Three top share tips to profit from the boom in rare earths

Jim Armitage
·7 min read
<p>Green bonds could be used to finance UK rare earth players</p> (Alamy)

Green bonds could be used to finance UK rare earth players

(Alamy)

News that China may be seeking to restrict exports of rare earths have sent prices of the metals, and shares of western miners, sharply higher this week.

That has added to six months of big rises as investors recognised their importance to countries’ desire to rebuild their economies from Covid in a greener way.

But what are these elements, and which UK stocks can you buy to get a slice of the action?

What are rare earth metals?

From electric cars to offshore windfarms to defence aerospace, rare earth elements are vital for use in magnets, microchips, batteries and other uses that will be critical for future production of electricity generating and electric vehicles.

There are 17 of them, and while they are plentiful in the earth’s crust, they are sparse further towards the surface making them difficult and expensive to exploit.

Where are they found?

Primarily in China, where an estimated 80% of the world’s total rare earth resources are currently being mined. As demand rises and prices go up, new production is being worked on in other parts of the world, notably Africa.

China has also got practically all of the world’s processing capacity, too, meaning even minerals extracted elsewhere still have to be exported to China for processing.

Some refining capacity exists in Malaysia from an Australian stock market company called Linus Resources but in general, China has stolen a march on other countries for processing partly because of its relaxed attitude to pollution, analysts say.

What’s the US worried about?

The Financial Times this week reported that China was looking at reducing its exports to the US to pressurise Washington DC over the trade war.

Such a move has been long feared by US politicians because rare earths are critical for its defence equipment manufacture. The F35 fighter jet, unmanned defence drones and other equipment are heavily reliant.

Furthermore, its use in the permanent magnets needed for efficient wind turbines means demand is already being squeezed worldwide. Massive new windfarm projects in South Korea and elsewhere are set to be a huge drain on resources.

What’s it doing about it?

In April last year, the Pentagon permitted rare earth separation plants in Texas and California to help ease China’s processing stranglehold.

In September, Donald Trump declared America’s rare earths reliance on China a form of national emergency, striking supply deals with Australia and Canada.

It is also financing new exploration and production projects outside China.

Only this week, it offered UK explorer Bluejay Mining a $208 million loan package to develop a site in Greenland.

Remember when Trump offered to buy Greenland? He wasn’t joking. It was rare earths he was after.

As stockbroker SP Angel’s analyst John Meyer puts it, US politicians are heavily financed by American industry, and access to rare earths is one of their biggest worries.

This is an issue for Joe Biden as much as it was for Trump, because the new President looks set to be just as tough on China as his predecessor.

Responding to news of China’s potential export curbs, Meyer says: “This isn’t just sabre rattling. It’s hugely worrying for US and European manufacturers who depend on raw materials and components from China.”

He raised the prospect of “a new kind of cold war” with China, which has already restricted imports from Australia due to the government there criticising its behaviour over Covid.

What’s the market’s reaction to all this?

Prices have gone through the roof and big investors have begun piling back in after a mass exodus a few years back.

NdPr - neodymium and praseodymium, used in windfarm turbine magnets - has gone from $40,685 a tonne a year ago to £63,064 in January, to $72,543 today.

Share prices in producers have leaped accordingly.

How do I play the rare earths boom?

There a few decent stocks in the London market, although it should be said that they have already surged since October’s positive news on global Covid vaccine developments, and there are risks in all of them because they are in various stages of development.

In rank order, from safest to riskiest, three of the best are arguably:

Rainbow Rare Earths

Rainbow shares have been up and down since the Evening Standard tipped them three years ago.

First they surged, before slumping, much as the whole market did as big investors fled, many of them moving to bigger mining stocks instead.

They’ve jumped from 3.3p in October to 18p, including a 21% leap on Tuesday on the back of the FT’s China story.

Management are today on a trip to Zimbabwe working on new exploration plans there, but its main exploration is in Burundi.

There, Africa’s only working rare earths mine, the Gakara deposit, is primarily producing minerals used in magnets.

A new chief executive, South African George Bennett, is being credited with improving the operational performance there. He has invested $1.5 million of his own money in the business to become its second biggest shareholder.

Rainbow is also planning to extract rare earths from the waste product from a fertiliser chemicals operation in South Africa known as Phalaborwa.

Gypsum from the old chemical works contains rare earth elements which Rainbow has found to be at a high grade compared with other sites around the world. According to the company, it is 10 times higher than in the mineral rich mud found in China.

The infrastructure already exists for the product to be processed on site so it does not have to be shipped to China.

Meanwhile, the previous refining done during the fertiliser processing means the rare earths should be relatively cheap to extract, according to the company.

The company is likely to have to raise more funds for the Phalaborwa project, possibly by the end of the year, although its last two equity raises under Bennett saw the shares rise, rather than fall due to dilution.

Mkango Resources

Mkango is headquartered in Toronto but has shares listed on the London Stock Exchange. They leaped 16% on Tuesday, but only after a sluggish start (note to management: try putting “Rare Earths” in the name).

Having traded at around 6p in October, they are now 18.2p.

Mkango is developing a rare earths project in Malawi that’s going through a feasibility study being carried out in four prospects in the country, the main one being called Songwe Hill.

It had a feasibility study in 2015 but given the time that’s elapsed another one is needed.

Oliver O’Donnell, analyst at VSA stockbrokers, says while Mkango will still need to export to China for processing, it is developing some interesting recycling projects with the University of Birmingham and Bentley Motor Cars. The idea is to find ways of re-using rare earths in old energy turbines coming to an end of their natural lives.

Pensana Plc

Pensana had the smallest share price reaction of our three rare earth stocks to the FT report, gaining only 4%. That is because it is the least advanced of the trio (not helped by it bizarrely today removing the words “Rare Earths” out of its company name - see above!).

It has assets in Angola which are still awaiting feasibility studies to assess the economics of the project. This will determine how much it will have to spend developing the site and what the day to day operating costs are likely to be like.

Pensana is looking to avoid exporting to China for production, carrying out the processing in the UK’s Saltend Chemicals Park in the Humber.

The plan is for Saltend to be a non-Chinese alternative like Linus in Malaysia, processing Pensana’s minerals from Angola as well as those of other clients.

If it happens, that will be welcomed by the US for national security reasons, and by Europeans because Pensana will be able to guarantee clean production standards, unlike the Chinese.

The two sides of Pensana’s business will each require heavy investment, which could come from issuing new equity or debt in the form of green bonds or other routes. Given that uncertainty, the shares are very hard to value.

Feasibility study results on Angola - a project not without risk - should be out in a couple of months, while planning for Saltend could be approved in the next three weeks.

The two projects are not necessarily dependent on each other to go ahead.

There are risks involved in all three stocks, but global demand is clearly going in their direction.

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