Rare Earths Miner With 100% Upside?

Why Tesla and other electric vehicle markers have this  Aussie hedge fund bullish on rare earths miners, with one name in particular.

2017 has been a landmark year for the electric vehicle industry. As well as the launch of the new, affordable Tesla Model 3, several European nations have announced their intentions to ban all fossil-fueled cars before the middle of the century and even China, the world’s biggest vehicle market, is considering a ban on the production and sale of fossil fuel cars as Beijing seeks to ease pollution.

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This green-energy drive has ignited interest in rare earth elements. Rare earth end-use applications range from polishing powders, phosphors, glass additives, lasers and the automotive industry — to name just a few uses.

Two key elements have received the most attention this year, neodymium and praseodymium. Collectively also known as NdPr, these two elements are used in the production of neodymium-iron-boron magnets, which are fundamental to the powertrain of electric vehicle motors. The Nissan LEAF, Chevrolet Bolt, and BMW i3 already use these magnets, and Tesla will also soon begin using a NdPr permanent magnet motor in the Model 3 RWD Long Range model.

Rare Earths Miners: Risky Business

If electric vehicles take off (not limited to just cars. Plans to adapt planes, trains and trucks are also unfolding) demand for rare earths will explode. Roskill’s 2017 Rare Earths Global Industry, Markets and Outlook Report is forecasting 4 million electric vehicles sales worldwide in 2017, rising to 50 million annually by 2030. Each vehicle motor requires around 1kg to 2kg of permanent magnets, driving estimated demand growth of around 14% CAGR during the next five years.

Investing to profit from this trend isn’t easy. The fortunes of rare earths miners are tied to market prices, and the rare earth industry has extremely high entry barriers — both a blessing a curse. For example, Molycorp spent $1.5 billion developing a rare earths mine 50 miles south of Las Vegas during the first half of this decade, but before the company had a chance to earn back its investment, a collapse in prices of rare earths led the company to declare bankruptcy in 2015 (buyers later offered $1.2 million to buy the mine).

Molycorp failed despite the fact that during 2016, the US imported $120 million of rare earth metals, according to the US Geographical Survey, more than 70% of which came from China.

Molycorp’s problems show that finding rare earths miners with access to high-quality deposits, strong balance sheets, efficient operations and an experienced management team to play the electric vehicle’s boom is not easy. However, analysts at the Newgate Absolute Return Fund believe that they’ve found the perfect company to play the boom and it has a substantial margin of safety for investors.

Rare Earths Miners: Newgate sees big upside

According to Newgate’s research, based on the current demand projections for electric vehicles, additional demand will be created for NdPr of 35,000 tonnes per annum, up from the current global supply of 25,000 tonnes per annum by 2025.

Newgate notes current prices have NdPr trading at $65,000 per tonne, up from $35,000 per tonne six months prior. Conversations with auto producers and miners suggest that prices will trade in a range of $70,000 to $100,000 per tonne range without any noticeable impact on demand.