Rare Earths

February 1, 2021

3:30 pm

“I would not give my rotating field discovery for a thousand inventions, however valuable… A thousand years hence, the telephone and the motion picture camera may be obsolete, but the principle of the rotating magnetic field will remain a vital, living thing for all time to come.”

Nikola Tesla

“The Middle East has its oil; China has Rare Earths.”

Deng Xiaoping

Introduction
The combination of the need for a greener future and the expectation of higher inflation leads us to one of our major sustainable investment themes: Energy Transition. Energy is critical to all aspects of economic activity. Since humankind began relying on fossil fuels for economic and population growth, the emissions from burning fossil fuels have exacted an unsustainable cost in the form of climate change and its adverse consequences. New sources of energy, therefore, are critical in order to navigate a more sustainable course to power the economy and support the population. The fund has invested in key materials and companies central to transitioning to cleaner energy, including copper, nickel, silver, uranium and rare earths. As an asset class, commodities broadly should perform very well against a backdrop of anticipated greater inflation. More specifically, we seek to add thematic “alpha” over the commodity “beta” by selecting the resources required for a more sustainable energy infrastructure, while applying rigorous ESG criteria. The fund’s investment in rare earths sits at that intersection.
What are rare earths?

Rare earths are elements which react with other metallic and non-metallic elements to form compounds with specific chemical attributes, many of which have industrial and technological applications such as lighting, optics, catalytic conversions, and magnets. While abundant in the earth’s crust, rare earths are generally widely dispersed, meaning mining only works at their infrequent points of concentration. 

The 17 rare earths seen in the periodic table below are increasingly necessary for modern life. “Rare earth elements (REE) are essential to civilian and military technologies and the 21st century global economy, including development of green technologies and advanced defence systems.”[1]
Mendeleev's periodic table

Source: Rare Element Resources. For illustrative purposes only.

Separating and refining the desired elements is a painstaking process and a key point in the value chain. There can be significant environmental damage involved in rare-earth extraction and separation, so responsible miners and refiners have had to rework their processes in order to mitigate the impact.
How are rare earths used – the demand story
For the Energy Transition theme, we are focussed on Neodymium, Praseodymium, and Dysprosium, especially the former two, which are often referred to as “NdPr”. These materials are used to produce some of the world’s most powerful permanent magnets, which are called “permanent” as they retain their magnetic properties without an inducing field or current (magnetising force). While useful in a variety of technologies, permanent magnets are key components in electric vehicles (EVs) and many wind turbines, which are high-growth segments in the race to reduce emissions. Governments and private companies globally are announcing ambitious goals to address climate change. A positive feedback loop is in place between government policies, with ESG taking hold in the investment domain, growing consumer awareness of climate issues, and the private sector adapting to these stakeholder demands. Two examples, which are pertinent our Energy Transition theme and rare earths specifically, are EVs and wind power.
EVs have received major press coverage recently, for example, the British Prime Minister’s announcement last month that new petrol and diesel cars will be banned from 2030. Other countries have made similar edicts. General Motor’s CEO, Mary Barra, has declared the company’s future as “all electric”. Even before 2030 the share of EVs as a percentage of total cars is expected to grow markedly, as seen in the graph below. China is particularly worth watching given government subsidies for EVs, consumer-survey data, and the world’s largest and fastest growing car markets overall, suggesting a path to significant growth.
Graph

Source: McKinsey and Company, 5th June 2020. Forecasts and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.

Rare earth (NdPr) magnets feature in more than 90% of EVs. The magnets in EV powertrains are anticipated to grow by 15x over the next decade. By 2035 it is estimated that EVs alone could consume 100% of current annual NdPr production.[2] Furthermore, it is estimated that EV demand for magnets to grow 16-fold between 2020 and 2030.[3] The growth is already happening. In September EV magnet deployment grew over the same month in 2019 by 47% in the Asia Pacific region, 57% in the Americas, and 99% in Europe.[4]
The other major application for rare earth magnets is in wind energy. Clean electricity produced by wind turbines features prominently in plans for a greener energy apparatus. According to McKinsey, wind capacity needs to quintuple by 2030 to keep on pace to limit global warming by 1.5 degrees centigrade.
Demand for magnets to supply wind turbines is expected to grow at a 9.4% CAGR.[5] Given land constraints, offshore wind is expected to feature prominently in the clean-energy infrastructure. For offshore wind turbines, direct drives using permanent magnets are often favoured over higher-maintenance gear boxes given the high cost and difficulty of servicing offshore turbines.
Graph
Source: BNEF, 20th January 2021. Forecasts and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.
Where are rare earths produced—the supply story
As seen in the graph below, China still dominates the mining rare earths, even as other nations scramble to produce, or at least secure, their own supplies of the strategic materials. The US, Australia, and Malaysia are the next largest producers.
China has been the world’s leading, low-cost producer of rare earths for decades, recognising their strategic significance well before their use in applications such as EVs and wind turbines. Continuing from the quote above, Deng Xiaoping went on to say about China’s rare-earth position: “It is of extremely important strategic significance; we must be sure to handle the Rare Earth issue properly and make the fullest use of our country’s advantage in Rare Earth resources.”
At one point, China accounted for nearly all the global supply of rare earths, prompting a World Trade Organisation (WTO) complaint by the US, the EU, Japan and Canada in March 2012.[6] Prices spiked when China imposed quotas on exports, citing its domestic environmental degradation, which was considerable. In its first white paper devoted to rare earths, the Chinese government wrote, “In some places, the excessive rare earth mining has resulted in landslides, clogged rivers, environmental pollution emergencies, and even major accidents and disasters, causing great damage to people’s safety and health, and the ecological environment.”[7] China’s domestic consumption of rare earths also curtailed its appetite to export.
Aware of their uncomfortable dependence on the Chinese supply of rare earths, other nations have set about securing alternative supplies. As seen in figure 4, Australia and the US have meaningfully ramped up production. The strategic importance has been made clear by governments, and the price spike ten years ago highlighting the message.
Graph
Source: Bloomberg, 7th January 2021.
In its summary of threats to the United States, the US intelligence community singled out China’s dominance of rare earths.[8] Consequently, it is unsurprising that the Department of Defence (DoD) recently signed agreements to invest in rare-earth projects with Australian and American producers. First, in June 2020, the DoD inked a contract with Australia’s Lynas Rare Earths to fund and design a separation facility in Texas that will process heavy rare earths from the company’s mine in Western Australia. According to the company this will be the “only source of separated Heavy Rare Earths outside of China”.[9] Second, months later in November, the DoD awarded a technology investment agreement to MP Materials to establish US-based processing of light rare-earth elements. The DoD is helping to finance the company’s downstream move from mining to processing.
What is the investment opportunity?
Unlike many commodities, rare earths do not have traded futures, so the investment opportunity lies in companies extracting and refining the materials. As outlined above, both the demand and supply sides are converging to boost the price of rare earths significantly. The growth in demand for rare earths in the EV and wind turbine segments were discussed above. In aggregate, the Adamas Intelligence forecasts that the value of global magnet rare earth oxide consumption will rise five-fold by 2030.[10] Meanwhile, the supply side appears constrained and unable to meet the surge in demand.
“Adamas Intelligence forecasts that global shortages of NdFeB alloy and powder will amount to 48,000 tonnes annually by 2030 – roughly the amount needed for some 25 to 30 million electric vehicle traction motors; in addition, global shortages of neodymium, praseodymium and didymium oxide (or oxide equivalent) will collectively rise to 16,000 tonnes in 2030, an amount equal to roughly three-times Lynas Corporation’s annual output, or three-times MP Materials’ annual output, of neodymium and praseodymium oxide (or oxide equivalents).”[11]
What makes this investment opportunity particularly compelling is not only this supply/demand dynamic for the materials themselves but also the limited way investors in public securities can participate. Lynas and MP Materials are the only listed companies outside of China with meaningful rare-earths productions. Both focus on their ESG credentials. Energy transition is a mega-trend in which rare earths will play an ongoing role, making an attractive sustainable investment theme. Companies seeking to mine and refine these critical components in a more environmentally friendly manner will benefit greatly. Both customers and investors are rightfully demanding they do so. Some measures MP Materials has taken, for example, include sourcing from ore with low levels of radioactivity, using a closed-loop flotation process to recycle water, safely disposing of mineral by-products at the point of origin, and low-impact dry-stacked tailings.
The geopolitical angle is also clear, with the two companies’ recent development agreements with the DoD in the US punctuating the point. If tensions between China and the US were to increase, the Chinese are aware of the strategic leverage they have in the form of rare earths. The development of these companies is a matter of national security for the US and its allies. Both stocks have recently rallied. However, as shown by Lynas’s stock price tracking, the metal’s spike in 2011, recent moves look meagre relative to a supply-shock panic.
Graph
Source: Bloomberg, 11th January 2021. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.

[1] James R. Clapper, Director of National Intelligence, Worldwide Threat Assessment of the US Intelligence Community, March 2013.

[2] MP Materials company presentation, July 2020.

[3] Bloomberg NEF, “Rare-Earth Demand in Clean Energy”, September 2020.

[8] James R. Clapper, Director of National Intelligence, Worldwide Threat Assessment of the US Intelligence Community, March 2013.

[9] Reuters, “Pentagon, Lynas sign contract to kick off design work for US rare earths facility”, July 2020.

[10] Adamas Intelligence, “Rare Earth Magnet Market Outlook to 2030”, Q3 2020.

[11] Ibid.

[4] Adamas Intelligence, November 2020.

[5] Bloomberg NEF, “Rare-Earth Demand in Clean Energy”, September 2020.

[6] Forbes, Jack Perkowski, “Behind China’s Rare Earth Controversy”, June 2012.

[7] Information Office of the State Council, “Situation and Policies of China’s Rare Earth Industry”, June 2010.

The term “RWC” may include any one or more RWC branded entities including RWC Partners Limited and RWC Asset Management LLP, each of which is authorised and regulated by the UK Financial Conduct Authority and, in the case of RWC Asset Management LLP, the US Securities and Exchange Commission; RWC Asset Advisors (US) LLC, which is registered with the US Securities and Exchange Commission; and RWC Singapore (Pte) Limited, which is licensed as a Licensed Fund Management Company by the Monetary Authority of Singapore.


RWC may act as investment manager or adviser, or otherwise provide services, to more than one product pursuing a similar investment strategy or focus to the product detailed in this document. RWC seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct.

This document is directed only at professional, institutional, wholesale or qualified investors. The services provided by RWC are available only to such persons. It is not intended for distribution to and should not be relied on by any person who would qualify as a retail or individual investor in any jurisdiction or for distribution to, or use by, any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation.


This document has been prepared for general information purposes only and has not been delivered for registration in any jurisdiction nor has its content been reviewed or approved by any regulatory authority in any jurisdiction. The information contained herein does not constitute: (i) a binding legal agreement; (ii) legal, regulatory, tax, accounting or other advice; (iii) an offer, recommendation or solicitation to buy or sell shares in any fund, security, commodity, financial instrument or derivative linked to, or otherwise included in a portfolio managed or advised by RWC; or (iv) an offer to enter into any other transaction whatsoever (each a “Transaction”). No representations and/or warranties are made that the information contained herein is either up to date and/or accurate and is not intended to be used or relied upon by any counterparty, investor or any other third party.


RWC uses information from third party vendors, such as statistical and other data, that it believes to be reliable. However, the accuracy of this data, which may be used to calculate results or otherwise compile data that finds its way over time into RWC research data stored on its systems, is not guaranteed. If such information is not accurate, some of the conclusions reached or statements made may be adversely affected. RWC bears no responsibility for your investment research and/or investment decisions and you should consult your own lawyer, accountant, tax adviser or other professional adviser before entering into any Transaction. Any opinion expressed herein, which may be subjective in nature, may not be shared by all directors, officers, employees, or representatives of RWC and may be subject to change without notice. RWC is not liable for any decisions made or actions or inactions taken by you or others based on the contents of this document and neither RWC nor any of its directors, officers, employees, or representatives (including affiliates) accepts any liability whatsoever for any errors and/or omissions or for any direct, indirect, special, incidental, or consequential loss, damages, or expenses of any kind howsoever arising from the use of, or reliance on, any information contained herein.


Information contained in this document should not be viewed as indicative of future results. Past performance of any Transaction is not indicative of future results. The value of investments can go down as well as up. Certain assumptions and forward looking statements may have been made either for modelling purposes, to simplify the presentation and/or calculation of any projections or estimates contained herein and RWC does not represent that that any such assumptions or statements will reflect actual future events or that all assumptions have been considered or stated. Forward-looking statements are inherently uncertain, and changing factors such as those affecting the markets generally, or those affecting particular industries or issuers, may cause results to differ from those discussed. Accordingly, there can be no assurance that estimated returns or projections will be realised or that actual returns or performance results will not materially differ from those estimated herein. Some of the information contained in this document may be aggregated data of Transactions executed by RWC that has been compiled so as not to identify the underlying Transactions of any particular customer.


The information transmitted is intended only for the person or entity to which it has been given and may contain confidential and/or privileged material. In accepting receipt of the information transmitted you agree that you and/or your affiliates, partners, directors, officers and employees, as applicable, will keep all information strictly confidential. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information is prohibited. The information contained herein is confidential and is intended for the exclusive use of the intended recipient(s) to which this document has been provided. Any distribution or reproduction of this document is not authorised and is prohibited without the express written consent of RWC or any of its affiliates.

Changes in rates of exchange may cause the value of such investments to fluctuate. An investor may not be able to get back the amount invested and the loss on realisation may be very high and could result in a substantial or complete loss of the investment. In addition, an investor who realises their investment in a RWC-managed fund after a short period may not realise the amount originally invested as a result of charges made on the issue and/or redemption of such investment. The value of such interests for the purposes of purchases may differ from their value for the purpose of redemptions. No representations or warranties of any kind are intended or should be inferred with respect to the economic return from, or the tax consequences of, an investment in a RWC-managed fund. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. Nothing in this document constitutes advice on the merits of buying or selling a particular investment. This document expresses no views as to the suitability or appropriateness of the fund or any other investments described herein to the individual circumstances of any recipient.


AIFMD and Distribution in the European Economic Area (“EEA”)


The Alternative Fund Managers Directive (Directive 2011/61/EU) (“AIFMD”) is a regulatory regime which came into full effect in the EEA on 22 July 2014. RWC Asset Management LLP is an Alternative Investment Fund Manager (an “AIFM”) to certain funds managed by it (each an “AIF”). The AIFM is required to make available to investors certain prescribed information prior to their investment in an AIF. The majority of the prescribed information is contained in the latest Offering Document of the AIF. The remainder of the prescribed information is contained in the relevant AIF’s annual report and accounts. All of the information is provided in accordance with the AIFMD.


In relation to each member state of the EEA (each a “Member State”), this document may only be distributed and shares in a RWC fund (“Shares”) may only be offered and placed to the extent that (a) the relevant RWC fund is permitted to be marketed to professional investors in accordance with the AIFMD (as implemented into the local law/regulation of the relevant Member State); or (b) this document may otherwise be lawfully distributed and the Shares may lawfully offered or placed in that Member State (including at the initiative of the investor).


Information Required for Distribution of Foreign Collective Investment Schemes to Qualified Investors in Switzerland


The representative and paying agent of the RWC-managed funds in Switzerland (the “Representative in Switzerland”) is Société Générale, Paris, Zurich Branch, Talacker 50,

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In case you missed it…

The term “RWC” may include any one or more RWC branded entities including RWC Partners Limited and RWC Asset Management LLP, each of which is authorised and regulated by the UK Financial Conduct Authority and, in the case of RWC Asset Management LLP, the US Securities and Exchange Commission; RWC Asset Advisors (US) LLC, which is registered with the US Securities and Exchange Commission; and RWC Singapore (Pte) Limited, which is licensed as a Licensed Fund Management Company by the Monetary Authority of Singapore.

RWC may act as investment manager or adviser, or otherwise provide services, to more than one product pursuing a similar investment strategy or focus to the product detailed in this document. RWC seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct.

This document is directed only at professional, institutional, wholesale or qualified investors. The services provided by RWC are available only to such persons. It is not intended for distribution to and should not be relied on by any person who would qualify as a retail or individual investor in any jurisdiction or for distribution to, or use by, any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation.

This document has been prepared for general information purposes only and has not been delivered for registration in any jurisdiction nor has its content been reviewed or approved by any regulatory authority in any jurisdiction. The information contained herein does not constitute: (i) a binding legal agreement; (ii) legal, regulatory, tax, accounting or other advice; (iii) an offer, recommendation or solicitation to buy or sell shares in any fund, security, commodity, financial instrument or derivative linked to, or otherwise included in a portfolio managed or advised by RWC; or (iv) an offer to enter into any other transaction whatsoever (each a “Transaction”). No representations and/or warranties are made that the information contained herein is either up to date and/or accurate and is not intended to be used or relied upon by any counterparty, investor or any other third party.

RWC uses information from third party vendors, such as statistical and other data, that it believes to be reliable. However, the accuracy of this data, which may be used to calculate results or otherwise compile data that finds its way over time into RWC research data stored on its systems, is not guaranteed. If such information is not accurate, some of the conclusions reached or statements made may be adversely affected. RWC bears no responsibility for your investment research and/or investment decisions and you should consult your own lawyer, accountant, tax adviser or other professional adviser before entering into any Transaction. Any opinion expressed herein, which may be subjective in nature, may not be shared by all directors, officers, employees, or representatives of RWC and may be subject to change without notice. RWC is not liable for any decisions made or actions or inactions taken by you or others based on the contents of this document and neither RWC nor any of its directors, officers, employees, or representatives (including affiliates) accepts any liability whatsoever for any errors and/or omissions or for any direct, indirect, special, incidental, or consequential loss, damages, or expenses of any kind howsoever arising from the use of, or reliance on, any information contained herein.

Information contained in this document should not be viewed as indicative of future results. Past performance of any Transaction is not indicative of future results. The value of investments can go down as well as up. Certain assumptions and forward looking statements may have been made either for modelling purposes, to simplify the presentation and/or calculation of any projections or estimates contained herein and RWC does not represent that that any such assumptions or statements will reflect actual future events or that all assumptions have been considered or stated. Forward-looking statements are inherently uncertain, and changing factors such as those affecting the markets generally, or those affecting particular industries or issuers, may cause results to differ from those discussed. Accordingly, there can be no assurance that estimated returns or projections will be realised or that actual returns or performance results will not materially differ from those estimated herein. Some of the information contained in this document may be aggregated data of Transactions executed by RWC that has been compiled so as not to identify the underlying Transactions of any particular customer.

The information transmitted is intended only for the person or entity to which it has been given and may contain confidential and/or privileged material. In accepting receipt of the information transmitted you agree that you and/or your affiliates, partners, directors, officers and employees, as applicable, will keep all information strictly confidential. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information is prohibited. The information contained herein is confidential and is intended for the exclusive use of the intended recipient(s) to which this document has been provided. Any distribution or reproduction of this document is not authorised and is prohibited without the express written consent of RWC or any of its affiliates.

Changes in rates of exchange may cause the value of such investments to fluctuate. An investor may not be able to get back the amount invested and the loss on realisation may be very high and could result in a substantial or complete loss of the investment. In addition, an investor who realises their investment in a RWC-managed fund after a short period may not realise the amount originally invested as a result of charges made on the issue and/or redemption of such investment. The value of such interests for the purposes of purchases may differ from their value for the purpose of redemptions. No representations or warranties of any kind are intended or should be inferred with respect to the economic return from, or the tax consequences of, an investment in a RWC-managed fund. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. Nothing in this document constitutes advice on the merits of buying or selling a particular investment. This document expresses no views as to the suitability or appropriateness of the fund or any other investments described herein to the individual circumstances of any recipient.

AIFMD and Distribution in the European Economic Area (“EEA”)

The Alternative Fund Managers Directive (Directive 2011/61/EU) (“AIFMD”) is a regulatory regime which came into full effect in the EEA on 22 July 2014. RWC Asset Management LLP is an Alternative Investment Fund Manager (an “AIFM”) to certain funds managed by it (each an “AIF”). The AIFM is required to make available to investors certain prescribed information prior to their investment in an AIF. The majority of the prescribed information is contained in the latest Offering Document of the AIF. The remainder of the prescribed information is contained in the relevant AIF’s annual report and accounts. All of the information is provided in accordance with the AIFMD.

In relation to each member state of the EEA (each a “Member State”), this document may only be distributed and shares in a RWC fund (“Shares”) may only be offered and placed to the extent that (a) the relevant RWC fund is permitted to be marketed to professional investors in accordance with the AIFMD (as implemented into the local law/regulation of the relevant Member State); or (b) this document may otherwise be lawfully distributed and the Shares may lawfully offered or placed in that Member State (including at the initiative of the investor).

Information Required for Distribution of Foreign Collective Investment Schemes to Qualified Investors in Switzerland

The representative and paying agent of the RWC-managed funds in Switzerland (the “Representative in Switzerland”) FIRST INDEPENDENT FUND SERVICES LTD, Klausstrasse 33, CH-8008 Zurich. Swiss Paying Agent: Helvetische Bank AG, Seefeldstrasse 215, CH-8008 Zurich. In respect of the units of the RWC-managed funds distributed in Switzerland, the place of performance and jurisdiction is at the registered office of the Representative in Switzerland.

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