Dec 01, 2010 06:00 ET
Resource Capital Research Report:
Key Points
- Rare and minor metals (RMM) company share prices have climbed in the past three months (+56%), outperforming the ASX S&P 300 Metals and Mining Index (+12%), due to potential future metal shortages and price rises. Some recent gains were fueled by market speculation rather than fundamentals.
- The current market driver is China's policy of squeezing export quotas and raising tariffs, especially for the rare earth elements (REE).
- As we stated in 3Q10, demand for the RMM should increase in the next 4-5 years, which could benefit current and near-term producers, or exploration and development companies with projects that can be fast-tracked.
The report covers TSX/V listed companies: Avalon Rare Metals Inc, Rodinia Lithium Inc. Tnr Gold Corp. and ASX listed companies: Alkane Exploration Limited, Arafura Resources Limited, Globe Metals & Mining Limited, Greenland Minerals & Energy Limited, Gippsland Limited, Gunson Resources Limited, Galaxy Resources Limited, Icon Resources Limited, King Island Scheelite Limited.
RCR also publishes quarterly reviews of the Iron Ore, Uranium, Gold and Copper sectors. To access the free summary of the Rare and Minor Metals Report or to purchase the 56 page Subscribers report, go to www.rcresearch.com.au/reports.
The outlook for rare and minor metals
The past three months have seen considerable share price gains for some rare and minor metals (RMM) equities, as investors become aware of the potential for future supply shortages and consequent high metal prices. Speculation has cooled in the past month, but companies that have quality projects should retain some of their recent gains while prices remain above their pre-2H10 levels.
The main market driver is China, which is reforming its RMM sectors, by raising tariffs, reducing export quotas, and encouraging consolidation and vertical integration of production. China's stated aims are to increase domestic value-adding and use of the RMM, conserve resources, and improve industry monitoring and efficiency. China's actions could boost global RMM production.
Some examples of commodities with a stable to strong outlook for the next several years:
- Lithium: Increasing intensity of use is expected to require additional supply beyond 2014.
- Niobium: Industry forecasts are for FeNb consumption growth of ~15% per annum to 2014.
- Rare earth elements (REE): Forecasts are for 20-30% CAGR in prices to 2015. Export prices (China) up 510% year-on-year.
- Tantalum: A supply shortfall is expected to hand a competitive advantage to companies that provide a long-term supply of ethically produced tantalum.
- Tungsten: Supply shortages are indicated from 2013.
- Zircon/zirconium: A lack of greenfields projects could create supply shortages and boost prices in the near to medium term (1-3 yrs).
Equity performances
Globally, RMM stocks have outperformed most exchange-based indices in the past 12 months. Share price performances have been studied, for 336 exchange-listed companies with one or more RMM projects (in six commodity groups: lithium, REE, tungsten, zirconium, niobium, tantalum). The unweighted average performance over 1 month (to November 17) was +11%, compared to 1% for Australia's ASX S&P300 Metals and Mining Index, and 0.1% for the ASX All Ords. Twelve-month performance was +56% (S&P300 MM, 12%). The average RMM company share price is 33% below its 12-month high and 155% above a 12-month low.
Analyst's Comment
"The past twelve months have overall been very strong for rare and minor metals markets," says RCR analyst Trent Allen. "The basket of stocks we looked at had an average share price increase of 56% over that period, beating most share market indices. This frenetic activity has raised the profile of rare and minor metals, which could help with future investment and project finance."
"As is so often the case with commodities, the force driving the market is Chinese policy. It's always difficult to be certain of China's intentions, so cuts in metal export quotas and talk of limiting production created a lot of uncertainty in 2010. This was compounded by China's willingness to use its dominant market position to gain political leverage, as shown by mention of the rare earth elements in recent trade and territorial disputes with Japan and the US.
"RCR recently attended the Sixth International Rare Earths Conference, organized by Roskill and Metal Events in Hong Kong, to try to gain a clearer picture of China's position on the RMM. It is apparently seeking to conserve mineral resources and add value to them in China, while simultaneously regulating its mining and metals industries to combat problems such as overcapacity, environmental damage and smuggling of high-value metals.
"This realization among investors, together with assurances from China about continue supply (again, focused on the REE), has taken some of the speculative heat out of RMM equities in the past month or so. RMM prices are unlikely to fall across the board for the foreseeable future, so long as fundamental market drivers remain in place, and companies with solid projects should on average retain the majority of their recent share price gains in the near to medium term.
"There should be opportunities for investors to profit from high-quality new RMM discoveries or from significant advances at existing projects, especially in terms of mineral processing and project funding."
About Resource Capital Research
Resource Capital Research ("RCR") (www.rcresearch.com.au) was founded in 2004 and is based in Sydney. RCR provides investors with in-depth reports on current investment opportunities in the mining sector both in Australia and globally. The focus is on small and mid cap resource companies, within the iron ore, uranium, gold, copper and rare/minor metals sectors, ranging from exploration stage, through development and production. John Wilson, the principal of the firm and analyst, has over ten years' experience analysing mining companies in Sydney and on Wall Street including for major investment banks. Dr. Trent Allen, Rare and Minor Metals Analyst, joined RCR in 2006. Trent has extensive experience as a mine geologist, academic and journalist.
The report is available at www.rcresearch.com.au. The next Rare and Minor Metals Company Review will be of the March Quarter, 2011.
For further information please contact:
Trent Allen
Rare and Minor Metals Analyst
(+61 (0) 438 873 682)
John Wilson
Managing Director
Resource Capital Research,
Phone: (+61- 2) 9252 9405
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