Aims to update investors on developments in the world of strategy metals – crucial inputs to industry, defense and technology innovation
Terence van der Hout
Jan 22 – 28, 2012 Gold&Discovery Fund
This week’s bulletin looks back on the performance of REE prices and the REE juniors, in 2011.
Number crunching 2011
Needless to say, 2011 was a dramatic year for all metals. Throughout the spring, summer and fall, fear of a repeat of the 2008 crash crept into the market in force. The financial troubles of both the US and Europe were major triggers for fear, helped by a slowdown in China propagated by weste media as a hard landing. The Fukushima black swan event pushed sentiment further off the cliff, and investors fled the risky mining markets, opting to hoard cash or accumulate perceived safe govement bonds. Even the precious metal miners with record margins and profits, were seen as risk plays, and subsequently ditched.
The full force of this fear was reflected in base metal prices, as demand for commodities is the first to suffer in an economic downtu. Base metals were -20% on average, during 2011, as we can see in the right column of the table, courtesy of Haywood Securities. In fact, except for a slightly positive performance of antimony, gold was the only metal that shone in 2011, gaining a solid 11%. A true out-performance.
However, despite gold’s good run validating the continuity of a decade-long bull market, the senior gold producers index (HUI) was -13.1% for the year, and the junior HUI was -32.5%. Clearly there was no appetite for equity, what with the -80% to -90% losses that investors had experienced during 2008.
And what of the rare earths? After a jubilant start following on from the run in 2010, the Fukushima disaster made everyone aware of where the real demand for rare earths is. Japan’s industrial activity crashed, and the demand vacuum quickly forced prices of the REE to fall. The drop was helped further by downstream manufacturers protesting against the high prices and threatening to engineer REE out of the manufacturing process and laying out plans to start recycling. The off-loading of Chinese speculators also didn’t do much good, and finally the seabed and moon-mining phantasies helped create a sentiment indicating that fears of a REE supply crunch were unfounded, that the metals weren’t so rare, and that companies developing REE deposits weren’t worth a dime.
Against this back drop, surprisingly, we saw export prices (FOB) rising 400% for the heavy rare earths (HREE), and almost 60% for the light REE (LREE), in 2011. The gains were, of course all made before the summer (note the time lag between the Fukushima disaster and when demand lapse kicks in in August), but annual performance is stellar nonetheless. And although prices have been declining since, after an initial strong correction this has flattened out considerably.
Looking back towards the end of 2009, when REE prices reflected a ten year period of Chinese monopoly and a rest of the world that didn’t care, we can appreciated the tremendous price gains that have been made by the various REE during the two-year bull run. Surprisingly, it is the LREE that have made the most gains, averaging more than +1,100% over the period.
Tuing back to 2011, the juniors in the REE sector have not benefitted at all from the underlying REE prices. Taking a peer group of both the most advanced LREE and HREE companies, 2011 has generally been a dismal year, with valuations ending more than 50% lower than when 2011 started. The disconnect is visualized in the graph above (which is indexed). Where the HREE juniors at first rose, this uplift later dissipated, ending at about the same indexed valuation as the LREE. In effect, REE juniors have been hit even harder than the gold juniors.
I would have expected a partial reason for this disconnect to lie in the fact that most REE juniors have a long road to production ahead of them, if they get there at all. Thus, all predominantly HREE juniors and most of the LREE juniors should receive a more than average lower valuation to discount this added risk. Alteatively, we would expect the most advanced REE companies with imminent production (Molycorp and Lynas), to have fared better. They both aim to start production from mining operations later this year, and most hurdles have by now been taken or addressed. However, this thesis is not supported by their share price development, Molycorp dropping -55% and Lynas -47% in 2011, mirroring the rest of the sector. In fact, the only REE junior to have escaped this scenario is Australian Alkane, which is seeking to produce yttrium (a Heavy REE) as a by-product of their zirconium and niobium operations in 2014. The by-product nature of the REE probably explains their -11% performance over 2011.
In effect, very little has changed. The sector is still not well understood, even after a two-year bull run. China’s monopoly is clearly not helping anyone predict what the market will look like once a number of non-Chinese juniors get to production. And identifying a good project from a mediocre one is, given the market caps of some juniors, still a gamble to most investors. There are so many variables at play that it is hard to determine which projects will actually become good enough to make money. And since speculation has left the market, we are left with a deflated REE junior mining sector in need of a trigger that may differ from the one that will light the more mature precious metal junior mining sector.
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Disclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund has commercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in this bulletin is the author’s independent opinion of developments in markets and at companies, and hence may contain factual errors, and may not reflect the opinions of the Gold&Discovery Fund. The content of this bulletin is not intended as an investment recommendation.
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