Rare Earths Shortage Looming?

The key metals needed for hybrid cars, flat-screen TVs and energy-efficient lighting could be in short supply in a few years’ time if rare earth element mines aren’t developed outside of China, some industry experts say.

About 95% of the world’s rare earths are produced in China, whose abundant sources and cheap production costs have made it the go-to source. But lately, the Asian superpower has been limiting exports to the rest of the world in the name of developing its own manufacturing sector. Continued growth in China could mean it will need all the rare earths it produces by 2013, leaving the rest of the world in short supply.

Dudley Kingsnorth, a rare earths consultant and executive director of Industrial Minerals Co. of Australia, estimates world demand will reach 230,000 tonnes per year by 2013, up from 135,000 tonnes this year, but production isn’t expected to keep pace. A 40,000-to 60,000-tonne shortfall is likely if there are no new rare earth mines up and running outside of China by then.

“We’ve got a whole lot of companies out there talking about their projects,” Kingsnorth says from his home in Perth. “They’ve got to stop talking about it; otherwise, that gap won’t be filled.”

Kingsnorth says that with a cornered market, China now has a strategic advantage that pretty much forces manufacturers outside of China to buy value-added rare earth products instead of rare earths in pure form. The government has done this by upping tariffs and cutting export quotas on pure rare earths; tariffs now range between 15% and 25%, up from 10% in 2006 and exports have been cut to 34,156 tonnes of rare earth oxides in 2008 compared with 48,500 tonnes four years ago. To Kingsnorth, this means opportunity for those developing deposits outside of China.

“Non-Chinese customers want to see some diversity of supply to minimize their sovereign risk,” Kingsnorth says.

Rare earth elements, known on the periodic table as the lanthanide metals plus yttrium, actually aren’t that uncommon. Uses for them have grown over the years: catalysts for the oil-refining industry, magnets used in high-energy electric motors and batteries for hybrid vehicles and LCD screens all require rare earths. Rare earths are critical for the military sector, too — for aircraft manufacturing and laser technology used for missile defence systems.

The potential for a shortage of rare earths rings an alarm bell for Jack Lifton, an independent consultant focusing on the sourcing of nonferrous strategic metals. Supply from China is not reliable over the long term, and rare earth consumers outside of China “are working on the edge of a cliff,” Lifton says.

“We have been lulled into a sense of false security because Wall Street, Bay Street and the City all think that all you have to do if you want a commodity is just keep offering a (higher) price,” Lifton says. “China is not responding to that pressure.”

Lifton doesn’t understand why the financial community isn’t backing the development of non-Chinese sources.

“It’s necessary to bring all of the known Western deposits into production,” Lifton says. “I think it’s nuts not to make the investment.”

It’s true the financial community is only now learning the opportunities for rare earths.

Research Capital analyst Barry Allen says his firm had its first-ever rare earths conference this April in Toronto.

“It was considered very new,” Allen says. “If we roll down the road ten years, rare earths are going to be a big part of our mining industry.”

Allen agrees that supply could be a problem in a few years, especially for carmakers that are seeing growing demand for hybrids.

“There is potential for a crisis looming in supply of rare earths,” Allen says.

But he expects a supply response. “The mining community has been pretty good about reacting to commodity prices,” he says.

One of the main hurdles for miners is balancing the supply of individual rare earth metals, as the ratio in which they occur naturally doesn’t always match demand. The metals can’t be selectively mined — they occur together and have to be separated during processing according to atomic weight.

Kingsnorth says europium, terbium, dysprosium and yttrium will be in short supply even with the extra production by 2013. For example, demand for terbium is expected to be 600 tonnes while only 300 tonnes will be produced. However, demand for praseodymium is forecast at around 7,000 tonnes, while supply is expected to be closer to 10,500 tonnes.

Yuri Lynk, an equity analyst at Canaccord Capital, isn’t convinced that anyone should be worried yet.

“I don’t know if I see a crisis; there’s lots of supply in China, it’s just severely restricted,” Lynk says.

Companies outside of China that need rare earths will have to pay more for them down the line, Lynk says.

In the last two years, prices have already risen considerably for certain rare earths elements, but their values per kilogram vary greatly. In the second quarter of 2008, lanthanum oxide cost US$8.50 per kg, up from US$1.45 two years earlier, while europium oxide sold for US$480 per kg, up from US$260. Terbium oxide cost US$730 per kg compared with US$455 per kg in 2006.

Although commodity prices for certain rare earths have shot up, there’s still not a lot of money to be made in rare earths as a whole. Fetching an average price of US$10-15 per kg this year, the entire rare earths market is valued at just US$1.5-2 billion. If the deposits outside of China step up to fill the 20% gap that Kingsnorth is predicting, the total value would be peanuts to any medium or large producer of base or precious metals.

“That only leaves about US$3-400 million worth of sales for the non-Chinese companies in today’s terms,” Kingsnorth says.

China’s stranglehold on rare earths isn’t all about the money; it’s been trying to create jobs by developing structures for downstream production.

“China has to find jobs for about 500 to 600 million people by 2020,” Kingsnorth points out.

And China wasn’t always the dominant producer. In the 1960s and ’70s, India, South Africa, Australia and the United States were significant rare earth suppliers.

But as environmental controls became stricter and production more costly, production shifted to China. Prices have collapsed several times since the 1980s, when Chinese producers overestimated demand growth. The most recent fall occurred when the technology bubble popped in 2001-02. At that time, most mines outside of China were forced out of business.

China has nurtured its dominant position, starting with exports of mineral concentrates in the 1970s, expanding to mixed rare earth chemicals in the 1980s and mixed rare earth metals and oxides in the late 1990s. In the last 10 years, as more uses for rare earths have been developed, China has been carving out its own manufacturing industry. The rest of the world has become entirely dependent on China for rare earth products, including Japan, which is the second biggest consumer of the metals. Japan consumed 18.5% of 2007 production, while China accounted for 58.5% of demand and the U. S., 10%.

In the West, investors are starting to warm up to the potential of rare earths projects. Avalon Ventures (AVL-T, AVVTF-o) president Don Bubar points out that his company was able to raise $16.8 million in November 2007 on the strength of the technical merits of its Thor Lake rare earth project, 100 km southeast of Yellowknife, N. W. T.

Acquired in 2005, the company has drilled nearly 17,000 metres at Thor Lake, defining an inferred resource of 14 million tonnes grading 1.23% total rare earths plus yttrium oxide and 0.025% tantalum oxide, (using a cutoff of 0.1% yttrium). Now Avalon is doing metallurgical studies, preliminary engineering work and environmental studies for a prefeasibility study to be completed next year.

But Bubar admits that such attention is a new thing for him; he’s been in the specialty metals business for a decade.

“We were generally ignored early on,” Bubar chuckles. “I find in Canada we have such a long history with precious metals and base metals. . . a lot of firms take comfort in those and don’t like to move outside of their comfort zone.”

During Avalon’s inception, Bubar focused his efforts in Europe and even the United States, where he says investors take a more generalist view.

But now with the transition toward hybrid and electric cars, investors are recognizing that demand for rare earths is solid. Each Toyota Prius, for example, requires 30 kg of rare earths and by 2011, Toyota expects sales of the car to reach 1 million — that’s 30,000 tonnes of rare earths needed for just one model of hybrid. Bubar says numbers like these help investors truly understand the importance of these obscure commodities.

Jim Engdahl, president and CEO of Saskatoon, Sask.-based Great Western Minerals Group (GWG-V, GWMGF-o) has seen the same indifference around rare earths, with his company starting to receive more attention in the last six months.

The company’s Hoidas Lake rare earths project, 50 km northeast of Uranium City, Sask., has a measured resource of 123,000 tonnes grading 2.5% total rare earth elements (TREE) plus yttrium or 2.96% rare earth oxides plus yttrium, an indicated resource of 430,000 tonnes grading 2.3% TREE plus yttrium, and an inferred resource of 812,000 tonnes grading 2% TREE plus yttrium.

Engdahl thinks the supply gap could happen earlier than expected, but he wonders whether investors will truly see the merit of the metals before something dramatic happens.

“It’s going to take some sort of major event like an auto plant having to shut down because it can’t get material,” he says.

Engdahl’s company has a unique mine-to-market strategy: eventually, Great Western’s mining operations will supply its subsidiary Great Western Technologies, which creates alloys and other value-added products for use in the aerospace, auto, industrial and high-tech sectors.

Mark Ellis, president of the subsidiary, is already feeling the pinch when trying to buy pure rare earths from Chinese suppliers.

“It’s getting much more difficult,” he says. “There is big pressure to have us alloy them with something.”

Since his company aligned with the minerals group, Ellis has been getting a lot of calls from other companies in need of rare earths.

“I think I could sell everything the mine will produce, today,” Ellis says. “The Chinese have a huge stranglehold on supply.”

But there are no rare earth mines up and running yet — outside of Molycorp Minerals’ Mountain Pass mine in California — so many manufacturers that use rare earths have moved operations to China.

That’s how Toronto-based Neo Material Technologies (NEM-T, NEMFF-o) secured its supply of rare earths, says executive vice-president Geoff Bedford. The Chinese government limits how much Neo Materials exports. The company makes and sells neodymium-iron-borne magnetic powders and other specialty metal products to customers in China, the U. S., Japan and Europe, but over the last six years, the major growth area has been China. When the company started out, only 15% of its products were sold in China; now Chinese companies make up 60% of its business.

“Companies that have moved to China like our own will always be able to get rare earths,” Bedford says. “As far as whether rare earths will be available for the rest of the world, I’ll be honest, I don’t see a shortage any time.”

Bedford still thinks the Chinese government will keep things tight and that the reason behind the stiff controls is clear. “They don’t want to see the mass exodus of rare earths (that happened) ten years ago when prices came off.”

Cost is the main reason China dominates the world scene in rare earths — market demand is being met through a few sources that can produce them very cheaply.

About half of China’s rare earths are mined in Inner Mongolia in the Baotu area, while the remainder is mined from ion-adsorption clays in Sichuan and Jiangxi provinces.

Canaccord’s Lynk says that new producers are at risk because not only does China control supply, it also has the power to manipulate the price of the individual commodities. He says China could destroy the competition.

“It’s not an accident that China has 95% of the market,” Lynk says. “You have to believe that the Chinese could crush prices in an effort to drive these competitors out — they could just open up the floodgates and supply the market with lots of rare earths in an effort to keep prices low and put these guys out of business.”

Kingsnorth says current prices are strong enough to support the development of projects outside China, without seriously affecting the Asian giant’s market share. In any case, Kingsnorth doesn’t think China would purposely create havoc for the rest of the world if it has enough resources to meet demand.

“If it were to not meet demand and allowed prices to go too high, then illegal mining in China will become uncontrollable as it has in the past with very high price increases,” Kingsnorth says.

Even with all the opportunity out there, Kingsnorth says that advancing rare earth projects is challenging because each project is unique. After developing a resource, companies need to build a demonstration plant so they can get supply contracts and do the engineering. All this is necessary to achieve reliable capital and operating cost estimates.

“If you’re a new project, the opportunity is there,” Kingsnorth says. “But there are a number of hurdles to overcome.”