Financing permanent magnets

Rare earths aren’t terminal metals. They’re sold via offtake. Then, they move through a long, complex processing chain before ending up in permanent magnets or other advanced materials, and end products for industry and consumers.

And they’re used in a broad array of industries, not just EVs and turbines, some of which are profitable and some of which are not.

Lately, there’s been no shortage of commentary about mine to magnet supply chains, but most of it overlooks a number of key issues.

Let’s look at those issues from a project financing perspective.

Bankability

Financing these projects is difficult. Non-terminal resource/processing projects require not just the right geology, but also low technology and process performance risk, a solid demand/supply profile, and very strong take-or-pay arrangements (amongst other things). And with certain hosted rare earths, there’s the little problem of separating thorium and a little bit of uranium. And that’s not allowed in every country.

And with rare earths, offtakes are shaped not just by need, but by price; and the real issue here is that no matter which way you look at it, directly or indirectly, price is set by China. China controls the raw material, intermediates, and the end-consumer products which allows it to set prices. And since the volumes we are talking about are massive, it indirectly sets the margin. Game over.

Right now, there are no global sanctions against selling rare earth oxides and concentrates to Chinese rare earth controllers, aka Shenghe Resources. Just like there’s no global price for carbon. As a result, miners and their sovereign governments have made China great again.

And more recently, China has now imposed bans on exporting several critical rare earth products. There’s a shock.

The West is squirming, and media and policy circles are full of calls to build new, integrated supply chains.

But in my experience, I’ve heard this song for years. Hubris is plentiful, while execution is still lacking, as is coordination and in some cases, it may now be too late, as we’ve seen with Australia’s nickel industry.

Now we have Governments wading in with financial support packages and credit wraps, which may incentivise the wrong behaviour and the wrong projects.

Here’s why:

Scenario 1—US/China Accord
If Washington and Beijing strike a deal—including freer trade of chips, rare earths, or other critical items, China’s bans might be lifted. Prices would fall. And many of the projects currently being advanced or financed (and potentially bankable only because of Government support in one form or another) could become commercially unviable overnight.
Scenario 2—No Accord—prices climb
If trade tensions persist, input costs will rise. Demand destruction kicks in. Governments will be forced to find substitutes, or ration access. Think back to the "food vs. fuel" debate. Use corn for ethanol or tortillas? Use palm oil for cooking or biodiesel? Or more recently during COVID, Germany had to reduce factory output and limit EV charging. Scarcity forces choices and mothers substitution and innovation and on occasion, shifts comparative advantage to another country.

So, ask yourself whether your project, offtake, and financing strategy can survive either scenario?

Let’s also be honest about government-backed credit wraps. The idea that public support alone can turn marginal mineral sands or rare earth projects into bankable propositions is at best, naive.

But today, everyone is an expert financier, including our drunken-sailor spending governments.

Government guarantees are not a replacement for commercial viability. And if a project only stands up because of short-term political support, it’s not investable over the long-term.

Takeaway

The key is to scenario-plan, not just for upside, but for reversals. Always ask what the main risk to your thesis might be. Existential threats aren’t so existential anymore, which is to say that they can be planned for. Planes can fly into buildings, viruses can stop the world in its tracks, despots do still invade their neighbours to annex land and resources, and an impeached President can run for and get re-elected.

If the US and China make peace, it could destroy value in some of the very projects currently being touted as essential. If they don’t, supply scarcity may still make them uneconomic. As the old Knight knew only too well, one must choose one’s chalice wisely.

Either way, fundamentals matter. Backing a project that only works under one narrow geopolitical setting is not a strategy, it’s a potentially face ripping gamble.

So, make sure you’re using the latest version of excel, model the entire chain, and model in the China price war and detente scenarios. And FFS, forget the spin. Your shareholders won’t thank you for it.

That’s enough hawk from me today.

Ree you in the market.

Mike

The Problem with Rare Earths isn't just supply, it's everything downstream

Financing permanent magnets

Bankability

Takeaway