Strategies and scenarios in rare earths - Sykes - Oct 2014 - University of Western Australia /...

COMPETENCE, COMPETITION &

THE CONTEXTUAL ENVIRONMENT:

Strategies & scenarios for rare

earths miners & explorers

John P. Sykes Email: [email protected]

Director, Greenfields Research

PhD Candidate, Department of Mineral & Energy Economics, Curtin University

Adjunct Research Fellow, Centre for Exploration Targeting, Curtin University &

The University of Western Australia

Strategic Management of Resources’ Companies,

The University of Western Australia Business School,

Perth, Australia: 27th October 2014

mailto:[email protected]

Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia

Your business and the world

Actor

Macroeconomics

TRANSACTIONAL ENVIRONMENT

(e.g. competition)

CONTEXTUAL ENVIRONMENT

(e.g. external events)

International

Finance International Commerce

Energy

Values

Demography

Legislation

Geo-Political Trends

Technology

Ecology CLIENTS

SUPPLIERS COMPETITORS

REGULATORS INVESTORS

EMPLOYEES

NGO’s LOBBIES

ACTOR

(e.g. you & your business)

Based on: Ramirez & Selsky, 2010, Business Planning for Turbulent Times

Ramirez et al., 2014, Oxford Scenarios Programme

27 Oct 2014

Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers

Slide 2 of 57


Your business & the TURBULENT world

Actor

Macroeconomics

TRANSACTIONAL ENVIRONMENT

(e.g. competition)

CONTEXTUAL ENVIRONMENT

(e.g. external events)

International

Finance International Commerce

Energy

Values

Demography

Legislation

Geo-Political Trends

Technology

Ecology CLIENTS

SUPPLIERS COMPETITORS

REGULATORS INVESTORS

EMPLOYEES

NGO’s LOBBIES

ACTOR

(e.g. you & your business)



27 Oct 2014


Slide 3 of 57


Rare earths is a turbulent industry

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Metal Pages La Oxide 99% min FOB China (CN) / tonne

“Arrest in Disputed Seas Riles China

and Japan” The New York Times, 19th Sept 2010

“Japan-China row escalates over

fishing boat collision” The Guardian, 9th Sept 2010

Data: Metal Pages

Imag

e: B

BC

27 Oct 2014


Slide 4 of 57


Rare earths is a difficult industry Frequency of delays at Australian rare

earth projects 1999-2012

0 2 4 6 8

Mt Weld

Dubbo

Nolans

Delay (years)

Length of delays at Australian rare

earth projects 1999-2012

0

2

4

6

8

10

12

14

16

Fre

qu

en

cy

Source: Sykes & Trench (2012)

27 Oct 2014


Slide 5 of 57


Dealing with turbulence in rare earths

Your

environment

Transactional

environment

Contextual

environment

Your assets and

competencies

Your competitors

and resources

available

Things beyond

your control



27 Oct 2014


Slide 6 of 57


ASSET ORIENTATED

STRATEGY IN RARE EARTHS

Competence, competition & the contextual environment:

Strategies & scenarios for rare earths miners & explorers

27 Oct 2014


Slide 7 of 57


Mine costs 101

Cost of mining = Cost of moving rock

Ore throughput x REO grade x recovery

= REO production

(Ore throughput x cost per tonne of ore)

/ REO production

= Cost per tonne REO

27 Oct 2014


Slide 8 of 57


Cost examples in rare earths

Avalon Rare Metals – Thor Lake/Nechalacho

Pre-Feasibility Study (June 2010)

Deposit Resource: 175.93 Mt @ 1.43% TREO

Proposed Mine Type: Underground

Annual Ore Throughput: 720 Kt of ore

Annual REO Production: 10,000 tonnes

Proposed Mine Life: 18 years

Operating Cost (ore): US$ 240 / tonne ore

Operating Cost (REO): US$ 17,280 / tonne REO

Start-up Capital Cost: US$ 810 million

Rare Element Resources – Bear Lodge

Preliminary Economic Assessment (Sept 2010)


Proposed Mine Type: Open pit







($240 x 720,000 t = $172,800,000) / 10,000 t = $17,280

($245 x 360,000 t = $88,200,000) / 14,000 t = $8,480

Data: Avalon Rare Metals & Rare Element Resources

27 Oct 2014


Slide 9 of 57


Low costs: “grade is king”?

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

To

tal R

are

Ea

rth

Ox

ide

Gra

de

(%

)

Advanced light rare earth deposits

Early stage light rare earth deposits

Most advanced rare earth

projects are the highest

grade – early mover

advantage

NB: Beware equating grades with

costs – orebody geometry,

homogeneity, host rock etc all have

an affect too (Kanakis, 2014)

Data: Technology Metals Research

27 Oct 2014


Slide 10 of 57


The problem with $/REO costs

Cummins Range Resource Composition

Metal Sept 2011 oxide

price (US$/kg)

Proportion in

resource (%)

Value of

resource oxide

blend (US$/kg)

Lanthanum 110.00 27.3 30.03

Cerium 110.00 47.7 52.47

Praseodymium 248.50 4.8 11.93

Neodymium 309.17 15.2 46.99

Samarium 128.50 1.6 2.06

Europium 4,810.00 0.4 19.24

Gadolinium 192.50 1.0 1.93

Terbium 3,710.00 0.1 3.71

Dysprosium 2,290.00 0.5 11.45

Others - 1.4 -

Total 100.0 US$179.80/kg

100 150 200 250 300 350 400

Thor Lake

Dubbo

Lake Hoidas

Nolans

Kvanefjeld

Cummins Range

Mt Weld

Steenkampskraal

Bayan Obo

Bear Lodge

Mountain Pass

Resource oxide blend (US$/kg)

Not all REO oxides are created equal !!!

© Greenfields Research Ltd; Data: Metal Pages

(prices), Technology Metals Research

(resources)

Data: Anova Metals & Technology Metals Research

27 Oct 2014


Slide 11 of 57


Two forms of rare earths: light & heavy

“Heavy” REE • Europium

• Gadolinium

• Terbium

• Dysprosium

• Holmium

• Erbium

• Thulium

• Ytterbium

• Lutetium

“Light” REE • Lanthanum

• Cerium

• Praseodymium

• Neodymium

• Promethium

• Samarium

Other REE • Scandium • Yttrium

Sc 21

Y 39

La 57

Ce 58

Pr 59

Nd 60

Sm 62

Eu 63

Gd 64

Tb 65

Dy 66

Ho 67

Er 68

Tm 69

Yb 70

Lu 71

27 Oct 2014


Slide 12 of 57


Some rare earths are “critical”

“Non-Critical” REE

• Scandium

• Lanthanum

• Cerium

• Praseodymium

• Promethium

• Samarium

• Gadolinium

• Holmium

• Erbium

• Thulium

• Ytterbium

• Lutetium

“Critical” REE • Yttrium

• Neodymium

• Europium

• Terbium

• Dysprosium

Sc 21

Y 39

La 57

Ce 58

Pr 59

Nd 60

Sm 62

Eu 63

Gd 64

Tb 65

Dy 66

Ho 67

Er 68

Tm 69

Yb 70

Lu 71

27 Oct 2014


Slide 13 of 57


Rare earths have different end uses

“Catalyst” REE

• Lanthanum

• Cerium

“Magnet” REE • Praseodymium

• Neodymium

• Samarium

• Gadolinium

• Dysprosium

Sc 21

Y 39

La 57

Ce 58

Pr 59

Nd 60

Sm 62

Eu 63

Gd 64

Tb 65

Dy 66

Ho 67

Er 68

Tm 69

Yb 70

Lu 71

“Specialist” REE

• Scandium

• Promethium

• Holmium

• Erbium

• Thulium

• Ytterbium

• Lutetium

“Phosphor” REE

• Yttrium

• Europium

• Terbium

27 Oct 2014


Slide 14 of 57


Targeting higher quality rare earths

Avalon Rare Metals – Thor Lake/Nechalacho

Pre-Feasibility Study (June 2010)


Proposed Mine Type: Underground






Basket value (REO): US$ 353,190 / tonne REO

Profit Margin (REO): US$ 335,910 / tonne REO


Rare Element Resources – Bear Lodge

Preliminary Economic Assessment (Sept 2010)


Proposed Mine Type: Open pit






Basket value (REO): US$ 147,920 / tonne REO

Profit Margin (REO): US$ 139,440 / tonne REO


Greater margin

© Greenfields Research Ltd; Source: Avalon Rare

Metals, Rare Element Resources

Data: Avalon Rare Metals & Rare Element Resources

27 Oct 2014


Slide 15 of 57


High grade vs high quality mining

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

TR

EO

Ba

sk

et

Va

lue

(U

S$

/kg

)

TREO Ore Value (US$/kg)

High grade ‘low cost’

light rare earth

projects

Heavy rare earth

‘high quality’ rare

earth projects


27 Oct 2014


Slide 16 of 57


The BCG “growth-share matrix”

Based on: Boston Consulting Group

Ma

rket

Gro

wth

(ta

rge

tin

g n

ew

ma

rke

ts)

Market Share (beating the competition)

QUESTIONS Also known as “problem

children”. High growth

sector but large capital

investment required.

STARS Leading

assets/products

dominating fast

growing markets, still

requiring investment.

DOGS/PETS Not profitable. Usually

“pet projects” that

provide a non-financial

benefit i.e. synergies,

labour retention etc

CASH COWS High market share in

slow growth industry –

“milked” to fund other

investments

27 Oct 2014


Slide 17 of 57


The BCG Box for mine projects


Ma

rket

Gro

wth

(ta

rge

tin

g n

ew

ma

rke

ts)


PROBLEM CHILD Challenging projects with

scale, that could be stars

in a high growth industry,

assuming some

structural changes.

STARS World class assets with

high grades and large

scale. Will dominate

future sector and be

hugely profitable.

PET PROJECTS Not profitable. Usually

“pet projects” that

provide a non-financial

benefit i.e. synergies,

labour retention etc

CASH COWS High grade, small scale

projects, which are quickly

cash generative, allowing

access to an industry and

providing cash for

investment elsewhere.

27 Oct 2014


Slide 18 of 57


Asset orientated rare earth strategies

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

TR

EO

Ba

sk

et

Va

lue

(U

S$

/kg

)

TREO Ore Value (US$/kg) Data: Technology Metals Research


PROBLEM

CHILD STARS

PET

PROJECTS CASH COWS

27 Oct 2014


Slide 19 of 57


Strategy 1: The Cash Cow

Advantages

• Assets very competitive

• Most already very advanced

• Geology and technology already known

• First mover advantage in geology as best assets picked first

Disadvantages

• Financial markets currently very tricky

• First mover disadvantage – all R&D had to be done “in-house”

• Currently not a viable strategy for non-first movers

Gain market share via

a low cost, high grade

asset

Examples: Molycorp, Lynas


27 Oct 2014


Slide 20 of 57


Strategy 2: The “Heavy” Problem Child

Advantages

• Attractive to the equity market

• Seems to be a high growth market

• No major incumbent competitors

Disadvantages

• Projects currently low grade

• Process routes unknown – R&D intensive

• Capital costs will be high

• Development timeframe very lengthy

• Debt financing will be very tricky

Discover and develop

a “heavy rare earth

deposit”

Examples: Northern Minerals, Hastings Rare Metals, Stans Energy, Tasman Metals, Quest Rare Minerals


27 Oct 2014


Slide 21 of 57


SITUATION ORIENTATED




27 Oct 2014


Slide 22 of 57


Targeting niche markets is difficult

Likely to be > 10 years for a new material

Co

ns

tructio

n

Fin

an

ce

PF

S

Off-ta

ke

Pe

rmittin

g

Me

tallu

rgy

(S

ep

ara

tion

)

Me

tallu

rgy

(E

xtra

ctio

n)

BF

S

Me

tallu

rgy

(Be

nific

atio

n)

Sc

op

ing

Re

so

urc

es

Ex

plo

ratio

n

Likely to be > 10 years for a new mine


27 Oct 2014


Slide 23 of 57


Recovering low grades problematic

RARE EARTHS 101

Resources x reserve recovery x mining recovery

x grade x processing recovery x cracking

recovery (x separation recovery) = LOM

production

90% recoveries: 90% x 90% x 90% x 90% x 90% = 59%

75% recoveries: 75% x 75% x 75% x 75% x 75% = 24%

50% recoveries: 50% x 50% x 50% x 50% x 50% = 3%

27 Oct 2014


Slide 24 of 57


Making low grades saleable is tricky

0

5

10

15

20

25

30

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

Co

nc

en

tra

tin

g F

ac

tor

(mu

ltip

le)

Ore Grade (%)

96.7%

93.3%

90.0%

86.7% 83.3%

80.0% 76.7% 73.3% 70.0% 66.7%

Percentages indicate equivalent mass

loss to take ore to a 30% concentrate

High grade

light rare earth

projects

Low grade light

rare earth

projects

Heavy rare

earth projects

27 Oct 2014


Slide 25 of 57


1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

LYNAS: Mt Weld (Forecast 12 years from purchase to production)

Project

Farm In

Resource

Drilling Scoping Study

Feasibility

Study Peer Review

Project

Funding GFC Refinancing Construction PRODUCTION >>>

ALKANE: Dubbo (Forecast 15 years from purchase to production)

Project

Purchase Feasibility Study Financing Definitive Feasibility Study GFC

Definitive Feasibility

Study Expanded

FS

Financing /

Construction PRODUCTION >>>

ARAFURA: Nolans (Forecast 12 years from purchase to production)

Project

Purchase Scoping Study

Prefeasibility

Study

Feasibility

Study GFC Feasibility Study

Expanded

Feasibility

Study

Financing /

Construction PRODUCTION

>>>

Rare earths mines difficult to develop

Second mover rare earth projects Shorter development time, and lower development cost

Maturing new market outside of China

Targeting 5-10 years from purchase to production?

COMPARISON OF AUSTRALIAN RARE EARTH PROJECTS

First mover rare earth projects Delays due to technical problems at feasibility stage

Faced funding problems throughout due to lack of investor awareness

Typical development timeframe will be 12-15 years

Sources: Lynas Corporation; Alkane Resources; Arafura Resources

27 Oct 2014


Slide 26 of 57


Where are the “fast followers”?

0.00

2.00

4.00

6.00

8.00

10.00

0.0 200.0 400.0 600.0 800.0 1000.0 1200.0

TR

EO

Gra

de

(%

)

Ore (Mt)

Major early stage light

rare earth projects

Major late stage light

rare earth projects

Heavy rare

earth projects

Early stage light

rare earth projects

27 Oct 2014


Slide 27 of 57


A situation based rare earths strategy

0.00

2.00

4.00

6.00

8.00

10.00

1.0 10.0 100.0 1000.0

TR

EO

Gra

de

(%

)

Ore (Mt)

PROBLEM CHILDREN

CASH COWS

PET PROJECTS

STARS

27 Oct 2014


Slide 28 of 57


Strategy 3: The “Light” Problem Child

Advantages

• Metallurgy / processing better known

• Possibilities to leverage scale

• Second mover advantage in development timeframe

• First movers success may make these projects more attractive for debt financing

Disadvantages

• Unattractive to the equity market

• Capital costs still likely to be high

• Light rare earths market has less attractive fundamentals

Develop a large, good

grade light rare earth

deposit

Examples: Rare Element Resources,

Arafura Resources, Peak Resources,

Frontier Rare Earths


27 Oct 2014


Slide 29 of 57


DISRUPTIVE STRATEGY IN

RARE EARTHS



27 Oct 2014


Slide 30 of 57


Where are all the stars?

0.00

2.00

4.00

6.00

8.00

10.00

1.0 10.0 100.0 1000.0

TR

EO

Gra

de

(%

)

Ore (Mt)

PROBLEM CHILDREN

CASH COWS

PET PROJECTS

STARS

27 Oct 2014


Slide 31 of 57


Where are all the stars?

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

TR

EO

Ba

sk

et

Va

lue

(U

S$

/kg

)

TREO Ore Value (US$/kg) Data: Technology Metals Research


PROBLEM

CHILD STARS

PET

PROJECTS CASH COWS

27 Oct 2014


Slide 32 of 57


Strategy 4: Aiming for the Stars

Advantages

• Potential to a new Bayan Obo or Ionic Clay?

• Lower short term cash burn

• First movers may provide an exit strategy

• Examples of exploration success in rare earths exist

Disadvantages

• Won’t provide cash flow

• May miss the best years of the market

• Exploration generally unattractive for equity investors currently

Find a world class

rare earth deposit

Examples: Tantalus Rare Metals, TUC

Resources, Namibia Rare Earths, Vale


27 Oct 2014


Slide 33 of 57


UNCERTAINTY & RISK BASED




27 Oct 2014


Slide 34 of 57


Uncertainty kills projects

Expected

Monetary

Value

(EMV)

$ Net Present

Value (NPV)

$ Costs

Probability of

Success (Ps)

Probability of

Failure (Pf)

EMV = ( Ps x [ NPV – Cost ] ) – ( Pf x Cost )

Based on: Centre for Exploration Targeting

27 Oct 2014


Slide 35 of 57


Uncertainty in rare earths development

Producers (2)

Development (2)

Feasibility (2)

Prefeasibility (10)

Advanced Exploration (43)

Early Exploration (164) 26%

23%

20%

100%

100%

26%

6%

1%

1%

1%

Data: Infomine

27 Oct 2014


Slide 36 of 57


Rare earth value accretion is concave

Exploration Scoping Feasibility Development Mining

Valu

e R

eco

gn

itio

n

Convex minerals:

• Gold

• Tin

• Copper

• Nickel sulphide

Concave minerals:

• Lead & Zinc

• Nickel laterite

• Vanadium

• Rare earths

Based on: Trench & Packey (2012)

27 Oct 2014


Slide 37 of 57


Value accretion at Lynas was ‘concave’

-15.00

-12.50

-10.00

-7.50

-5.00

-2.50

0.00

2.50

5.00

7.50

10.00

12.50

15.00

Ap

r 0

1J

ul 0

1O

ct

01

Ja

n 0

2A

pr

02

Ju

l 0

2O

ct

02

Ja

n 0

3A

pr

03

Ju

l 0

3O

ct

03

Ja

n 0

4A

pr

04

Ju

l 0

4O

ct

04

Ja

n 0

5A

pr

05

Ju

l 0

5O

ct

05

Ja

n 0

6A

pr

06

Ju

l 0

6O

ct

06

Ja

n 0

7A

pr

07

Ju

l 0

7O

ct

07

Ja

n 0

8A

pr

08

Ju

l 0

8O

ct

08

Ja

n 0

9A

pr

09

Ju

l 0

9O

ct

09

Ja

n 1

0A

pr

10

Ju

l 1

0O

ct

10

Ja

n 1

1A

pr

11

Ju

l 1

1O

ct

11

Lynas vs ASX vs Cerium

Rare earth

resource

announced

HofA with

Gansu Rare

Earths for

downstream

plant

Purchase

of Mt Weld

completed

Pilot plant

work

completed

successfully

Scoping

Study

completed

Feasibility

Study

completed

Downstream

agreement

with Rhodia

Downstream

plant moved

to Malaysia

Mining approved

by WA govt &

mine contract

awarded

GFC:

financing

problems

China Non-

Ferrous

deal

announced

More permit

approvals

China Non-

Ferrous deal

cancelled

Rare earth

prices soar

– not

reflected in

share price

Off-take contracts

awarded

Permit

approvals

in Malaysia

Based on: Sykes & Trench (2012)

27 Oct 2014


Slide 38 of 57


Uncertainty kills projects

Expected

Monetary

Value

(EMV)

$ Net Present

Value (NPV)

$ Costs

Probability of

Success (Ps)

Probability of

Failure (Pf)

EMV = ( 0.2 x [ 500 – 5 ] ) – ( 0.8 x 5 ) = 95

Based on: Centre for Exploration Targeting

20%

80%

$500 million

$5 million

$99 million

$4 million

Should I proceed with the Feasibility Study? NB: The numbers are fake, but realistic for a rare earths project at the decision point for undertaking a Feasibility Study.

YES: EMV is positive, thus you should proceed, but the ‘uncertainty ‘ is currently costing around $400 million. Strategic focus should be on increasing the chance of success, rather than optimising the final project.

27 Oct 2014


Slide 39 of 57


Rare earths as a by-product?

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

To

tal R

are

Ea

rth

Ox

ide

Gra

de

(%

)

By-Product TREO Equivalent Grade

Total Rare Earth Oxide (TREO) Grade


27 Oct 2014


Slide 40 of 57


Making concave commodities convex

Exploration Scoping Feasibility Development Mining

Valu

e R

eco

gn

itio

n

Convex minerals:

• Gold

• Tin

• Copper

• Nickel sulphide

Concave minerals:

• Lead & Zinc

• Nickel laterite

• Vanadium

• Rare earths


27 Oct 2014


Slide 41 of 57


Strategy 5: the by-product cash cow

Advantages

• Primary commodity provides hedge

against rare earth uncertainty

• Potentially easier to finance

• Potential earlier cash flow

• Rare earths extraction remains an

“option”

Disadvantages

• Metallurgy likely to be complicated

• Won’t work as a co-product or rare

earth “as a by-product” operation

• Difficult to achieve scale

• May be unattractive to equity markets

Extract rare earths as a

by-product

Examples: Greenland Minerals, Pele Mountain Resources, Alkane Resources, CBMM


27 Oct 2014


Slide 42 of 57


Neutral risk to preferred risk

Typical risk profile

of an investor or a

firm: potential

losses seem much

worse than the

potential gain as

you approach

“ruin”

Source: Maxwell & Guj, 2013, AusIMM Mineral Economics Monograph

27 Oct 2014


Slide 43 of 57


Life cycle of a mine project

Concept Exploration Discovery Economics Development Mining

Value

Time

EXPLORATION MINING

High Risk –

High Potential

Lowered risk Full Value

Speculation Orphan Period

Speculators

Leave

Institutional

Investment

Based on: Marketoracle

27 Oct 2014


Slide 44 of 57


‘Convex’ risk progression:

Project vs Corporate

Project/Technical risk versus Corporate Risk in the Minerals Sector

Project Risk

Corporate Risk

Incre

asin

g r

isk

Exploration Feasibility Development Production De-commissioning

A high chance of

project related

problems at this

stage, but little at

stake so not of

concern to the overall

company

A lower chance of

project related

problems at this

stage, but if they do

occur they could be

life-threatening to the

company


27 Oct 2014


Slide 45 of 57


Capital costs: What is affordable? Kvanefjeld

(Greenland Minerals & Energy)

Mt Weld

(Lynas)

Mountain Pass

(Molycorp)

Zandkopsdrift

(Frontier Rare Earths)

Nolans Bore

(Arafura Resources)

Dubbo

(Alkane Resources)

Strange Lake

(Quest Rare Minerals)

Eco Ridge

(Pele Mountain Resources)

Hastings

(Hastings Rare Metals)

Bear Lodge

(Rare Element Resources)

Sarfartoq

(Hudson Resources)

Thor Lake

(Avalon Rare Metals)

Kipawa-Zeus

(Matamec Explorations)

Market Capitalisation

(equiv. US$10 million)

Project Capital Cost

(equiv. US$100 million)

Data: Company websites & Google Finance

NB: Values are for

2012, not current!

27 Oct 2014


Slide 46 of 57


Make the ‘concave’ problem a ‘convex’

solution

Incre

asin

g r

isk

Exploration Feasibility Development Production De-commissioning

Source: Trench & Sykes 2013

‘Concave’ Project Risk

‘Convex’

Project

Risk

Corporate Risk

Solve concave problems early:

• Experienced management?

• Technological (not geological) focus?

• Inform the investing public?

27 Oct 2014


Slide 47 of 57


DELAYS risk peak

REDUCES

risk

Input of extra capital:

• Strategic investor?

• Take advantage of

fashions?

Exploration Development Production

Extra funding delays risk accrual

Based on: Trench & Sykes (2013)

27 Oct 2014


Slide 48 of 57


Convex to concave sequencing

Value ‘Staircase’ becomes:

• ‘Convex’ project first i.e. gold

then rare earths

• Raise money from a fashionable

commodity

Based on: Trench & Sykes (2013)

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Strategy 6: Pet Project (The “Cash Dog”)

Advantages

• Quick to implement, whilst market still attractive

• Cash generative

• Simple & cost effective

• Lower risk

Disadvantages

• Not a long term solution

• May be more trouble than it’s worth

• Not many obvious opportunities

• Rare earths not conducive to “quick & easy” development

• May not be attractive to equity markets

Do something quick and

easy, then move on

Examples: India Rare Earths? Tin

smelter slags?


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Strategy 7: do something else!

Advantages

• Hedge against rare earth market risk

• Potential for faster development &

cash flow

• Maybe cheaper / easier / lower risk

• Wider range of opportunities available

Disadvantages

• May be unattractive to “rare earth”

focused investors

• Skills may not transfer as planned

• Loss of focus

• Spreading resources too thinly

Get involved in a

different commodity

Examples: Alkane Resources, Kimberley

Rare Earths, Avalon Rare Metals


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STRATEGY IN CONTEXT FOR

RARE EARTHS



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Rare earths growth-share matrix


Ma

rket

Gro

wth

(a

dd

ing

to

th

e c

om

pe

titi

on

)

6) CASH DOG 1) CASH COW

4) FIND A STAR!

2) HEAVY

PROBLEM CHILD

3) LIGHT

PROBLEM CHILD

5) BY-PRODUCT

CASH COW 7) DO

SOMETHING

ELSE!


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Rare earths scenarios matrix

Increasing shortage of light rare earths

Inc

rea

sin

g s

ho

rta

ge

of

he

avy r

are

ea

rth

s

SURPLUS Negative for all rest of

world (ROW) rare earth

mine developers

Positive for all ROW

rare earth consumers

LIGHT

SHORTAGE Positive for “light” rare

earth mine projects.

Negative for “heavy” rare


SHORTAGE Positive for all rest of

world (ROW) rare earth

mine developers

Negative for all ROW rare

earth consumers

HEAVY

SHORTAGE Positive for “heavy” rare


Negative for “light” rare


Based on: Boston Consulting Group;

Oxford Scenarios Programme

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The rare earth project scenarios matrix

CASH COW

BY-

PRODUCT

CASH COW

HEAVY

PROBLEM

CHILD

LIGHT

PROBLEM

CHILD

FIND A

STAR CASH DOG

DO

SOMETHING

ELSE!

SHORTAGE HEAVY

SHORTAGE LIGHT

SHORTAGE

SURPLUS

Based on: Oxford Scenarios Programme

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Coursework: putting strategy into action

Now implement the strategy-scenario grid:

• Assign probabilities to each of the scenarios

• Define the parameters of the target asset for each scenario

• Determine where your assets fit into these strategies

• Determine the entrance & implementation cost of each strategy

• Select a blend of strategies that cover as many scenarios as possible for the resources & time available

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THANK YOU

For more information:

Centre for Exploration Targeting: www.cet.edu.au

Greenfields Research: www.greenfieldsresearch.com

Contact information:

John P. Sykes: [email protected]

http://www.cet.edu.au/

http://www.greenfieldsresearch.com/

mailto:[email protected]

Strategies and scenarios in rare earths - Sykes - Oct 2014 - University of Western Australia /...

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