Lynas and Blue Line to build rare earths separation capacity in US

A combination of growing demand for rare earth elements (REEs) and supply uncertainty related to the ongoing trade war between the U.S. and China has reignited project investment, with rare earth producers betting that market forces will remain sustainable over the long-term.

In May, Australia’s Lynas Corp. (ASX: LYC; US-OTC: LYSDY), the largest producer of rare earth materials outside of China, and Blue Line, a U.S.-based processor of rare earth products, signed a memorandum of understanding to develop rare earths separation capacity in Texas. The project would focus on medium to heavy REEs used in permanent magnets, catalysts, batteries and electronics, providing much needed separation capacity outside China.

The joint venture would be the only large-scale producer of separated medium and heavy rare earths products in the world outside of China, the companies say.

Chinese mines produced 70% of total REE ore in 2018, according to the U.S. Geological Survey, but China controls nearly all refining and processing capacity in the world, giving it greater access to the supply of usable REEs.

“This is an exciting opportunity to develop local separation capacity for our customers in the U.S. and to close a critical supply chain gap for U.S. manufacturers,” Amanda Lacaze, Lynas’ CEO and managing director, said in a press release announcing the joint venture.

Lynas and Blue Line’s announcement came the same month that China warned the U.S. of possible disruptions to the supply of processed REEs, in retaliation for U.S. tariffs on Chinese goods and restrictions imposed on Chinese telecom giant, Huawei. China’s National Development and Reform Commission, the country’s top economic planner, said that China “is willing to continue supplying rare earth metals to the world markets, but it is opposed to those who use the products made with such rare earths to ‘suppress and dampen China’s development.’” China highlighted the U.S. action against Huawei in its concerns. It also pointed to issues that could provide justification of future REE export decreases, including “rapidly decreasing inventory, inefficient production and environmental pollution.”

Regardless of whether China takes steps to stop, or reduce, REE exports to the U.S. — which most analysts say is unlikely — Lynas’ separation capacity in Texas would be a welcome alternative supply. In December 2017, the Trump administration issued an executive order to streamline approval and make it easier for mining and processing projects of 23 minerals deemed “essential to American prosperity and national security,” including REEs.

Molycorp’s Mountain Pass rare earth element mine, as seen in 2011. Mountain Pass is located on the south flank of the Clark Mountain Range in southeastern California. Photo by Trish Saywell.

The Lynas–Blue Line venture is not the only U.S.-based project under development this year. The Mountain Pass rare earths mine in California emerged from care and maintenance after affiliates of JHL Capital Group and QVT Financial acquired the asset in 2017. Previous owners had invested more than US$1.5 billion establishing the facility, which included a full separations process, but had to suspend operations at the site after REE prices fell in 2014, and the mine’s owner at the time, Molycorp, filed for bankruptcy protection.

MP Materials, the joint-venture entity formed to operate the project, has since invested over US$200 million and increased the number of employees from eight to 200 to get Mountain Pass underway again, including reworking the separations facility. Co-chair of MP Materials, Jim Litinsky, said in a June 2019 company video that the Mountain Pass mine sends 100% of its mined REE ore to China for processing, but that it expects “sometime next year we will be a separated rare earths producer,” when the separation facilities enter production.

Litinsky said that Mountain Pass is profitable right now — despite a 25% Chinese tariff on REE ore imports — because its ore is concentrated and does not have the radioactive element issues that other REE deposits must address. However, it would be better to avoid the tariffs altogether.

The radioactive environmental impact from REE separation operations can be challenging and also impact supply. REEs are rare, not because they are hard to find, but because they tend to bond tightly with other elements. This is problematic when those other elements are radioactive, such as uranium and thorium. These elements get caught up in wastewater during processing and can contaminate surrounding environments.

China has tried to address environmental issues by cracking down on illegal and small-scale REE mining operations. Roskill, which monitors the REE market, said in its 2019 “Rare earths outlook” report that China has cut illegal production almost in half since 2016.

At the same time, requirements imposed by Malaysian regulators related to the radioactive waste at Lynas’ chemical processing plant in Kuantan drove the company to announce earlier this year that it would move its cracking and leaching operations from the Southeast Asian nation to Western Australia, where it will be closer to its high-grade mine and concentration plant at Mt. Weld.

Environmental issues aside, MP Materials and Lynas — the two largest REE producers outside China — and their hundreds of millions of dollars in REE investments are somewhat reminiscent of activity earlier this decade, when China reduced REE exports and threatened embargoes.

By the early 2000s, China was responsible for 97% of global REE production. In 2010, after Japan detained the captain of a Chinese fishing trawler during a maritime dispute, China imposed quotas on REEs, slashing exports nearly 40% — which sent prices soaring.

This led to a flurry of REE investment outside of China before tensions eased. China eventually removed the limits, returning exports and prices to normal levels. The resulting price decrease in 2014 led to several bankruptcies. Mountain Pass was put on care and maintenance, and major development projects in other areas of the world were put on hold.

From left: geologists Chris Pederson and Martin Heiligmann inspecting core at Avalon Advanced Materials’ Nechalacho rare-earth project in Thor Lake, N.W.T. Photo by Avalon Advanced Materials.

Avalon Advanced Materials (TSX: AVL) was one such victim. In 2014, it suspended its planned Nechalacho project in Canada’s Northwest Territories, where it cites a “dramatic decline in REE prices.” Avalon restarted development work in 2018 when prices revived, and is now moving ahead with scoping and permitting work at the project. In January 2019, it signed a deal with Australian private company, Cheetah Resources Pty Ltd., under which Cheetah took ownership of the near-surface, light-REE resources in two areas of the Nechalacho project for $5 million. The deal lets Avalon focus on heavy REEs while managing work programs on-site for Cheetah’s asset, for which it has a 3% royalty.

Fellow Canadian developer Search Minerals (TSXV: SMY) is also investing in its Deep Fox and Foxtrot properties in Labrador, where it plans to permit next year with a view to build in 2021, according to its March 2019 investor presentation.

These are just two of several development projects underway outside China. This could be good news for global supply, but it could also mean another short-term boom  leading to suspended operations and bankrupt developers once tensions between China and the U.S. ease. MP Materials and Lynas, among others, say this time is different.

“Ten years ago, Molycorp, that was hot air,” based on a promise of future demand and a short-term price strike, MP Materials’ Litinsky said in his video. “[This time] we have a real demand change that will unfold over the next decade that I think will make this cycle much more sustainable.” However, he noted it would be hard to compete with China’s lower costs.

Roskill, a U.K. consulting firm, has indicated the demand increase needed to sustain development will be there, as REE producers hope. In its 2019 outlook, Roskill forecast that REE demand could grow 5% this year. At the same time, some of the elements may enter supply deficits due to China’s crackdown on illegal domestic production. However, some of that could be offset by recycling magnets from wind turbines, which are large, high-quality sources of REEs.

Frost and Sullivan, another market analysis firm, forecasts that electric vehicle demand and infrastructure development will see the REE market grow as much as 7% annually from 2018 to 2025.

The 17 REEs clustered near the bottom of the periodic table are becoming increasingly important due to increased adoption of everything from smartphones to wind power. REEs are critical for the magnets used in wind turbines and the batteries in electric vehicles and smartphones, which together consume one-third of all REEs. Other uses include fuel cracking and other catalysts, glass polishing, and alloys.