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Penny stocks don’t generally interest me. I try to protect my capital wisely, and early-stage companies experience a lot of growing pains and existential risks.
These risks are amplified in the natural resources sector, as commodity prices can drop to the bottom at any time.
However, Pensana Metals (LSE:PRE) is making me rethink that rule. That’s because the company is about to break China’s stranglehold on rare earths.
The rare earths comprise 17 chemical elements (15 lanthanides, plus yttrium and scandium). They are essential for various technologies, including electric vehicles, wind turbines, smartphones, and defense systems.
Currently, the Chinese account for 85% of rare earth processing. But Pensana’s planned separation facility at the Humber Freeport in the north of England should put a dent in that domain.
China’s trump card
Russia’s invasion of Ukraine sent prices of energy, potash and nickel skyrocketing in 2022. That was a rude wake-up call to Western leaders about the precariousness of commodity supply chains.
But the alarm on rare earths had already sounded 12 years earlier.
In September 2010, a dispute between Japan and China over the sovereignty of the Senkaku Islands led China to flex its muscles, halting all deliveries of rare earths to Japan.
The unofficial embargo was short-lived, but the episode showed the danger of relying on a hostile nation for critical supplies.
Government Funding: Rarely Turned Down!
Around the world, governments have drawn up lists of critical minerals and have even provided subsidies to domestic producers.
In 2019, the US Pentagon said it would fund mines and processors.
The Mountain Pass mine in California is the only rare earth mining and processing facility in the US taken over by PM Materials in 2017, the mine lay dormant for much of the 2000s due to the boom in ultra-cheap Chinese rare earths that flooded the market from the 1990s onwards.
The Australian rare earth miner Lynas it also has refining facilities.
Now Pensana looks set to add a third rare earth processing plant to that list of non-Chinese refiners. To do so, it relies on an undisclosed sum from the UK government’s £1bn Automotive Transformation Fund.
Given that the UK government released its “Critical Minerals Strategy” last week, I’d bet Pensana’s plan can get more support if needed.
Pensana also mines rare earth mixed sulfate at its Longonjo project in Angola.
The refinery in the north of England is estimated to have a high capital cost of £160m.
rocky road
While MP Materials and Lynas are profitable, Pensana doesn’t even have revenue, and its processing plant won’t open until 2024.
In addition, analysts have criticized Pensana for its executive pay and its level of disclosure. Some also think the company’s target of producing 12,500 tonnes of rare earth oxides a year is too high.
Still, the demand for rare earths will double over the next decade. And with tensions between the West and China already tense, I think Pensana’s stock price could rise faster than a spy balloon if relations were to break further.
I plan to add a small amount of Pensana to my portfolio the next time I have extra money to invest.
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