The rare earths rush is on

Published: Sunday, 22 November 2009

IM spoke to Clint Cox, founder of The Anchor House, which specialises in rare earth research, about the complexity of the subject, evaluating a deposit, and the China factor

What initially attracted you to focusing on the rare earths industry?

When I did my initial research in the rare earth industry a few years ago, several things became clear. First, rare earths are being used in a high percentage of new technologies, and often have no viable substitute. This gives the market tremendous upside potential.

Second, the market is relatively small a value of only about $1,250m. I foolishly thought that small meant easy to understand it turns out that this is, by far, the most complex resource industry I have ever studied. Although this complexity makes it very difficult to fully comprehend, it also makes for an exciting area to research.

How have you seen the rare earth landscape change over the past five years?

The most significant change in rare earths is that they have entered the spotlight in 2009. The mainstream media has begun to take notice, US politicians are beginning to pay attention, and new exploration companies are sprouting daily. There used to be just a handful of companies concerned with the rare earths outside of China mainly end-users, processors, and a small group of potential producers.

Rare earths have become a hot topic because they sit right in a unique sweet spot: They are used in green technology, some defence applications, and they are presently controlled by China. Recently, it was rumoured that REEs might be included in a WTO complaint filed by the EU and the US (they weren’t ). Then a draft proposal by the Chinese Ministry of Industry and Technology suggested some changes in export policies, and that set off alarm bells for some who follow the industry outside of China. It turns out that many of the concerns were based on somewhat misguided interpretations of the draft.ÊÊ

How do you see the industry going forward?

This is a very tricky question. The REE market has a history of dramatic and abrupt change. There are 15 elements, and the focus of the industry tends to shift between them with frightening speed. When colour television was developed, europium (Eu) became king.Ê In the 1960s, samarium (Sm) took center stage with the development of samarium-cobalt magnets. Another shift occurred in the early 1980s when the neodymium (Nd) magnets were invented. Now dysprosium (Dy) and terbium (Tb) are in high demand.

The industry could take a number of different directions, but the focus outside of China has been to find new resources to diversify risk for the end-users.

Where do you see the best opportunities for future growth?

Demand growth will come from the expansion of current applications as well as a number of new applications. One area that seems to be continuing its expansion is that of magnets. Super-strength REE magnets are used in computer hard drives, small motors, MRIs, toys, and some military applications. Rare earths are also increasingly used in alloys to give strength, improve melting temperatures, and for hydrogen storage. REEs, especially lanthanum (La), are used as fluid cracking catalysts (FCCs); as the world turns increasingly to alternative sources of crude oil, these FCCs may play an increasingly important role.

Green technology will have to rely heavily on the rare earths in order to be successful, with uses including wind turbines, hybrid and electric vehicles, and energy efficient lighting.

Of course, there is always the unexpected. There are many new uses being explored right now for the REEs. My guess is that we will get blindsided by some fantastic use in the not-too-distant future.Ê However, many R&D shops are becoming more cognizant of the REE supply issues and are careful not to develop applications that will absorb the world’s supply of a given element.

Production growth can come from a variety of sources. The market tends to focus on several high-profile projects in the USA, Canada, and Australia. These may come to production, but it is just as likely that the market will be surprised by a new, unexpected source, as it has been repeatedly in the past.

It is important to keep in mind that as the world searches for new resources, China is not stagnant, and they will continue to develop their rare earth resources and look for new ones. They are also making concerted efforts to become more efficient and environmentally responsible.

What are some of the challenges facing the industry?

First, let’s look at the challenges within China. There is a substantial effort underway to consolidate the Chinese rare earth industry into several manageable areas. China faces the challenge of cleaning up its environment and streamlining operations while maintaining its economic edge and keeping the world happy with supply of rare earths.

China needs jobs, and increasing the amount of manufacturing creates much-needed jobs. China has offered foreign manufacturers unlimited access to rare earth supply if they build and operate facilities inside China. Foreigners can thus avoid tariffs and export quotas. Many foreign companies are willing to manufacture within China, but they are very selective as to what they will manufacture there and what they retain outside of China.

The ion adsorption clays in South China are unique and supply the bulk of the world’s HREEs. The clays are a finite resource and the sustainability of production at today’s capacity is often debated. There are efforts underway to consolidate these operations. The world needs an increasing amount of these HREEs, and there is a great need to find another HREE resource.

Cerium (Ce) - element #58, is the most plentiful of the rare earth elements, so an abundance of Ce has to be processed in order to get to the other REEs. If new technologies can be developed to absorb the Ce supply and push the price up, it would help the profit potential of the projects with light rare earth (LREE) dominance.

To expand on the cerium issue, there must be a general balance maintained in the marketplace. There is no rare earth mineral that perfectly matches marketplace demand (which is also in constant flux), so there is always going to be both scarce and excess elements as they come out of the ground in unequal distribution. Because it takes approximately 7-10 years for mines to come to production in the West, it is difficult to choose REE projects with mineral distribution that will match a future market that is currently unknown.

Finding funding for rare earth projects is a challenge, although this has become a bit easier lately with recent media coverage. But because of the complexity of the sector, it is a bit more inaccessible to investors.

Can a non-Chinese rare earth source really compete with China?

Maybe. Recently, the Russians were supplying the market with small amounts of REEs, so it can be done. However, supplying the industry with a large sustainable source that will impact the market  this is more difficult to assess. The Chinese have very favourable cost structures for their projects  such as REEs as a by-product of iron mining at Bayan Obo, and clays which are easy and cheap to concentrate.

One of the big questions here is whether or not end-users will pay a premium and what that premium would be Ð for a REE source outside of China.

Many of the projects being investigated right now have been known for years. There are some new projects as well. Some of these may have potential, but many will face challenges that will prevent them from production.

If prices go up, it may allow for higher cost producers to enter the marketplace - but these will also be the first to shut down when prices fall back.

What are some of your key criteria when looking to invest in a rare earths project?

First, we start with the typical mining criteria such as: the experience of management team, location, access to power and water, indigenous interests, environmental issues, and permitting  to name a few.

Then, we look at matters specifically relating to assessing the rare earths including:

  • Grade expressed as percent rare earth oxide, or REO
  • Tonnage the final product oxides are measured in metric tonnes
  • Target mineral its element distribution and processing issues
  • Economics how much will it cost to produce a tonne of concentrate?

Historically, rare earth minerals that have been mined economically are monazite, bastnosite, xenotime, loparite, and ion adsorption clays. However, many new projects that are being considered contain minerals that have never been processed, and so metallurgy may be an issue.

One of the most complex components of dealing with REE minerals is that of distribution. Each REE mineral will include at least trace amounts of all 15 elements. However, usually minerals will skew towards the heavy rare earths (HREE) or the light rare earths (LREE). Each rare earth-bearing mineral also has its own basic distribution, but can vary widely between geologic settings. For example, most monazites may have between 15-20% neodymium (Nd), but there are unique locations that have over 40% Nd.

Of course, there are other metrics we use, in-house, but the key metrics are those listed above. That said, we are still looking for an investment that we feel comfortable with.

Rare earth terms

RE rare earth

REM rare earth metals

REE rare earth elements

REO rare earth oxides

LREE light rare earth elements (La-Sm)

HREE heavy rare earth elements (Eu-Lu)