Arafura Rare Earths (ASX: ARU) shares are up 8% today. ARU shares are also down 50% over the past 6 months. Of course, the uptick today is interesting but the more important number is that fall over the half year. For it’s that medium to long term change in the share price - as is true of any investment - which is going to determine what happens to our wallets. At which point we need to consider what’s going wrong at Arafura. The correct answer to that being, well, nothing’s going wrong at ARU. It’s that the things going on in the rest of the world are bad for the outcome at Arafura.
This is just one of the base problems about mining - it’s a commodity business. In technical terms this means there are many competitors all trying to sell to the same buyers. So, miners are price takers. They get paid the market price, they have no control over their own selling prices. When the market price is high of course this is a glory, but when it falls then not so much. The recent history of rare earths has been that demand is soaring, there’s a limited amount of supply, the price has jumped. That makes many more mining projects look good. So, more get started. That’s great - but that increased supply will at some point meet that increased demand and so prices will moderate.
Now, the way this usually happens in mining is that supply rises more than demand. So, prices fall back to where they started or even below. This did happen during the last rare earth bubble back in 2010. By 2013 or so prices were below where they’d been in 2009 as a result of new supply hitting the market. Some suppliers - Molycorp for example - then went bust.
Arafura Rare Earths share price from Google Finance
And here’s the thing. Many more rare earths deposits are being found - rare earths are not, in fact, rare. As we discussed with Australian Rare Earths: “What Australian Rare Earths has is indeed exciting. It's an ionic clay deposit of rare earths. This is similar to what OD6 has found and so too a number of other people around the world. This is one of those detailed technical things that can make such a difference in the mining world. For what is really happening here is that we used to think that the particular geology of South China gave a distinct advantage in the mining of two of the heavy magnet rare earths, terbium and dysprosium. We're now finding out that this isn't really true. What we thought was specific to that area - weathered granites - is in fact common enough in subtropical areas globally. Thus a number of companies globally announcing that they have such ionic clay rare earth deposits.” Since then there have been at least 12 - just by our account - such announcements of ionic clay finds on the Australian stock exchange alone.
And the magnet metal price has been falling, as we said about MP Materials: “That's that short term move. And we can check that we've got the right data source as that's the one that Arafura is using as a measure of its own viability as a miner. But what about the long term? After all, we're so old that we can recall three years back when Nd/Pr was in the $30 to $40 range. And also Ce and La were at $5 not 50 cents. Back in the days when rare earth mine economics were really very different. It's true that Nd and Pr have been up well over $100 each in recent times. But the bigger question is how long will those sorts of prices last? Are we in a technical and cyclical drop here or something more fundamental? “ Nd and Pr have halved in price in recent months. Few expect them to soar again and definitely not if a dozen ionic clay mines come online.
One way to read this is that there’s little to nothing wrong at Arafua. It’s just that the rest of the market is making Arafura progressively less valuable.