Given that they tend to elude accurate valuation by conventional and established mine valuation methods, are rare earth metals mines truly economically viable?
By: Ringo Bones
Even though Mainland China had more or less resumed its import quotas to Japan and the rest of the globe back in November 24, 2010, Beijing’s current unrivalled monopoly of the commercial mining and production of rare earth metals can easily make anyone wonder why the United States or any other nation in the world can’t seem to be able to start their very own economically viable rare earth metals industry. Although as of December 10, 2010, Molycorp of the U.S. – the largest producer of rare earth metals outside of the People’s Republic of China - and the Japanese metals trading giant Sumitomo had inked a deal for a mutual rare earth metals supply security. But is the reason just down to economics? Or do we have to look back why in the previous 20 or so years how America and some other nations managed to make a profit in the commercial mining and production of rare earth metals.
It is no coincidence why America’s very own home-grown rare earth metals mining industry was abruptly shut down 20 years ago – right about the end of the Cold War and the collapse of the then Soviet Union. America’s rare earth metals industry was subsidized by the uranium industry – or more accurately the nuclear fission power generation and the nuclear weapons industry. It is now common knowledge that most uranium ores also contain commercially viable amounts of rare earth metals. And the zeolite ion-exchange resin techniques used to process rare earth metals also works for the chemically purification of plutonium-239 from the nuclear pile. Nuclear weapons used to safeguard the United States against the then Soviet Union so the nuclear weapons industry was the primarily subsidizing America’s rare earth metals industry before their closure around 1989 and 1990 since construction of new civilian nuclear fission power plants on American soil was frozen by the US congress after the Three Mile Island nuclear accident of 1979.
Compared to mainland China’s relatively low labor costs, America’s rare earth metal industry looks like a losing proposition when this factor is taken into account in a typical mine valuation calculation. Typically, the ability of a mining property to earn is a measure of its value. Many factors including the natural resources and the plant and the equipment must be taken into account. Consideration must also be given to operating efficiency, labor costs, taxes, and to the critical factors of supply and demand and the purchasing power of money – i.e. the currently prevailing economic conditions. In order to determine the commercial viability of a certain mining operation, the present worth and the prospective possibilities must be determined; the risks must be recognized and evaluated. Such determinations are made to the maximum extent possible on the basis of the factual information that can be assembled as amended and weighed in the judgment and experience of the examining mining engineer.
In the final analysis, every mine valuation is a considered estimate as opposed to an exact appraisal. It would be a rare accident of coincidence if the actual outcome of operations was in accord with the predicted result of prior examination. Despite the certainty that the results of examination will be inaccurate, the greatest possible care must be exercised in making an evaluation in order to measure the degree of risk. The determination of value of a certain mine starts when the examination has been completed to provide ore-reverse data, mining costs and profits, financial requirements, and future prospects, mathematical calculations may be made to establish the present dollar-and-cents value of the ore deposits.
These computations are made on a gross basis so that the result is a single figure. This one sum represents a compounding of the capital required to equip the mine, the realization from sale of product less cost of sales, and amortization of plant as well as interest on invested capital. The remainder is the profit or true value and must be reduced to present worth by giving effect to the time period in which the profit is revealed. A variety of formulas have been developed for use in the valuation of this kind. The present value of the annual dividend to be paid out over the “estimated” 20-year life of a specified mine can be determined by use of one or the other number of mine valuation formulas.
It is somewhat evident that the 20-year lifetime assumed for a typical rare earth metals mine could be changed but a number of factors bear on establishing mining rate. These include the additional proven ore reserves that can be established – which is a little difficult since the difference of the percentage concentration of an economically viable rare earth metals mine and the one that’s not is not that large. Then there are equipment costs which increase with the size of the plant, the mechanical efficiency of the plant, the market for the product – which could be depressed by overproduction – and the security of the investment. Shares of a mine with a long life typically are more preferred by investors.
Given that there are no new nuclear fission power plants being constructed in the US since the 1979 Three Mile Island nuclear fission power plant accident and the most recent Will Lyman narrated science documentary about nuclear fission power plants that mentions dysprosium and holmium nuclear poisons was probably produced between 1992 and 1995, it seems that the civilian nuclear power generation industry and the US DoD’s nuclear weapons program are no longer subsidizing America’s rare earth metals mining industry to make them economically viable enough to continue operating in the austere fiscal environment of a post Cold War world.
And given that the current main use of rare earth metals is in the consumer electronics industry and low carbon energy generation from renewable sources, it seems that the high labor costs and lack of government sourced subsidies spelled the death knell of America’s rare earth metals mining industry in the post Cold War world. Even the profitability of the Mainland China’s rare earth metals mining industry is walking on a thin line indeed when valuated using established mine valuation methods. So let’s just wish good luck to Molycorp and Sumitomo for inking that rare earth metals deal, hope you’ll make a handsome profit this 2011.