Rare Earths Represent Rare Investment Opportunity

Steve Gozdecki
Sep 10, 2010

Although they have grown in importance to become part of our everyday lives, the term "rare earth element" rarely comes up in our daily conversations. Yet rare earth elements - the 17 chemical elements that include scandium, yttrium and the 15 lanthanides - are a crucial component in such things as high-tech electronic gadgets, hybrid automobiles, wind turbines and the catalysts used in oil refining. They also have a wide range of military applications.

While worldwide demand for rare earth elements has risen steadily in recent years with the increase in mobile phone and digital music player sales as well as alternative energy projects, production has not kept pace with this increase. In large part, this stems from the fact that rare earth mining gradually shut down in most parts of the world over the past few decades because China was able to sell these elements so cheaply. Today, that nation produces more than 97 percent of the world's rare earth elements, with India and South Africa conducting the remainder of rare earth mining operations at present.

A monopolistic situation like this would be undesirable even under the best of conditions - but the need for alternate supply sources has become even more stark recently with the announcement from China's Ministry of Commerce that it will significantly reduce exports of raw rare earth elements and set pricing on a monthly basis.

While the popular belief that the Chinese word for crisis combines "danger" and "opportunity" is in fact linguistically incorrect, there is little doubt that this near-crisis around the rare earth supply does indeed pose both dangers and opportunities. Because they are so vital to American interests and security, a domestic or near-shore source of rare earth elements would seem a must in any business environment if only for supply continuity and quality control purposes. These new export quotas hasten the need to develop mining and processing capabilities in other locations - and places like the United States, Canada and Australia have known reserves waiting to be tapped.

In sum, the global supply of rare earth elements is constrained at present, while demand is rising rapidly in sectors like transportation, power and consumer electronics. New producers hope to bring projects online, but need to raise capital in order to do so. This situation makes for a golden investment opportunity!

Short supply
In July, China announced that it would once more curtail exports of raw rare earth elements. Total exports for 2010 have been capped at just over 30,000 tons - 40 percent less than the 50,000 tons it exported in 2009, and a continuation of the export reductions that it began to enact in 2006.

A variety of explanations have been given regarding the motivations behind this export reduction. Some speculate that China wishes to slow the pace of mining in order to reduce the environmental impact associated with this activity. Others believe that China needs its rare earths to manufacture goods for its own population, as it is estimated that close to two-thirds of China's rare earth elements are being used domestically. A third school of thought is that China wishes to reduce these raw material exports in order to ensure that its own plants and factories can continue to refine, manufacture and export finished goods that require rare earth elements as inputs well into the future. More than likely all of these as well as additional considerations, such as the need to eliminate renegade mining and smuggling activity, lie at the root of China's decision.

Signs also point to the possibility that China is running out of the heavy rare earth elements, which are scarcer and more valuable than the more abundant light rare earths. China will need vast quantities of two heavy rare earths, terbium and dysprosium, to reach its goal of building enough wind turbines to generate more than 300 gigawatts of electricity. These two heavy rare earths are also required to build electric and hybrid automobiles. So while China is currently the world's greatest producer of rare earths, in a few short years it may well be looking to import them.

The rare earth elements market has already seen significant price increases since China's recent announcement. Indeed, for all but one of the 17 rare earths, late August 2010 prices were at their highest point in a decade! From the beginning of 2010 to August 5, Terbium prices rose 65 percent. Yttrium prices more than doubled over that same span - while gadolinium rose 490 percent, and samarium increased more than sevenfold!

Continued strong demand
Because of their unique properties, there are no substitutes for rare earth elements. The high-technology consumer products, transportation, energy, medical device and defense industries all rely on rare earth elements - and almost all project increased demand moving forward.

Each hybrid vehicle manufactured requires both a substantial amount of rare earth elements - around 25 pounds - and a wide range of them. The hybrid electric motor and generator contain neodymium, praseodymium, dysprosium and terbium, while the nickel-hybrid battery contains lanthanum and cerium. While Japanese companies have been stockpiling rare earths, imagine what would happen to ever-busier Toyota Prius assembly lines were there to be a cessation or even just a disruption in the rare earth element supply!

Traditional gasoline- and diesel-powered vehicles typically require around 10 pounds of rare earths - including cerium, zirconium, lanthanum, neodymium, yttrium and europium - for components like catalytic converters, LCD screens and headlight glass as well as glass and mirror finishing. The anticipated growth in hybrid, plug-in hybrid and electric vehicles will fuel rapid and substantial increases in rare earth element demand.

Because they are a key component in high-powered magnets, rare earths are used extensively in high-tech devices for medical and consumer use. The magnetic resonance imaging (MRI), positron emission tomography (PET) and x-ray machines that allow hospitals to see inside patients non-invasively feature components made from rare earths, as do the high-powered magnets that power computer hard drives, DVD players, speakers and earphones. The manufacturing of liquid crystal display (LCD) and plasma televisions and optical lenses for digital cameras and camcorders also require rare earth elements. With the steady increases in medical care quality worldwide as well as the continued increases in standards of living, medical equipment and consumer electronics are global growth industries that will factor into the increased rare earth demand in coming years.

To amplify this last point - literally billions of new consumers in places like India, China and Southeast Asia will soon be looking to buy everything from high-tech gadgets to automobiles as their standards of living increase. These economies are growing at a rate more than triple the US's, and have populations that carry little to no debt. With so much pent-up consumer demand and ready money, these are the economies of the future - and the rare earth demand sites of tomorrow as well.

Both "green" technologies and more traditional energy production also rely upon rare earth elements. The oil refineries that make today's vehicles go require them in catalysts, and nuclear power plants use them in control rods. The amazingly efficient compact fluorescent light bulbs (CFLs) use rare earths, as do the wind turbines that are steadily increasing in number worldwide to generate electricity. CFLs are already big and are a major part of the future, and manufacturers will be scrambling to secure the rare earth suppliers to continue making them.

Most importantly, rare earth elements are literally a key to national security due to their many applications in the defense industry. With the ever-increasing importance of air superiority on the battlefield, the many ways in which they are employed in combat aircraft - including control systems and ceramic coatings for jet engines - point to the need for a secure and reliable near-shore or domestic source of rare earths. Radar systems and leading-edge sonar devices also rely on rare earths, as do missile and "smart" bomb guidance systems, spy satellites and even electronic counter measure (ECM) devices that can prevent hostile guided weapons from reaching their targets. Can the US afford to be dependent on other nations for the very materials needed to maintain our defense readiness? Does the Department of Defense have a plan to stockpile rare earths or some other way of securing their supply?

Companies making moves
While the current supply-and-demand situation in the rare earth elements marketplace may appear discouraging, it presents a potentially lucrative opportunity for those looking to invest in those companies that will be emerging to meet the world's hunger for these unique resources.

Resource-rich Canada is home to a number of rare earth element deposits. At Thor Lake in Canada's Northwest Territories, Avalon Rare Metals is developing the Nechalacho deposit, which is believed to be the single largest rare earth deposit outside of China and especially bountiful in terms of heavy rare earths, with plans to begin mining and processing by the end of 2015. Great Western Minerals Group has five rare earth elements projects planned worldwide, including Canadian-based projects in New Brunswick's Benjamin River and Saskatchewan's Hoidas Lake and Douglas River as well as a project at Deep Sands, Utah and the Steenkampskraal Mine in South Africa.

Lynas Corporation of Australia expects to begin its first phase of rare earth extraction from its Mount Weld, Australia, project in the second half of 2011. Canadian company Tasman Metals Ltd. holds a number of claims in Finland, Norway and Sweden focused on rare earth exploration, including several sites that formerly produced rare earths.

Canadian-based Rare Element Resources was formed several years ago to develop a sizeable rare earth site known as the Bear Lodge project in northeast Wyoming. California's Mountain Pass open-pit mine, dormant for nearly a decade, expects to be brought back into active mining status by Molycorp Minerals in 2012.

Conclusion
The impending global crisis around the rare earth element supply offers a rare opportunity for the forward-thinking investor. A single country has a monopoly at a time when global demand for rare earths is booming. Supply is tightly restricted and prices are on the rise. New sources of supply wait to be developed. This will be a substantial growth market in coming years. Those companies that succeed at bringing new deposits to market first should reward their investors handsomely - this could well be a once-in-a-decade opportunity!

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Disclosure: Steve Gozdecki does not hold shares in any of the companies mentioned in this article.

Steve Gozdecki
website: www.stevegoz.com
email: stevegoz@sbcglobal.net

Steve Gozdecki is a Chicago-based freelance writer and casual investor.

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