They're not rare and they're not earths - and the scenario is set to changePublished by MAC on 2011-02-21
Source: Reuters, PlanetArk
So-called "Rare Earths" (which are actually neither)became the darling - and daring - metal for investors during the past 18 months. There were widespread fears that China - by far the world's biggest miner in the sector - would staunch exports to other countries. This, we were told, was bound to mean that all manner of their application - from boosting alternative energy, serving computers and mobile phones and in other hi-tech industries - would go to the wall.
In reality, while China has a near-monopoly on current rare earths availability, the country is expected to meet around two-thirds of non-Chinese demand this year. Nor is the rest of our planet in dearth of supply, with sizeable deposits in the US, Australia, Canada, Kyrgystan and elsewhere. India has been producing a modest amount of some of these elements for decades.
The extraction of rare earths is extremely hazardous and unhealthy (For this reason a US mine operated by Molycorp was closed down some years ago, although the company has now put it on the front burner). Belatedly recognising this, the Chinese regime has also said it will close down some of the most dangerous and unregulated mines.
That's not a calculation which enters the mines of most industry players, nor their financial backers. On the contrary, their projection of rare earths as essential for human well-being (not to mention "green" wind power) has produced some of the most ridiculous "pure" stock-trading hype by its promoters of any in recent times. (And that's saying something). (MAC's own dossier on rare earths is packed with such corporate waffle).
The bubble had to burst at some point. Judging by the following article (a surprisingly even-handed piece from a Reuters reporter) it will do so sooner than generally expected.
But this will cause hardly a blink among those who've already taken profits by speculating in rare earths' shares and then pulled out. Other investors would be well-advised to follow the same path, at least in respect of the more dubious junior, jump-started, outfits which have made completely unsustainable claims over the past year.
However, such a culling will then open the field wider to more "responsible" and securely- capitalised companies, with higher-grade deposits, to better advance their projects. The "rare earths rush" may now be receding, and is likely to become much more localised.
But, so long as their end-uses are considered vital to serving a growing global middle class, the potentially devastating impacts of mining them are sure to increase.
Analysis: Investors Get Picky In Rare Earth Race
15 February 2011
Rare earth stocks were the darlings of 2010. Now investors are casting a far more discerning eye over the sector, betting that only a handful of companies will survive in the race to supply the world with the high-tech metals of the future.
|A man works at the site of a rare earth metals mine at Nancheng county,
Jiangxi province Photo: Reuters/Stringer
Critical to a company's success is the quality of its ore deposits and its technological prowess in extracting and processing the metals. Analysts estimate that half a dozen companies might make the grade.
Currently, China has a near-monopoly over supply of the 17 rare earths, producing more than 95 percent of the global supply of the essential metals used in smartphones, electric car motors, wind turbines and high-tech industrial equipment.
Even the slightest changes in China's export quotas have lifted the shares of any rare earth company that was aiming to become an alternative supplier. But in 2011, investors are increasingly dropping the long-shots and buying into projects that at least have a good chance of crossing the finish line.
"We're starting to see a bit of the separation in terms of the potential of individual names," said Byron Capital Markets analyst Jon Hykawy. "Investors are interested in the potential and finding out whether some of these properties might actually bear fruit."
Australia's Lynas is expected to become the first major producer outside of China as early as next year. Its shares have quadrupled since the beginning of August.
Right behind Lynas is industry juggernaut Molycorp, which already processes about 3,000 tonnes of rare earths a year from stockpiled concentrate and could start producing new material as early as 2012. Shares of the Colorado-based company hit a high of $62.80 on January 5, just five months after listing on the New York Stock Exchange at $13.25.
At the other end of the spectrum is Medallion Resources, which skyrocketed last fall only to tumble 22 percent since October. Also at the bottom of the pile is Frontier Rare Earths, which listed with much fanfare at C$3.25 in November and is now still at C$3.25.
With the shakeout establishing who is at the front or back of the pack, savvy investors are focusing on those in the middle.
"There's probably room in this space for no more than five or six projects outside of China," said Hykawy, who said investors need to be picky about which projects they back.
Annual demand for rare earths outside China is about 44,000 tonnes, with China set to export about 30,000 tonnes in 2011.
By 2015, rare earth experts say global demand could reach 200,000 tonnes, with demand outside China about 70,000 tonnes, seemingly creating a massive deficit.
Lynas and Molycorp will have the potential to produce over 60,000 tonnes of rare earths a year between them within three years, leaving a relatively small window for rivals.
That means that while hundreds of outfits are promoting rare earth finds, the vast majority will not make it into production.
"If the deposit is middle of the road, and you've got 200 hundred similar projects to choose from, I think those are ultimately roadkill," Hykawy said.
The quality of the deposits, metallurgy and processing capability are some of the most important considerations in drawing the line between winners and also-rans.
"The ore grade really links into the production costs," said Jacob Securities analyst Luisa Moreno. "A project could simply be not feasible if the grades are really small."
This could be bad news for Tasman Metals, Stans Energy and Quest Rare Minerals, all of which are exploring projects with ore grades below 2 percent.
Quest will have to process over 86 tonnes from its Strange Lake project in Quebec to get just one tonne of rare earths. In contrast, Molycorp at the Mountain Pass mine in California will have to process only around 12 tonnes of ore for one tonne of rare earths.
That's just a first step.
Miners also have to remove the rare earths from other minerals in the host ore, an expensive and often tricky process involving acids and extreme heat. Then they must separate the rare earth concentrate into individual oxides and process those into materials that end users like technology companies can use.
Processing adds value, giving smaller companies like Stans and Great Western Minerals an advantage over rivals.
Stans plans to restart the Kutessay II mine and processing plant in Kyrgyzstan, which produced 80 percent of the Soviet Union's rare earth oxides and alloys between 1961 and 1991.
Great Western holds a controlling stake in the high-grade Steenkampskraal mine in South Africa and plans to have the project back online by 2013 to feed its own rare earth alloy and rare earth metal facilities.
Kutessay II and Steenkampskraal have historically produced just small amounts of rare earths, but the infrastructure is already in place, meaning they will have a head start.
Shares of Stans and Great Western have doubled since the end of 2010, as investors see the potential for the two companies to be the next to market after Molycorp and Lynas.
"I think timing is really important," said Moreno. "There's a lot of projects out there. But those that are coming in the next five or six years, I think they're going to position themselves really well."
Bang for Buck
Elsewhere, Neo Material Technologies is a rare earth play that is benefiting from present demand.
The Toronto-based company buys Chinese rare earth concentrate and processes it for the global market. Its shares rose to record highs four times so far this year.
"We're one of the very few companies that benefit from the high rare earth oxide price environment outside of China," said Chief Executive Constantine Karayannopoulos. "We're talking record profits."
Karayannopoulos said demand, and prices, should stay high for the next two years, as companies run down stockpiles, and China trims quotas further to meet its own rare earths needs.
But most analysts don't expect high prices to last.
"As Molycorp ramps up and as Lynas ramps up, you're going to have the world probably go into surplus for some particular types of rare earths," said Dahlman Rose analyst Anthony Young. "You can see prices pull back from the current levels."
Prices of the most common rare earths, lanthanum and cerium, surged to $60 a kilogram from about $5 during 2010, and will likely fall back first.
But Young said heavy rare earths, along with certain light rare earths used in magnets, will likely remain in hot demand.
For Molycorp's chief executive, Mark Smith, the possibility of lower rare earth oxide prices isn't cause for concern.
His company was a top global producer of rare earths like cerium and europium until the Chinese cornered the market with cheap product in the 1990s.
"It's absolutely a completely different ball game now," said Smith. "We feel very, very confident that we will now be the low cost producer in the world, which gives us a lot of confidence about not repeating history here."
(Editing by Janet Guttsman)
China To Shake Up Rare Earth Industry
By Ben Blanchard and Chris Buckley
17 February 2011
China announced a shake-up of its rare earths industry on Wednesday, vowing "reasonable" quotas on mining and exports to bring order to the small but strategic sector where its dominance has spooked foreign buyers.
China produces about 97 percent of the global supply of the minerals used in smartphones, electric car motors and high-tech industrial equipment, and Beijing cut export quotas by 40 percent last year, alarming buyers and trading partners.
Premier Wen Jiabao told a Cabinet, or State Council, meeting that the country's rare earth industry had been harmed by illegal mining and "chaotic" exports.
"We will fully take into account both domestic resources, production and consumption as well as the international market, and reasonably set annual quotes for total volumes of rare earth mining production and for exports," said an account of the meeting on the central government website (www.gov.cn)
Chinese rare earths traders said the announcement firmed up official moves already happening, and some said it would probably magnify the dominance of bigger state-owned companies in the industry.
"The government has already been moving to strengthen controls on mining, and being stricter about environmental controls, and this sounds like it's an extension of that," said Ni Kunwei, a rare earths sales manager with the Jinlong Rare Earths Company in east China's Fujian province.
"In the short term, I'd expect rare earths prices domestically to rise, because of all the attention from the government and the extra controls," he added.
The State Council said it would take "about 5 years" to "establish a sustainable and healthy setting for the rare earths industry with reasonable mining, orderly production, efficient usage, advanced technology and intensive development."
That would also entail more comprehensive oversight of the sector, stricter mining policies and environmental standards, and strict entry barriers into the sector. There would be a crackdown on illegal mining and mining above permitted levels.
"We must accelerate industry integration," the statement said, adding that would also involve mergers and restructuring.
The announcement said China would take into account both domestic and foreign markets and "actively develop international cooperation."
It also said that China's rare earths sector had made big strides and expanded in size.
"But there are still problems with the development of the rare earths sector... and considerable chaos in export orderliness. These are seriously affecting the healthy development of the sector."
The announcement said China would take into account both domestic and foreign markets and "actively develop international cooperation."
The new government policy statement did not give any details about mining or export quotes. China has cut export quotas for the first half of 2011 by 35 percent from the first half of last year, although total quotas for this year have not yet been announced. China says the quota cuts will prevent reckless and polluting mining of deposits.
China's moves have raised hackles in major trading partners such as the United States, European Union and Japan. The U.S. Trade Representative office has threatened to take China to the World Trade Organization about its export restraints.
The rare earths issue adds to the growing list of trade-related disputes between China and the United States, including U.S. complaints that China's currency is undervalued.
U.S. makers of high-tech products such as Apple Inc's iPads and various Japanese companies have been scrambling to secure reliable supplies of the minerals outside China as Beijing steadily reduces export allocations.
China's International Business Daily reported on Tuesday that the country was likely to create a rare earth industry association in May to help its miners obtain more pricing power in the global market.
(Editing by Alex Richardson)