Rinehart and Forrest's appetite for rare earths speaks volumes about the sector’s outlook
The billionaires are diving in via the bigger players. But the less well-heeled can get a slice of the action through numerous leveraged juniors such as RareX and AR3. And Greenvale shares burn rubber on a plan to be Australia’s only bitumen producer.
Australia’s richest, Gina Rinehart and Andrew Forrest, have turned some of their mining billions into positions in rare earths.
The key role of rare earths in the energy transition – each EV has 1kg of the stuff and wind turbines require 200kg for each MW of capacity - is well understood.
So too is the critical importance of the world weaning itself off China’s dominant supply position, which is why much of the investment in the sector in recent times has been soft-dollar financing by Western governments, including Canberra, to encourage more supply.
But the arrival of Rinehart and Forrest in the sector is something else given that the investment advice they receive is at another level to what the rest of us get by on.
Our number one and number two richest are buying into the sector because demand for high-performance rare earths permanent magnets (NdPrB) is going through the roof, and a serious supply shortage is on the cards from around 2027.
Specifically, Rinehart’s Hancock Prospecting has pumped $60m into Arafura Resources (ASX: ARU), giving it a 10% stake in the company. Arafura is advancing the $1.6 billion Nolans rare earths project to the north of Alice Springs, just off the Stuart Hwy to Darwin.
It has also been recently reported that Hancock Prospecting put its hand up for some of the $21m pre-IPO raising by Brazilian Rare Earths ahead of its planned listing next year.
And there was Forrest’s privately-owned Wyloo making a $150m investment through an exchangeable note in Hastings Technology (ASX: HAS) which is developing the Yangibana project in the Gascoyne region of WA.
The Wyloo funding underpins Hastings’ acquisition of a 22% stake in the Canadian-listed Neo which is one of the few Western-world companies involved in rare earths processing and permanent magnet production.
Arafura and Hastings have a combined market cap approaching $1.2 billion, making them the sorts of stocks that billionaires like to dabble in.
For the less well-heeled, there are plenty of junior stocks on the ASX providing leveraged exposure to the rare earths thematic.
RareX spotted the rare earths thematic back in mid-2019 when it picked up the Cummins Range project near Halls Creek in the Kimberley region of WA.
It is the same carbonatite-type deposit as Mount Weld, the geological marvel in WA that underpins the $8 billion market cap of the established ASX rare earths producer Lynas (ASX: LYC).
RareX has since growth the resource at Cummins Range into one of the biggest on the ASX (18.8Mt at 1.15% rare earths and 9.9% phosphate), and its mix of its rare earths “basket” is pretty much the same as Mount Weld, including the split of the magnet oxides (20% NdPr).
Most of the resource is in the indicated category (80%) which allowed the company in September to release a scoping study into a potential $430m development, with first production possible in 2026, just when the forecast supply deficit is due to hit.
Based on conservative rare earths price assumptions, and with by-product phosphate production, the capex payback was put at 2.8 years. Net present value was assessed at $633m, and the internal rate of return at 29% pre-tax.
If there was one issue the market got hung up on, it was the short project life of 12 years. But the fix for that is well and truly in hand as a resource upgrade in March next year will blow away the current estimate.
Managing director Jeremy Robinson told the conferences that based on ongoing exploration results, Cummins Range “will become a very, very large project in the year ahead”.
A push out in resources to the 100Mt mark seems likely, albeit not at quite the same grade. The additional scale will make Cummins Range more appealing to strategic partners/off-takers, and who knows, potential acquirers.
All that is kind of interesting given RareX is trading at 5.2c for a market cap of $30m, or an enterprise value of $24m after its $6m in cash is taken into account.
Australian Rare Earths
The company has already established a big resource position at its Koppamurra project near Naracoorte in southeast South Australia.
It is of the Chinese-style clay-hosted type and stands at 81.4Mt at 785ppm. But a resource upgrade is due in the March quarter of next year and the expectation is that AR3 will be well on the way to reaching its exploration target of 200Mt.
It recently signed a (non-binding) MOU with Neo (mentioned above) which covers a joint development agreement and the potential for Neo to take 50% of Koppamurra’s production, with AR3 targeting first production in 2025/26.
Importantly, Koppamurra’s “basket” of rare earths includes both the light magnet metals (NdPr) and the heavy (dysprosium and terbium), with the latter two produced almost exclusively in China and Myanmar from clay-hosted deposits.
Shallow clay-hosted deposits like Koppamurra deposits have the potential for low-cost, low CAPEX production if the metallurgy is right. AR3 has been kicking goals on that front.
It is trading at 34c for a market cap of $45m. It has been much higher in the last 12 months but like the other rare earth stocks has come back on the fall in NdPr prices from a peak of $US175/kg in March to $US90-$US100/kg recently in response to global recession fears, and China’s COVID shutdowns.
Both are short-term factors in comparison to the multi-decade thematic of a decarbonising world, one to be increasingly filled with EVs and wind turbines.
Greenvale Energy’s (ASX: GRV) decision to refocus on its Alpha torbanite (shale oil) project in central Queensland has given the stock some traction of late.
A 5.5c stock in early November, Greenvale has bounced to 10c. It is all about Alpha’s potential to become Australia’s only domestic bitumen producer.
Australia is currently meeting its bitumen needs with imports of 180 degree-heated ship loads of the stuff from China, Singapore and Thailand. So it stands to reason a domestic source would have a major cost advantage.
What’s more, the bitumen price, as posted monthly by the Queensland and Victorian governments, has taken off to $1,650/t, up 52% in two years.
Anyone who has driven on country roads in the eastern states in recent months would have risked their front end as potholes are lurking everywhere after the floods.
Filing them and then upgrading the road system will require lots of bitumen, just as COVID stimulus infrastructure spending adds to the demand.
Greenvale has some work to do but is planning to get a preliminary feasibility study into Alpha out in the first quarter of next year.
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One of Australia’s leading business journalists, Barry FitzGerald, highlights the issues, opportunities and challenges for small and mid-cap resources stocks, and most recently penned his column for The Australian newspaper.