Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
In a report titled the ‘Sisyphean challenge of production,’ Chrisopher Ecclestone – a Hallgarten strategist who could have just as easily picked up a career in poetry – has some choice words to describe the rare earths sector as of late: Scorched earth, a ‘Bonfire of the Vanities,’ companies going to their doom, and even an ‘apocalyptic event.’
Yet, the tides are turning, according to the New York-based investment bank.
“There follows in its wake signs of green shoots.”
What Ecclestone is trying to say is that the REE sector is set for a turnaround with two producers in particular looking ready to challenge Chinese dominance in the market.
However, the report also warns that the lethargic economic recovery is not helping improve sentiment and that China is still a problem.
“The Chinese are currently sitting on the REE prices to try and thin out the ranks of Western wannabe miners that will undermine their dominance.”
China’s near-complete dominance in REE production gives it enormous influence over prices. When the Asian giant restricted exports in 2011 REE prices skyrocketed. Over the past two years they’ve plunged and Ecclestone expects them to remain relatively flat throughout 2014.
REE miners’ stock prices followed a similar pattern, with Molycorp and Australia’s Lynas both losing more than 80% of their value since 2011.
The Hallgarten strategist describes the “post-apocalypse world” as one in which “small is beautiful” – mega mines just won’t cut it.
“Only Lynas and Molycorp have got away with the creation of mega-mines/complexes and they have paid the price in valuation for such ambitions,” the report reads.
Citing rare-earth expert Jack Lifton, Ecclestone writes that “the right sized mines with proven metallurgies and the best mix of critical rare earths will enter the market on schedule … (these) are the lowest costs, the best mix of critical rare earths, and the right size – a size small enough to be able to supply the market and remain profitable even with reduced production”.
Hallgarten says that the group of companies left in the REE sector – or at least those that have a chance of surviving – is much smaller than two years ago.
Among these survivors are Alkane and the two big ones, Molycorp and Lynas.
Ecclestone also predicts that financing will now be easy to come by now that the storm is over.
