A New Rare Earths Supply Chain Is Taking Shape

Podcast Transcript

Ed Coyne: Hello, and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. I'm pleased to welcome a new guest to Sprott Radio, Reg Spencer. Reg is a mining analyst at Canaccord. Reg, thank you for joining me today on Sprott Radio.

Reg Spencer: You're welcome, Ed. Thanks for having me.

Ed Coyne: Reg, let me start by thanking you for joining us first thing in the morning. I appreciate you stepping in and having this conversation so early in your time in Australia.

Reg Spencer: No problem at all.

Ed Coyne: Reg, as a new guest of Sprott Radio, could you tell us a bit about yourself and some of the work you're currently doing at Canaccord?

Reg Spencer: I've been with Canaccord for about 16 years, and I currently head up our mining research division for our Australian business. What originally started as precious metals coverage has evolved. I inherited coverage of a little company called Orocobre quite a few years ago in the lithium sector, and the timing was almost perfect, one might say, because that was really the start of what we've subsequently seen happen in a broader spectrum of critical minerals.

It's evolved from lithium to a bunch of other critical minerals markets, with rare earths among the main ones. Now, critical minerals, lithium, rare earths and all those things that fit into that bucket take up about 95% of my time. I must admit it's a lot of fun. There's never a dull moment in any of these markets, especially now, with what's going on geopolitically, technologically, from a conflict standpoint and in how industries operate.

It makes it clearer that what might have been a lesser-known or niche commodity or metals market only 10 years ago is now very much in the mainstream. We see that it provides big opportunities for investors.

Ed Coyne: You're starting to cover lithium, and I know you have covered the world of rare earths as well. That's still a largely misunderstood part of the market. I think the world's woken up to the term critical materials. They certainly know precious metals, but I thought we'd really stay focused on rare earths for today's conversation. Can you define what rare earths are and list a couple of the truly rare ones, along with what they're used for, to help set the table for today's conversation?

Reg Spencer: Look, without being too scientific, rare earths is a general term that applies to 17 lanthanide elements, which sit right down the bottom of the periodic table, and most people have never even heard of them. The term "rare earths" is a bit of a misnomer, because they aren't particularly rare in terms of crustal abundance. They are relatively common compared to other metals and commodities we discuss. They are called rare because finding them in a concentration sufficient to exploit economically is the rare part.

To make matters even more complicated, of those 17 lanthanides, most are not very valuable, and the markets for each of those elements are relatively small. Several of them are absolutely critical, not only for everyday purposes and civilian applications, but also for critical areas such as defense and medicine. The important ones, and probably ones that some of your listeners may have heard before, are neodymium and praseodymium, Nd, Pr for short. These two elements are essential for rare earth permanent magnets.

People often don't think too deeply about magnets, but if something moves, it probably has one. Over time, the industry has figured out that these magnets, which contain rare earths, are the most powerful magnets you can have that last the longest, operate under duress or at high temperatures, and so on. That's the part of the rare earths market that we, as investors, are most interested in. Magnets are now essential for new technologies. Initially, we looked at use in electric vehicles and in electric motors as key drivers of demand growth.

They're used in wind turbines for renewable energy, as well as in more conventional applications like MRI machines, speakers, car tailgates and more. Then, if we look a little bit into the future, and probably what's going to be very interesting, the emerging new demand sector is robotics. Some of your listeners may have even seen or maybe have already done some work to understand what's happening in the field of humanoid robotics.

The way I think about it is that it is basically the physical embodiment of AI, and that industry is moving very rapidly. I like to use a little anecdote because I often get scoffed at when I talk about humanoid robotics and the opportunity it presents for rare earths and investors. In 2014, the world sold 300,000 electric vehicles (EVs), and this year we'll sell about 25 million.

Even though Tesla, with its humanoid robots or some Chinese outfits, hasn't sold many of these things commercially, the adoption curve can be quite steep and rapid. Likely by the mid-2030s, we're going to be talking about robots the same way that we talk about EVs. There are a few others in that list of rare earths that are important, but several of them are not. The markets are quite small. For investors, it's the rare earths used in magnets that are the important ones.

One last thing I will mention, Ed, is that there are two other rare earths with even smaller markets, but they are what you call heavy rare earths: dysprosium and terbium. These are becoming increasingly important for industry, the military and technology, as these two elements are increasingly used in rare earth permanent magnets to make magnets stronger, last longer and operate at high temperatures. They're even harder to get your hands on, given the natural distribution of the way that these things would sit within a typical rare earth deposit. Hopefully, that's a good enough high-level summary for you.

Ed Coyne: Yes. They are rare because it is difficult to get them in the right size and scale. I think it might help crystallize a bit how to think about these things. Let's shift to that side of it for a minute, the mining side of this. Mining is very difficult in general. Many of the metals we typically invest in and talk about at Sprott often take 8 to 10 years from discovery to being pulled out of the ground, refined and used.

Realistically, it's typically around 10 to 15 years. In this rare earth universe, what is the typical time frame? If let's say you and I made a discovery today, we pull the capital together, and we want to mine one of these rare earths, what are we looking at from the time of discovery to the time it's getting out there in the marketplace?

Reg Spencer: That's a good question. Look, your earlier comments are correct, and we agree with them. The lead times to production from a greenfield discovery aren't getting any shorter, and that certainly applies to rare earths. I think rare earths are more complicated because some deposits contain radionuclides, such as uranium and thorium. That basically means that the permitting part of your project development timeline is often longer and more complex. That just adds to it. Now, I suppose I'd probably answer your question differently as well, Ed.

Given that we've never needed a lot of rare earths before, mainly because China produces or has produced more than we'd ever needed. In fact, until very recently, only two mines were producing rare earth oxides outside China. One happens to be in Australia, and the other one happens to be in California, so Lynas Rare Earths and MP Materials. Because of that dynamic, China controls about 80% of the upstream mine supply. Still, control over downstream refining and the production of oxides, the form of rare earths required to manufacture these permanent rare earth magnets, exceeds 90%.

In fact, based on our last piece of work, it's about 93%. To answer your question, it's a bit hard because we haven't built a new rare earth mine since Lynas came online in 2011. The risks of bringing on a new rare earths project extend beyond just development lead times. There are also not insignificant technical risks associated with these things. For example, it took Lynas six years to reach nameplate production once they were refining rare earth oxides, because it's very difficult.

Anyone residing in North America who follows this market would understand that Mountain Pass Rare Earth Mine had two previous attempts at producing rare earth oxides. Only now, under its third owner, is it ramping up, so it may even be longer to answer your question. I would like to think that the industry has gotten better and understands these things. One of the things that often stops mines from getting developed in a timely fashion is capital.

Now, we see capital being made available for critical minerals and rare earths projects, not necessarily from traditional capital markets, but from new sources such as governments and industry. Nevertheless, I haven't seen anything change in the industry that would make me think a rare earth mine is going to come on any faster than a copper, gold or similar mine. A 10-year lead time, that's probably fair.

Ed Coyne: What about from a recycling standpoint? There's a recycled market for copper and silver. Are rare earths recyclable? If so, what percentage of demand is being met by recycling?

Reg Spencer: Rare earth magnet recycling is still embryonic in terms of its overall market share. We call it secondary supply rather than primary mine supply. When you manufacture a magnet, you'll end up with a particular shape that needs to be machined to its final use shape. Then you end up with all these little offcuts and shavings and bits like that. That material is called swarf. It's typically your swarf material that hasn't been used in an end application before, which is recycled and returned to the supply chain.

For larger magnets, such as those in electric vehicles or wind turbines, we're not yet sure what role recycling will play, since many of these products haven't reached the end of life. A typical electric vehicle, I don't know how long it would last. 10 years, maybe, if it's a good one. We're only just reaching a point of mass adoption for electric vehicles. It might still be another few years before there's a sufficient supply of end-of-life magnets from electric motors, large-format permanent magnets that you could recycle.

You can find these rare earth permanent magnets in computers, iPhones and other things, but the magnets are so small, and the volume of feedstock you would require is so great. The economics of recovering a very, very minute amount of rare earth oxides from those magnets make that a pointless exercise. I think it's going to be several years before the supply of rare earths from those secondary sources becomes material. We need, in our opinion, many, many new greenfield mines developed to keep the market adequately supplied.

Ed Coyne: You mentioned that capital is becoming more accessible, whether in industry or even government. You're hearing more about companies like Microsoft investing in energy and land to gain access to energy. It seems like capital is starting to ramp up. What about from a technological standpoint? Are there any technological advances that are making mining, particularly as it relates to rare earths, easier, faster, cleaner, or is it a pretty established industry right now where there hasn't been much change?

Reg Spencer: I think the big one, Ed, is what's happened geopolitically. A recognition of China's dominance in not only rare earths, but also a whole raft of other critical minerals markets. What may have started several years ago with COVID has led to deglobalization. Given how important some of these materials are to industry, defense and civilian and technological applications, there is a new requirement to develop new projects and supplies in the West.

That's probably been the major evolution in rare earths in recent years. The world has realized that we can't rely on China to supply enough of this material, and China doesn't want to, it would appear. China's objective is to supply its own cars, renewable energy, AI robotics, or whatever industry with its own materials, rather than export them. That's probably been the biggest change.

That’s been the catalyst for junior companies to look for new deposits. We saw in 2022 pricing hit a multi-year high of $170 a kilo for NdPr. It was maybe five years ago that you started to get investor recognition that the rare earths market was going to tighten. There were certainly early signs of geopolitical winds of change. Because of that effort to look for new deposits, our junior industry found some. Another change I've certainly seen in the six-plus years I've been covering the sector is that we are now looking at different deposit styles that could be exploited.

A conventional rare earth mine, like a Mountain Pass or a Mount Weld, contains hard rock deposits. The way you typically exploit these is by drilling and blasting them, digging them up, crushing them, grinding them and concentrating them. Then that concentrate needs to be further processed. It needs to be calcined, acid-leached, and then solvent-extracted to separate your individual rare earths.

That process is very complex, capital intensive and cost intensive. Other deposit styles are increasingly interesting to investors and us. Probably the most interesting of these is your ionic clays. These are deposits where weathering processes over tens of millions, hundreds of millions of years have weathered a primary hard rock deposit, leaving rare earth ions attached to clay minerals. What makes these deposits interesting is that Mother Nature has done half the processing for you. They're cheaper to mine, and they're effectively cheaper to process because they sit at the surface. The way you extract rare earths is to dig them up, deslime them, and put them in a big tank with a little ammonium sulfate, which is basically fertilizer. It's those kinds of deposits and the fact that they have higher concentrations of important rare earths like your dysprosium and terbium, that are increasingly making them more interesting to investors, to us, and Sprott as well.

Ed Coyne: Yes, we are paying close attention to this space from an investment perspective. You've mentioned China a couple of times, and of course, you mentioned Australia and California. Taking China out of it, who's starting to ramp it up from a capital standpoint, from a mining discovery standpoint?

Reg Spencer: Obviously, Australia is a main player given we've got incumbency through Lynas Rare Earths. Several other deposits are well down the path to financing and development. What we see taking place in North America is capital being made available and growing political and industrial will to develop downstream magnet manufacturing capacity. Unfortunately, through Mother Nature, you don't have the same quality of deposits in North America as you do in other places.

A part of the world that is becoming increasingly relevant in rare earths, and which we're only now seeing investors pay more attention to, is Brazil. Brazil is blessed, like Australia, the United States, Canada and many other parts of the world. It is very geologically diverse and mineral rich. From a mining standpoint, it is well-endowed. There's a very established mining industry there. Energy costs are very low, thanks to their low hydro and labor costs. That to me makes it an attractive place to develop a mine.

Over the last few years, we've seen some very significant deposits discovered and defined, both hard rock and clay. Given that Brazil is relatively close to the United States and has all the ingredients you would like to see to help new projects get developed, it is a part of the world where we see big opportunities. If you wanted me to be specific, I'd point to the large clay deposits in the Poços de Caldas caldera, just outside São Paulo.

If we move further north in Brazil, you've got the Monte Alto discovery, which is a little bit different than clay. It's conventional hard rock, but it has the highest-grade rare earth minerals I've ever seen anywhere in the world. That project's moving ahead. You've got the Araxá Project discovery and so on. Yes, Brazil, in my view, offers a lot of opportunity and is a part of the world where I think investors and industry are increasingly focusing.

Ed Coyne: Very cool. The other side I also want to address is the risk side. You mentioned early on that geopolitics and technology are putting a spotlight on rare earths. Clearly, a lot's happening on the geopolitical front right now. As it relates to rare earths, what are you seeing in the geopolitical landscape right now? What risks are being identified, and can we do anything about them?

Reg Spencer: I think the key risk to Western supply is geopolitics. As I said, China controls 93% of global rare earth refining capacity. We've seen China exercise that control on numerous occasions in recent years. The first was in 2010, and that led to pricing spiking, for example, with NdPr rising to several hundred dollars per kilogram.

Then, more recently, in response to the Trump administration's trade policies, China placed export controls on rare earths, which were only lifted in October last year. They weren't even really lifted, now that I think about it. They were only paused. That is probably the key risk because, given the conversation we had earlier about how long it takes to develop not only new mines but also to build out downstream magnet manufacturing capacity, there is a significant risk that China could turn the taps off again, leaving the West short of material.

What is the West doing about it? The U.S. government is doing a lot to help provide capital. You're seeing the development of new pricing mechanisms for rare earths, like floor prices, which in other metals markets may not be new, but in rare earths, certainly are. They're important because China's ability to manipulate markets and prices can keep new projects out.

In fact, that's what we think we’ve seen happening since 2022. If prices get high, it acts as an incentive for new mines to be developed. If new mines are developed, then China loses control. With export quotas, we saw NdPr pricing fall from $170 a kilo to a low of $57 a kilo in July last year. We think the industry needs an incentive price of around $100 per kilo.

At $57, nothing is being developed. Now, going back to your earlier point about geopolitics, and I know this is a little bit complex, but I'll assure you that it is all intertwined. The next point on export controls is that there is a risk that China may reintroduce these. The current status quo between the West and China regarding the pause in export controls on rare earths and related products lasts until November.

If, for whatever reason, we see a flare-up of tensions between the West and China, or between the U.S. and China, there is a possibility that those export controls may be reintroduced. It's also important to note that additional export controls on heavy rare earths remain in place. There are export controls in place for applications where you might need a magnet for an MRI, but if that same magnet is used in an F-35 Strike Fighter, you’re not allowed to get that from China.

It's an extreme example of geopolitics shaping a commodity market. What are the outcomes of this? Obviously, the West needs to respond, and we're starting to see that happen. Floor prices, government-backed financing packages, off-take-related financing, that kind of thing. An additional consequence of this situation is the pricing of these products.

We are now starting to see genuine pricing bifurcation in the rare earths market. I'll give you a specific example. Even though the market for dysprosium and terbium oxides in Europe is relatively small, the price you pay for that material is four times the price it sells for in China, reflecting the export controls, reflecting the availability of that material, and reflecting the reality that industry and governments and defense want a supply of this stuff that's secure and independent of China's control. They're willing to pay any premium for it. It's a very interesting time for rare earths.

Ed Coyne: It's a complicated one, and so many things are changing so quickly right now. What are some of the things people should be paying attention to if they want to dive into this space? How would someone get started as a student of this space?

Reg Spencer: Come and be a client of Canaccord.

Ed Coyne: There you go.

Reg Spencer: Look, without blowing our own trumpet, I'd like to think that we have some very good equity and sector research in rare earths. Outside of that, because the sector is relatively small, opaque and controlled by China over 90%, there isn't much to choose from. It's not like copper. It's not like gold, where there are innumerable pundits available, bloggers or journals to rely on for information.

It's only recently that rare earths have become topical, and you find them talked about in the media, but because they're not well understood, that can pose problems for investors. A good example is that recently, Reuters reported that the U.S. government was not planning to provide floor pricing for any more American projects. The day the news headline hit the market, rare earth company equities got absolutely slammed.

I wasn't surprised by a headline like that because the U.S. government isn't going to underwrite every single rare earth project at full price. It was a complete misunderstanding on the part of investors, and they even thought it would be the case. Where do I get my information? It's from a collection of companies, a collection of experiences, contacts and industry networking.

There is a blogger who publishes a Substack newsletter called The Rare Earth Observer. It is the most hype-free, almost too cynical, regular appraisal of what's going on in rare earths that I've come across. At times, I think it's too cynical. If you're too cynical, you can obviously miss out on good investment opportunities, in my view. In terms of being able to pull together everything from deep knowledge of the Chinese market to processing to exploration to recycling, to junior companies, it's the best source of information I've come across. Again, some of it I take with a grain of salt and put it alongside all the other tools at my disposal when doing the work we do.

Ed Coyne: I say that often about precious metals. You can go down some very entertaining rabbit holes. If you lose your sense of reality, it quickly becomes foggy. Certainly, in this world, we must be mindful of that. It's also helpful to know what you're doing. You've been doing it for six years. You've been in the industry for close to two decades. I know our listeners certainly appreciate that.

I want to go back to the positive side for a moment. What's got you excited about this space? Over the next, call it 12 to 24 months, what are some of the things that you're most excited about or enthusiastic about related to rare earths? I know that it really puts us in the nerd category when I frame the question that way, but let's talk about it.

Reg Spencer: As I mentioned at the start, I also cover lithium and other critical mineral markets. Why I really like rare earths, and more so than lithium today, for example, is that the supply of rare earths is not elastic to price, unlike lithium, where if pricing gets high enough, we've got a well-stacked project pipeline that incentivizes new supplies to come online.

In rare earths, it's very different. Even though several projects could be developed, many still require substantial financing. They still require some technical risks or issues to be resolved. Building a brand-new rare earth mine and an integrated oxide refinery is extremely capital-intensive. I like the sector now because, as we see at Canaccord, we're in a market deficit, and we expect it to last for several years.

We've seen prices rise. Even if prices were to go up by 1,000%, it would do nothing to bring on any of those new supplies any faster. For example, the Iluka Eneabba Rare Earths Refinery is due to come online in 2028. If NdPr went to $1 million a kilo tomorrow, that project is not coming online any faster. The Meteoric Caldeira Rare Earth Project in Brazil is again about to go through FID [Final Investment Decision] and financing. If prices are $1 million a kilo, that's not going to bring that project to market any faster.

Given the supply side's inability to respond quickly to price signals, this often leads to outsized price moves, on the basis that demand doesn't change and supply isn't there. That's really what I'm focused on, and what's making me excited about rare earths over the next few years. There is limited ability for new supply to come online anytime soon. That means you're going to have deficit markets, and that means you're going to have extreme pricing scenarios.

Again, what makes rare earths interesting is that, in a typical rare earth deposit, you'll find numerous different lanthanide rare earth elements. Maybe half a dozen of them we want, and the rest are less important. Each deposit is different, and the mix of rare earth elements varies. Some projects are going to have more heavy rare earths, which are your dysprosium and terbium, which are what we're all looking for and what we're most interested in, than your light rare earths, where NdPr sits in the spectrum. There are opportunities for investors in that part of the market as well.

Then lastly, because we've seen some pretty amazing discoveries, some of the specific examples I gave earlier, and new projects coming onto the market, there is the potential for M&A [mergers and acquisitions]. That could include any new discovery, any project with enriched heavy rare earths, any project with low capital and operating costs, or any project with a very large resource base. You could see those kinds of companies and projects subject to M&A. Again, that's what I'm looking at right now as a potential catalyst in the sector.

Ed Coyne: Wonderful. Thank you so much for starting your day with me. It's been cool talking to you about rare earths. Anything you wanted to leave the listeners with that I maybe didn't address, or you didn't get to talk about, or I didn't think about?

Reg Spencer: If I had to sum it up, on the demand side for rare earths, you've got technological change that's going to support demand growth for the foreseeable future. Whether it's EVs today, or renewable energy, or humanoid robotics as we move in the 2030s, it doesn't look like that's going to change anytime soon. The more advanced technology gets, the more magnets we're going to need.

Secondly, on the supply side, supply is not price-elastic. There are numerous challenges to bringing on new supply, whether upstream at the mine end, midstream, or downstream in oxide production. There are challenges, whether it's capital, permitting or timelines. It's those things that will provide the ingredients for pricing spikes, as I see them.

Lastly, for investors, in Canada and Australia, there are several very interesting little companies, or not-so-little companies, with good projects that are entering that phase and are now of sufficient scale that investors should be interested. It’s an amazing time for Sprott to be looking at this sector. There's certainly plenty going on and many potential opportunities.

Ed Coyne: I really appreciate you bringing that all to the table. Thanks again for spending your morning with us. We certainly appreciate that.

Reg Spencer: My pleasure, Ed.

Ed Coyne: Once again, you're listening to Sprott Radio, and thank you for listening.