Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
A very interesting article that explains the role of permanent magnets in the wind turbine industry - including the current approach to ESG, and the potential for substitution should prices rise too high or supply be constrained.
www .windpowermonthly. com/article/1519221/rethinking-use-rare-earth-elements
The conclusion I'd draw from both is that, again, any ESG pricing premium due to Pensana will be limited. Also, scope for general market price rises will also be limited over the medium term due to potential for substitution.
- ESG
"...Lynas provides product assurance certificates for its REEs and tracks the material through the supply chain, including magnet makers…"
"...Lynas… also offer 'three-way contracts' with OEMs and magnet manufacturers. Such measures 'provide security of supply, guaranteed provenance, product quality and pricing stability'…"
These points suggests that Lynas already broadly operate in the way that Pensana propose to.
Lynas reference their 'small pricing premium' in their financial updates:
"Lynas achieved a small price premium compared to the NdPr market price, supported by: … 3) end users placing more importance on being able to trace the origin of rare earths from a sustainable and auditable source of production to their end products, which Lynas can fulfil"
- Substitution
"...The high-temperature superconductor (HTS) generators currently under development also require very small amounts of REEs. The HTS being developed under the EU-funded EcoSwing research project uses 'much less than 1kg of REEs'…"
"...Others are aiming to eliminate rare earths altogether. UK-based GreenSpur Renewables is developing a multi-megawatt direct-drive generator using cheap and plentiful ferrite magnets…."
Thanks for the response, China. Down-ramping was of course not the aim of the post - rather, the aim was to clarify the pricing assumptions included in the NPV and to review how they stack-up against available external benchmarks. I'm sure other shareholders are doing the same, as will be anyone looking to fund the company.
In summary, the price in the NPV appears to be 'high' (and 40% higher than the Adamas 2030 price). Re. validating that assumption, the most interesting point, that I've mentioned a few times and you also referenced, is the price premium that could be secured through ESG compliance.
Attempting to think-through that aspect: currently, wind turbines use magnets made in China (ESG-non-compliant). What impact would the availability of ESG-compliant magnets have on this situation? If we ran short of ESG-compliant magnets, would we stop the wind farm project? Unlikely (due to precedent, and the overriding imperative to build the wind farm) - instead we'd use China magnets, and potentially require an 'offset' premium to reflect the difference in ESG standards. This would set the ESG premium as a specific amount, admitting China into the supply pool, from where they would be able to compete on the base price (only the ESG premium would remain constant). As such, I'm not sure if ESG compliance will confer much of a sustainable 'net' price advantage. Very interested to hear others' thoughts on how this might work.
Also on the competition front, it would be interesting to understand how governments will look to protect their new non-China sources from Chinese competition (assuming that China will be likely to aggressively compete against any new entrants, on price in particular, potentially to a terminal degree). If I've understood the history correctly, Lynas had to rely on the (admittedly self-interested) benevolence of strategically-minded Japanese manufacturers to avoid going out of business over the last decade or so. Who would be Pensana's protector?
To answer your other points:
Re. exchanges - the most reliable source of pricing actuals will be Lynas results. I believe Lynas actuals correlate most closely with SMM, so I take the latter to be representative of current price. I'm not clear why different exchanges would show materially different prices - presumably any difference would be arbitraged-out (CN-NY shipping costs are negligible per kg of oxide) - I suspect any difference reflects the small size of the market and that, within this, the smaller exchanges are perhaps not representative of a true market price - happy to be corrected if there is another explanation.
Re. Lynas costs, fair enough, will have to read-up more on this, although the point was more to explain, in part, how Lynas were able to survive at the lower price point of the last few years.
All competing or supporting views welcome.
Approximated NPVs in different pricing scenarios (ten year life at 8% discount rate):
- Average price Q3-18 to Q2-21, ($39/kg), NPV = $(1.0)bn, £(3.00) per share
price source: Lynas actuals. Lynas is better positioned to operate at these levels given their lower opex rate - Pensana opex rate forecast to be 50% higher than that of Lynas (Pensana at $22/kg treo)
- Current price (~$68/kg), NPV = nil
price source: SMM metal website
- Apply Adamas 2030 price to all years ($100/kg), NPV = $1.0bn, £3.00 per share
price source: slide 10 of the Pensana Investor Presentation
- Estimated assumption used in business plan, average of all years ($140/kg), NPV = $2.3bn, £6.50 per share
price source: inference from data provided in business plan. Best available validation using values provided: $550m Revenue (av. first five years) * 0.91 (NdPr share of rev from PFS) / 4500 (est av. production in first five years) = $111/kg; likely be to slightly higher (~$120-140/kg) given that production within the initial years may be below the 4500 nameplate capacity, and NdPr share of revenue could also be higher.
Could price elevate to the levels seemingly used in the business plan? In a supercycle (etc.) and with price differentiation, this certainly could be possible, but remains a significant unknown. We should be aware of both the expectation of significant upward movement apparently embedded in the published NPV, and the associated impact on NPV if these levels are not achieved.
Welcome other views as always.