Rare earth miners: on the cusp of a rally?

While the surge in high technology and green technology applications for rare earths seemingly indicates good times ahead for miners and explorers of these metals, an Australian analyst suggests a dose of reality before uncorking the champagne.

Rare earths, a group of esoteric metals used in such unique applications as hybrid cars, windmills, fluorescent lightbulbs, magnets and plasma screens, are mostly mined in China, putting the country in the driver’s seat of this small, specialized market.

They include lanthanum, cerium, praseodymium, neodymium, samarium, europium, gadolinium, terbium, dysprosium, erbium, yttrium and four others.

In an effort to encourage manufacturers to produce finished products in China, the country has imposed export taxes and export quotas on the metals, and ruled out foreign ownership of Chinese rare earth mines.

Often, rare earths have no substitutes for their specialized applications, so foreign manufacturers may be getting concerned about this situation, with China having a stranglehold over supplies of these vital materials.

The question is whether this could herald a rally in rare earths, and with it, an opportunity for miners and explorers of these niche materials to advance their projects to production.

Dudley Kingsnorth, executive director at Industrial Minerals Company of Australia, agrees to some extent with this bullish outlook. “There is an issue with rare earths,” he says. But the situation is not as simple as it may look at first glance.

People are concerned that china supplies 95% of these metals, and that it has introduced measures to control and limit their export, putting overseas buyers at a disadvantage.

But China’s objective is to create jobs, Kingsnorth points out, rather than manipulate the market for these metals. The government there wants to facilitate the creation of integrated downstream industries.

“On the other side of the coin”, says Kingsnorth, “you have major manufacturers that are not comfortable placing so much manufacturing capacity in China, because of sovereign risk.”

“This is not a new situation,” he says. “It has been with us for some time.” And he agrees that it presents an opportunity for miners outside China.

However, people often underestimate the time required to bring a project to production. The mining side on a particular project could be straightforward, but the development of a process may turn out to be the more difficult and time-consuming step.

This is because each property is different, with a unique and complex mineralogy, metallurgy and chemistry, Kingsnorth says. And the process must also address the handling of radioactive uranium and thorium.

Most rare earth projects are owned by junior companies that need finance to advance to production. And since there are no open, transparent markets in these niche metals, funding is based on offtake sales contracts.

While it is true that many western buyers would like to increase diversity of supply away from China, they would also like to do so at low risk. But bringing a project to production is risky because of technological uncertainty.

Kingsnorth estimates the time needed to bring a project to production at a range of four to eight years.

A case in point is the Mount Weld project in Western Australia, owned by Australia’s Lynas Corp (LYSCF-O). The process took eight to ten years to develop, costing more than A$25 million.

“It could be typical,” Kingsnorth says. “Until you have a process, you don’t have a project.”

(Kingsnorth is personally familiar with Mount Weld, having managed the project under a previous owner.)

Rare earth miners cannot get sales contracts unless they demonstrate a process on a pilot plant. A working process can be the basis for a bankable feasibility study, which could lead to sales contracts, hopefully followed by financing. But merely demonstrating a process on a bench scale in the laboratory will just not do.

There is an opportunity in rare earths, Kingsnorth says, but it comes with considerable risk. He believes that in five year, most junior companies with rare earth projects will not be in production.

This is a small market. Demand in 2008 was 125,000 tonnes, valued at US$1.25 billion, falling to 92-95,000 tonnes this year. Kingsnorth sees demand rebounding to 120-125,000 tonnes next year, surging to 180-190,000 tonnes in 2014, valued at US$2-3 billion. Typical prices are US$9-11 per kg.

Because the proportion of different rare earths within deposits does not correspond to the demand, it will be necessary to mine 210,000 tonnes to meet the projected 2014 demand. If 160-170,000 tonnes come from China, the rest of the world would have to mine 40-50,000 tonnes.

Kingsnorth identifies two companies most likely to get projects to production, having the most advanced projects.

The first is Lynas Corp.’s Mount Weld project. Lynas is scheduled to receive A$252 million in equity from China Nonferrous Metal Mining, plus US$104 million from Chinese banks, subject to regulatory approvals. This will allow the company to build a mine to produce 21,000 tonnes rare earth oxides (REO) per year.

The second candidate is a private company, Greenwood Village, Co.-based Molycorp Minerals. Molycorp is conducting development studies for a 20,000 tonne-per-year REO mine at its Mountain Pass project in California.

A potential third REO project is Dong Pao in Vietnam, which foreign companies, together with the government, are trying to advance.

Other aspiring rare earth companies are in various stages of resource definition and process development.

Bringing a rare earth project on line requires dollars, expertise and determination, Kingsnorth concludes.

Rare earths with the most promising supply/demand fundamentals are europium, dysprosium, terbium and yttrium, followed by neodymium and lanthanum. Meanwhile, cerium is projected to show a surplus.