Vital Metals’ construction halt a reality check on what it will take to diversify
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The supply chain snarls of the past few years put a wind at the back of rare earth companies, with governments around the world eager to support a homegrown sector. Now, the current economic turbulence and potential for a recession are testing that momentum.
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Last week, Australia’s Vital Metals Ltd. announced that it had halted construction on its half-finished rare earth processing facility in Saskatoon, after its costs rose substantially in recent years.
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“The company is pausing all construction-related activities at the Saskatoon processing facility to allow the company to focus on conserving cash and to seek alternative funding sources,” Vital said in an April 18 press release. Interim chair Richard Crookes was even more direct, stating in the release that there is “no economic imperative” to complete the project at the current time, citing higher costs, lower prices and no market for what the facility aimed to produce.
Crookes’s assessment amounts to a reality check on what it will take to diversify the supply of rare earth metals — and wrest control of the industry away from China, which has emerged as an unreliable source amid the country’s growing geopolitical rivalry with the United States and other Western democracies.
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Even though some of North America’s rare earth companies have made strides in the past two years, it remains a sector dominated by Chinawhich accounted for 61 per cent of global production or 168,000 tonnes in 2021. That level of concentration would be problematic even if China and the West were on better terms. The pandemic showed what happens to supply chains when expected events disrupt access to what is effectively the only source.
Rare earth headwinds ‘short term’
Rare earth elements are critical to modern technology largely because they can be forged into powerful magnets that power the pumps, motors and sensors found in mundane items such as windshield wipers and fuel pumps, but also in complicated sensors and the motors that drive wind turbines and electric vehicles.
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“If it vibrates or moves or is sensing,” there’s a good chance it contains magnets made from rare earths, said Ryan Castilloux, managing director of Toronto-based Adamas Intelligence, a rare earth research firm.
Castilloux said a confluence of factors have pushed down rare earth prices. As inflation has taken hold, demand for electronics has flatlined. Meanwhile, flagging sales of conventional automobiles — a major source of demand for rare earth magnets — have also weighed on the industry. As a result, Castilloux said the processing plants in China — where the majority of the magnets are still made — are awash in inventory.
“All of these headwinds are short term,” he said. “I don’t know how long that is … but the long-term story of massive growth has not been affected at all.”
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Longer term prospects weren’t enough to persuade Vital to continue to burn through cash at its Saskatchewan operations, at least for now. The company said it will conduct a three-month review, and intended to retain its Saskatoon-based workforce in the meantime, as “these important stakeholders will be integral to allowing for a quick restart of construction and commissioning activities when the foundations for a long-term, sustainable business model are put in place.”
Changing strategies
Since June 2021, Vital has been operating the only rare earth mine in Canada, called Nechalacho, near Yellowknife, but it’s small, producing about 1,000 tonnes of “beneficiated product,” according to the company’s latest annual report.
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Vital is also retrenching. In March, the company announced that its chief executive John Dorward had resigned with three months’ notice, and that the board of directors had launched an international search for a replacement.
That followed an announcement in December that Vital was changing strategies in Saskatchewan. Up until then, it had mined a small high-grade zone known as North T, which contains a measured resource of 68,000 tonnes of ore containing 9.6 per cent light rare earth oxide — a category that includes the critical and widely used element, neodymium.
But to create a business that will endure for decades, Vital said it will now focus on developing a far larger property called Tardiff, located approximately two kilometres away from North T, even though the deposit there is of a lower grade. Tardiff contains 119 million tonnes of ore containing 1.46 per cent total rare earth oxides — meaning not only light rare earths, but also the less widely used heavy rare earths.
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To that end, Vital announced it completed a 5,500-metre drilling campaign last week, hoping to find more high-grade zones at Tardiff, which it called “one of the largest single deposits in the Western World.”
Vital hasn’t officially abandoned the processing facility in Saskatoon, a step that would add value to the product it sells. But costs have been swelling. Its earliest capital cost estimates of A$5.25 million in September 2020 have long been passed and the project has changed.
As its ambitions to stake a place as a globally significant producer of rare earths have grown, Vital has received $7.5 million in government funding and loans for the project. But in December, it said it had spent A$19.7 million on the Saskatoon plant, and revised the total cost to A$60.7 million, in part because it had doubled the annual processing capacity to 1,000 tonnes.
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Details being ‘ironed out’
Vital is not the only rare earths company facing headwinds and rethinking its strategy amid the recent price drop, which has been significant.
Pricing for magnets made from neodymium and praseodymium, two key light rare earths elements, started 2022 at as high as $180 per kilogram and finished the year at as low as $90 per kilogram, according to the March 29 earnings call for Toronto-based Neo Performance Materials Inc., which currently sits downstream as a rare earth magnetic powder producer.
“We’re well into a period that requires careful navigation,” Constantine Karayannopoulos, chief executive of Neo Performance said on the March 29 call. “The combination of macroeconomic conditions, strained supply chains of rapidly growing clean technologies and volatile rare earth prices are superimposing a complex landscape on our industry and business.”
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Still, the company finished the year with $147 million in cash on its balance sheet, and even though Karayannopoulos warned that his company’s margin would compress in the current market environment, it has seized the opportunity to grow: On April 18, it acquired for $13 million a 90 per cent interest in the UK’s SG Technologies Group, one of Europe’s leading producers of rare-earth-based magnets and magnetic assemblies for industrial and commercial markets.
Frederic Bastien, an analyst at Raymond James Financial Inc. who covers Neo, described it as part of the company’s new “Magnets-to-Mine vertical integration strategy.” Last August, Neo invested money upstream, buying a potential rare earth deposit in Greenland that could one day be mined.
Castilloux said that even though rare earth prices are dropping, the long-term demand forecast for rare earth magnets remains robust, and Western governments from Canada and the U.S. to countries in Europe are eager to break China’s dominance.
“The nucleus of the snowball is formed, and we can see it rolling down the hill,” said Castilloux. “But some of the details are still being ironed out.”
• Email: gfriedman@postmedia.com | Twitter: GabeFriedz
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