Defense Metals, Nordex, Rheinmetall - The world does not work without rare earths

Defense Metals - Increases land package and drills again

Although rare earths are more common, there are few economically viable projects. Defense Metals owns one such project in Wicheeda, Canada. The Rare Earth Project is now 4,244 hectares in size and shows high-grade deposits of rare earths at surface. From this, an indicated mineral resource of 5 million tonnes averaging 2.95% total rare earth oxide (TREO) and 29.5 million tonnes averaging 1.83% TREO has been inferred to date. The Preliminary Economic Assessment (PEA) was released last November. The deposit is certified to have an after-tax net asset value of 512 million Canadian dollars (CAD). Approximately 25,400 tons of rare earth oxide are expected to be produced per year, generating revenues of CAD 397 million.

The Company added 507 hectares to its land package in early May through a joint venture. On May 24, SRK Consulting was engaged to assist the Company in the planning and execution of a geotechnical field drilling program. This is intended to bring the data to a pre-feasibility study level. In late May, a test of a process yielded better rare earth recovery results at a lower cost compared to the PEA study process. On June 7, the 5,000m diamond drilling program began. Just 9 days later, the first two drill holes totaling approximately 615m were nearing completion. Upon completion, geotechnical infill and pit slope drilling will begin in the main deposit area.

This exploration work will cost money, which was raised through a private placement in April. Around CAD 4.55 million was raised through the issue of new shares. However, this put the share under pressure. At the beginning of March, it was at CAD 0.36 but fell to CAD 0.165 by June 20. From there, there was a 45% rebound. Currently, the share is trading at CAD 0.23. In the second half of the year, the hydrometallurgical flow sheet is to be finalized, the pre-feasibility study is to be started, and potential customers are to be approached with the rare earths extracted from the pilot plant. Even though the overall market is currently difficult, the market environment for rare earths is ideal.

Nordex - In the valley of tears

Neodymium magnets are used for the gearless generators in wind turbines, as these permanent magnets ultimately have a positive effect in terms of power in a wind turbine. At the same time, these gears are much smaller and thus save on other raw materials. Without rare earths, there are no permanent magnets. Recently, more and more wind power manufacturers complained about supply chain problems. The German company Nordex is also affected by this. With the start of the traffic light government, good business initially beckoned to renewable energy manufacturers, but the euphoria has faded.

With rising inflation and the accompanying interest rate hike by the FED in March, fears of financing problems returned. That was followed by the Group's profit warning on May 24. Increased costs put pressure on the already thin margins at the wind turbine manufacturer. The Company still expects sales of EUR 5.2 to 5.7 billion, with an EBITDA margin of between -4% and 0%. In addition, there are write-downs on projected turbines in Ukraine and Russia. Most recently, the Company had to announce the closure of the last rotor blade plant in Germany, even though it expects to need more rotor blades in the coming years.

On June 21, the Company published its figures for the first quarter. The bottom line was EUR 933 million in sales with an adjusted EBITDA margin of -5.6%. In the medium term, however, the Company aims to achieve a margin of 8%. At the end of June, a private placement of 16 million shares to the anchor shareholder Acciona SA at EUR 8.70 followed. The dilution was not to the liking of shareholders, and Morgan Stanley recently announced a reduction in its share position. The share is currently trading at EUR 8.31, just short of the low for 2022 of EUR 7.93. It is a bit of a paradox that the Company has the full backing of the government and yet is stuck in the bureaucratic jungle.

Rheinmetall - New orders and cooperation

According to the US Congressional Research Service, an F35 fighter jet requires 417 kg of rare earths, and modern frigates contain around 1.5 tons. The European Security and Technology Agency assumes that supply shortages of rare earths are to be expected from 2025 onwards. Dependence on China certainly poses a risk, which the US military already recognized in 2019 and announced plans to fund rare earth factories. If the Chinese were to halt exports, the production of precision and other high-tech weapons and communication systems would come to a standstill. This would also directly affect the production of the German Rheinmetall.

At present, it does not affect the Group. Since the outbreak of the Ukraine conflict, business has been booming. In June alone, 7 new orders with a volume of between EUR 20 and 250 million were won, including from the US Navy and NATO customers. In addition, there are cooperation agreements with Michelin and Calian. An end to the order intake is not in sight due to the situation in Ukraine. Germany alone will provide the German Armed Forces with EUR 100 billion. Other countries are also being forced to increase their defense spending, as many countries' defense budgets were below the 2% required by NATO.

Apart from the energy sector, the defence industry is the only one that can really profit from the current situation. Rheinmetall's share price reflects this, which is only just below the high for the year of EUR 227.90 despite the difficult overall market. The current price per share is EUR 212.60. In June, there were buy recommendations from Goldman Sachs, Warburg Research and UBS with price targets between EUR 240 and EUR 298. So far, the management has been very reluctant to increase its forecasts. We can look forward to August 5 with interest. That is when the Düsseldorf-based company will present its half-year figures.

Conclusion
The fact is that 90% of rare earths come from China, giving the country a monopoly position. Now that it seems the East and West are moving further and further away from each other, it is more important than ever to find alternatives for these dependencies. Defense Metals is on its way to becoming a producer, and one can use the weakness in the overall market for an entry. At Nordex, little is going according to plan at the moment. Despite ideal conditions, there are a lot of stumbling blocks. We could see even lower prices here. Rheinmetall, on the other hand, is going like clockwork. The upward trend is hard to stop at the moment.