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December 6th, 2023 | 08:00 CET

Siemens Energy, Defense Metals, Rheinmetall - Rare earths as a risk factor

  • Mining
  • RareEarths
  • renewableenergies
  • armaments
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The scarcity of and access to rare earths has become a major global concern. China plays a decisive role in the production of rare earths, as the country mines 60% of all rare earths worldwide and processes 85% of them. After the US banned the export of AI chips, China considered banning the export of rare earth metals. These trade blockades from both sides are causing tensions in international trade relations and concerns about supply bottlenecks. Rare earths play an important role in wind power, armaments, medicine, electromobility and the electronics industry. As an investor, one should be aware of these risks.

time to read: 4 minutes | Author: Armin Schulz

Table of contents:

    Siemens Energy - Problems at Gamesa must be solved

    Rare earths play a key role in modern wind power technology. Neodymium and dysprosium are crucial for the production of high-performance permanent magnets used in wind turbine generators. The increased efficiency and robust performance of such equipment directly increases the profitability and sustainability of wind energy projects. In terms of profitability, Siemens Energy, or rather its subsidiary Gamesa, is struggling. While the other divisions are delivering solid figures, the wind power division is dragging the Group into the red.

    The Company presented its latest quarterly figures on November 15. Sales revenue fell by 2.5% to EUR 8.5 billion, mainly due to Siemens Gamesa. Earnings were also affected by the subsidiary and amounted to minus EUR 487 million before special effects. In total, a loss of EUR 870 million was recorded, compared to a profit in the previous year. Basic earnings per share amounted to minus EUR 1.04 compared to plus EUR 0.33 in the previous year. Free cash flow before taxes fell to EUR 1,108 million, compared to EUR 1,949 million in the previous year. The downward trend was halted thanks to guarantees from the federal government, Siemens and several banks.

    The cooperation between BASF and Siemens Energy in the construction of a water electrolysis plant for the production of CO2-free hydrogen could bring a breath of fresh air. The project in Ludwigshafen is intended to contribute to the decarbonization of industry and accelerate the energy transition and will be completed in 2025. The partners will receive EUR 124.3 million in subsidies for this. While DZ Bank and Deutsche Bank downgraded the share to "Hold" following the hydrogen announcement, Goldman Sachs recently issued a "Buy" recommendation with a price target of EUR 18.60. The share is currently trading at EUR 11.49.

    Defense Metals - Mineral resource increased

    Defense Metals aims to reduce dependence on China with its Wicheeda rare earth element (REE) project in British Columbia, Canada. The global shift to electric vehicles presents a major opportunity for the Company as the demand for neodymium-iron-boron magnets in electric motors increases the need for neodymium. Defense Metals is committed to meeting this increasing demand and contributing to national security and the need for environmentally friendly technology. In order to meet this demand, significant mineral resources of high-grade rare earth elements are required. The Wicheeda deposit offers just that. In September, the Company announced an increase in the mineral resource estimate. The corresponding NI 43-101 technical report was submitted to Sedar on October 30.

    The measured mineral resource is 6.4 million tons, with an average rare earth oxide (TREO) grade of 2.86%. The Indicated Mineral Resource is 27.8 Mt at an average TREO grade of 1.84%, while the Inferred Mineral Resource is 11.1 Mt at an average TREO grade of 1.02%. Overall, the combined Measured and Indicated Mineral Resources total 34.2 Mt at an average TREO grade of 2.02%. This exceeds the previous estimate by 17% in TREO grade and 31% in tonnage ratio. This improvement is based on additional borehole data from recent years and an updated geological model.

    There is also positive news on the processing side. The flotation tests show high recovery rates of 80% for a concentrate with 45% TREO and low energy consumption. The rare earth oxides and carbonates extracted from the pilot plant were supplied to interested parties from all over the world in order to convince potential customers of their quality. The samples were customized according to the requirements profile of the interested parties. The Company is currently working on the pre-feasibility study, which is scheduled for completion in the first half of 2024. The share has not yet been able to benefit from the positive news and is currently trading at CAD 0.16.

    Rheinmetall - New EUR 142 million order

    Rare earths play a critical and often underestimated role in the defense industry in the development and manufacture of modern defense systems. These include high-technology components ranging from precision-guided munitions systems, radar and communications equipment to night vision devices and aircraft. In times of geopolitical tensions and continuous innovation in military technology, securing access to and supply of rare earths has become a strategic priority for nations around the globe. Accordingly, Rheinmetall's production is also dependent on this critical raw material.

    The demand for defense articles has increased significantly since the outbreak of the Ukraine conflict. The Sipri Institute sees significant growth potential in the coming years. Orders are already increasing at many defense companies, but there is still a lack of production capacity. In November, Rheinmetall announced that it expects annual sales to almost double to EUR 13-14 billion by 2026. This year, sales are expected to reach around EUR 7.5 billion, with a margin of 15%. The last quarterly figures already exceeded analyst expectations.

    As recently as December 4, the Company announced an order worth around EUR 142 million for artillery ammunition from Ukraine. Demand for this type of ammunition is very high, so the Group intends to increase its capacity by 700,000 artillery shells in 2024. The German armed forces alone have placed orders worth over EUR 1 billion over the next few years. Production is to take place in Germany, Spain, South Africa and Australia. The share is trying to reach its old high of EUR 295.10 and currently costs EUR 281.10. Therefore, there is plenty of room to reach the highest price target of EUR 381 from Barclays Capital.

    Even if we are not aware of it, rare earths are found in many electronic products, and almost all new technologies require this critical raw material. Siemens Energy, however, has fewer problems with rare earths than with the profitability of its wind power division. The conversion will take time. Defense Metals is on its way to becoming a rare earth producer. Due to its proximity to the US, sales markets are quickly found, even though samples have been sent all over the world. Rheinmetall is positioned well in a booming defense industry, and the capacity increases are expected to pay off in the long term.

    Conflict of interest

    Pursuant to §85 of the German Securities Trading Act (WpHG), we point out that Apaton Finance GmbH as well as partners, authors or employees of Apaton Finance GmbH (hereinafter referred to as "Relevant Persons") may hold shares or other financial instruments of the aforementioned companies in the future or may bet on rising or falling prices and thus a conflict of interest may arise in the future. The Relevant Persons reserve the right to buy or sell shares or other financial instruments of the Company at any time (hereinafter each a "Transaction"). Transactions may, under certain circumstances, influence the respective price of the shares or other financial instruments of the Company.

    In addition, Apaton Finance GmbH is active in the context of the preparation and publication of the reporting in paid contractual relationships.

    For this reason, there is a concrete conflict of interest.

    The above information on existing conflicts of interest applies to all types and forms of publication used by Apaton Finance GmbH for publications on companies.

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    Der Autor

    Armin Schulz

    Born in Mönchengladbach, he studied business administration in the Netherlands. In the course of his studies he came into contact with the stock exchange for the first time. He has more than 25 years of experience in stock market business.

    About the author

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