China’s Precious Metals - Rare Earth boom outpaces gold and oil ralliesOctober 04 2010, 2:30pm
Gold prices and gold companies have barely been out of the headlines as the yellow metal continuously hits all time highs, yet it’s not the best performing commodity out there.
In a note to clients Nomura Securities’ chief strategist Sean Darby examined the intriguing Rare Earth story, which has seen China’s protectionist stance on exports drive a 300% surge in metal prices.
“While investors watch the gold price touch new highs, metals termed Rare Earth (RE) ... climbed far faster over the past month,” Darby said.
“China controls more than 90% of global production of REs and has embarked on a series of deals to secure output from other international producers, meaning it accounts for 97% of all REs sold globally.”
The Rare Earth story has been somewhat under the radar for many UK investors, largely due to the lack of London-listed rare earth companies. However with such a compelling jump in prices, the sector is likely to attract the interest of more and more investors.
Rare Earth Elements (REE) are a group of metals which are crucial in most new technology.
Strictly speaking there are seventeen REEs, however there is also a broader range of ‘hard to find’ strategic metals, such as Tantalum, Niobium, Palladium and Germanium.
In terms of geo-politics the Rare Earth story is particularly intriguing.
“China’s dominance in the supply of REs means it is able to act as a monopoly producer in the short run,” Darby said.
In his research Darby highlights that whilst China and North Korea have large economically viable reserves, however profitable reserves are hard to find and among the world’s developed economies they are scarce.
Furthermore it is the high-tech minded developed economies who rely on the supply of REEs the most.
Countries such as South Korea and Japan, both heavily dependent on the metals for hi-tech manufacturing, are scrambling to secure future supplies.
The dramatic rise in REE prices has been driven by a squeeze in supply after China cut back exports,
Darby noted that China has slashed its export quotas in a bid to protect its own domestic sales, with approximately 60% of China’s RE production being reserved for domestic consumption.
“China has warned in the past that its own industrial demand might lead it to stop exporting REs altogether,” Darby added.
The move prompted the US to table an act to establish initiatives to reintroduce a domestic Rare Earth supply chain.
Similarly other developed economies are joining the push to find and develop Rare Earth resources outside China.
Consequently Rare Earth prices are soaring, up on average by 300% between January and August 2010, with the rises for each individual metal ranging from 22% to as much as 720%.
A number of companies have already latched on to the opportunity presented by a looming supply shortage in some, (though not all) of the metals.
There are many exploration, development and mine restart projects on the go outside China.
From an investor's point of view most publicly-traded Rare Earth focused explorers and mine developers are based in Australia and Canada.
Whilst London doesn’t have any pure-play REE stocks, Noventa’s (LON:NVTA) tantulam business and Kenmare Resources’ (LON:KMR) titanium project are set to benefit from similar economic trends.
Among the ASX listed Rare Earth stocks Nomura sees two stand-out stocks: Lynas Corporation (ASX:LYC) and Arafura Resources (ASX: ARU).
Lynas owns the richest deposit of Rare Earths in the world, and it is expected to be the next rare earths producer out of the blocks.
The company’s Mount Weld mine and concentration plant are due to come online in December 2010.
Lynas is also building a Rare Earths processing plant in Pahang, Malaysia, where production is scheduled to get underway in the third quarter of 2011.
Arafura is currently developing its Nolans Rare Earths-phosphate-uranium project in Australia’s Northern Territory.
Earlier this month, Arafura successfully produced commercial quality separated Rare Earth Oxides.
At Nolans the company is making rapid progress on its bankable feasibility study, and the project is on track for first production in 2013.
Here are a few other publicly-traded Rare Earth plays.
Toronto-based Avalon Rare Metals (TSX-V:AVL) is currently developing a number of rare metals projects in Canada.
Avalon’s flagship project, the 100%-owned Thor Lake project in Canada's Northwest Territories, hosts the Nechalacho deposit - the second-largest REE deposit in the world.
Besides being large, the deposit is also high grade with an exceptionally high enrichment of valuable heavy rare earth elements (more than 20% in the Basal Zone) which should generate high operating margins.
Saskatchewan-based Great Western Minerals (TSX-V:GWG) has an integrated ‘mine to market’ strategy.
It is investing in three stages of the rare earths supply chain - exploration, mining and processing.
The company already processes Rare Earths through two of its subsidiaries; Less Common Metals (LCM) based in Birkenhead, England, and Great Western Technologies Inc in Troy, Michigan, US.
Greenland Minerals and Energy (ASX:GGG) is exploring and developing a giant multi-element rare earths/uranium/sodium fluoride Kvanefjeld project.
In February 2010 it published an interim report on the pre-feasibility study which indicated that the project has the potential to become a highly profitable world class mine.
The capital cost for the mine and processing plant capable of treating 10.8Mtpa is $2.3B. Construction could begin in 2013 and first production in 2015.
Commerce Resources (TSX-V:CCE) owns three projects in Canada. The Blue River tantalum/niobium project in British Columbia is the most advanced.
A Preliminary Economic Assessment is underway scheduled for publication in the fourth quarter of 2010.
Dacha Capital (TSX.V:DAC) has a unique business model in the Rare Earth space. The investment company aims to achieve capital appreciation through its physical REE holdings. The company has been buying up and stockpiling the metals at LME warehouses in Korea and Singapore.
Rare Element Resources' (TSX.V:RES) flagship property is Bear Lodge which lies 12 miles from Sundance in Wyoming, US.
In August it reported its progress towards a commercial metallurgical process.
The company can now produce a pre-concentrate at 90% recovery, containing up to 20% Rare Earth oxide from Bear Lodge.
Quest Rare Minerals (TSX.V:QRM) is advancing two rare earth projects in Quebec and a uranium project in New Brunswick.