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!
###
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.
321gold Ltd
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