全球金属与矿业：稀土贸易是否过热？

Global Metals & Mining: Is the Rare Earth trade cooked? We have seenextreme volatility in “rare earth” stocksthis yearon the back of tradeconflicts between China and the USA. Bob Brackett, Ph.D.+1 917 344 8422bob.brackett@bernsteinsg.com On Liberation Day this year, we highlighted the issue (A Minor Metals Primer - what'scritical? strategic? rare? tariffed? next?) and noted thatan obvious step for the USgovernment would be to support investment in processingof domestic REEs. Wewarned investors around the volatility of minor metal prices. Andrianto Guntoro+44 20 7676 6825andrianto.guntoro@bernsteinsg.com Theprocess of government involvement is fully underway, highlighted by theframework announced last week (United States-Australia Framework For Securing ofSupply in the Mining and Processing of Critical Minerals and Rare Earths). Wedon’t believe the overall rare earth market deserves the prices or valuations ithas achievedand thus warn investors to be cautious. Framing the challenge, we can determine annual revenue (size of market) by multiplyingREO price and volume. It yields $15 bln a year at today’s (elevated) prices. US & Australia(where public equities have exposure to production) comprise 15% of global production.The total addressable market is estimated at $9 bln of discounted future cash flows.The largest public US REE company has an enterprise value of $12 bln. The largest publicAustralian REE company has an enterprise value of $12 bln. Rare Earths aren’t rare. There’s barely 20% more copper in the crust as neodymiumbut we mine 30,330% more of it (25,000 kt versus 75 kt).75 kt is a trivial coppermine for context.A crude (but clever) price forecast of important rare earths seessignificant downside. Minor metals historically face boom-bustsand rare earths reminds us of lithium (withgovernment intervention). Government intervention (desiring to develop secure and cheap supplies for militaryapplications) is underway. Times for investing in supply/processing are measured inperhaps a few years. We also note thata trade deal with China around rare earths wouldrapidly impact price(akin to copper -Quick Take: Don't reach for the copper taco). We believe thehopes of a rare earth demand supercycle are misguidedgiven (1)reviewing historic cycles, (2) modest growth from conventional demand sources, (3)technology substitution, (4) thrifting, (5) overstated belief in humanoid robots, and (6)innovation in permanent magnets from rare earths to other chemistries. We note that we arefocused here on rare earth elements(particularly permanentmagnet elements) andnot other critical minerals(which operate in their own suppy/demand markets with their own opportunities for government investment).We aren’targuing any specific equity is overvaluedand recognize that companies alreadyguaranteeing themselves offtake agreements and government participation clearly have anedge over companies fully exposed to the public market. BERNSTEIN TICKER TABLE INVESTMENT IMPLICATIONS We have no significant exposure to rare earths in our coverage. DETAILS Here’s the annual total addressable market of all of the elements in the Universe. The best (biggest) markets are iron, copper, gold, aluminum (and hydrogen). The red boxes circle the typical Rare Earth Elements (REEs). They are the Lanthanides plus typically Scandium and Yttrium. Only 5 of the REEs have annual revenue (price x volume) of more than $1 bln (but all less than $10 bln). We can decompose the annual revenue of each element into a combination of price and volume, shown below. It’s a log-logchart and covers more than ten orders of magnitude yet nonetheless spreads out the various elements. We move more iron orethan any other element. We move less osmium than any other element. Manganese is the cheapest element (six bucks a ton!)while rhodium is the most expensive ($5,800 an ounce, or $186 million dollars a ton). Rare earths are relatively unimportant. In terms of the Rare Earths (REE), here is a summary of their uses. Those named critical by the US government are highlighted inyellow. We can determine annual revenue (size of market) by multiplying price and volume. Below we show that the US & Australia (where public equities have exposure to production) comprise 15% of global production. If we take $15 bln a year of revenue x 15%, we arrive at $2.25 bln of revenue available to public equities. At a 25% EBITDAmargin (higher than that achieved by other midstream-heavy processors like aluminum and well above, for example, MPMaterials current margin), assume $0.6 bln of cash flow. Assume no capex (a terrible assumption) and apply a perpetuity formulaat 10% discount rate and 3% growth rate (the IEA’s forecast to 2040): $0.6 bln / ( 0.07 ) = $9 bln of future discounted cash flows addressable at today’s (elevated) prices. The largest public US REE company has an enterprise value of $12 bln. The largest public Australian REE company has anenterprise value of $12 bl