Rare Earth Metals: Why All the Fuss?

Note: The rare earth metals are extremely important to the developed Western economies. The two part interview with Jim Dines along with Casey's overview will provide a great foundation about these vital elements.]

Part One – Jim Dines – Paper For Wealth In The Ground – 30 minutes

Part Two – Jim Dines – Paper For Wealth In The Ground - 33 minutes

By Doug Hornig, Senior Editor, Casey’s International Speculator

Rare earth elements (REEs) have been the mystery metals of the mining world for years. Now, suddenly, everyone’s heard about them.

Before we delve into the reasons behind all the publicity, here’s the basic skinny on REEs: One, they are rare, at least sort of. Two, they are indispensable to modern technology. Three, the number of active, dedicated producers is tiny, with more than 90% of the world’s supply coming from China.

If you took high school chemistry, you probably remember the periodic table of the elements. But if you’re like most of us, even if you pulled a 95 on the chem final, you may not recall many of the details today. And there’s a better than even chance you never bothered to memorize the names of the REEs. It’s time to get reacquainted.

They’re generally clustered in a separate grouping at the bottom of the table, are known collectively as the lanthanoids, and these are their names, in order of atomic number (57-70): lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, and ytterbium. Yttrium (39) and lutetium (71) are also sometimes included.

Need to know, point 1: Rarity.

Fact is, we begin with something of a misnomer. These elements are not, strictly speaking, rare. Earth’s crust is full of them. True, they’re not as common as iron, carbon, or silicon, but are about on a par with nickel, copper, and zinc. Even the scarcest is way more abundant than gold, platinum, or palladium.

What is rare about them is that they’re widely dispersed. Very seldom are they found in economically exploitable deposits. Complicating matters further is that there are so many of them, and they clump together. They have to be separated first from the ore and then from each other.

Thus REE production comes primarily from other mines’ byproducts. The miner strips off the metal he’s really after, then sends the REE clusters to a specialty refiner.

Need to know, point 2: Applications.

It’s safe to say that life as we know it would be very different without the REEs. The more our technological accomplishments pile atop one another, the more crucial these metals become. Because of their unique properties, there are generally no substitutes for them.

Of all the REEs, the one people may have heard of is neodymium. Alloys containing it have revolutionized permanent magnet technology, allowing miniaturization of all sorts of electronic components in appliances, A/V equipment, computers, communication systems, and military gear. Your hard drive probably has neodymium in it. So does your DVD player.

Liquid crystal displays depend on europium. Fiber-optic cables can’t function without erbium. Virtually all specialty glass products, from mirrors to precision lenses, are polished with cerium oxide. Several REEs are essential constituents of both petroleum fluid cracking catalysts and auto emissions-control catalytic converters. Half a dozen REEs go into the manufacture of the energy-efficient fluorescent bulbs that will soon be mandatory. Lanthanum-nickel-hydride rechargeable batteries are replacing older ones based on lead or cadmium. And no REEs, no electric cars. Nor next-generation wind turbines.

That’s only a partial list. But what makes REEs an increasingly sensitive topic is their role in national defense. Here are a few small items that have become dependent on them: jet fighter engines, missile guidance systems, underwater mine detectors, range finders, space-based satellite power plants, and military communications systems.

Think the Pentagon is very, very interested in maintaining a steady REE supply?

Need to know, point 3: Supply.

95% of the world’s REE production originates in China. If you’re looking for reasons why we’re so nice to the premier Communist power left standing, this is a biggie.

We weren’t always so dependent. Not long ago, mines such as Mountain Pass in California made us nearly self-sufficient in REEs. But in the early ‘90s, China flooded the market with cheaper product, until it had driven all of its competitors out of business.

Today, Mountain Pass is being revived, but the start-up of an old mine is a lengthy and costly process. There are also some from-scratch REE development projects under way in the U.S., as well as Canada and Australia. But for the moment, China holds the hand with all of the high cards in it.

Forget your hard drive. Forget 11th-grade chemistry experiments. This is a national security issue. The American government cannot afford to lose that supply source, period. Maybe someday, but not now.

And that’s what’s behind the recent furor over these obscure elements. Because China threatened just that, a cutoff. The one thing that really gets Washington’s knickers in a twist.

In August, the story broke in the mainstream press. Sources in China leaked news of a draft copy of a report from the Ministry of Industry and Information Technology. It allegedly calls for a total export ban on five of the rare earths, with the rest restricted to a combined export quota of 35,000 metric tons a year, far below annual global consumption of 125,000 tons, and rising fast.

This doesn’t look like a move they’d follow through on, if only because of the lost trade revenues. And it’s only a recommendation; final approval rests with China’s State Council. But consider it an opening shot across our bow, if you wish. Or perhaps they’re telling us they need their REEs for the domestic economy, and we’d best go find our own supplies. Either way, the scramble is on to find alternatives.

That could backfire. REE prices and demand were already dropping last fall as the recession deepened, and China maintains a decided competitive advantage beyond control of supply: lax environmental standards (many REEs are highly toxic). Thus the new companies could spend the fortunes required to come on line, only to find themselves victims of yet another market glut engineered by the Chinese. Still, these metals are so important, it wouldn’t surprise us if the U.S. government subsidized domestic production, rather than risk a squeeze.

THE MARKET

The market took due notice of the China story, driving the stocks of Western REE producers, and would-be producers, nearly straight up. Since late August, Avalon Rare Metals (AVARF.PK) has gained 120%, Arafura Resources is up 75%, Rare Element Resources (RRLMF.PK) has added 72%, and Lynas Corp. (LYSCF.PK) is 50% higher (China, ever the master strategist, exploited the credit crisis to grab 25% of Arafura and more than 50% of Lynas). Lurking in the background is Molycorp, the private company redeveloping Mountain Pass. It’s planning an IPO that may well come out of the gate red hot.

With market action this frantic, the sector is on the frothy side at the moment. The heady market caps being awarded to these companies are obviously not based on fundamentals, and a savvy investor takes care not to get caught on the wrong side of a bubble.

Even though the Chinese export ban may never materialize, the ever-growing need for REEs is dead serious. And while the current bubble may pop any day, the long-term prospects for successful miners are outstanding.

Comments

[Alan Young:]

Thanks, this is a very good summary (and well written).

A couple of updates/corrections:

The Chinese bid for Lynas has fallen through; instead, the company is issuing more stock through the Australian financial markets. Ironically, the furor over the evident Chinese attempt to corner the market is what made the stock offering possible (although the price has been diluted, of course).

Additional Rare Earth companies worth a mention are Great Western Minerals (GWMGF); Quest Uranium (QSURF)--they shifted from Uranium to rare earth exploration this year: and NEO Material Technologies (NEMFF). All are based in Canada.

Oct 04 05:26 AM

[Innovations...:]

Great Western Minerals (GWMGF) has an interesting Mine-to-Market strategy that includes a processing plant and significant expertise - and it appears to be generating revenue today.

Oct 04 09:04 AM

[Wildebeest:]

Lynas dropped 1/3 in the two days of trading since the Chinese bid was stopped. Trading in these sort of companies looks to be driven by day traders rather than serious investors. Also, until prices do rise substantially some of the rare earth ventures look to be marginal at best. Having a large resource is one thing -- and with Lynas most of it is inferred anyway -- but it has to be economic.

There are better sectors out there to invest in.

Oct 04 11:35 AM

[isaac the t...:]

Great time to get in with Lynas. They've replaced the Chinese funding with conventional funding almost immediately (oversubscribed by institutional investors). They're pipeline is well underway. Check out the website- Lynas Corp.
And yes, I bought shares in the past 3 months.

Oct 04 12:26 PM

[Wildebeest:]

I don't know about "great" but they might be worth looking at if the price drifts lower.

The headline resource sounds good but most of it is inferred. The dollar per kilo value on their ore that is being spruiked assumes 100% recovery. If you allow for recovery rates it is not clear how it will be profitable at current rare earth prices. Buying is therefore a leap of faith about the direction of prices (and that the resource will be upgraded from inferred).

wildebeests.wordpress..../


On Oct 04 12:26 PM isaac the terrible wrote:

> Great time to get in with Lynas. They've replaced the Chinese funding
> with conventional funding almost immediately (oversubscribed by institutional
> investors). They're pipeline is well underway. Check out the website-
> Lynas Corp.
> And yes, I bought shares in the past 3 months.

Oct 04 04:43 PM

[nickpaul:]

The rare earth deposits of LYNAS at Mt Weld and at the Southern Zone are measured, indicated and inferred. The huge highly prospective zones that LYNAS has, also contain other rare metals. There is more misinformation in this area than any other i've encountered. Best go to individual web sites, and draw your own conclusions. Beware hype about %ages of HREE's and LREE's, and concentrate on the average (or head) grades of total REE's and the %ages of individual elements. There are "expensive" and "cheap" individual elements. I own LYC, ARAFF, ALKEF, GWMGF and RRLMF.


and "cheap" individual

Oct 04 06:50 PM

[chux08:]

In this case, I think it would be advantageous to invest in an American rare Earth element company such as Ucore Uranium. Besides having one of the largest heavy REE deposits in North America, located on Prince Edward Island near Ketchikan Alaska, their flagship Bokan Mountain project also contains the past producing high grade Ross Adams uranium mine, Alaska's only uranium mine with over 11 million lbs of U-308. Their September 3rd news release says that a past USBM strategic study done in the 1990's on both the property and the deposit, was done well enough to be converted over to NI43-101 standards, saving the company millions of dollars and maybe years off getting this deposit into production. The study also contains the formulas for separating the metals found in THIS deposit in particular, something very few other companies specializing in REE's currently have for their deposits. This deposit may be so important to the US Government (along with the Mountain Pass project in California owned by MolyCorp), they may provide some kind of development assistance and other such special treatment, to help bring them into production and to make sure they have a ready source for their Star Wars and other high tech weapons systems (and many other high tech and even green applications too) that couldn't exist without a ready supply of REE's. Not only do they have this outstanding REE project, they have several high quality uranium properties located all through Canada in their development pipeline that are worthy of mention also. Anyway, check em out for yourself. This truly would be an "investment in America" for whatever that's worth....

www.ucoreuranium.com/b...

Oct 04 10:34 PM

[Wildebeest:]

You're right. I had mistakenly focused on the southern zone when commenting on most of the resource being inferred (which it is in the southern zone). My main concern was and is slide 18 of their 9 Sept investor presentation. The value of their ore relies heavily on the value weighting due to trace components. The rare earths make up ~9% of the ore (in the central zone) and of that the high value rare earths make up 0.12%, 0.44% and 0.07%. The value attributed to the ore relies on high recovery rates for these 3 trace components. Therefore the ability to achieve a high recovery of those 3 is the crucial thing in any attempted valuation of Lynas.

In other news an announcement of a supposedly large deposit in Greenland recently:
business.timesonline.c...


On Oct 04 06:50 PM nickpaul wrote:

> The rare earth deposits of LYNAS at Mt Weld and at the Southern Zone
> are measured, indicated and inferred. The huge highly prospective
> zones that LYNAS has, also contain other rare metals. There is more
> misinformation in this area than any other i've encountered. Best
> go to individual web sites, and draw your own conclusions. Beware
> hype about %ages of HREE's and LREE's, and concentrate on the average
> (or head) grades of total REE's and the %ages of individual elements.
> There are "expensive" and "cheap" individual elements. I own LYC,
> ARAFF, ALKEF, GWMGF and RRLMF.
>
>
> and "cheap" individual

Oct 05 10:18 AM

[tommm:]

Yes - good summary on lots of the basics of REE's...and the investing therein. And I so much enjoyed the personal and casual tone of the writing, combining details with the vernacular (skinney, knickers in a twist, and others. ) thanks, and keep them coming.

Oct 09 04:33 PM

[Michael*WD:]

Article and comments provide interesting and valuable perspectives. While all of the companies mentioned may prove to provide substantial returns to current investors in the distant future they are all speculations. The sale of additional shares by a corporation provides additional capital but this also dilutes the equity per share of existing shareholders. Risk tolerance level and patience are two major factors for such speculative ventures. Probabability of profitable performance is another.

Oct 24 04:29 PM