Battery Metals

Are rare earth stocks doomed?

Wed 10 Jul 24, 3:23pm (AEST)
Red rocks outback Western Australia WA
Source: iStock

Key Points

  • Meteoric Resources' scoping study for its Caldeira Project reveals marginal economics at current rare earth prices, highlighting industry-wide challenges amid a 70% drop in neodymium prices since 2022
  • Despite low-cost production potential, rare earth projects like Caldeira and Arafura's Nolans require significantly higher prices for compelling returns, raising questions about their viability in the current market
  • Government funding and strategic partnerships are supporting rare earth projects, driven by the need to reduce dependence on Chinese supply chains.

Meteoric Resources (ASX: MEI) released a scoping study for its globally significant Calderia Project earlier this week, offering a sobering outlook for the wider industry.

The study reveals marginal project economics at current rare earth prices, and highlights the potential challenges ahead – should prices remain low.

The price of neodymium, used to produce powerful permanent magnets, is down almost 70% from February 2022 highs.

2024-07-10 13 58 33-Neodymium - Price - Chart - Historical Data - News
Neodymium price chart (Source: TradingEconomics)

A household rare earth name like Lynas (ASX: LYC) was selling NdPr (neodymium and praseodymium) oxide to China for US$145/kg in February 2022.

Fast forward to the March quarter of 2024, NdPr was fetching just US$47/kg.

Assumptions vs. spot

Meteoric should be praised for presenting Caldeira's key financial metrics under two scenarios: Long-term forecast prices and current market prices.

This reminds me of Chalice Mining's (ASX: CHN) Gonneville scoping study, which revealed a post-tax net present value between $2.8 billion and $4.2 billion (at the time of reporting, Chalice had a market cap of $1.5 billion). The only problem was that the study assumed palladium prices of US$2,000 an ounce compared to current spot prices of US$1,250 an ounce (and currently less than US$1,000).

So again, hats off to Meteoric. But let's dive into the life of mine financial outputs.

Financial outputs

Adamus LT forecast

Spot

Pre-tax NPV (US$m)

1,235

148

Post-tax NPV (US$m)

699

16

Pre-tax IRR

38%

14%

Post-tax IRR

27%

9%

Payback period

2.2

5.1

Basket price TREO

US$45/kg

US$21/kg

In terms of life of mine cash flow and earnings metrics:

Financial outputs

Adamus LT forecast

Spot

Annual revenue (US$m)

284

137

Annual EBITDA (US$m)

193

60

Operating cash flow (US$m)

123

40

The project's leverage is evident in these figures. The contrast between US$45 and US$21 (re 'basket price TREO') highlights the dramatic impact that price can have on the project's financial outcomes. Most notably, the post-tax NPV plummets from US$699 million to a mere US$16 million under current spot price conditions.

Meteoric says its Caldeira will have an estimated all-in sustaining cost of an initial US$7/kg, which will rise to US$9/kg over the 20-year life of mine period. This positions the project as one of the world's lowest-cost producers.

Despite this advantageous cost profile, the project's economics remain challenging. Rare earth prices must rise significantly for truly compelling returns.

The rest of the industry

Remember the Gina Rinehart-backed Arafura Rare Earths (ASX: ARU)?

The latest study for its Nolans Rare Earths Project in the Northern Territory dates back to 2019. Although the project and market conditions have evolved significantly since then, the study highlights similar challenges.

The 2019 study for Arafura's project projected an NPV of $729 million and an average annual EBITDA of $377 million. However, these figures were based on ambitious NdPr price assumptions ranging from US$67-90/kg over the mine's life.

The study's sensitivity analysis revealed that for every US$5/kg change in NdPr oxide price, the project's EBITDA would shift by approximately $28 million, with the NPV moving by about $130 million.

To put this in perspective, consider that Lynas was selling NdPr for US$47/kg in the March quarter. Applying this to Arafura's projections would reduce the annual EBITDA by around 30% to $265 million. This does not consider other variables such as exchange rates, operating costs and capex.

Will these projects enter production?

Rare earths are essential for the energy transition. But China is responsible for approximately 90% of global NdPr processing. The rest of the world is urgently seeking ways to diversify its supply chain and reduce dependence on Chinese sources.

Despite deteriorating project economics, local rare earth companies face no shortage in funding support. Some of the latest funding announcements from Arafura include:

  • 14 March 2024: Secured conditional Commonwealth Government approval for a debt financing package of US$533 million

  • 27 May 2024: Secured conditional approval for up to US$300 million in debt finance from Export Development Canada

  • 4 July 2024: Conditional approval for up to US$115 million in United Loan Guarantees from Euler Hermes Aktiengesellschaft

A large-cap name like Lynas has secured contracts with the US Department of Defense. These agreements cover the construction of a heavy rare earths separation facility in the US, with all construction costs fully covered for Lynas.

What's next?

In April, Citi downgraded Lynas to a 'Sell' rating, citing a bleak outlook for rare earth prices and rising cost expectations. The analysts expect NdPr oxide prices to average US$54.7/kg in 2024 and improve to US$64.8/kg in 2025 and US$74.9/kg in 2026.

While prices are forecast to bottom over the next 12-24 months, the current trend is quite clear. However, recent geopolitical tensions could potentially provide some price support. Notably, the US plans to implement a 25% tariff on Chinese natural graphite and permanent magnets in 2026, up from the current 0%.

While rare earths are strategic, it's by no means an easy business.

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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