- We remain positive on VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX) in the medium-long term.
- Long-term sustainability trends should underpin the constructive demand outlook for metals crucial for green technologies.
- Government support for rare earth and strategic metals companies should remain forthcoming as they continue pushing towards self-reliance, especially with geopolitical tensions witnessed across the globe.
- Weakening global growth could dampen demand for traditional end-uses of RESMs, such as smartphones. However, we expect demand for advanced green technologies to remain more resilient, which could help to mitigate any near-term demand weakness.
- We believe the long-term story for the VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX) remains intact. We project a target price of USD174 for this ETF, and investors can look forward to an attractive upside potential of +80% by FY24.
Since we initiated a buy call on VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX) in April, the metals market has faced challenges (Chart 1) from slowing global growth. The REMX ETF is down about -11% while the broader Bloomberg World Mining Index is down -24% (in SGD terms, since 11 Apr) (Chart 2).
Despite the macro headwinds, we believe the positive story for rare earth and strategic metals (RESMs) remains positive as a whole. In this article, we revisit our original thesis, review the drivers for this industry, and outline why we believe this ETF is more attractive after the recent selloff.
Chart 1: Metals prices have fallen since April, except for Lithium
Chart 2: REMX ETF is down for the year, but comparable to the broader mining sector
Sustainability trends underpin constructive long-term outlook
In our previous article, we highlighted examples of how RESMs were used in electric (EV) and hybrid vehicles, as well as renewable energy such as solar panels. We believe this story has not changed – RESMs continue to be crucial for emerging green technologies, and the trend toward sustainability continues to gain steam even today.
We see green technology adoption continuing to grow at a rapid pace, and this is most evident from EV adoption. According to the International Energy Agency (IEA), electric car sales have doubled in 2021 and the agency expects it to grow by a 24% CAGR from 2021 to 2025, followed by a 12% CAGR from 2025 to 2030 (Chart 3). Meanwhile, other prominent green technologies like solar energy are also expected to grow exponentially, with an estimated 17% increase in global solar photovoltaic module production in 2022.
As we argued previously, this increasing adoption of green technologies, as a part of the global sustainability push, greatly bolsters long-term demand for RESMs which supports RESM upstream companies. From an industry level, we are seeing this play out with many long-term deals signed over the past few months (Table 1). These deals are significant as they are not only an indication of commitment towards greater adoption of green technologies, but for RESM companies, it provides a sticky source of revenue over the long term, which could also mitigate some of the cyclicality associated with mining companies.
Chart 3: EV sales expected to grow strongly to 2030
Table 1: Non-exhaustive list of contracts signed since our previous article in April
|
Name of RESM company |
Details of contract/deal |
Date of announcement |
|
Livent Corp |
Supply lithium hydroxide to GM. Starts in 2025 and lasts 6 years |
Aug-22 |
|
Zhejiang Huayou Cobalt |
Supply various strategic metals to Tesla until end-2025 |
Aug-22 |
|
Liontown |
Supply lithium spodumene to Ford, 5y deal |
Jun-22 |
|
Zhejiang Huayou Cobalt |
Joint venture with LG Chem to produce batteries |
Jun-22 |
|
MP Materials |
Supply rare earth materials for electric motors to GM, long-term agreement |
Apr-22 |
|
Source: iFAST compilations. List is non-exhaustive. |
||
Government support for RESM-related companies should remain forthcoming
Looking ahead, we believe governments will continue to be incentivised to support RESM-related companies for self-reliance reasons.
RESM supply chains tend to be more geographically concentrated relative to traditional metals, with over 80% of rare-earth processing situated in China, over 50% of lithium production done in Australia, and over 60% of lithium processing situated in China. As such, worsening geopolitical relations across the world (including recent tensions between US and China) have compelled governments to step up investments in building up and securing domestic RESM supply chains.
Many major economies and RESM-producing nations, in both the East and West, have already made concrete plans or promises this year to enhance domestic RESM independence (Table 2). Even if East-West relations normalise over time, we expect governments to continue supporting RESM independence, to reduce the risk of potential supply-chain shocks in future (as witnessed with Europe’s energy supply post Russia-Ukraine War).
In summary, we are seeing clear concrete actions and plans taken by governments, emboldened by the need to be self-reliant. For the reasons above, we firmly believe government support towards RESM companies will continue, bolstering the outlook for this industry.
Table 2: Non-exhaustive list of government actions/plans this year to boost domestic RESM independence
|
Country |
Action by Government |
Date of announcement |
|
US |
Inflation Reduction Act of 2022: USD 7500 tax credit to buyers of EVs with a minimum percentage of minerals mined in the US (or US allies) |
Jul-22 |
|
US |
Cold War-era Defense Production Act: USD 500m in support for domestic critical metal supply chains |
May-22 |
|
China |
Pledged to assist the development of lithium production in Qinghai, Sichuan, Jiangxi |
Jan-22 |
|
Australia |
"2022 Critical Minerals
Strategy" in Mar included multiple grants/loans. |
Multiple |
|
UK |
Published first "Critical Minerals Strategy" report, alongside the launch of the first rare-earth processing hub in the UK (Pensana) |
Jul-22 |
|
Canada |
Published "Critical Minerals Strategy" discussion paper, has earmarked C$3.8b over 8 years |
Jun-22 |
|
Source: iFAST compilations. List is non-exhaustive. |
||
Key risk: Waning global growth
In the near term, we see demand risks in RESM markets which could weigh on the prices of these metals, and consequently on the profitability of RESM mining companies.
On the demand side, we caution that the weakening global growth outlook could cool demand for traditional end-uses of RESMs (such as smartphones and autos), which could in turn adversely affect demand for the metals. Smartphone shipments are expected to decline -3.5% year-on-year based on International Data Corporation’s (IDC) forecast, while global car sales are expected to decline -5.2% year-on-year based on Germany’s Center for Automotive Research. Looking at recent earnings releases, Samsung (the number one market leader in global smartphones) has also revised its smartphone demand forecast downwards, while General Motors has already modelled several downturn scenarios to guard against the possibility of a growth slowdown.
However, a potential buffer for the above could be the consistent demand for green technologies. Market leaders in their respective green-tech space (including EV and renewable energy companies) have continued to report stable growth and/or kept their earnings guidance intact. RESM mining companies have generally echoed this sentiment, with a majority guiding for resilient prices and earnings, as they expect demand for green end-uses to remain strong both in the near and longer term.
A breakdown of REMX ETF
Since our article in April, the REMX ETF has added four new companies to its allocation - Core Lithium Ltd, Lake Resources NL, Piedmont Lithium Inc, Sierra Rutile Holdings Ltd). This brings its total non-cash holdings from 20 to 24. These 24 companies within the ETF offer a diverse exposure to a range of different RESMs (Table 3), though they are mainly concentrated in Australian as well as Chinese companies (listed in China or Hong Kong), due to their market dominance in parts of the RESM space (Chart 4).
We have retained our earnings forecasts, due to our expectation that short-term demand should remain resilient and long-term drivers remain unchanged. Overall, we believe that the long-term story for this ETF remains intact. We project a target price of USD174 for this ETF, and investors can look forward to an attractive upside potential of +80% by FY24, using a fair P/E ratio of 20X (Chart 5, Table 4).
Table 3: Top 10 holdings broadly cover both rare-earth and strategic metals
|
Region of Listing |
Weight (%) |
Main Industry |
|
Pilbara Minerals Ltd |
8.2% |
Strategic Metals |
|
Allkem Ltd |
7.3% |
Lithium |
|
Zhejiang Huayou Cobalt Co Ltd |
7.1% |
Strategic Metals |
|
Liontown Resources Ltd |
5.9% |
Lithium |
|
China Northern Rare Earth Group High-Tech Co Ltd |
5.9% |
Rare Earths |
|
Lynas Rare Earths Ltd |
5.8% |
Rare Earths |
|
Xiamen Tungsten Co Ltd |
5.5% |
Strategic Metals |
|
Lithium Americas Corp |
5.2% |
Lithium |
|
Livent Corp |
4.9% |
Lithium |
|
Shenghe Resources Holding Co Ltd |
4.8% |
Rare Earths |
|
Source: Bloomberg Finance L.P., iFAST compilations. Data as of 30 Aug 2022. |
||
Chart 4: REMX continues to be concentrated in Australia and China
Chart 5: Earnings forecast and price performance for VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX)
Table 4: Projections for VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX) FY22 – FY24
| NYSE:REMX | FY21 | FY22 | FY23 | FY24 |
| PE Ratio (X) | 28.5 | 16.0 | 13.1 | 11.1 |
| Expected Earnings Growth YoY | - | 50% | 22% | 18% |
| Earnings Per Share (EPS) | 30.1 | 45.0 | 55.0 | 65.0 |
Projected
Fair Price (based on a fair PE Ratio of 20X) |
- | - | - | 174 |
| Potential Upside from Today (%) | - | - | - | 80% |
| Source: Bloomberg Finance L.P., iFAST estimates. Data as of 31 Aug 2022. | ||||
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