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Pensana, PRE, Near Unchanged On Sales MoU – Why?

Tim Worstall
Tim Worstall trader
Updated 3 Oct 2022

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Key points:

  • Pensana has announced an offtake contract for 25% of production
  • The PRE share price has barely moved as a result
  • Is this important news that should have more effect?

Pensana (LON: PRE) is near unchanged on the announcement that they've been able to sign a Memorandum of Understanding on selling a significant part of their future rare earths production. We might think that this is an important piece of news, one that should move the PRE share price considerably – if we did, obviously we'd be wrong for it hasn't. Which leads to the question, well, why hasn't it?

Actually, we'd also like to know why Pensana is down 44% over the past 12 months – aren't rare earths supposed to be flavour of the month right now? The answer to that is that yes, Pensana is in the rare earths business. It also seems to be approaching the business in the correct manner – the value add in the industry is not in the mining for a mixed concentrate, it's in the ability to process such a concentrate and deliver individual rare earths. It's thus that processing plant in the north of England which is the important part of PRE.

One problem more generally is that the interest in rare earths has meant many people attempting to enter the market. It's not entirely obvious that the current high prices for magnet materials are going to be maintained. Further, the economics of the separation business have already led to gross oversupply of cerium and lanthanum – which is why their prices are getting close to zero these days – making the whole business model less profitable.

Pensana Rare Earths share price
Pensana Rare Earths share price from IG

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What's more to the point for Pensana today is that their announcement is almost devoid of information. They've signed a Memorandum of Understanding for an offtake contract for 25% of their production. “Offtake” has a specific meaning here, it means the buyer will take the product. Not may, but will. OK, fine.

But all the other things we'd like to know are left out. Who is the contract with? At what prices? For which of the rare earths? If it's for the cerium and lanthanum (which would be the bulk of production by weight but trivial by value) then that's actually deeply uninteresting. If it's for the Nd/Pr fraction well, that's more interesting. But that's also the part that no one at all thought there would be any difficulty in selling. Prices matter too – is there to be some ongoing negotiation? Or a fixing to some external pricing mechanism? That second is difficult with rare earths as there's no terminal market.

So, basically, what we're really being told is that someone – we don't know who – is interested in buying some portion of production. But we don't know which portion, at what price. This is not the sort of announcement that is likely to move the price all that much – and at least so far it hasn't.

The reason the Pensana price hasn't moved much is simply that this isn't an interesting announcement.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.