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I have occasionally written on rare earth elements and some of the factors influencing prices. What I have never written is a background report on rare earths, the uses of them and market conditions. Here is my attempt at rectifying that oversight, as well as addressing those rare earths that I feel will offer the most upside potential.

There are many who currently believe that the rare earth market is super hot, on the verge of bubble. To this I offer the following:

  • One country controls the supply chain, and when that one country decides to tighten supplies (export quotas) while demand increases, price increases naturally follow.
  • While I believe that China is currently "flexing its muscle" with export quotas, and that these quotas will be loosened somewhat, China will be increasing domestic usage that will ultimately catch up with production capacity.
  • Given defense concerns (in the U.S. and abroad), countries will be forced to diversify their raw material sources, leading to further development of non-Chinese mines and production facilities.
  • The lead time required to begin mine production is significant enough that demand will continue to outpace supply in the near-term. This will continue to drive prices of rare earth elements up until production capacity comes online.

Rare Earth Description

There are 17 rare earth elements (REEs), 15 within the chemical group called lanthanides, plus yttrium and scandium. The lanthanides consist of the following: Lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, and lutetium. Rare earths are moderately abundant in the earth’s crust, some even more abundant than copper, lead, gold, and platinum.

The lighter lanthanides, when compared with their heavy analogues, have an enhanced distribution in the crust. This crustal enrichment relative to the mantle is most pronounced for lanthanum and tails off relatively smoothly towards lutetium, the last member of the series. The light lanthanides are thus significantly more abundant than the heavies.

Rare-earths production is derived from the rare-earths ores bastnasite, monazite, xenontime, and ion-adsorption clay. Bastnasite is the world's principal source of rare earths and is produced in China and the United States. Significant quantities of rare earths are also recovered from the mineral monazite. Xenotime and ion-adsorption clays account for a much smaller part of the total production, but are important sources of yttrium and other heavy-group rare earths.

In 1990, rare earths were produced by at least 14 countries. The United States was the largest of these, followed by China, Australia, India, and Malaysia. Except for one primary mine in the United States, essentially all rare earths are produced as byproducts during processing for titanium and zirconium minerals, iron minerals, or the tin mineral cassiterite.

Location

Most rare earth elements throughout the world are located in deposits of the minerals bastnaesite and monazite. Bastnaesite deposits in the United States and China account for the largest concentrations of REEs, while monazite deposits in Australia, South Africa, China, Brazil, Malaysia, and India account for the second-largest concentrations.

Rare-earth element reserves and resources are found in Colorado, Idaho, Montana, Missouri, Utah, and Wyoming. Heavy rare earth elements (HREEs) dominate in the Quebec-Labrador (Strange Lake) and Northwest Territories (Thor Lake) areas of Canada. There are high-grade deposits in Banyan Obo, Inner Mongolia, China (where much of the world’s REE production is taking place) and lower-grade deposits in South China provinces, providing a major source of the heavy rare earth elements. Areas considered to be attractive for REE development include Strange Lake and Thor Lake in Canada; Karonga, Burundi; and Wigu Hill in Southern Tanzania.

End Uses

1. Clean energy technologies: Lanthanum, cerium, praseodymium, neodymium, cobalt and lithium are used in electric vehicle batteries. Neodymium, praseodymium and dysprosium are used in magnets for electric vehicles and wind turbines. Samarium is also used in magnets. Lanthanum, cerium, europium, terbium and yttrium are used in phosphors for energy-efficient lighting. Indium, gallium and tellurium are used in solar cells.

The U.S. Department of Energy (DOE) released a report examining the role of rare earth metals in clean energy based on data collected and research performed during 2010 . Its main conclusions include:

  • Several clean energy technologies — including wind turbines, electric vehicles, photovoltaic cells and fluorescent lighting — use materials at risk of supply disruptions in the short term. Those risks will generally decrease in the medium and long term.
  • Clean energy technologies currently constitute about 20% of global consumption of critical materials. As clean energy technologies are deployed more widely in the decades ahead, their share of global consumption of critical materials will likely grow.
  • Of the materials analyzed, five rare earth metals (dysprosium, neodymium, terbium, europium and yttrium), as well as indium, are assessed as most critical in the short term. For this purpose, “criticality” is a measure that combines importance to the clean energy economy and risk of supply disruption.

2. Defense and military systems: The primary defense application of rare earth materials is their use in four types of permanent magnet materials commercially available: Alnico, Ferrites, Samarium Cobalt, and Neodymium Iron Boron. Neo magnets, the product derived from Neodymium Iron Boron, and Samarium Cobalt are considered important to many defense products. They are considered one of the world’s strongest permanent magnets and an essential element to many military weapons systems.

Here is a brief summary:

[Click all to enlarge]

Supply and Demand
World demand for rare earth elements is estimated at 134,000 tons per year, with global production around 124,000 tons annually. The difference is covered by previously-mined above-ground stocks. World demand is projected to rise to 180,000 tons annually by 2012, while it is unlikely that new mine output will close the gap in the short term. New mining projects could easily take 10 years to reach production. In the long run, however, the U.S. Geological Survey expects that global reserves and undiscovered resources are large enough to meet demand.

The following is taken from the U.S. DOE Critical Materials Strategy report dated December 2010:

And the medium-term assessment:

What these graphs mean to me is that the rare earths that should be focused on are: Dysprosium, Neodymium, Terbium, Europium and the quasi-rare earth Yttrium.

Future Production Potential

While, given the current market for REE, many companies are in the process of beginning or expanding REE production capacity, there are currently some companies with recognized (i.e., on the map and feasible) plans for increased production of REEs.

Molycorp (NYSE:MCP), which has an exploration program underway to further delineate its rare earth mineral deposits, has plans for full mine production in the second half of 2012 and plans to modernize its refinery facilities. Molycorp’s Mountain Pass deposit contained an estimated 30 million tons of REE reserves and once produced as much as 20,000 tons per day. Mountain Pass cut-off grade (below which the deposit may be uneconomic) is, in some parts, 7.6%, while the average grade is 9.6%. U.S. Rare Earth (another U.S.-based company), in the pre-feasibility stage of mine development, has long-term potential because of its large deposits in Idaho, Colorado, and Montana.

Canadian deposits contain the heavy rare earth elements dysprosium, terbium, and europium, which are needed for magnets to operate at high temperatures. Great Western Minerals Group (OTCQX:GWMGF) of Canada and Avalon Rare Metals (AVARF.PK) have deposits with an estimated high content (1-2%) of heavy rare earth elements. Avalon is developing a rare earth deposit at Thor Lake in the Northwest Territories of Canada. Drilling commenced in January 2010. Thor Lake is considered by some in the industry to contain one of the largest REE deposits in the world, with the potential for production of heavy REEs.

GWMGF.PK owns a magnet alloy producer in the U.K. When GWMGF.PK begins production in Canada and elsewhere, it plans to have a refinery near the mine site allowing greater integration and control over the supply chain. Great Western’s biggest advantage could be its potential for a vertically integrated operation.

Regulatory Sidebar
From Rep. Mike Coffman's website:

Rep. Mike Coffman (R-CO) made the following statement on the House Floor today during consideration of an amendment he has offered to the National Defense Authorization Act for Fiscal Year 2011. Coffman’s amendment, which builds on the GAO report he pushed for in last year’s defense bill, would require the Department of Defense to develop a plan for establishing a domestic rare earth magnet capability. Rare earth magnets are currently used in many critical weapons systems:

“The Department of Defense is facing a near-term shortage of key “rare earth” materials necessary to support our defense weapon systems, and rare earth magnets are especially critical. Currently, over 97% of rare earth production is controlled by China.”

“Today, the United States does not have a manufacturer of neodymium iron boron rare earth magnets, yet they are found in our precision guided munitions, ships, aircraft, and other critical weapons systems.”

“One key finding of the GAO report was their determination that some U.S. defense contractors are currently utilizing “neo” magnets from Chinese sources and incorporating them into the weapons platforms delivered to the Department of Defense. At present, we have almost no alternatives to these Chinese components, as the United States is not currently producing these magnets. Though America is not currently producing these magnets, we have the technological know-how to do so, combined with significant deposits of rare earths."

This is a brief overview of the rare earth market; I hope it helps. I'm currently at work on a piece that will focus on the firms that are involved in the mining and production of the critical rare earths identified earlier.
Disclosure: I am long GWMGF.PK.
Source: Rare Earths - A Brief Summary and Focus Elements