Rare earths emerging as pick of the proxies for EV exposure

Surging demand for EVs is expected to see rare earths live up to their name. This bullish outlook is fuelling interest in leveraged juniors such as RareX. And Kingston lives up to this column’s forecast of a share price re-rating.
27th November 2020
Barry FitzGerald

The surge in the value of Elon Musk’s Tesla to $US544 billion ahead of the stock’s entry into the blue-chip S&P 500 stock index next month is mind blowing stuff.

Is Tesla really worth almost three times the value of the dual-listed BHP? It is spearheading the electric vehicle and storage of renewable energy revolution, so maybe it is.

But that’s one for others to debate.

The interest here is how Tesla’s value surge is being taken as an endorsement of the EV/renewables revolution in a world increasingly moving towards decarbonisation and what that means for the materials needed to make it happen.

Materials for the lithium-ion batteries that underpin the revolution (lithium, nickel, graphite, zinc and others) have not exactly taken off just yet.

But the share prices of ASX-listed producers/explorers of the requited materials have been on the march since September, probably due to confirmation of a strong rebound in EV sales growth post the worst of COVID-19 and now the Tesla S&P factor.

The chemistry of the preferred Li-ion batteries will change over time. So there is some risk in the long-term around picking battery materials to play the EV/renewables thematic.

That’s not the case with the rare earths that go into the permanent motors of EV’s and windmills, and just about every other new world economy application.

No matter the battery chemistry or who is building the EVs and windmills, the motors require the light rare earths of neodymium and praseodymium (NdPr) to ensure their reliability.

Exposure to rare earths as a way to have exposure to the EV/renewable revolution was a theme UBS dived into during the week in a note on ASX-listed Lynas (LYC), the second biggest rare earths producer outside of China”, which has an 80% grip on the market.

“Lynas is positively exposed to a step-change in demand from EVs as each EV contains about 1-2kg of NdPr, mostly in the motor, UBS said. (It has a $4.05 price target on Lynas compared with Thursday’s market price $3.69 for a $3.3b market cap).

UBS reckons annual EV sales could grow from about two million now to 36 million by 2030. As a result, it forecasts that NdPr demand will triple from 30,000tpa to 90,000tpa by 2030.

“(But) we do not think the market has created sufficient incentives for supply growth to triple by 2030. We estimate that an incentive price for NdPr is $US$60/kg. Prices have been below this level for most of the past 9 years, averaging ~US$41/kg,”UBS says.

It believes that NdPr prices will need to lift from $US50/kg now to a peak of US$100/kg by 2024  before reverting to $US60/kg in the long term.

From that it can be taken that the rare earths space is in line for some price excitement in coming years on demand fundamentals alone.

Then there is the strategic appeal of rare earths in a world increasingly worried about China’s grip on the supply chain. The potential for supply shocks – NdPr got to $US280/kg in 2011 when China pulled supplies from Japan over a territorial dispute – is ever present.

RareX/Juniors:

Watchers of the rare earths space are well aware of junior names like Arafura (ARU, trading at 10.5c for a $117m market cap) and Hastings (HAS, trading at 14.5c for a $162m market cap).

Today’s interest though is in RareX (REE, trading at 11c for a $44m market cap). It is the company that only backdoor-listed last year with ownership of the advanced Cummins Range rare earths project near Halls Creek in the East Kimberley as its main focus.

Like all other rare earth deposits, Cummins Range is not in the same league as Lynas’ Mount Weld deposit near Laverton. But with NdPr accounting for 22.1% of its total rare earth oxide (TREO) material, it has got the right mix.

A recently completed drilling program had the target of defining a higher grade portion of the ore body. Assay results to date have proved to be extremely encouraging, including a Mount Weld-type grade of 5.4% TREO in a nice and thick 70m intersection.

The drilling program was the first real effort at Cummins Range – along with Mount Weld it is one of two known rare earth deposits bearing carbonatites in Australia - in more than a decade. More assays results are on their way.

RareX plans a different pathway to production than the complicated pathway Lynas chose with its integration of Mount Weld into a separation and finishing plant in Malaysia.

RareX wants to keep things simple by producing a concentrate to ship off to refineries in China, as well as the new ex-China capacity expected to come on stream in response to the western world’s task of weaning itself of Chinese supplies.

A resource upgrade at Cummins Range is likely next year, with particular interest in the scale of its higher grade potential.

In the meantime, RareX is out to add to its rare earths credentials through exploration. To that end, it recently raised $3m at 10c a share in a placement to fund a high-risk, high-impact drilling program at the cutely named Weld North prospect.

Weld North is a circular magnetic anomaly target under sand cover, 85km north of Lynas’ Mt Weld deposit. It could be a rare earths-bearing carbonatite intrusion or a granite intrusion of no interest. Watch out if it is the former in these days of heightened interest in rare earths, thanks to Elon.

Kingston (ASX:KSN):

It was mentioned here last week that PNG gold developer Kingston Resources (KSN) was one to watch giving the pending release of a pre-feasibility study into the redevelopment of the Misima gold deposit in PNG.

Kingston was trading at 24.5c at the time and has since managed to swim against the tide in a lower gold price-affected market to close on Thursday at 28.5c.

Figures in the PFS were pretty much as expected – 130,000oz annually over an expected initial mine life of 17 years from a $A283 capex project producing its gold at an all-in sustaining cost of $A1,159/oz.

So the case behind last week’s statement that Kingston, with one of the lowest enterprise value to resource ounces metrics of all ASX-listed gold explorers/developers, is overdue a re-rating on Misima has been confirmed with the PFS.

Having said that, Kingston’s ability to trade higher when all around it in the gold space were struggling in the wake of gold’s price weakness, probably had as much to do with the elevation of Mick Wilkes from non-executive director to non-executive chairman as the release of the PFS did.

The former OceanaGold president and CEO knows how to build mines and was a stickler for good ESG credentials with developments long before it became fashionable. His 10 years in PNG with Highlands Pacific is a major plus given Misima’s PNG address.

 

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