Rare Earth Due Diligence Checklist: Investment Screening Framework

Evaluating rare earth companies requires sector-specific due diligence beyond standard equity analysis. Production timelines, capex feasibility, off-take security, and geological risks are first-order. This checklist provides a systematic framework for screening rare earth stocks and identifying credible investment theses.

Production and Resource Fundamentals

Ore Reserve and Resource Assessment

• Check: NI 43-101 (Canada) or JORC (Australia) compliant resource statement?
• Verify: Mineral resource tonnage and grade; distinction between measured, indicated, inferred
• Red flag: All resources in "inferred" category (not yet validated); >50% dilution risk
• Target: 50%+ of resources in "measured" or "indicated" category for development stage
• REE element split: Understand what % is magnet REEs (Nd, Pr, Dy, Tb) vs low-value LREEs
• Red flag: >50% cerium or lanthanum (oversupply elements); low price realization

Production Timeline and Status

• Current status: Is company in exploration, development, or production?
• Timeline to production: Operating company = 0 years; development stage = 3-7 years typical
• Red flag: Exploration-stage company expecting >10 years to production (high execution risk)
• Permitting progress: What permits are outstanding? Environmental, water, tailings facility?
• Historical delays: Has company met previous construction milestones? Track record matters

Production Volume Forecast

• Verify: Annual production target in REE tonnes or REE oxide equivalent
• Magnet REE focus: What % of production is Nd, Pr, Dy, Tb?
• Comparison: Size vs. global supply (Nd global ~600k tonnes/year); comparative scale
• Red flag: Company claiming >50% of current magnet REE supply without clear market contracts

Capex and Financial Feasibility

Capital Expenditure Requirements

• Total capex: What is full build-out cost? Separate mining vs. processing capex
• Timing: When is capex required? Front-loaded (next 2-3 years) or phased?
• Magnet REE beneficiary: Does higher capex buy optionality (separators can reprocess)?
• Red flag: Capex >$500M with unproven resource; risk asymmetry is extreme
• Comparison: Mountain Pass ~$1.5B; MP Materials total invested ~$800M; benchmark context

Funding Sources

• Equity raised: How much capital has company raised to date? Dilution history?
• Remaining capex needs: Can company fund capex from existing cash + equity raises? Or debt required?
• Red flag: Company needs to raise >50% of remaining capex; dilution risk rising
• Strategic investor: Does company have strategic investor (government, industrial partner)? De-risks funding
• Asset-backed financing: Can company monetize reserves for project finance? Validates feasibility

Unit Economics

• Cash cost per tonne REE: What is all-in production cost? Compare to current prices
• Margin analysis: At $70/kg Nd, does company break even? Negative margins unviable
• Sensitivity analysis: How much does margin swing if Nd price drops 20%?
• Red flag: Breakeven cost >$60/kg; limited margin of safety; vulnerable to price declines

Off-Take and Commercial Security

Off-Take Agreements

• Critical: Does company have binding off-take agreements (contracts) for production?
• Type: Full-supply contracts vs. foundational demand signals?
• Counterparty quality: Off-takes from creditworthy strategic buyers (Tesla, Siemens, etc.) vs. traders?
• Price terms: Fixed-price contracts (price risk to seller) vs. market-linked (upside shared)?
• Red flag: Zero off-takes signed; company betting entire capex on commodity spot market sales (extreme risk)

Revenue Concentration

• Customer concentration: What % of revenue from top 3 customers?
• Red flag: >70% revenue from single customer; customer concentration risk
• Industry diversification: Sales to EV/wind/defense/industrial? Or single sector?
• Geographic diversification: Who are customers? China domestic? Western OEMs? Emerging markets?

Market Entry Risk

• Proven buyer relationships: Has company demonstrated ability to sell product samples?
• Qualification: Do OEMs require multi-year product qualification before bulk purchases?
• Price discovery: Can company achieve market-competitive pricing vs. Chinese incumbents?
• Red flag: New entrant with zero commercial sales and ambitious production targets (execution risk)

Operational and Geological Risk

Deposit Quality and Mining Complexity

• Ore type: Bastnaesite (China), monazite (diverse), ionic clay (Asia)?
• Grade: Higher grade = lower waste = lower cost; compare to peer deposits
• Depth: Open pit (cheaper) vs. underground (expensive)?
• Red flag: Very low grade or extreme depth; cost structure uncompetitive
• Geological uncertainty: Resource in early-stage drilling vs. proven by extensive development mining?

Processing Complexity

• Technology: Proven separation technology or novel/unproven process?
• Red flag: Unproven separation technology; technical risk is extreme
• Thorium/radioactivity: Does deposit contain thorium? How is company handling waste?
• Environmental permitting: Are permits granted or still pending?

Operational Execution Track Record

• Management team: Does team have prior rare earth or mining development experience?
• Red flag: First-time mining entrepreneurs without sector expertise
• Prior projects: How have previous management projects performed? On-time, on-budget?
• Advisory board: Is there credible technical advisory board with mining credentials?

Financial and Balance Sheet Strength

Balance Sheet Quality

• Cash position: Months of cash runway at current burn rate?
• Red flag: <6 months cash; imminent funding requirement or dilution
• Debt exposure: Does company have material debt? Any covenant violations?
• Liabilities: Any contingent liabilities (environmental, litigation)?

Burn Rate and Path to Cash Flow

• Annual burn: How much cash does company burn annually? G&A + capex?
• Timeline to positive cash flow: When does operating mine generate positive cash? Years?
• Red flag: Path to positive cash flow >7 years; execution risk compounding

Historical Financing and Dilution

• Share count trend: Has share count increased >50% in past 3 years? High dilution
• Recent raises: At what price were recent equity raises? Pricing trends?
• Shareholder base: Who owns significant shares? Strategic investors or financial?

Geopolitical and Regulatory Risk

Political Risk Assessment

• Operating country: Political stability score (World Bank governance indicator)?
• Mining history: Has country enforced environmental regulations on other miners?
• Regulatory certainty: Are mining permits stable or subject to retroactive changes?
• Red flag: Countries with history of policy reversals (Venezuela, Zimbabwe)

Environmental and Social Risk

• Indigenous rights: Are indigenous communities impacted? Legal claims possible?
• Water/agriculture conflicts: Will mining compete for water? Farming opposition?
• ESG scorecard: MSCI, Sustainalytics rating? Any violations?
• Red flag: Major ESG controversies or indigenous conflicts pending

Trade Policy Risk

• End market concentration: If sales to Western OEMs require export/import licenses, what risk?
• China competition: Could Chinese competitors undercut on price? Market consolidation risk?

Management and Governance

CEO and Management Team

• CEO background: Prior mining/materials experience? Prior company successes?
• Red flag: CEO with poor track record or no mining sector experience
• Board expertise: Board members with mining, REE, or industrial background?
• Insider ownership: Do insiders own meaningful shares? Alignment with shareholders?

Corporate Governance

• Board independence: Majority independent directors?
• Audit quality: Big 4 auditor vs. smaller firm?
• Red flags: Audit qualifications, going concern warnings, management turnover

Investment Rating Criteria

High Quality (BUY)

• Magnet REE focus; resource >70% measured/indicated
• Production timeline 2-4 years; capex <$500M
• Binding off-takes from creditworthy buyers; price >$50/kg equivalent
• Strong management team; proven execution
• Sufficient funding; path to cash flow positive

Medium Quality (HOLD)

• Magnet REE exposure; resource 40-70% measured/indicated
• Production timeline 4-6 years; capex $400-800M
• Foundational off-takes or strong market demand signals
• Experienced management; mixed execution history
• Funding needs; dilution likely but manageable

Low Quality (AVOID)

• LREE focus or Nd only; resource <40% measured/indicated
• Production timeline >6 years; capex >$800M
• Zero off-takes; speculative market entry
• Inexperienced management; execution risks
• Significant funding gaps; severe dilution ahead

Red Flag Checklist (Walk Away If...)

• Company has zero commercial off-takes and >$500M capex
• All-in production cost >$60/kg; margin of safety too low
• Resource 100% inferred; insufficient technical validation
• Timeline to production >7 years; too much execution risk
• No prior mining sector experience on management team
• Operating in country with poor governance or mining history
• Environmental liabilities or unresolved indigenous conflicts
• Cash runway <6 months; imminent dilutive capital raise
• Majority of revenue from single customer
• Unproven or novel separation technology

Key Takeaways

• Screen for magnet REE focus; LREE exposure reduces scarcity premium
• Production timeline critical; >6 years = execution risk becomes material
• Off-take agreements de-risk commercial viability; zero contracts = red flag
• Capex requirements must be fundable; <$500M capex preferred
• Management team must have mining/rare earth track record
• Geopolitical and environmental risk assessment is non-negotiable