Rare Earth Elements: A Bubble Or A Long-Term Growth Story?

Apr 20 2011 | 12:27pm ET

By Steven Markusen, Archer Advisors -- Over the last twelve months the Rare Earth Element (REE) industry emerged from complete obscurity to front page international news driven by hot IPO’s such as Molycorp (+300% since July 2010 IPO) and China’s stranglehold on supply. As a long-term follower of the mining industry, the tremendous attention this sector recently received and its dominance in the mainstream media comes as somewhat of a surprise. Though, this is not to say that the attention is unwarranted.

I have followed the mining industry for over thirty years, first as an exploration geologist in the 1970s and early 1980s, then as a financial analyst and portfolio manager since 1984. Since 2009, I have built a database on the rare earth industry and rare earth mining companies from disparate sources including company reports, industry blogs and Web sites, government reports from the United States Geological Survey, U.S. government agencies and congressional offices, as well as international sources. 

The question is, will the REE market correct and the bubble pop or are we witnessing a fundamental re-pricing of REE? From our research, rare earth metals are to twenty-first century high-technology what copper was to the twentieth century and steel was to the nineteenth century. Rare earth elements are integral components to a number of technological product paradigm shifts, and they will enjoy favorable demand dynamics for years to come.

What Are Rare Earth Elements?

Rare earth elements are used throughout the global economy based on their unique electrical, chemical, and physical properties. In total, there are 17 rare earth elements, 10 of which have commercial and industrial uses. These elements, while common to the earth’s crust, are rarely found in concentrations that offer the economics to extract. Rare earth elements are used in oil refining catalysts, optical glass polishing, and high-tech military applications. Some specific applications include:

  • Rechargeable batteries: When used, REE have the benefit of lower toxicity over lithium cadmium batteries. For example, a single Toyota Prius battery contains over 30 pounds of the rare earth element lanthanum.
     
  • High-powered magnets: These magnets have higher power, smaller size, and longer life than traditional iron magnets. REE magnets, higher power with less weight, make possible our miniaturized digital world of computer disk drives, PDA’s, smart phones and iPods. The Rare Earth element neodymium is used in conjunction with Iron and Boron in magnets that are now utilized in wind generators because they generate more power with less weight and maintenance than traditional electric magnets. An estimated 2000 pounds of neodymium rare earth magnets are used for each three megawatts of wind power generated.

In most of these applications there are no known substitutes for the Rare Earth metals.

Strong Demand and Tight Supply

Over the next four years, industry experts forecast global demand for rare earth oxides to grow from 130,000 tons per year in 2010 to 190,000 tons per year in 2014. At a time when the world’s appetite for rare earth oxides is growing, the world’s supply is shrinking. China, which supplies 96% of the world’s rare earth oxides, cut exports by 50% over the last two years. A reason China cut exports is to retain a greater percentage of rare earth oxides available to produce higher value products such as rare earth metals, alloys, and magnets. In addition, illegal mining in Southern China has a huge destructive impact on the environment. This was highlighted in a recent article in the NYTimes that discussed the Ill-fated Bukit Merah mine in Malaysia that remains toxic over 19 years later (NYTimes, March 8, 2011 Mitsubishi Quietly Cleans Up Its Former Refinery). Even with two new rare earth mines coming online in 2011, the supply of rare earth oxides is expected to remain tight through at least 2015.

Difficult To Extract

Rare earth elements are found in uncommon varieties of igneous rocks. Numerous barriers to entry exist to develop rare earth mineral deposits that do not exist with the mining of other elements such as gold, silver or iron. Rare earth deposits, unlike most base or precious metal deposits, normally contain multiple mineral phases – or in other words, have complex mineralogy that formed over different time periods and environmental conditions - making processing difficult and expensive.
 
Rare earth elements are extracted and refined through 20-30 chemical processes that separate the different elements. It may take a number of years to define the optimal processing steps. Rare earth mineral deposits are generally associated with varying amounts of the radioactive element thorium which is classified as a hazardous material. The more thorium present, the more time and expense required to develop a mine plan that deals with the disposal of radioactive waste. As it is complex, time intensive, and produces radioactive waste the process of taking any of the currently known rare earth deposits to the mining stage will require at least five to 10 years.

While there are many known occurrences of rare earth minerals, prior to 2006 there had been very little historical exploration of rare earth mineral deposits. Most known deposits are associated with other base metals, precious metals, or with radioactive metals such as uranium and thorium.
 
Demand Is Driving Price Increases

As demand for rare earth oxides has outstripped supply, rare earth oxide and metal prices have soared higher.

  • Lanthanum oxide, used in rechargeable batteries and cracking catalysts currently is $60.80 per pound up from $8.12 per pound in June of 2010.
  • Neodymium metal, used in making very strong neodymium-iron-boron permanent magnets, priced at $42.90 per pound last summer is now trading at $117.50 per pound.
  • The rarest of the REE, samarium, used in samarium-cobalt magnets and in lung cancer treatments has risen 1,120% over the last six months.

Sellers have little supply available for sale. Buyers are more concerned about securing supply and are price insensitive. In response to the price increases, a number of countries including Korea, Japan, and even China, have announced plans to build strategic stockpiles of rare earth oxides and metals. While the U.S. has no formal rare earth policy, studies by the U.S Congress, the Government Accountability Office, the Department of Defense, and private think tanks all recognize the strategic importance of rare earth elements.

The Market Responds

Over the last several years, as rare earth prices have increased, many companies have raised money in the public markets to fund exploration and development of rare earth mineral deposits. There are currently over 30 public companies involved in rare earth exploration and development with 150 active rare earth exploration prospects worldwide. Two deposits, one in the U.S. and one in Australia, are currently in the mine construction phase. Companies that can develop projects quickly and economically will have a first mover advantage and will be in a position to be able to achieve exceptional economic profits.

Steven B. Markusen is the Managing Member and founder of Archer Advisors, LLC based outside of Minneapolis.  He is the Portfolio Manager of the Archer Focus Fund, LLC portfolio of investments.  He has 27 years of financial industry experience, including 26 years in portfolio management. Prior to portfolio management, Markusen was an exploration Geologist for Cyprus Amax. He received a BS in Geology from Colorado State University and an MBA in Finance from the University of Denver.  Markusen is a member of the American Association of Petroleum Geologists, The Society for Mining, Metallurgy, and Exploration, and Mining Minnesota. He is a member of the Association for Investment Management and Research, the Twin Cities Society of Security Analysts, and is a Chartered Financial Analyst. 


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