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Of the many aspects of a rare earth deposit vital to its success, John Kaiser of Kaiser Bottom Fish Online argues that there are three deal breakers. These three things, when assessing the quality of potential resource investments in the smoking hot rare earth sector, should be meticulously scrutinized. In the order that John told them to me on our latest episode of resourceINTELLIGENCE TV, these essential attributes are rock value, tonnage footprint and distribution of metals.

John is known as a mining maven with 25 years experience in the resource investment sector. His investments calls have over the years netted him a broad following of investors. As a result, John speaks regularly on the conference circuit, from San Fransisco to Zurich. Between now and next September, John is scheduled to speak at more than 25 conferences.

Part 1: Click here to view the video

Part 2: Click here to view the video

For example, John’s assessment of Quest Uranium’s [TSXV: QUC] Strange Lake project, which helped to put the company on many serious investors’ radar back in April 2009, gave “an astonishing rock value of US $304 per tonne for those samples Quest plucked from the main outcrop of the Strange Lake deposit.”

In our interview, John also mentions a number of other rare earth prospects for investors, such as Great Western Minerals [TSXV: GWG] and Avalon Rare Metals (AVARF.PK). Each company has its merits so investors must sift through the data and make intelligent choices.

The rare earth story is relatively new to most investors. Most by now know that China controls somewhere between 90 and 98 percent of the global supply of rare earth material. There really aren’t any functioning rare earth mines outside of China today. Rare earths are used in some of the fastest growing manufacturing sectors, including wind turbines, cell phones and hybrid electric vehicles, to name just a few.

Here’s a brief background on why the fundamentals for rare earths are what they are today: red hot. Every good story has an ample source of tension. The rare earths story abounds with the stuff.

To wit: Gasoline is quickly becoming passe. Within a few decades, most new vehicles will not be run directly from greenhouse gas emitting substances like petroleum-based fuels but rather a combination of fuel and electricity or something else entirely. There are simply too many reasons why this is so: Peak oil, global warming and oil-fueled wars being the three most obvious causes of triple digit oil costs.

Then there is the race for the prize: He who controls the means, will largely control the process. And the means is technology and rare earths. As I stated earlier, China controls almost all the rare earth production in the world.

Add to that that China has also stated that it will cease providing the world with rare earth metals and instead begin manufacturing its own hybrid vehicles. The New York Times wrote an excellent piece on that here. I’ll borrow a couple of paragraphs to illustrate the point:

China wants to raise its annual production capacity to 500,000 hybrid or all-electric cars and buses by the end of 2011, from 2,100 last year, government officials and Chinese auto executives said. By comparison, CSM Worldwide, a consulting firm that does forecasts for automakers, predicts that Japan and South Korea together will be producing 1.1 million hybrid or all-electric light vehicles by then and North America will be making 267,000.

The United States Department of Energy has its own $25 billion program to develop electric-powered cars and improve battery technology, and will receive another $2 billion for battery development as part of the economic stimulus program enacted by Congress.

The problem is not that China wants to dominate the market. China’s problem is a very practical one that concerns growth: It’s difficult to move a billion people around cities and towns without a steady supply of fuel. Since China has little oil and practically the entire global supply chain of rare earths, it makes sense for China to take battery powered route.

Now consider that Toyota (NYSE:TM) is and wants to remain the global leader of hybrid electric manufacturing and sales. In 2006, Toyota controlled over 91% of the hybrid market in Europe and 70% in the US.

To put it into perspective, in 2007 Toyota announced that it had sold 1 million hybrid vehicles for the first time. Two years later, on August 1st 2009, the company announced its annual sales of hybrid vehicles had doubled again to 2 million.

In every one of those 2 million hybrid vehicle batteries is approximately 25kg of rare earth metals, including dysprosium and neodymium. That means 50 million kg or 110 million pounds of the various rare earths.

Another example: According to aggregateresearch.com, a utility scale wind turbine uses more than a ton of heavy-duty and lightweight magnets, 700 pounds of which is neodymium. According to the American Wind Energy Association, in the US

wind turbine and turbine component manufacturers announced, added or expanded 70 new facilities in the past two years, including over 55 in 2008 alone.

The rate of growth of this sector is astonishing.

Now let’s come back to China. Here’s an excerpt from a Wikipedia article:

Nearly all the rare earth elements in the world come from China, and many analysts believe that an overall increase in Chinese electronics manufacturing will consume this entire supply by 2012.

This last phrase is in itself remarkable: If China were to consume its entire supply of rare earths by 2012, the world would not be able to produce another rare earth-fueled hybrid or electric vehicle — unless there suddenly appeared another source of rare earths. There are alternatives, yes, but the heavy rare earths in particular allow for long life batteries that make battery-powered travel a viable alternative to petroleum powered travel.

The Wikipedia entry continues:

In addition, export quotas on Chinese Rare Earth exports have resulted in a generally shaky supply of those metals. A few non-Chinese sources such as the advanced Hoidas Lake project in northern Canada as well as Mt. Weld in Australia are currently under development; however it is not known if these sources will be developed before the shortage hits.

And that, really, is the crux of this week’s episode of Resource Intelligence TV. We’ve interviewed two of the fastest moving companies in this sector. One, GWG, has two projects near production and could be the first REE producer outside China. The other, QUC, has a large deposit already but based on preliminary drilling could be sitting on one of the biggest.

Disclosure: No positions

Source: Analyst John Kaiser on Rare Earths