Rare earth meltdown
RB not the only lithium/rare earth firm in which shareholders lost millions
As RB Energy Inc. flamed out and fell into creditor protection during the past couple of weeks, investors were shell-shocked.
Despite some startup problems in recent months, Vancouver-based RB seemed to be in an ideal position. It was emerging as North America’s only serious lithium producer, just as demand for the metal is set to soar because of its use in electric vehicle batteries. Its management team was linked to the legendary Lundin Group, a resource conglomerate with a fantastic track record of success. Lundin companies do not just melt down like that.
But RB did. It filed for protection last Monday after its stock price collapsed and it could not raise capital under reasonable terms.
“I can tell you, it’s been a long time since I’ve seen the resource capital market crash as quickly as that,” chief executive Rick Clark said. “I would say the last time was back in the ’90s.”
There was a time when RB, formerly known as Canada Lithium Corp., had a much easier time raising cash. The company has tapped the capital markets for about $268-million since 2009, according to Financial Post data. RB also received $92-million of debt financing from Bank of Nova Scotia and Caterpillar Financial Services that was partially guaranteed by the Quebec government.
RB is one of several companies that capitalized on an investor frenzy for lithium, rare earth elements and other rare metals. Prices for these specialty commodities went berserk between 2009 and 2011 due to concerns about tight supply and rising demand from industries like green energy, consumer elec- tronics and electric cars. Lithium production was limited to a handful of players and rare earth production was almost entirely in China, where the government put restrictions on exports. Investors bet there would have to be new sources of supply.
They started pouring money into junior mining firms that were fortunate enough to have the words “lithium” or “rare metals” in their name. Indeed, some companies shifted their focus to lithium or rare earth firms to take advantage of the frenzy.
In retrospect, a lot of these financings were disastrous for shareholders. For example, Avalon Rare Metals Inc. raised about $92-million in public offerings between 2009 and 2011 at prices between $2.30 and $5.81 a share. Today, the stock is worth 30¢ and the company’s total market value is $38-million. Rare Element Resources raised $57.5-million at a staggering $9 a share in 2010. It is now down to 70¢.
The initial public offerings from this period look just as grim today. Frontier Rare Earths Ltd. raised $60-million in a 2010 IPO that was priced at $3.40. It is now worth 22.5¢. Lithium Americas Corp., which was backed by no less than Magna International Inc., was priced at $1.85 in its 2010 IPO. The shares now change hands for 27.5¢.
And these are the companies still around and doing productive work. Some smaller lithium and rare earth firms got out of the business entirely.
Jon Hykawy, president of Stormcrow Capital Ltd. and an expert on these specialty commodities, said a lot of “dubious choices” were made by investors during the boom in 2010 and 2011 as they were keen to throw money at just about anything in this space.
“I saw companies take money off the back of no real engineering studies [on their projects],” he said.
He added that a lot of juniors got financed even though they had not identified who might buy their product. The customer base for these commodities is limited, so relationships and offtake agreements are critical, he said.
But the investors weren’t the only ones making mistakes. Mr. Hykawy said the miners should have raised more money when the financing window was open for them. If they had, they could have advanced their projects further during the current bear market and maintained a healthy cash cushion to ride it out. But they assumed they would always be able to tap the capital markets, he said, which was a critical error.
Now some of them have to raise money no matter how dilutive it is for shareholders. Companies like Avalon and Quest Rare Minerals Ltd. have done financings priced at penny-stock levels this year to reach key goals.
And the recent woes of RB Energy are another bad sign for the rest of the sector.
RB is far more advanced than the other lithium or rare earth juniors, as its $350-million Quebec Lithium mine is fully built and in production. It wanted some capital to keep afloat for a few months until it could generate positive cash flow. It was a relatively lowrisk story and easy to explain to investors (though there were concerns about prior delays and cost overruns at the mine).
While the company said an ill-timed release from the Toronto Stock Exchange helped to torpedo its financing efforts, it maintains that it should have been able to raise the funds in a reasonable market.
The silver lining for these companies is that the outlook for the commodities still looks solid. Lithium prices have held up better than almost any other metal over the past couple of years, as the long-awaited surge in electric vehicle production finally appears to be close. And while rare earth prices are well off the absurd levels of 2011, they remain reasonably healthy.
Mr. Hykawy said the lesson of the past few years is these miners will have to look for more strategic investors to get their projects built, because they simply cannot rely on the capital markets.
“I suspect we’re not going to see many projects financed to completion on the back of pure financial investors anymore,” he said.