Key points:
- Pensana is the attempt to solve the rare earths problem
- The base strategy is good, separation is the key issue
- The difficulty will be operational management
- Pensana Could Be A Grand Rare Earths Strategy
Pensana (LON: PRE) shares are up 10% this morning in London on the back of an operational update. As we’ve noted before about Pensana the company is an attempt to solve the rare earths problem. How to supply that ever-increasing demand for rare earths while also reducing dependence upon Chinese supply of such strategic metals?
Some companies in this space are simply working to mine more rare earths – but this isn’t, in fact, where the problem lies. Rare earths are not rare (nor are they earths) and supplies of mixed concentrate are not difficult to find. They’re often enough a waste output of other mining processes, for example from the processing of mineral sands for zirconia.
What is difficult, and what is the major cost bottleneck in the whole process, is separating the rare earth concentrate into the 15 individual elements of the lanthanide series. So, plans about rare earths, companies with such plans, need to be evaluated on their ability to solve this part of the problem.
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This is indeed what Pensana is doing. The mining in Southern Africa for the rare earth concentrates is a minor part of the plan. The construction of the rare earth processing plant on Teesside is the major part. That’s also what swallows the capital of course.
The operational update today at Pensana should be seen as concerning this, the important part of the plan. The short news is that they’ve been able to knock 5% off the capital requirements by going over the engineering plans with a fine-toothed comb. This might not sound like all that much but rare earth separation plants (the thing they’re to build at Saltend)
are hugely expensive and the original Capex vastly influences the ongoing profitability of the process. So, reducing that Capex means that the whole future of the project becomes more appealing.
No plan is without its problem though. The one faced by rare earth producers is that very one of high Capex costs. Once a plant is built then that’s the money spent. So, once built it will be used. This means that the profitability of any one of them depends upon how many others are built. It’s possible for an investment wave to lead to overcapacity that is, and thereby destroy the profitability of any one plant.
Whether this will happen is a longer-term concern and one that we’ll only gain an answer to in the longer term.
This then giving a likely set of determinants of the Pensana share price in the future. Being able to be fast to market and a reasonable Capex cost will be positive for Pensana. How many others manage to follow them will be that defining factor of the profitability of the venture once built.