Rare earth magnets keep their strong attraction despite Tesla’s jawboning

There wasn’t any discussion at Tesla’s investor day on March 1 about steering wheels in the Model Y SUV coming off while herbing down the highway. Talk about hands-free driving.

Okay, there have been “only” two reported incidents. Still, US auto safety regulators have opened an investigation into the incidents which trade reports reckon comes down to a missing bolt, one that attaches the wheel to the steering column no less.

Friction alone was holding the problem steering wheels in place. But once some torque was applied, something Teslas have plenty of, off they popped.

While there was no discussion on the issue at the investor day, Tesla did make a big splash about its plan to move away from using rare earth magnets in its powertrains.

The disclosure pulled the rug on the rare earths stocks, most notably market leader Lynas (LYC). It shares have fallen 23% since, wiping $1.77 billion from its market cap.

The general market malaise is also a factor in a market value crunch which has left Lynas with a somewhat skinnier market cap of $5.8 billion.

Weakness in the key magnet rare earths (down from $US124/kg in July last year to $US87/kg in December, but up from $US35.90/kg in December 2019) hasn’t helped the sector either.

There has been plenty of discussion since about what Tesla’s move means. Experts like Adamas Intelligence reckon that should Tesla drop rare earth magnets across its fleet, the global market for the stuff would be 3-4% less over the long term.

That assumes Tesla maintains its current EV market leadership.

“In relation to the magnitude of the expected supply gap, a 3-4% drop in demand by 2035 would go virtually unnoticed,” Adamas said.

It is assumed Tesla’s move involves a switch to ferrite magnets. They are cheaper but come with weight and efficiency penalties.

Take in all that and it seems likely that Tesla’s rare earths “bombshell” isn’t really a bombshell at all, and that the sell-off in the rare earths stocks has been overdone.

Tesla said as much when it noted at the investor briefing that as the world transitions to clean energy, demand for “rare earths is really increasing dramatically”.

The seemingly overblown reaction to Tesla’s move to a bulkier and less efficient form of a permanent magnet – assuming they haven’t re-invented the wheel – means that the rare earth producers, developers and explorers are better value than they were.

The big thematic that demand for rare earths of the permanent magnet type will continue to surge, and that the western world’s reliance on supplies from China needs to be broken, has not gone away.

Following on from Joe Biden’s Inflation Reduction Act, the European Union has just ushered in its Critical Raw Materials Act (CRMA) to ensure it has the metals required for the energy transition and its defence industry.

COVID and the war in Ukraine has taught everyone about the vulnerability of supply chains. The EU has a current 98%, 93% and 97% dependency on China for rare earths, magnesium and lithium respectively.

Like the IRA, the CRMA will involve tax breaks of all sorts to increase Europe’s mine supply to 10% of its requirements by 2030, and 40% of its processing requirements. A central purchasing agency, and speeding up permitting, is part of the plan.

Good luck with all that. It is an impossible task for the EU. But the will (and tax breaks) are there, as they are in the US. Decarbonisation and decoupling from Chinese supply lines is the new mantra, which requires a multi-decade effort.

In comparison, the current market concerns around the global banking system is a short-term blip.

RareX (ASX:REE):

Against that backdrop, rare earths junior RareX (REE) is due some attention ahead of a major resource upgrade at its Cummins Range rare earths project in the Kimberley region of Western Australia.

It is already a handy 18.8Mt at 1.15% total rare earth oxides (TREO) and 10.9% phosphate. But assays rolling in from a 2022 drilling program have returned thick (200m wide, with two more than 400m) intercepts of rare earths and phosphate.

So a “significant” resource estimate is in the pipeline. Just how significant it is for the modestly $25m capped explorer (4.2c a share, down from 5.4c on March 1 thanks to Tesla) remains to be seen.

RareX MD Jeremey Robinson did give a hint or two. “We believe we are now on the cusp of a major resource upgrade to be delivered in coming weeks that will provide investors with a much clearer picture of the true scale of and significance of the Cummins Range project,” he said.

It is also worth noting that ahead of the latest drilling results and the pending resource upgrade, RareX picked up the services of Danny Goeman as a non-executive director.

Goeman was previously the global director of sales and marketing and shipping at Fortescue for four years and before that, he was head of marketing at international potash development company Danakali (ASX: DNK).

With that sort of background, he obviously had a capability to choose across the resource space. It says something about RareX and Cummins Range.

CZR Resources (ASX:CZR)

The iron ore price has been a tower of strength in recent times. While all else has come under the pump, the steel-making raw material has held at around 8-month highs of $US130/t.

That’s up from the low of $US80/t in November and compares with the annual average in 2022 of $113/t.

China coming out of its COVID lockdown and Vale’s supply constraints have been working in iron ore’s favour.

There was some weakness when China set an economic growth target of “only” 5% with a greater emphasis to be put on consumption rather than infrastructure build out.

Nothing wrong with 5% economic growth as the economy would double every 14 years if sustained, and we’re talking about the world’s second biggest.

BHP, Rio Tinto and Fortescue are benefitting from iron ore’s elevated pricing more than the recent battering of their share prices would suggest.

The elevated pricing has also sparked investor interest in the iron ore juniors. They are few and far between nowadays.

The good news is that they are of a better quality than what surfaced during the mining boom, which is just as well given iron ore’s ability to undergo wild swings in short time frames.

The tightly held CZR Resources (CZR) is one of the new breed. And when it is said it is tightly held, it really is as prospector extraordinaire Mark Creasy is on the register with a 53.15% shareholding.

CZR has interesting gold assets but its main go is its Robe Mesa iron ore project in the Pilbara. It is a neighbour to the north and south of Rio’s 30Mtpa Robe Valley mines, and 40km north of MinRes’s Onslow project.

Its current reserve base stands at 45.2mtpa and is set to grow. A definitive feasibility study into an upscaled 3Mtpa operation is due next quarter. While CZR has been working on its own infrastructure solution, Robe Mesa’s location makes it rich in options.

It last traded at 17c for a market cap of $40m which is not a lot for a 3Mtpa near-term production potential, with a long life part of the bargain.

Orion (ASX:ORN):

Hats off to Orion Minerals (ORN), which has been battling away over the years to become a copper-zinc producer of scale from projects in South Africa’s Northern Cape province.

It has just secured a strategic funding package headlined by the involvement of Clover Alloys, a privately held mining group that has built a reputation for the fast and profitable development of chrome operations using a modular approach.

Clover is to cornerstone a $13m placement at 1.5c with four attached free options exercisable at 1.7c, with the placement also supported by Orion’s long-term shareholders, Tembo Capital (subject to shareholder approval) and the Delhi Group.

From all that it can be taken that South Africa Inc is lining up to back Orion’s Prieska copper-zinc project, and its Okiep copper project. The nation’s mining industry has continued to contract and its hoped that project’s like Prieska and Okiep will be part of the industry’s revival, and doing things in a better way.