Rare earths set for rare returns as demand grows

Prime minister Boris Johnson drew scepticism in September 2020 when he promised to turn the UK into the "Saudi Arabia of wind", saying that turbines would soon supply every home with renewable power.

Aside from the fact that one turbine would need to be built every day until 2030 to realise this target, the plan failed to address another key component: the colossal 26,000 tonnes of rare earth elements needed to build these turbines in the first place. Rare earths – namely neodymium and praseodymium, the combination known as NdPr – are used for the magnets inside the turbines. 

China holds a mostly-uncontested monopoly over the market for rare earths, producing an estimated 90 per cent of the world’s output, almost half of which is from a single mega-processing plant in Inner Mongolia. As these materials grow ever more important, the near-total reliance on Chinese production has begun to rankle with western governments. Last month a bill with bipartisan support was brought to the US Congress banning Chinese rare earth supply for defence applications from 2026, further encouraging new supply. 

China has already flexed its muscles once by cutting off rare earth exports to Japan during a diplomatic spat in 2010, and recently hinted that it may look to limit all exports over the coming years as the country prioritises its own green energy transition. And with demand for NdPr magnets predicted to rise fivefold in the next eight years, finding new sources of rare earths is becoming a necessity.

A new generation of rare earth hopefuls is looking to do just that. Pensana (PRE), Mkango Resources (MKA), and Rainbow Rare Earths (RBW) are three London-listed suitors competing to build new supply chains of these critical minerals, independent of China. 

It sounds like a winning formula. After all, the misleadingly-named rare earth elements are actually surprisingly common in the earth’s crust. Nevertheless, their tendency to exist at low concentrations and jumbled up with other elements makes finding a decent mine difficult. And given the rare earths industry’s history of spectacular booms and busts, it’s not hard to understand scepticism.

“It's an absolute graveyard in the industry,” said executive chair Paul Atherley in an interview with Investors' Chronicle. Many would-be miners fail to pass the funding hurdle. 

So far, the only significant rare earth mining and separation facility outside of China is owned by Lynas Rare Earths (AU:LYC). The company ships its Western Australia-mined rare earth ores to its plant in Malaysia for separation, but has been fighting to keep this plant alive in recent years against a backdrop of increasing government scrutiny over its handling of radioactive waste.

Nonetheless, Lynas's market capitalisation has gone from A$1bn (£530mn) to over A$8bn in the past two years. 

Other projects have ended in tears. Ten years ago, Molycorp was the poster-child for western attempts to break the Chinese stranglehold on the industry, buying up a defunct mine in California in 2008 and promising to compete with Chinese rare earth prices. Despite bringing in more than $500mn (£368mn) a year in revenues from sales of its rare earths, Molycorp struggled to stay solvent due to spiralling costs and a rare earths price-collapse in 2011, and filed for bankruptcy in 2015. Its managing director, Rocky Smith, has since joined Pensana as chief operating officer. 

Rainbow in London offers another cautionary tale, beginning production in 2017 but stumbling and since mid-2021 seeing activity stop because of a dispute with the Burundi government. It is now developing a project in South Africa, an easier place to do business. 

London's other rare earth companies have made the most of investor interest. Pensana plans to mine neodymium and praseodymium at its Longonjo mine in Angola, and then ship the concentrates out to a $125mn rare earths separation facility it is planning for the Humber. Atherley said the key to success for rare earths companies is recognising the new orthodoxy: ‘He who separates wins’.

Separation offers the highest rewards for those who get it right, since mined ores must be painstakingly processed in order to separate the rare earth elements from surrounding materials, before they can be turned into permanent magnets for wind turbines. This process is as difficult as it is expensive, with rare earth elements required to be 99.9999 per cent pure to be considered ‘in spec’.

John Meyer, partner at commodities-focused brokerage SP Angel, said Pensana’s peers in rare earth mining can typically expect to receive around 35 per cent of the end-value of the rare earth metal that they have mined and then shipped to China for processing. By doing the separation themselves, that figure rises to 80 per cent of the value.

Pensana sees the Saltend Chemicals Park in Hull, where it has received planning permission to build a rare earths processing facility capable of producing 4,500 tonnes of magnet metal rare earth oxides a year, or 5 per cent of the global projected demand in 2025, as a “jewel in the crown”.

The 370-acre site is already home to chemical engineering giants Ineos and BP Chemicals, and Atherley describes it as a “WeWork for chemical engineering plants – without the beer or the charismatic CEO”.  This would allow Pensana to sidestep some of the burdens of building chemicals infrastructure from scratch since Saltend’s owners, American private equity firm PX Group, will supply the power, water, reagents, and waste disposal for its operations. On top of that, Saltend’s free-port status means that Pensana would be able to freely import rare earth concentrates from around the world including its mine in Longonjo, and then ship out the finished products.

There are big ifs, though. The firm is gearing up to begin construction on its UK site, and says it expects to be processing rare earths by the end of next year. Its ability to maintain funding levels in volatile markets will go a long way in determining whether this succeeds.

Rare earth projects are notorious cash-guzzlers. Lynas faced years of perennial funding issues before being saved from collapse in 2016 by state-owned Japan Oil, Gas and Metals National Corp (JOGMEC). At this point the Japanese government intervened to secure its own rare earths supply after the Chinese embargo.

In December, precious metals miner Hochschild Mining (HOC) decided to spin out its Chilean rare earths deposit into a separate company, Aclara Resources (CA:ARA) to allow the nascent mining operation to tap more funding on Toronto’s public market.

Similarly, Pensana has been assembling a “jigsaw puzzle” of funding, including equity investments from M&G, Artisan Partners, and the Angolan Sovereign Wealth Fund, as well as eyeing a potential bond issuance in the works with financiers ABG Sundal Collier. 

Pensana has also applied for British government funding through the Automotive Transformation Fund, a £1bn funding pot which aims to supercharge the UK’s electric vehicles industry.

Industry experts say that government funding is increasingly essential to the success of British rare earth projects. Professor of Metallurgy at Birmingham University, Allan Walton, told Investors' Chronicle that there was “no doubt that unless they do it, we will not have those industries here”.

UK government funding for rare earth projects has been dwarfed by the EU and US, where public investment has been much higher. Enthusiasm for onshoring the rare earths industry led the Pentagon to grant Lynas over $30mn in funding last year to build two processing and separation facilities in the US.

“The issue is that quite often these rare earth companies are relatively small, so they are  vulnerable to price fluctuations,” said Walton, whose magnet recycling business HyProMag has received two UK government grants.

Both Pensana and rival Mkango Resources are optimistic that prices will remain high thanks to the structural shortage across the world and demand rising from the growth in electric vehicles and offshore wind turbines.

Mkango is a survivor of a broad downturn in the exploration sector a few years ago, but is not as far along in its plans as Pensana, targeting first production from its Songwe project in Malawi around 2025. The firm is also planning a rare earths processing hub in Poland, which the miner said provided “substantially lower operating costs than” other sites including those it visited in the UK. To compete with China, which offers VAT relief on internal rare earth sales. “You've got to have the lowest cost possible option”, explained chief executive Will Dawes.

What makes Mkango interesting for investors, however, is its strategy of ‘mine, refine, recycle’. A lynchpin of this approach is Mkango’s 42 per cent stake in private magnet recycling business HyProMag. The University of Birmingham spin-out has licensed a patented method using hydrogen to extract and break down rare earth magnets, and reprocess them back into functioning magnets, discovered by noted metallurgist Rex Harris.

Dawes told Investors' Chronicle that there is “probably the greatest potential for growth” in magnet recycling, since fewer than 3 per cent of magnets from end-of-life products such as cars, loudspeakers, and phones are currently recycled. HyProMag’s strategy is aiming to build a recycling facility at Tyseley Energy Park in Birmingham, while pursuing an expansion into Europe with a Germany-based subsidiary.

This could be a game-changer for the UK, since recycling could provide an “indigenous supply of rare earth metals” that the country lacks. Recycling uses 88 per cent less energy than mining and processing rare earths afresh, and results in typically only a 1 to 2 per cent weakening of the magnet’s power, according to HyProMag.

Pensana has some exposure to this trend, having announced a partnership last month with Equinor to recycle end-of-life magnets from offshore wind farms, but these turbines are very new and will likely not be available to begin recycling for another 10-15 years.

One thing looks certain. Without a sustainable supply of rare earth metals, the UK’s plans to become a leader in wind turbine and electric vehicle production could be just bluster.