What American influence means for UK rare earth miners

The battle to control the energy transition is shifting into a geopolitical frontier, and picking up pace, as the US government muscles in on rare earth mining and processing – with plans to lure UK-listed miners to invest across the Atlantic.

Heads are turning with the promise of cash from The White House just as domestic stocks and their investors battle a handful of problems at home. Low valuations, the need for huge amounts of capital and the US's commitment to cut China out of the equation are all working against the traditional base of listed miners.

Investment plans are shifting across the Atlantic in order to win government backing. “We have seen more commitment from the US to fund operations on US soil,” says Rainbow Rare Earths' (RBW) chief executive, George Bennett. “It is far more aggressive than European and EU governments.” 

The US Department of Defense has put hundreds of millions of dollars into projects designed to reduce China's dominance in the rare earth supply chain. The metals are used in magnets that are needed for renewables, electric vehicle motors, as well as defence technology. In September the DoD handed $94mn (£77mn) to German company Vacuumschmelze, or VAC, for a new magnet factory. 

Meanwhile, UK-listed companies sputter along with low valuations and sometimes shaky balance sheets. To complicate matters, some are trying to build both mines and processing plants at the same time, requiring hundreds of millions of dollars of funding and work to be done across two or three countries.

“It's not just about mining, it's about chemistry and processing [as well],” says Mkango Resources' (MKO) chief executive, Will Dawes. “Rare earth deposits are not as straightforward as developing a gold project or a copper project, that's why there are so few.” 

China has had a stranglehold on the rare earths mining and processing sectors for some time, and the US and EU want their own supply. The US will require components of electric vehicles to have locally sourced parts to receive tax incentives, creating a two-track auto market. The government is rightly putting cash into the supply chain at the same time.

The closest ties between the US government and a London Stock Exchange company so far are between Rainbow Rare Earths and investment company TechMet, majority-owned by the US International Development Finance Corporation. TechMet owns 12 per cent of Rainbow.

A company 80-per-cent owned by Mkango, HyProMag, was also named by the Minerals Security Partnership (MSP), a multi-nation group to channel capital into critical mining supply chains, as a key part of the energy transition for its magnet recycling technology. Mkango is also moving forward on a rare earths mine in Malawi and a processing plant in Poland.

Lastly, Pensana (PRE) made it through a cash crunch earlier this year with the help of shareholders and is still working on its processing plant in Saltend, near Hull, and its Longonjo mining project in Angola. Financing the two projects remains a tall order, although the UK government has said it would provide up to £4mn for the Saltend plant, which is expected to cost $250mn. Saltend was also nominated for the MSP project list, although this has not been finalised yet. 

Rainbow boss Bennett said rare earths projects had the same development issues seen across the sector: a lack of financing and developers being too ambitious with estimates. That could turn around with government grants and interest from players further down the supply chain, but these remain junior miners. Rainbow announced this week that it would need to raise $3.4mn by the end of 2024 to stay afloat. 

This could be avoided if management can get its final study on the Phalaborwa project in South Africa done within the next few months and raise project finance. Although, given the share price tumbled 13 per cent on the day this news came out, investors are sceptical. The company has already raised $15mn this year. 

Rainbow has an easier route to commercial production than the others given Phalaborwa is a reprocessing of rare earth-containing gypsum, rather than a mine. The company will potentially then send the reprocessed product (mixed rare earth sulphate) to the US, where it can be fed into the car or renewables supply chain. The two key rare earths used in magnets are neodymium and dysprosium, shortened to NdPr.  

China has already reacted to this state of affairs. Annual rare earths production there is capped by the state, and in 2023 the maximum was 240,000 tonnes, a new annual record and 14 per cent ahead of 2022.

“With China looking to maintain its dominance in the rare earth market, the increase in supply has weighed on prices this year and is potentially serving to dissuade some new supply from other jurisdictions,” says BMO Capital Markets analyst Colin Hamilton. 

Bennett adds that more supply will be good for the sector. "The more certainty that the market's got of a reliable supply chain of these rare earth oxides, the more the vehicle manufacturers are happy to proceed with current permanent magnet motor design," he says. 

Two-parter

Miners getting involved in midstream processing is not a new phenomenon, especially those selling into the battery metals space. Lithium giant Albemarle (US:ALB) does both, as does Lynas Corp (AU:LYC). The latter was for a long time the only non-Chinese miner and producer of rare earths, with its Australian mine and Malaysian plant. 

The UK-listed companies are aiming at this two-country model as well. However, geology has meant rare earth deposits are in countries without strong mining industries, further complicating the task. Mkango is building in Malawi, while Pensana has its Longonjo project in Angola. Rainbow also built an operation in Burundi, although is now focused on South Africa after the Burundi government froze all mining and processing activities on the Gakara site over two years ago. 

The plants are the potential assets attracting government funding, however. 

Pensana’s new £4mn grant is conditional on it providing a “a funding, activities and deliverables plan”, which it said it would in the coming weeks. The UK government has shied away from blank cheques for new project builders – see Britishvolt crying out for cash when it burned through what it had raised from private investors – but has backed existing major employers in the car space such as Nissan and Jaguar-Land Rover.

Paul Atherley, chair of the miner, said maintaining the broader auto manufacturing sector was a key focus of the government. “Currently the UK doesn't produce that many cars, but it's actually a very big producer of internal combustion engines. All of those producers have got to change to electronic drive units,” he says. “We provide the metal [at Saltend], someone can turn it into magnets.”  

Pensana’s investment case will be tested very soon. It is looking at placing $150mn of bonds and is in talks with the UK Investment Bank, Atherley says, and “is about to start engaging with the US government under the MSP”, he adds. The total spend currently in the pipeline for the company is $450mn. 

If managing financing and development of a mine and separate processing plant isn’t enough, Mkango has taken it one step further with its rare earths recycling arm, HyProMag. Planning is under way for a US facility, while the first magnets are expected to be made at its Tyseley Park base near Birmingham by the end of the year.

Strategic investors

With all this attention and support, why do these companies face the same struggles as Bacanora Lithium, for example? Bacanora failed to raise the cash to build a lithium mine in Mexico and eventually sold itself to Chinese giant Ganfeng Lithium. UK investors dodged a bullet there, however, given the Mexican government cancelled the licence. 

The traditional route for juniors with good projects is to pay for a mine with a mix of debt and equity, but the share price weaknesses of Pensana and Mkango almost rule that out. Atherley says the plan is to sell down the ownership of both Saltend and Longonjo at the project level to avoid diluting existing shareholders. Earlier this year, the company had said a major player would come on board, investing $220mn in the company. This was Sibanye Stillwater (US:SBSW), which Atherley says pulled out because an investment committee decided it could not take on another major project. 

Rainbow is also hopeful of a strategic investor. Bennett adds that the partnership with K-Technologies in the US would likely open doors, and that management would “seriously consider” building most of the processing capacity in the US. “It would give us a US presence, it would make us material in the eyes of US investors, and it would be significant in the eyes of the US government as well,” he says. This would be the only local facility splitting a rare earth sulphate into the four separate oxide forms needed for magnet production. 

Operating in the US is obviously more expensive than in South Africa, Poland or the UK, in the cases of the other mining hopefuls, but not when the government is potentially handing over free money.