| Supply Shortfalls in Heavy Rare Earth Elements Raise Concerns and Opportunities |
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| Written by Kidela, Kidela Capital Group | |||
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Understanding the difference between light and heavies and being able to anticipate the contrasting fortunes of the two types of REEs is critical to anyone looking at REs as an investment opportunity. In the short and long term, supply-demand issues, pricing and technological innovation will significantly affect prices and opportunities. Some media have gone so far as to imply that in spite of the actions of China with its current near monopoly on production and the potential impact of reduced supply versus increased global demand, the costs associated with extraction and production of critical REs are prohibitive. Investors have been advised that smaller companies, which appear to be poised to benefit from the bottleneck of supply and demand, may be unable to cash-in on the looming RE supply deficit. The field will be left to a couple of large companies who can use economies of scale to make a profit and crowd out the market. There are question marks over the ability of small companies outside of China to commercialize production and gain the requisite expertise to manage the costly and complicated processes associated with RE extraction.1 While this analysis may have some merit, there are two significant issues that it fails to address. Firstly, it does not take into account the presence of ancillary elements such as zirconia and niobium, which are also mined from the same sources as the REs – elements that may help underwrite the costs of extracting REs. Perhaps more importantly, the analysis also fails to take into account the differences between Heavy Rare Earth Elements (HREEs) and Light Rare Earth Elements (LREEs). “There are a lot of neophytes when it comes to Rare Earths. Some are stuck on old methodologies that don’t apply to the Rare Earth sector… they don’t understand the pricing and supply dynamics in this market.”
Of the 15 REEs, 10 are considered to be HREEs: europium; gadolinium; terbium; dysprosium; holmium; erbium; thulium; ytterbium; lutetium; and yttrium. As is becoming well known, “Rare Earth Element” is for the most part a misnomer. The majority of REs are abundant around the world and are usually found among other elements, such as copper, gold, uranium and iron, and are typically produced as a by-product. The so-called LREEs such as lanthanum, cerium, praseodymium, and neodymium are more abundant and concentrated, and usually make up about 80 to 99% of a total RE deposit. Heavy Rare Earths more desirable The HREEs are truly rare — gadolinium through lutetium and yttrium — are scarce but very desirable.3 Consequently, HREEs are generally more valuable: for example, a survey of international Rare Earth Oxide prices on April 8, 2011 showed the HREE terbium selling for $1085/kilogram usd and the LREE cerium at $126/kg usd.4
“Currently, the most critical elements for the future are likely to be neodymium and dysprosium. The most threatened critical elements, according to our statistics are europium, terbium, dysprosium, and yttrium. It is likely that high-powered magnets will be a Rare Earth leader in terms of future growth rates.” Currently, the dominant end uses for REEs in the U.S. are for auto catalysts and petroleum refining catalysts. Other major end uses for REs include use in phosphors in colour televisions and flat panel displays on cell phones, portable DVDs, and laptops; medical devices; polishing materials; industrial glasses; defense applications such as jet fighter engines, missile guidance systems, satellite and communication systems. HREEs are increasing sought out for a number of key applications: terbium is used in phosphors and permanent magnets; dysprosium also in permanent magnets, and in hybrid engines; erbium in phosphors; yttrium in fluorescent lamps, ceramics, and as a metal alloy agent; europium as red color for television and computer screens; gadolinium in magnets; and ytterbium in lasers and steel alloys.6 While many REs are finding important uses in a variety of applications, the most important REs are the so-called big four magnet metals: neodymium and praseodymium (LREEs) and dysprosium and terbium (HREEs). These four metals make up 90 percent of RE permanent magnets used today. These four will be critical in the increasing number of permanent magnets required by today’s and tomorrow’s technologies. “Magnets mainly use the so-called middle and heavy group of Rare Earths, including neodymium and dysprosium. Using iron- based magnets in a mobile phone would make it much bigger, like a briefcase.” According to some analysts, neodymium and dysprosium may have the biggest demand growth potential among REs as they are used in the magnets in BlackBerrys, Toyota’s Prius hybrid automobile and electricity generating windmills. Robert Mackay is CEO of Stans Energy Corp., a Canadian company which owns Kutessay II, a past-producing Heavy Rare Earth mine as well as a nearby processing facility in Kyrgzstan. Mackay maintains that “out of the 15 main Rare Earth Elements, we estimate that there are five that you can make a lot of money on, five you break even on and five you have got to find a use for.” Mackay lists neodymium, yttrium, dysprosium, terbium and europium as the potential money makers.8 This is reflected in the market conditions for these five Rare Earths. Along with most other REs, neodymium, yttrium, dysprosium, terbium and europium have all experienced significant price increases over the past decade, as this graph showing the 10-year international price history of their respective Rare Earth oxides illustrates.
The world’s LREE supply remains dominated by China, the vast majority of production coming from one iron ore mine in Inner Mongolia. Heavy Rare Earths are largely extracted from ionic adsorption clays in Jiangxi and other southern Chinese provinces, Currently China’s production makes up an estimated 97 percent of global HREE supply. That may change, albeit over the long term. Potential production from Canada, Kyrgyzstan and Greenland could significantly alter the dynamic of the RE market. Canada has potentially large HREE deposits at Thor and Hoidas Lakes. Greenland’s Kvanefjeld mine contains some of the world’s large deposits, although it is some years from production. Stans Energy’s goal is be a near-term producer of HREEs, with dysprosium, terbium, yttrium and neodymium expected to be primary commercial components of their open pit mine and processing facility in Kyrgyzstan. Global demand for Rare Earths rising In 2010, world demand for REEs was estimated at 134,000 tons per year, with global production around 124,000 tons annually. The difference was covered by previously mined stocks. By 2012, world demand is expected to rise to 190,000 tons annually although no new mine output is expected in the short term. Most new mining projects will take 10 years to reach production. In the long run, however, the USGS expects that global reserves and undiscovered resources are large enough to meet demand.9 As China increasing restricts exports in order to feed its domestic markets, the short term will likely see supply pressures worldwide. It is also worth noting that many REEs, including the heavies, cannot be separately mined. Therefore, in order to meet the demands for some specific elements such as neodymium oxide, quantities of ore larger than overall demand need to be mined. In order to meet the world demand of 190,000 tons of Rare Earth oxide in 2012, depending on the percentages breakdown of each element demanded, some 220,000 to 240,000 tons may actually need to be produced. Assuming that China will produce 140,000 to 160,000 tons, others nations will have to produce 60,000 to 80,000 tons in 2012.10 Fortunately, other nations have the resources even if they do not have current capacity. It will be a challenge and there is little evidence demand will be met with current projects in the start up, assessment and approval stage. China holds 36% of the world’s RE reserves (36 million metric tons out of 99 million metric tons), while the United States has about 13%. South Africa and Canada both have large deposits, while other reserves are also found in Australia, Brazil, India, Russia, Kyrgyzstan, South Africa, Malaysia, and Malawi.11 By 2015, the supply REs in general will again begin to meet demand. Some individual REES, such as neodymium and dysprosium, will remain in shortage, however.
“What we are interested in are those mining companies which produce Heavy Rare Earths, because heavy earths are used for magnetic stuff, etc., which probably have the highest growth.” In the next 10 years, there may even be an oversupply of lighter REs, specifically cerium and lanthanum, which tend to make up a large bulk of many Rare Earth deposits. Lanthanum may find an emerging market in lanthanum-nickel-hydride car batteries, if they prove more effective than lithium-ion battery in new generations of hybrid and electric vehicles. According to Dudley Kingsnorth, executive director of Industrial Minerals Co. of Australia, a lack of supply in the short turn form outside of China is going to lead to a global short supply of neodymium, dysprosium, terbium and europium. “Dysprosium is the Rare Earth in which there will be the greatest shortage,” he says.13 There will be an annual Rare Earth oxide supply of 208,000 tons by 2015, more than enough to meet projected demand of 190,000 tons. But there will still be significant shortfalls in dysprosium oxide supply. It is projected that production will reach 2,000 tons per year, well short of the projected demand of 2,500 to 3,000 tons. Europium is also expected to face similar shortfalls. The supply of terbium, neodymium, erbium and yttrium could also be tight.14 The result, according to Kingsnorth, is that prices for HREEs are likely to remain high for the next few years, while prices for cerium and lanthanum may actually drop. Lanthanum and cerium prices expected to fall As mines in the U.S and Australia come on-line in the short term “you’re going to have the world probably go into surplus for some particular types of Rare Earths,” said Dahlman Rose analyst Anthony Young. “You can see prices pull back from the current levels.” Prices of the most common REs, lanthanum and cerium, surged to $60 a kilogram from about $5 during 2010, but are forecasted to fall back. But Young adds that Heavy Rare Earths, along with certain Light Rare Earths used in magnets, will likely remain in hot demand.15 Another thing to consider with respect to heavy rare earth elements in the longer term is the peak concept. Heavy Rare Earth resources are finite. And supply could run out in as little as 20 to 30 years. The REE market is getting lots of attention these days and there are certainly short term opportunities, but it is clear that in the medium and long term, the relative fortunes of the two types of Rare Earths may follow very different paths. There may be some truth to the analysis that many small companies may not manage to find the requisite expertise and backing to make good on their promise, it seems those companies who have access to Heavy Rare Earth Elements will likely have a much better shot at monetizing their investments in a niche sector of a niche market.
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The subject of Rare Earth Elements (REEs) is well and truly in the mainstream media and a number of investment gurus have weighed in on the relative merits of investing in Rare Earth (RE) mining companies. But the media has generally missed a specific distinction in the story, namely the differences between Light and Heavy Rare Earths.
