Rare earth bonanza

In the year 1219, after uniting the tribes of Mongolia, Genghis Khan dispatched 450 men to the town of Otrar, in present-day Kazakhstan, to trade. The local governor Inalchuq executed the group, and later beheaded Khan’s ambassador, sent to request an apology. Khan’s response was to raise an army and embark on the most brutal and successful military campaign in history. Inalchuq was executed by the application of molten silver to his ears and eyes.

Eight hundred years later, Mongolia – more precisely Inner Mongolia – is once more a source of political controversy, and again trade is the catalyst. The reason, lying beneath the region’s majestic grasslands, is a group of metals that power the world’s most cutting edge technologies. They are called rare earths and they enable the operation of modern essentials from flat screen televisions to iPhones and electric cars.

Rare earths are a riddle, defined by enigma and expressed in contradiction. They are not rare and neither are they earths. In fact they are metals, and are roughly 1,000 times more common than gold. They are driving the revolution in clean technologies, but are associated with radioactive materials and environment destruction. They may be a source of great wealth, but also extreme financial risk, and they have become the billion dollar stake in a game of international political poker – a game in which China holds all the aces.

The first rare earth elements were discovered in 1787 by Lieutenant Carl Axel Arrhenius, who found the black mineral ytterbite (renamed to gadolinite in 1800) at a quarry in the village of Ytterby in Sweden. Over the subsequent hundred years a total of 17 rare earth chemical elements in the periodic table were found, namely scandium, yttrium, and the 15 lanthanides. Scandium and yttrium, atomic numbers 21 and 39, are considered rare earths because they occur in the same ore deposits as the lanthanides, atomic numbers 57 to 71, and exhibit similar chemical properties.

The first commercial production of rare earth flints was at Treiback in Austria in 1903. Their industrial use at the time was limited, and remained so until efficient separation techniques were developed during the late 1950s and early 1960s. In 1953 annual global demand for rare earth oxide, from which the rare earths are extracted, was 1,000 tons, and the industry was worth some $25 million annually.

By 2003 an array of applications had emerged, with clean technologies generating high demand for the rare earth properties of magnetism and luminescence. Industrial demand proliferated for the manufacture of superconductors, wind turbines, lasers, solar panels, electronic polishers, refining catalysts and batteries for electric cars.

According to the US Department of Energy some of the most critical rare earths for clean technology purposes are dysprosium, neodymium, terbium, europium and yttrium. Industries reliant on the $2 billion rare earth industry are estimated to be worth some $4.8 trillion, or 5% of global GDP.

Less often highlighted is the importance of rare earths to the military, where they are used in everything from guided missiles to smart bombs, propulsion systems and predatory unmanned aircraft, such as the drones used to devastating effect in Afghanistan. A US government report last April identified four rare earth element shortages that have caused weapon system production delay.

The problem for policy makers and manufacturers is that rare earth metals, despite being pervasive in the earth’s crust, are exceptionally difficult to extract. And as demand for clean and advanced technologies accelerates, supply concerns deepen. China produces about 97% of rare earth elements, commanding a near monopoly of global trade. The country produced 120,000 metric tons of rare earths in 2009, according to the Government Accountability Office, the investigative arm of the US Congress, of which it exported around 35,000 tons.

At the centre of Chinese production is Baiyun Obo, a two-mile-wide crater in Inner Mongolia’s heartland that is the biggest open cast mine in the world and the largest single source of rare earths. The elements extracted from the mine feed more than 77% of demand for metals such as terbium, which powers low-energy light bulbs, neodymium, used in the giant magnets that drive wind turbines; and lanthanum, for high performance batteries.

The Baotou region in Inner Mongolia produces about half of China’s annual output, and Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Company is the country’s biggest producer. In December, China dropped a supply bombshell, announcing it will cut its exports of rare earth metals by 11% in the first half of 2011. That followed a 40% quota cut in 2010, a move that led to a nine-fold increase in prices.

Following the announcement the price of rare earths again soared and shares of rare earth miners around the world jumped, while politicians and industrialists expressed concern that China’s actions could hold back moves to an environmentally cleaner future. Some commentators suggested China is choking supply to obtain political advantage, while Sony Corp, the world’s largest consumer electronics maker, says China’s move was a hindrance to free trade. Japan imports some 10,000 tons of rare earths a year.

Those closest to the situation, however, say China has good reasons for the export cut, as it moves from a downstream operator and exporter of rare earths to an upstream manufacturer of high quality industrial goods. To that end, it not so much seeks to undermine foreign producers as to support its own.

“China no longer wishes to be a low cost producer and is consolidating control,” says industry consultant John Kaiser, a rare earth specialist and founder of Kaiser Research Online. “Realising they do not have infinite resources they have taken the bull by the horns, which you can’t blame them for.” China is focused on cleaning up its environmental act, Kaiser says, closing many of its illegally run mines and stamping down on the most brutal extraction methods, such as the pouring of hot acid over oxide deposits to extract the rare earths. China has committed itself to being the largest renewable energy generator in the world and is already the largest manufacturer of hybrid electric vehicles.

One of the reasons China has a monopoly on the production of rare earths is that it could exploit its low cost base and laxer environmental restrictions to extract the metals. But as the price of rare earths rise, extraction from mines in the US and Australia now are becoming viable.

A US Department of Energy report warned in 2009 that, in the absence of the development of new rare earth resources, the US over the next five years risks losing control over the production of a host of technologies. The risks will likely decrease thereafter as alternative supplies come on line, but supplies of metals such as dysprosium and neodymium remain critical in the medium term, the Department of Energy said.

“It is important that we have multiple sources of supply globally, and within that effort domestic production is especially important,” says David Sandlow, assistant secretary for policy & international affairs at the US Department of Energy at the Technology and Rare Earth Metals Conference 2010. “We are going to need to take action to address this situation.”

The US government has announced a three-pronged strategy to counter the threat of diminishing supply. That comprises supporting US production, developing alternatives and encouraging recycling. Key to the strategy is a mine in California’s Mojave desert, which is the largest known deposit of rare earth elements outside China.

The Mountain Pass site was closed in 2002 after failing to compete against China on price, and amid environmental concerns following a spill. Now, in the face of Chinese production cuts, New York listed Molycorp Minerals is reopening the mine.

Since going public in July, Molycorp has raised more than $500 million to expand its production facilities. The US comgovernment is widely expected to provide loans, and Japan’s Sumitomo Corp and Hitachi Metals have signed agreements exchanging funding for supply. By the middle of next year, Molycorp aims to produce an annual 20,000 tons of nine rare earths, rising to 40,000 tons soon after.

Still, the mine does not have sufficient resources to satisfy US demand. The US Department of Energy says Mountain Pass won’t produce dysprosium and terbium, two of the five rare earths it says will face critical shortages in the short term.

The only other ex-China mining company likely to produce substantial yields any time soon is Australia’s Lynas Corporation, which runs the Mount Weld operation in Western Australia. Lynas is aiming to start production in about a year and is reported to already have supply contracts with Japanese traders.

In time, Mountain Pass and Mount Weld will begin to make a mark on global production. By 2014, China’s output will be 67% of the global total of around 170,000 tons, according to Lynas, with Mountain Pass and Mount Weld contributing 13% and 12% respectively.

Behind Molycorp and Lynas there are a plethora of commercial rare earth propositions at various stages of readiness for production. According to estimates there may be some 200 companies promoting rare earths in one fashion or another. Many of these are legitimate listed companies, while others are prospecting operations run off tiny budgets.

The technical challenges associated with rare earth extraction mean that even the best funded projects can take a decade from inception to production. That means there are very few, if any, additional sources of rare earth production likely to come online before 2015. The implication is a short-term supply squeeze, likely to push up prices.

“In the long term there is not really a concern about physically having enough of these elements but there is inertia in the production process which could lead to a supply issue over the next couple of years,” says Andrew Bloodworth, head of science for minerals at the British Geographical Survey. “On the demand side it looks like there is going to be a major expansion, so that may impact prices.”

A European Commission report into critical raw materials published in June estimates demand for rare earths for the production of electric cars alone is likely to rise from the current level of less than 5,000 tons a year, to nearly 34,000 tons by 2020. Global demand for rare earth in 2010 was around 125,000 tones, the vast majority of which was supplied by China and 75,000 tons of which was retained for Chinese domestic use, according to the Industrial Minerals Company of Australia.

Quotas for 2011 suggest Chinese production this year will total some 90,000 tons. China is again expected to retain around 75,000 tons, leaving just 15,000 tons for export, and a 35,000 ton shortfall for non-Chinese buyers. Observers privately admit that excess demand is likely to be met by supply from the black market. Prices of rare earths have spiked in recent months as investors gauged the impact of the Chinese export cuts.

The KBFO Composite Rare Earth Oxide Price Index for exported production rose from just 3,000 in July 2010 to just over 15,000 at present. The price of neodymium, used in the Toyota Prius hybrid car, was recently $80 a kilogram, compared with $19.12 in 2009.

“Prices may go higher still, particularly if China cracks down on unofficial exports,” says Kaiser. “There is certainly going to be volatility on prices and by the second quarter we could see further rises.” Another implication of the Chinese exports cuts is that many of the new technologies that use rare earths may not be able to get into production, Kaiser said.

“If you need these raw materials to produce super magnets they may not be available,” he says. “It’s a potential kick in the chops for the clean energy sector over the short term.” With rare earths getting pricier there would appear to be opportunities to make a lot of money from them for the shrewd investor – but there are also many pitfalls.

The Chinese export cut has fueled a frenzy of speculative buying. Molycorp went public in July at a share price of $14 and closed on January 6 at $60.70, valuing the company at nearly $5 billion. Lynas’ share price was around 50 cents for the first six months of last year, and in early January hit $2.25

Both Lynas and Molycorp are established companies in the process of installing equipment and certain to come online in the next couple of years. Their output is to some extent already spoken for, and for that reason they represent a relatively safe investment bet. Among alternatives listed in Canada and Australia are Alkane Resources, Frontier Rare Earths and Matamec Exploration, all of which have seen big jumps in their share prices over the past six months.

“What we are seeing is a gold rush,” says Keith Delaney, executive director at the Rare Earth Industry and Technology Association. “But there is a huge difference and a large amount of time between starting a project and profitable production. These investments are extremely technical.”

One of the most difficult aspects of exploiting rare earth deposits is the metallurgy, or the process of extraction. Each ore body has a particular and unique structure, and a mining company intending to exploit that resource needs to develop a bespoke process to do so.

“Many of these companies are single project enterprises that don’t have a huge balance sheet,” says Dudley Kingsnorth, a consultant and founder of Industrial Mineral Company of Australia. “At a minimum they need to have contracts for sale in place, a demonstrable process and environmental approval.”

Also, rare earths have an association with the radioactive materials uranium and thorium, and miners need to have proven radioactive disposal resources to have any hope of moving to full production.

“With the exception of Lynas and Molycorp and a couple of others I don’t see any projects being in substantial production before 2015 at the earliest,” says Kingsnorth.

At the beginning of 2010 rare earths were trading at $10-15 a kilo. Now, because of the Chinese quotas, they are priced at $30-50 a kilo. By 2015 the total global market for rare earths is expected to be worth around $4 billion, according to IMCOA, and China will retain 60% of the market.

“The remaining 40% will be worth $1.6 billion in total, which is worth bearing in mind if you are considering how big the industry might be in the future,” Kingsnorth says. “I would say most stocks are fully priced at current levels and there are many that are overpriced.”

Those interested in buying into the rare earth phenomena may wish to distinguish between projects focusing on the more common light elements, and the rarer heavy elements, which have higher atomic weights, analysts said. Terbium (used in magnets and fluorescent lighting) and dysprosium (which stabilises magnetic power at elevated temperatures) are among the most compelling.

“If you want to get in you should focus on large systems that have a full spectrum of rare earths, which will stand up better when global production rises,” Kaiser says. “There is tremendous upside if the best case scenario becomes a reality, but a lot of the easy money in terms of stock prices has already been made.”

Four of the most in demand rare earths

Dysprosium
Dysprosium is a rare earth element first discovered in 1886 by French chemist Paul Emile Lecoq de Boisbaudran. Represented by the symbol Dy on the periodic table, dysprosium is an element that never occurs in its free state – it is always found with other minerals. Boisbaudran needed 30 attempts to extract it from holmium oxide and consequently named it dysprosium - “hard to get” in Greek. With other elements, it can be used to make laser materials and neutron-absorbing control rods for nuclear reactors. But its probably best known for its use in drive motors for hybrid cars like the Prius.

Neodymium
Neodymium (Nd) is a bright, silver metallic element that quickly oxidizes in air. It was discovered in 1885 by Austrian chemist Baron Carl Auer von Welsbach. Neodymium magnets are considered to be the strongest magnets in existence, with a magnet of a few grams having the capacity to lift a thousand times its own weight. The metal is crucial in the making of the giant magnets in wind turbines. Electric cars also use neodymium.

Terbium
Terbium (Tb) is a silvery-white earth metal, soft enough to be cut with a knife. Being a rare earth metal, it isn’t found as a free element, but is contained in many other minerals. Terbium was discovered in 1843 by chemist Carl Gustaf Mosander, who detected it as an impurity in yttrium oxide. The metal is used in alloys to produce electronic devices, but mostly in the production of low-energy light bulbs.

Yttrium
Yttrium (Y) is a silvery-metallic transition metal never found as a free element. It was isolated in 1828 by the German chemist Friedrich Wohler and named after the Swedish town it was first discovered, Ytterby. Yttrium is the 28th most abundant element found on the earth’s crust and is 400 times more common than silver. It is used in the production of electrodes, electrolytes, lasers and superconductors, for medical applications and in making phosphors used in television cathode ray tube displays and LCDs.