being first to market, however on products it’s still not clear how PRE might go about delivering metal, they may initially be limited to oxide only. So much depends on the downstream supply chain structure, which is yet to be clarified.
China, please take a look at the ARU Ann presentation on HC from 05/10/21, looks like they are selling NdPr oxide or metal depending on customer preference, with metal conversion tolled through Vietnam and Thailand. Europe is one of their target markets.
Current NdPr oxide price on Metal site is 600rmb, less 13% VAT convert to USD at 6.4 gives $83/kg.
China, please take a look at the ARU Ann presentation on HC from 05/10/21, looks like they are selling NdPr oxide or metal depending on customer preference, with metal conversion tolled through Vietnam and Thailand. Europe is one of their target markets.
Current NdPr oxide price on Metal website is 600rmb, less 13% VAT convert to USD at 6.4 gives $83/kg.
Highly instructive progress at Arafura over the last few months, which may inform some related questions for PRE.
Are auto manufacturers and other end users now acting as aggregators in the NdFeB supply chain, meaning we sell to them and they coordinate downstream aspects? ARU progress seems to suggest that this may be the case, which changes the customer story considerably. However, it’s still not clear who exactly will provide magnet manufacturing capacity. Perhaps some of the larger companies would just do this themselves, if it’s core to their business?
Do we expect to have a metals plant in place at Saltend for 2023? Presumably not, in which case are we able to supply Metal to customers through toll processing? If we are unable to supply Metal at all, to what extent does this limit the potential offtake group?
On financials, ARU presented a base case NPV of $1.0bn at $87/kg. What does PRE's NPV look like at $87/kg? It's one thing to embed forecasts of price growth, but a business case would normally include a baseline position. I suspect PRE may be around $0.5bn at that level. Current price is $83/kg, so this is still relevant.
Arafura seem to have a great deal of interest from offtakers, so critical concern regarding availability of customers is reduced, subject to metals questions above. We may well be in direct competition with ARU for specific customers, although notable that ARU should be in production only one year after PRE. Of course, there could be room for both.
While it’s possible that ARU and PRE touting for customers at the same time may have some impact on pricing, the main concern on price remains the potential for PRE to be adversely impacted by actions of incumbents, assuming that contracts will have a floating price, as is generally the case for Lynas.
Hi Scaramonga, I do indeed own shares of this stock.
Generally, like everyone else, I’m keen to understand possible risks to my investment and the likely SP into the future. In that context, most of my posting is around market structure – PRE’s position within this will have a critical impact on its fortunes, and there are a number of unanswered questions in this area still (again, hope some of this will be covered by ‘Tony’s RNS’).
I’ve been involved with PRE for some time, so perhaps this combined with the complex (and interesting) market-level issues leads me to post here rather than on the boards of other companies in which I am invested.
Having said that, being a single-company poster is not that unusual (on this or other boards). Of course, there are more here due to existence of the Australian contingent.
Listening to the LYC call yesterday, it was interesting to hear AL’s caution regarding the potential for Lynas to integrate downstream into magnet manufacturing. Essentially, it seemed that AL was wary of treading on the toes of existing customers (although nothing was ruled-out).
A conundrum for PRE further down the line, perhaps.