Rare earth elements present a lot of opportunity for investors but they are so new to everyone that it's hard for investors to understand the potential of a rare earth element company or value it effectively.
At the recent Cambridge House International Montreal Investment Conference, Alex Knox spoke to attendees and gave them some tools to value a rare earth element company effectively.
Alex Knox is a consultant and a mineral geologist who has been working in rare earths since the 1980's. He described his own talk as "a primer so the investor can have some tools to evaluate a rare earths resource company – fundamentals, valuation, and how to evaluate their exploration program."
We've provided a summary of Mr. Knox's talk below. Where possible, quotations provided are direct quotes, although some direct quotes have been slightly edited for readability.
Mr. Knox opened with this: "I'm often asked the question, 'what's an economic grade for rare earth deposits?'" and then he explained the confusion that prompts this question by describing two profitable rare earth mines: "There's one mine going into production in California that has an average grade of 7% rare earths. There's another one going into production in China with an average grade of 0.1% rare earths… and they're both economic and producing at a profit today."
With some metals – like copper or gold – it's relatively easy to look at the grade and assess the economics. But Mr. Knox asserted that it is much harder with rare earths. This is partly due to the fact that rare earths are so new, but also, he added: "There are so few rare earth mines in production, and there are so many differences between mines, it's difficult to understand the economics."
One way investors can value a rare earth element company is by looking at the relative abundance of each rare earth. "The rare earths are the Lanthanides plus Yttrium and Scandium… (although some people throw in other elements as well)," said Mr. Knox. "They all occur together in nature. There are no Neodymium minerals. Every deposit of rare earths contain all of these minerals together (in various ratios)… and that's what makes it difficult to evaluate grades because some will be rich in lighter rare earths and some will be rich in heavy rare earths."
One way to compare is to use a baseline, and the preferred baseline is by looking at the rare earth distribution in ancient meteorites (called "Chondritic Meteorites"), which have been around since the beginning of the universe. It is used as a tool to compare against the abundance of each of the rare earths in any given deposit.
Mr. Knox explained that investors can look at most rare earth exploration press releases to find the ratio of rare earth abundance in a deposit and then they can compare it to the Chondritic meteorite to see which rare earths the deposit is relatively enriched with.
Here's how it's helpful for investors to determine the potential economics of a mine: Since heavy rare earths are more valuable, a deposit that is relatively more abundant in heavy rare earths might be more economic at a lower grade than a deposit that is relatively abundant in light rare earths.
"This is an easy thing to do at home," added Mr. Knox. "You can instantly evaluate any press release on any company by creating a graph [and comparing the deposit with the chondrite meteorite]."
The next tool to help investors accurately value a rare earth element company is by looking at the temperature used to form the deposit. When we think of molten rock in the earth's crust, we think of high temperatures. However, "rare earths can also be transported by low temperature processes. Low temperature processes will fractionate [separate] rare earths from heavy-to-light much more effectively. If you are looking at a deposit that was formed at low temperatures, you would find more fractionation between each rare earth elements." Investors then have to evaluate rare earth deposits differently, depending on whether it was created at a high temperature or low temperature.
Next, Mr. Knox briefly touched on by-products – a way to value a rare earth company that reaches beyond just the rare earths themselves. Rare earth elements are incompatible elements; and Mr. Knox explained: "When granite crystalizes, rare earths don't have a home; they are excluded from the deposit. When they are excluded from the granite, they may form a fluid that enriches the deposit. One or more elements will be enriched with rare earths and these may form by-products that could easily occur with the rare earths. The economics of a deposit doesn't have to be found strictly in the rare earth content but in the by-product. When you evaluate a deposit, look for by-products that can potentially be valuable."
Next, Mr. Knox listed extraction processes as another way to value a rare earth element company. He said: "We've been extracting gold and copper for years but extracting rare earths is new. When you're evaluating a rare earth company, you need to figure out whether the extraction will be difficult and add to the cost (and hence require a higher grade) or very easy (which will require a lower grade). If the deposit is fractioned, it will be easier to extract the rare earth."
Then, Mr. Knox told the conference that grain size also played an important role in an accurate valuation. "[Some] rare earth minerals are so fine that you can't see them, [while others are] coarse. If they are coarse, you can use extractive processes on the grains to get them out of the rock. However, if the grains are fine, you'll have to use your processes on the entire rock (not just the grains) and that will use more material and your processing cost will be higher."
Finally, Mr. Knox listed mineralogy as another tool for investors to value a rare earth element company. He explained that the more minerals present, the more complicated (and costly) the process is to extract rare earths. Then he gave the example of one company that found 13 different minerals in its deposit, which means that it will have to develop a process to extract rare earths from all 13 of those minerals. Compare that to a deposit with fewer minerals, which will have better economics. "If you have 13 different minerals, you're going to require a higher grade," he added.
After providing tools to investors so they can accurately value a rare earth element company, he then went on to describe how rare earth element deposits were found. But it wasn't just a history lesson! Investors should pay attention because it will help them to know whether an exploration company has a higher likelihood of finding rare earths with its particular approach.
Mr. Knox said: "[A few years ago], no one was into rare earths. The demand was pretty minor because there was no use for them. There is no large historical list of deposits that we can go back and evaluate. Many rare earth deposits have been discovered as a by-product of Uranium exploration or Niobium exploration. None of the major deposits in Canada and the US were found because they were rare earths – the explorers were looking for Uranium."
Mr. Knox continued: "If you want to explore for rare earths, we need to talk about district scale – areas of about 100 square kilometers. You can look for Carbonatites – they're easy to find and Canada had hundreds of them. They tend to be enriched with light rare earths and the vast majority of them are underexplored (for rare earths because nobody cared)."
"Rock types that tend to have rare earths, look for incompatible elements like Zirconium, Hassium, Uranium, Thorium – especially Thorium." In addition, rare earths are radioactive and frequently associated with minerals that are magnetic, he added.
Since rare earths are relatively new, explorers are still figuring out where to find them, producers are still figuring out how to get them out of the ground, and investors are still figuring out how to value rare earth element companies effectively. Thanks to Alex Knox's list, investors now have a tool kit to understand the relative value of a rare earth deposit.
REFERENCE
More information about Chondritic meteorites: http://meteorites.wustl.edu/goodstuff/ree-chon.htm
Bio of Alex Knox: http://cambridgehouse.com/speaker/alex-w.-knox,-m.sc.,-p.geol/146
Cambridge House International's Montreal Investment Conference: http://cambridgehouse.com/conference-details/montreal-investment-conference-2011/59