The Future of the Global Rare Earth Industry Future Of The Global Rare Earth... · “I have been following the rare earth market for a couple of years now, and I have been confused

FINANCIAL NEWS, DATA & ANALYSIS

The Future of the Global Rare Earth Industry www.fnarena.com

A Special Report for Subscribers at FNArena

The Future Of The Global Rare Earth Industry 2

The Future Of The Global Rare Earth Industry

By Greg Peel, FNArena Financial News, Data & Analysis

October 2012

Contents

Introduction……………………………………………………………………………………….3

Rare Earths and the Green (And Smart) Revolutions…………………………………………….4

Global Demand for Rare Earths……………………………………………………………. ……7

Rare Earth Prices and Demand Destruction………………………………………………..........12

Global Supply of Rare Earths…………………………………………………………………....15

Rare Earths and the Environment………………………………………………………………..23

Investing in Rare Earth Hopefuls………………………………………………………………..25

Conclusion……………………………………………………………………………………….29


3 A Special Report for Subscribers at FNArena

Introduction

“Why are you here?” asked the veteran miner, now non-executive chairman of an Australian-listed rare earth metal aspirant.

“To learn,” your correspondent replied. “I have been following the rare earth market for a couple of years now, and I have been confused by what I have read – many of the reports I have come across are quite conflicting in terms of demand and supply predictions, light metals versus heavy metals, which companies will or will not succeed...”.

“The reason you’re confused,” he suggested, “is because the industry itself is confused”.

I came to appreciate the truth of these words over the course of the 2012 Rare Earths Conference, organised by global metals news and information service Metal-Pages, held in September in Guangzhou, China, capital of the rare earth-rich Guangdong province. If not completely confused, the rare earth industry is at least in a state of flux, brought about by the rare earth price bubble of 2009-11 and its subsequent burst, sending prices plummeting some 80% into 2012.

Global demand for rare earth metals for manufactured products was already beginning to grow exponentially when in January 2010, the world's biggest producer of rare earth metals – China – imposed more restrictive export quotas. Prices subsequently “went parabolic”, rising some 25-35 fold from their 2009 levels. These were supposedly metals the world could not do without, despite the fact few had ever before heard of “neodymium”, or “dysprosium”, let alone tried to pronounce their names correctly. Speculators, in the form of metals traders, jumped on board. Shares in rare earth mining companies across the globe suddenly became “hot”, even if the miners had not yet produced a gram. It was a classic bubble scenario.

In Australia, the name on everyone's lips was “Lynas”. Lynas Corp (LYC.AX), unlike a couple of hundred aspirants globally, was already producing rare earth minerals ready for processing in Malaysia as soon as the Malaysian government saw fit to grant approval. Lynas was on or near the top of every metal-watcher's list of global rare earth aspirants likely to succeed. Shares in Lynas were trading at A$0.12 in March 2009 and at A$2.60 in March 2011. But as Lynas waited for a slow-moving Malaysian government to make a decision, rare earth metals prices crashed.

In retrospect, even Beijing was taken aback by the reverberations its export quotas generated. Major manufactured goods exporter Japan went into apoplexy, followed closely by the US, and fists were banged on tables at the World Trade Organisation. Chinese rare earth producers were similarly incensed. There is a price for everything, and also a price beyond which commercial viability evaporates. 2011 brought about “demand destruction” for rare earth metals – substitution, recycling, and where neither was possible, consumer exit. Rare earth prices lit a fire under ex-China exploration and new project assessment. While China may produce over 90% of



rare earth metals, it can lay claim to only half of global deposits. This time it looked as if Beijing may really have shot itself in the foot.

In August 2011, Beijing relaxed its export quotas. At the same time, global economic growth was waning. Chinese economic growth was also waning. Commodity prices were falling. Rare earth metal prices headed south – fast. Shares in rare earth metal mining aspirants followed suit. Producers, consumers and shareholders were all left in a daze.

Lynas share price, two years. Source: eSignal

It was enough to prompt some commentators to call the rare earth industry over – done and dusted. Yet despite the bursting of the price bubble, and a sluggish global economy, rare earth metal prices have settled back to levels which are still substantially higher than their launching point in 2009. When Lynas completed the feasibility study for its Mount Weld project in Western Australia, the price of cerium oxide was around US$6/kg. Cerium subsequently peaked at over US$150/kg in July 2011 but at the time of writing had settled around US$22/kg. That's still a substantial premium over the US$6/kg that rendered Mount Weld a commercially “feasible” project.

For Lynas, the rare earth industry is not yet “over”. Nor is it for leading US producer Molycorp, for Japanese consumers, for Chinese producers and consumers, and indeed for anyone attending the 2012 Rare Earths Conference. The industry is, however, still reeling. The question now is: Whereto form here?

Rare Earths And the Green (And Smart) Revolutions

The production of the first iron sword revolutionised battle and changed history but was not possible before iron was discovered. Nuclear reactors did not precede the discovery of radioactive elements. Similarly, without the discovery of rare earth metals today's viable electric cars, wind turbines, crisp-screened smart phones and energy efficient lighting would not be possible. It may seem to the uninitiated that those elements on the periodic table way up in the Lathanide series – the ones no one had to bother learning at school – have only found uses this century. They never seemed to be heard of prior. However rare earth elements began to be identified way back at the turn of the nineteenth century, although it wasn't until new separation processes were developed in



the US in the 1940s that rare earth metals could begin to be fully exploited. China has been mining rare earths for over fifty years.

Rare earth elements (REEs) are the most costly of all metals to process. “Rare” is a scientific classification, not an allusion to scarcity, however it so happens that, like uranium for example, large deposits of REEs are themselves fairly rare. REEs are an insecure bunch who like to hang around in groups, so where you find one you inevitably find pretty much all of them clustered together, in varying grades. It is this clustering which makes the individual separation of elements from their mineral host such a tricky and costly business.

So costly, in fact, that most of the world could not see a commercial imperative to mine and process them late last century. The nineties in particular saw a global down-cycle for all metal demand, let alone rare earths, and hence a drop-off in all mining investment. Best to leave the production of rare earths to Communist China. There's enough there to satisfy what was basically insignificant global demand.

Then along came the twenty-first century, and with it the Green Revolution. The climate change and man-made emission juries may still be out, but pollution, environmental degradation, the high cost of energy, and the non-renewability of particular resources are undeniable. The world is going “green”.

Coinciding with the Green Revolution is the Information, or perhaps we can now say “Smart” Revolution. At the turn of the century, some (but not all) of us had clunky PCs on dial-up connections and chunky mobile phones good for nothing more than making phone calls. And the internet bubble burst, suggesting that perhaps it was all just a bit of a fad after all.

In what seems little more than a heartbeat, we now have more than one computer per home, fast broadband, wi-fi, smart phones, tablets and flat-screen 3D televisions. And the internet is taking over our lives, just as it was once predicted. They call it “Silicone Valley” for a reason, and silicone would arguably win the Nobel Prize for the twenty-first century's most influential element. Yet one must appreciate that said revolutions would not have reached their current stages without the availability of rare earth elements.

Source: Hastings Rare Metals



REEs are present in today's televisions, computers, smart phones, tablets, DVDs, rechargeable batteries, catalytic converters, magnets, LED lighting and much more. REEs are present in rechargeable batteries for portable devices such as smart phones et al, and several pounds of REEs are found in the batteries that power hybrid and electric cars. Electric motors incorporate magnets, and REE magnets provide the efficiency required to power electric cars and to generate electricity from wind turbines.

REEs provide colour phosphors and polishing compounds used for TV, computer and smart device screens and optical-quality glass. Importantly in today's world, REEs have many military applications including stealth craft, armoured vehicles, precision-guided weapons and night vision goggles, and have been in use for some time in the Gulf Wars.

It is these military applications which most concern the US government with regard to China's dominance of REE supply and the slow-moving response of ex-China production development. Japan leads the world in the production of electronic devices and components, cars and their components, and new lighting technologies. Today's vehicles, electric or otherwise, utilise several motors beyond that which power the wheels. Every automatic moving part, from windows to wipers to seats, antennae, mirrors and so on is powered by electric motors consisting of levels of REEs. Japan's economy is thus quite beholden to China's manipulation of global REE supply.

Source: Hallgarten & Co

The above table lists the rare earth elements in order of atomic number. Those in yellow are the more abundant light REEs and in blue are the more scarce heavy REEs.

Missing from the table is the element yttrium. With an atomic number of 39, yttrium is not, by scientific classification, a rare earth element. However given its properties and usages are closely aligned with the light REES, and as yttrium is often a major component of the basket of REEs in any given deposit, the industry includes yttrium within the REE suite. Interestingly, next on the periodic table is zirconium (40), found in mineral sands, and the price of zircon similarly bubbled



and deflated along with the REEs over the same time frame. Mineral sand sources of zirconium and titanium (22) are, like REEs, difficult to find in large commercial quantities.

It is no stretch to acknowledge the exponential growth of global ownership of flat-screen TVs, computers, smart phones and other electronic devices over the past decade, with the developing world offering a continuing growth surge. One might also note the growing use of LED and other new lighting technologies in today's lighting applications. Weapon and related military technology development speaks for itself. Wind farms are increasingly popping up across the planet. And the next big jump will be in the field of hybrid and electric cars, which are now reaching production levels to provide the economies of scale to achieve comparable affordability. Ownership of such vehicles is forecast to step-jump within a couple of years.

What it all boils down to is the fact REEs have become essential commodities in the twenty-first century. REEs can be substituted in some, but not all, of today's applications if price dictates, however available substitutes offer inferior quality and efficiency. When the price of nickel becomes non-viable for stainless steel producers, for example, chromium is one element that can be substituted. However the resultant stainless steel product is inferior to a nickel alloy equivalent. The US government is not one to be satisfied with inferior quality, particularly where military applications are concerned. Thus the heavy REE dysprosium, for example, has been declared “critical” by the US government and the expectation is all US production could be acquired for public benefit.

Global Demand For Rare Earths

Dysprosium is not the only REE to be declared both significant and critical by the US government. Together with the European Commission, the US has listed all of dysprosium, europium, neodymium, terbium and yttrium under this classification. While there has been a great deal of research conducted on the supply side of REEs, and the various upcoming rare earth projects across the globe, the demand side for critical REEs “is shrouded in uncertainty,” noted Lara Smith, managing director of Core Consultants in her presentation to the Rare Earths conference. Core Consultants is a South African-based firm offering consultancy, modelling and research for the global mining industry and has recently been engaged in a number of due diligence studies for various REE producers.

Core Consultants has thus spent time researching forecasts for global REE demand, homing in on the growth sectors of visual display technology, electric vehicles and wind turbines.

REEs are used for the luminescent material in visual display units, for either the display itself (plasma screens) or in background illumination (liquid crystal display or LCD). Cold cathode fluorescent (CCFL) tubes containing REEs are used for background illumination, particularly in older devices. LCD televisions typically require around 82 tubes and notebooks one or two tubes. Yttrium and europium are the main materials used for background illumination, while plasma displays require yttrium, europium and terbium.

LCD screens are now preferred over plasma, and newer screens use light emitting diode (LED) back-lighting instead of CCFL. LEDs also make use of luminescent REE material. In 2010, 90% of all new notebooks were equipped with LED technology and 30% of new televisions. LEDs are projected to grow to encompass one third of the lighting market, while CCFLs are also expected to increase in market share over older lighting technologies. It should be noted that today's tablets are 60% brighter than traditional notebooks, while Apple's iPad3 in particular is expected to more than double the number of tablet LEDs.



Source: ITC, Core Consultants

Recent research suggests households in mature markets own an average of 2.4 televisions and households in emerging markets own 1.8. A survey suggests 40% of emerging market households intend to buy a new TV in the next twelve months. In mature markets the ongoing trend is replace older sets with flat panel, mostly LCD TVs of greater quality, definition and size. There were 216 million LCD TVs sold in 2011 and 245 million are forecast to be sold in 2012. Notebook and tablet sales have increased by 35% since 2009 and production is expected to double over the next 3-5 years.




The number of global mobile phone subscribers grew from 2 billion to 5.8 billion in 2005-11, to a population penetration average of 85%. Asia's individual penetration was 75% in 2011 and Africa's 42%, suggesting there are still substantial gains to be realised. We acknowledge also that mobile phones are quickly discarded and replaced with newer models. Aside from display materials, smart phones also require neodymium and praseodymium.


While the electronic device market has rapidly become relatively mature, the next big consumer technological shift is expected to be from traditional combustion engine vehicles into hybrid and electric vehicles. Automotive manufacturers plan to build 12-13 million of such vehicles by 2020, while China is expected to produce 80 million electric bicycles by 2015. Electric and hybrid motors require dysprosium and/or neodymium magnets.


Turning our attention now to wind power, it is expected that by 2015 almost 12,000 tonnes of neodymium will be needed to provide the magnets for wind turbines. Expanded Chinese wind capacity in particular will drive global wind power from a current 133,000 megawatts to 381,000 megawatts in the time period.




Returning to LED lighting once more, we note that beyond visual display units, LEDs are rapidly becoming the choice for lighting solutions for everything from humble home lighting to theatrical lighting, workplace lighting, and the decorative lighting of buildings so favoured by Asian cities. Were we all bedazzled by the light show at the London Olympics Opening Ceremony? An awful lot of LEDs were employed.

Canton Tower, Guangzhou

This is Canton Tower (above), a 610m observation/communications tower sitting at the edge of the Pearl River, which dominates the Guangzhou skyline. It is constantly changing colour as one drifts past on a conference cocktail cruise, eventually morphing into this rainbow palette. Guangzhou is well behind Shanghai, Hong Kong or elsewhere in the tall building stakes at this stage, but those in



place still try to outdo each other with such luminescent displays. It's frivolous stuff of course, and a waste of energy, but it serves to highlight the many benefits of LED lighting over other forms in many applications.

LEDs have become the New Thing in lighting, but we have already seen an evolution globally away from old-fashioned incandescent light globes to new energy-saving, long-life bulbs (pictured). The new bulbs, now standard in Australia, contain REEs. The brightness of a 20W rare earth bulb is equal to that of a 100W incandescent bulb and a REE bulb will (supposedly) last five years. The energy savings are obvious.

China will stop manufacturing incandescent bulbs in 2013. LED lamps, which also contain REEs, consume only 50-70% of the energy consumed by the new bulbs. Both new lighting solutions contain no toxic substances, emit no infrared or ultraviolet light or high frequency radiation, and do not strobe. They are therefore “healthier” than incandescent bulbs, notwithstanding energy savings and the subsequent emission/pollution implications. They also require fewer raw materials to produce. The new household bulbs contain only two grams of REEs. The production of rare earth luminescent material (yttrium, cerium, europium and terbium oxides) accounts for about 7% of total REE production. LED bulbs require much less raw material again, and more light REE yttrium and cerium is required than heavy REE, and much more expensive, europium and terbium.

Tang Yinxuan, president of Hangzhou Daming Fluorescent Materials Company Ltd, noted that the demand for rare earth tricolour fluorescent powder for LEDs was less than ten tonnes in 2011, is expected to be 20 tonnes in 2012, and is expected to then double to 40 tonnes in 2013. An annual demand growth rate of 20-30% is forecast thereafter in 2014-17. By that stage LEDs are expected to represent 50-70% of the lighting market.

Clearly the above numbers imply a global surge in luminescent REE demand beyond that associated with phosphors for smart phone screens et al. That's before we get to REE applications such as electric motors and batteries, wind turbines, and things military. However, the numbers belie the fact that the global REE lighting market is already maturing. Smart phones, tablets and so forth are still relatively new and plenty of demand potential remains from the developing world, notwithstanding rapid developed world upgrades to new versions. Wind farms are hardly new, but they are still on the upswing. Electric cars are expected to see a step-jump in production over the next two-three years. The REE-for-lighting demand growth curve on the other hand will quickly flatten.

For starters, REE bulbs last longer, consume less energy and require less raw material than incandescent bulbs. LEDs last even longer, consume even less energy and require even less raw materials again. REE bulbs are rapidly becoming ubiquitous. Once we shift to LEDs, for which economies of scale are now rapidly reducing the price of end-products, demand growth for the REEs required will begin to subside.

That's the view of Chinese lighting man Tang Yinxuan. However, predicting global REE demand into the future is almost akin to science fiction. The following graph, provided by Montero Mining & Exploration (MON.TSX) CEO Tony Harwood, would seem to dispute Mr Tang's predictions.



Source: Montero Mining & Exploration

Note the particular demand curve forecast for phosphors.

It's another example of why there is quite a deal of confusion in the global REE market – not just because of the price bubble and burst we have just experienced, but also because of the sheer novelty of a lot of REE applications on the longer time scale. What will the world look like in 2035? Will we all be driving hydrogen-fuelled cars? Will we have identified extraordinary dysprosium deposits on Mars? These questions may seem flippant now, but recall that 15 years ago hardly anyone owned a home computer or mobile phone. Now look at us. And we have to put this in the context of the serious time frames and costs involved in bringing a greenfield REE project to the point of actual REE processing.

But coming back to that price bubble and burst...

Rare Earth Prices and Demand Destruction

An interesting undertone to the Rare Earths 2012 conference was the not so subtle diplomacy apparent in more than one of the presentations. Delegates and presenters hailed from all over the globe but of unmissable note were polite digs from presenters from Japan and China. Japan has been manufacturing electronic goods, cars and lights for decades, and up until this century China was quite happy to supply Japan's REE requirements with a smile. However in this century, China is the “new Japan”. For the past decade China has been flooding the world with cheap televisions, whitegoods, and everything in between, and now the global auto market is in China's sights. Who is China's major competitor in this field? Japan. Who has all the REEs? China.

I noted in the introduction to this report that the inevitable result of an unrealistic price bubble – a bubble based on supply constraint rather than a demand surge – is demand destruction. At some point, a high price is simply too high. Last decade we saw major price upswings for base and bulk metals and minerals, which ironically in this context was all about a demand surge from China. These price shifts, which resources analysts at first would not believe, forced raw material



substitution (cheaper chromium for nickel in stainless steel production for example, resulting in lower quality stainless steel) and vigilant recycling of product. In many cases it forced end-user businesses to go bust or walk away. Base metal price bubbles did not burst as a result of the GFC. They burst before the GFC. Nickel trebled in price from 2006 to 2007 and then halved again in 2007. Chinese stainless steel manufacturers could not afford so high a price.

From 2009 to 2011 REE prices did not just treble, they surged by tens of multiples of times, sparked by Chinese export restrictions. The following two charts, provided by Advanced Materials Japan CEO Shigeo Nakamura, offer an insight into how the global REE consumer market responded.

Source: Advanced Materials Japan



Advanced Materials Japan is a REE trader. The bars in the charts represent imports of REEs to Japan, from China in red and the rest of the world in green. The first chart takes us up to 2011 in annual terms and the second takes us into 2012 in monthly terms. The dotted blue line in the first chart represents averaged REE prices.

If we discount 2009 as representing the GFC blip, the charts identify two distinct trends – the peaking of Japanese REE imports as a response to price and the increased ratio of imports from sources other than China. The green bars are particularly interesting, for they seem to belie the fact that at present, the rest of the world is capable of supplying less than 5% of world REE demand.

Let's just say that when it comes to the crunch, Japan is not going to ask too many questions about the true source of non-Chinese REE supply. And the truth is that Beijing's REE export quotas only served to ramp up the business of smuggling REEs out of China to parts foreign, for sale to non-Chinese end-users. Beijing is not oblivious to the REE black market, nor to illegal REE mining in China, but more on that later. The following chart shows why reliable REE supply is rather important to Japan. (Pardon the poor translation.)

Source: Advanced Metals Japan

Given the importance, Japanese consumers of REEs were not about to walk away despite crippling import prices. What they did was to substitute and to recycle.

Companies like Toyota and Toshiba started substituting other elements for REEs. Toyota is pulling REEs out of old motors, and Honda out of old batteries. Mitsubishi recycles material from air conditioners and Konica re-uses cerium in its slurries. Even the scientists are in on the act. Japan's National Institute of Industrial Science & Technology has gone about the tricky business of removing the tiny levels of luminescent REEs in old screens. Hiroshima University has developed the separation of REEs by microbial-mediation.Where there's a will, as they say, there's a way. And nothing fires up a will like sky-high prices in a cornered market.



The end result, as Mr Nakamura explained, is that Japanese industry is now, for example, consuming 30% less cerium and dysprosium and 80% less europium and terbium for the same net production result. Moreover, there is an element of “if you can't beat them, join them”. REE-consuming Japanese manufacturers have begun moving their operations to China.There's no export quota on the Prius (yet).

In his presentation, Mr Nakamura concluded with the obvious plea. Beijing's ill-conceived attempts to control the global REE market have proven mutually destructive for everyone involved – producers and consumers, Chinese, Japanese or other. There is no reason why the REE market cannot prove beneficial to all involved. “Miners and end-users can get along with each other,” Mr Nakamura entreated, “to evolve a sustainable rare earth economy”.

Unfortunately as Mr Nakamura spoke, CNN was running pictures of Chinese students burning Rising Sun flags as a response to the fight over those rocks in the East China Sea.

Global Supply of Rare Earths

Lynas Corp has already produced enough rare earth-bearing ore at its Mount Weld mine to feed the Lynas Applied Material Plant (LAMP) in Malaysia for around two years. The hold up to production has been the granting of approval from the Malaysian government for the plant to go ahead. A temporary operating licence was granted but has since been again held up in the Malaysian court.

Lynas, if permitted, is one of two ex-China companies ready to provide the world with its first “new” supply of REEs outside the small legacy operations which have previously provided the 3% or so of global supply not sourced from China. The other is US-based Molycorp (MCP.NYQ). Molycorp has been ramping up its Mountain Pass REE mine in California to the point that by August this year it was producing 2,800 US tons of REE ore per day. Over the next several months Molycorp will complete the commissioning of its oxide separation and product finishing operations.

Project Pheonix, Mountain Pass. Source: Molycorp



At Mountain Pass, Molycorp will be able to produce an amount of each of the REEs and yttrium to satisfy a hungry market. We recall that of the full suite, the US and European authorities have classified five REEs as “critical”, being dysprosium, europium, neodymium, terbium and yttrium. Dysprosium, europium and terbium are all more expensive heavy REEs while yttrium is included by association as a REE. Neodymium is strictly a light REE but as one of the heavier of the light REEs is often separated into a mid-range class with promethium and samarium. The five elements have deemed to be critical due a mix to their scarcity, importance and lack of effective substitution. It is typical for a REE deposit to contain large ratios of the light REEs lanthanum and cerium and a much lower ratio of the mid and heavy REEs. A case in point is the Mountain Pass mine, for which the following production forecast chart provides an idea of the elemental break-down. The blue segments are cerium, the green segments are lanthanum, the white segments are neodymium and praseodymium and that really fine slice of grey at the top of each box is “other”, a list of which can be gleaned from the accompanying table.

* Company-wide production guidance (8/12); Mountain Pass only production. Source: Molycorp

Lynas and Molycorp boast similar distribution profiles. While they could soon both be significant global producers of REEs (pending Lynas’ approval) they will not be considered significant producers of critical REEs. It will be significant that they are producing any heavy REEs outside China, but volumes will not be substantial.

Hastings Rare Metals (HAS.AX) is one of several Australian-listed REE hopefuls some way from the production stage. Hastings was one of four REE supply-side presenters at the Rare Earths 2012 conference, joining Molycorp, Canada's Montero Mining and Luxembourg-headquartered Frontier Rare Earths (FREFF.PNK), the latter providing an update on the Zandkopsdrift project in South Africa.

REE analysts include Hastings in the “maybe” group of global REE hopefuls, if for not other reason than Hastings' projects in Western Australia are still at the assessment stage. However, Hastings is carrying a significant trump card, in the form of stand-out distributions of dysprosium (8.8%) and



neodymium (3.5%) within deposits which contain 53.2% yttrium and only small amounts of cerium (6.0%) and lanthanum (1.6%). Note that all of dysprosium, neodymium and yttrium are deemed to be critical.

I am not here to push the barrow for Hastings in particular (miners and mining analysts get very touchy) but to use Hastings and its heavy REE distributions to demonstrate another source of confusion and disagreement within the REE industry. (And besides, Technical Director Steve Mackowski has provided a number of useful charts.)


REEs dysprosium and neodymium in particular are soon to become highly sought after as the clean energy revolution kicks into gear, providing permanent magnets for electric vehicle motors and wind turbines as discussed above. The above table illustrates an importance/supply risk graph on the right and on the left, a chart comparing dysprosium deposits among a select group of global REE aspirants. Lynas is in there (Mount Weld), as is Molycorp (Mountain Pass), and also Australian-listed Alkane Resources' (ALK.AX) Dubbo project.

Clearly Hasting's heavy rare earth oxide (HREO) deposits are a stand-out. The significance of that assumption is made obvious by the following chart, which compares the market prices (as at May, 2012) of the light REEs, lanthanum and cerium, the heavy REE dysprosium and the pretender yttrium.



Prices China FOB; Source: Hastings Rare Metals

At the time of writing REE oxide prices have drifted lower, but comparative pricing between the various elements remains largely intact. The true “rarity” of dysprosium is reflected in the differential in May between US$22/kg for both lanthanum and cerium, US$100/kg for yttrium and US$1050/kg for dysprosium. In 2010, the world -- and when I say “the world” I effectively mean China -- produced more dysprosium than was consumed. However, with the production of hybrid and electric vehicles expected to step-jump over the next 2-3 years, the following projections suggest why dysprosium is considered the most critical of the “critical” REEs, notwithstanding military applications.




I suggested in the Demand section of this report that there is not necessarily agreement among producers, consumers and analysts as to just what global REE demand growth may be over the next decade or more, and the same is true for the supply side. The supply side is probably even more of a guess given most of the projected ex-China production growth potential still lies firmly in the ground, and it takes several years and a lot of money to bring a REE mine and processing plant to the point of viable oxide production.

We recall the research conducted by South Africa-based Core Consultants which featured in the Demand section above. Core Consultants focused on the five critical REEs in attempting to forecast ongoing demand. The firm also conducted research on the supply side of the equation, focusing only on those ex-China REE projects that are at least in the pre-feasibility stages of development, have off-take agreements in place, and have secured financing.

What the analysts found may come as a bit of a shock. Their conclusion was that if we balance expected Chinese and ex-Chinese future supply (on the above criteria) against projected demand, the critical REEs will be in surplus by 2015.

Source: Core Consultants

In surplus? Then what on (rare) earth is all the fuss about? Surely REEs will simply fall in alongside some of the lower atomic numbered elements in the periodic table, such as base metals and iron, in experiencing short and long price swings based on the cyclical global demand-supply balance? Surely the gloss will come off?

Such a projection does not explain why dysprosium might be US$1050/kg when copper is less than US$4/kg. This brings us back to China, its 50% of global known REE deposits, its 97% of global supply, and its ill-conceived export quotas. Beijing may have backed down on its quota policy after nearly destroying the REE market altogether, but that does not imply China will happily now engage in a global free market.

Let's now look at the same graph as above, but this time take out Chinese production. Things look a little different.



Source: Core Consultants

Concluded Core Consultants managing director Lara Smith, “If we exclude China and assume that they will continue to limit their exports of criticals either through quota, reduced mining or other means, then we will find ourselves in a supply shortage for the remainder of the decade”.

Somewhere in between lies the answer, and the simple fact that the answer is at best “somewhere in between” only serves to underscore the uncertainty surrounding the future of the global rare earths industry. There is a certain irony that the economy destined to become the biggest on the planet must import the majority of its base metal, bulk mineral and energy needs, while on the other hand holding the fate of global critical REE supply in its hands. Someone up there wanted to keep the game interesting.

And sure enough, less than a week after the Rare Earths 2012 conference in Guangzhou was over, Beijing announced a reduction in the number of domestic rare earth mining permits, cutting numbers by 40% from 113 to 67. The brief report issued by the Chinese Ministry of Land gave no indication of what impact the cuts would have on total Chinese REE production.

The announcement came at the height of heated tensions between China and Japan over the afore-noted group of uninhabited islands in the East China Sea. The timing may thus be considered interesting, as one must ponder as to exactly what Beijing is trying to achieve with its seemingly knee-jerk attempts to limit the export, one way or another, of Chinese REEs. Is Beijing simply playing a Blofeld-esque game of trying to “control the world” of REE production and pricing to China's own advantage?

It has oft been suggested that China is the “new Japan”, comparing China's emergence as an economic, manufacturing and exporting powerhouse with the similar rise of Japan in the sixties and seventies. Japan reinvented the car, the stereo, and all sorts of other household electronic goods on its path to becoming the world's number two economy at one point, fighting it out with heavy manufacturer and exporter Germany for the silver behind the US. China, too, can play at this game, particularly given its sheer weight of population and subsequent low-wage economy. It is debatable as to whether China “reinvented” anything but while we now scoff at “Made in China” labels as we once did so for “Made in Japan” labels, the truth is developed world households are becoming full of cheap Chinese whitegoods and electrical goods, and slowly garages are accommodating Chinese-made vehicles.



China has now, for example, successfully penetrated the LCD television market. LCD TVs require, as noted in this Report, levels of rare earth elements for their new generation screens and back-lighting systems. Before China entered the TV market, Chinese REE oxides found their way to dominant manufacturer Japan, providing Japan with the opportunity to “value add” from raw material to finished product and enjoy the implicit profit margin. But why, now, would China hand over the margin opportunities to Japan? It would make commercial sense to satisfy REE demand for local manufacturers before exporting any excess to a REE-starved rival. Or at the very least creaming some of the margin provided by further processing or even component manufacture – hijacking the production chain.

Monopolistic attempt at world domination and competitor-crushing or a straightforward example of free market capitalism?

Yet while the above would explain Beijing's attempts to restrict REE exports, it doesn't explain why Beijing would now choose to restrict domestic production instead. The result can only be higher REE prices for Chinese manufacturers as well as the rest of the world.

Clues may lie in the April edition of a recently established newsletter from the Chinese Rare Earth Information Center. This publication is available to both domestic and foreign subscribers, and the April edition was offered as a sample at the Guangzhou conference, in both Chinese and English editions. The following is an excerpt (please note I have not attempted to tidy up the English translation):

“In 2011, a series of policies were issued targeting on rare earth industry. Price of rare earths fluctuated sharply during 2011 and consumers were concerned about the supply of rare earth. There was a big change in rare earth industry.

“Chinese government attached great importance to the problems that hampered the healthy development of rare earth industry, including illegal mining, rapid expansion of smelting & separation capacity, serious damage to the environment, waste of resources, lagging behind in R&D of high-end applications, disordered export and so on. To improve the environment and protect resources, a series of control policies were introduced and the State Council had launched four special regulation campaigns on rare earth mining, smelting & separation, environmental protection as well as smuggling crack-down. Rare earth policies facilitated consolidation of rare earth industry.”

The excerpt suggests a genuine attempt by Beijing to rein in a runaway, anarchic domestic REE industry; to consolidate, enhance, and maximise the benefits of China's REE domination. That Beijing wants the rest of the world to appreciate such an attempt would suggest the government has no intention of smiling with evil intent while stroking a cat. China may be sitting on a whole world of opportunity with its REE reserves, but with that brings a whole world of problems that have to be managed for the most harmonious outcome. The export restriction idea was clearly a mistake, and only served to encourage bad and corrupt practice in the domestic industry while trying to provide a domestic price advantage. The mining permit restriction policy sacrifices lower Chinese domestic REE prices but provides the opportunity for a more equitable global market, and ultimately a cost/benefit balance that offers the most satisfactory outcome for China.

Two elements that stand out from the CREIC newsletter excerpt are “serious damage to the environment” and “lagging behind in R&D of high-end applications”. I will address the various environmental issues surrounding REE production later in the Report but let us consider the latter.




As noted, China is trying to move up the production and manufacturing value-add chain. When Beijing restricted REE exports, REE prices, as noted, shot to the moon. Why worry about how one can maximise the margin benefits of manufacturing with REEs when instant riches are going begging from the simple sale, legal or otherwise, of raw material offshore? But this was not Beijing's plan. The Chinese government wants to make the most of the REEs China is blessed with by becoming the world's foremost manufacturer of the high-tech applications for which REEs can be exploited.

To that end, the above chart highlights research from Australia's Commonwealth Scientific & Industrial Research Organisation (CSIRO) which suggests the growth of China's high-tech manufacturing industry will result in China's surplus of REE production swinging into deficit, even to the point China will become an importer of critical REEs rather than an exporter. And now that Beijing has moved to severely restrict mining permits, the CSIRO's forecast seems ever more possible.

Let's recall Core Consultants' conclusion with regard to global demand-supply forecasting, noted above: “If we exclude China and assume that they will continue to limit their exports of criticals either through quota, reduced mining or other means, then we will find ourselves in a supply shortage for the remainder of the decade”.

If this is the case, then why have global REE prices failed to recover after their bubble-and-burst, and indeed have continued to drift lower? Why have lower REE prices, combined with the ex-China rush to provide fresh REE supply, led some commentators to call the global REE industry all over bar the shouting?

Well, firstly we might consider such a conclusion to be at best premature and at worst ill-informed. We may also benefit from comparing recent action in another commodity market, and a very “REE-like” one at that, being the mineral sands industry.

Australian mineral sands miner Iluka Resources (ILU.AX) is the world's leading producer of zircon and second in production of titanium oxide. The former is predominantly used for ceramic glazes (think kitchen/bathroom tiles for example) and that latter provides a robust pigment that puts the “white” in “whitegood”. For years Iluka's share price wallowed in the doldrums until a sudden



surge in zircon and titanium prices in 2010-11 saw that share price explode to the upside. The price surge mirrored the REE price surge in timing, and to some extent in magnitude, and the subsequent pullback was also largely simultaneous. The speculative market appeared to be equating mineral sands closely with REEs, and given the lack of large global mineral sand reserves and projects under development, there certainly are comparisons to be made. However in this case, not only is China not a dominant mineral sands producer, it has become the world's fastest growing zircon and titanium consumer as it increases manufacturing to accommodate for exploding domestic Chinese demand for tiled kitchens with fridges and dishwashers.

The mineral sands price explosion may have had an element of REE association to it, but it certainly had nothing to do with export restrictions. The subsequent price pullback thus had nothing to do with restrictions being eased. Yet at the release of Iluka's September quarter 2012 production and sales report, management revealed a 52% fall in revenues from the June quarter. The company did curtail production in the period, but lower prices were the main influence on the big drop in revenues.

Management argued the seasonal impact of the northern summer holiday slowdown, and further noted that zircon and titanium consumers were in the advanced stages of inventory de-stocking. But they also admitted that pigment producers had been shying away from Iluka's quality product to acquire cheaper material. So in a nutshell we can highlight three aspects of a mature commodity market: seasonality, inventory cycles, and demand destruction at high prices.

I noted previously that when REE prices bubbled in 2011, Japanese consumers were quickly forced into substitution and recycling (presumably having first drawn down inventories) which will no doubt now remain as common practice to promote margin efficiency. I have noted the example of substitution and recycling in the stainless steel industry following the nickel price bubble of last decade. Behind each of these supply-demand imbalance, price bubble-and-burst stories (nickel, mineral sands, REEs) lies China, and the ongoing tale of China's great “urbanisation and industrialisation” push. While China's economy will continue to cycle like any other, and in 2012 has been cycling down, few disagree that an underlying, longer term Chinese growth trend remains intact.

On this basis alone we can see the potential for the global REE market to eventually settle down to a more mature beast – not dying a death but rather cycling along like any other commodity market on simple demand-supply balance fluctuations. Throw in the high-tech nature of twenty-first century REE applications and we can conclude that rumours of the industry's demise are no doubt exaggerated. Demand can be largely assumed, so that just leaves supply. Outside of early movers like Lynas and Molycorp, the ex-China supply-side remains one of contention given the very early stages of project assessment and development and the considerable time and cost scales of bringing a new project to the end-product production stage.

Before we move on to look at potential new supply, we'll first address the important issue of the environmental impact of REE mining and processing.

Rare Earths and the Environment

The reason the Malaysian government withheld its approval of the Lynas REE processing plant for so long came down to the issue of radioactive by-products. To a varying extent, REE-bearing minerals also contain levels of radioactive elements such as thorium and uranium which have to be dealt with during the separation process. In a post-Japanese tsunami world, the word “radioactive” is political dynamite. The Malaysian government is looking down the barrel of an upcoming general



election and its Opposition was decrying the LAMP as “the next Fukushima”. Not until Lynas was able to make cast iron guarantees for the safe disposal of thorium stockpiles was the government prepared to allow processing to go ahead (this was later challenged in court).

Molycorp both mines and processes its REEs on-site at Mountain Pass. In his conference presentation, Molycorp CEO Mark Smith was at pains to point out the environmentally conscious practices adopted by the company in mine and plant design and operation.

Project Phoenix at Mountain Pass derives its power and heating requirements from on-site natural gas. The use of toxic processing reagents has been greatly reduced by the recycling of water and sodium chloride to reproduce required reagents and cut wastewater discharge down to near zero. The need for fresh water input has been greatly reduced and Molycorp has even developed its own proprietary water purification process (the licencing of which to third parties provides another source of income). New paste tailings permanent disposal technology eliminates the need for a tailings dam at the mine. It's not just about keeping the tree-huggers happy – through recycling and other efficiencies Molycorp has been able to greatly reduce its processing cost and double its end-product to required ore ratio.

I noted earlier that the Chinese authorities are also very concerned about the environmental impact of REE mining and processing. Indeed, China has swung sharply from being largely ambivalent towards environmental destruction and pollution a decade ago to leading the world today in environmental protection policies. Smog-bound skylines and rivers full of dead fish do tend to provoke a response.

After around 30 years of REE mining in China's Jiangxi province, abandoned rare earth mines dot an area of 97 square kilometres. In 2011, Jiangxi REE producers posted 6.4bn renminbi of profit. Xunwu county vice-chief Liao Liping estimates 38bn renminbi is needed to repair the environmental destruction wrought by abandoned mines.

An abandoned Chinese REE mine. Source: Hangzhou Daming Fluorescent Materials Co Ltd



The implication for the Chinese government is that if REE mining were to continue in the country uncontrolled, the cost of repairing the resultant environmental destruction would outweigh the income derived from REE mining. Now environmentally vigilant, Beijing had little choice but to withdraw permits from non-environmentally conscious miners.

The implications for ex-Chinese miners are no different. Australia is another global commodity exporter in which prospective projects have been held up for long periods, significantly remodelled or rejected altogether after independent environmental impact studies have been conducted. Molycorp is proving that best practice can lead to higher profit margins as well as environmental protection. Lynas found that shifting its processing to a third world country did not provide relief from environmental issues. REE aspirants across the globe will no doubt need to put aside amounts of pre-production funding to be used for environmental assessment and subsequent mine/plant design – another start-up cost in an already very costly business.

Time, cost, volatile prices and the need to secure financing for a risky business – these are the issues facing today's many ex-China REE aspirants. A patch of dirt and some promising core samples do not necessarily provide a guaranteed path to riches. To return to this Report's “confusion” theme, there appears to be very little agreement both within the industry and from outside analysis as to which of the world's REE mining claimants – which number in excess of two hundred – can actually move towards commercially viable production.

Investing In Rare Earth Hopefuls

I should note at this point that the purpose of this Report is to inform, not to recommend or advise.

Stock market investors learn over time, usually the hard way, that investing in a commodity by investing in the company that produces that commodity does not provide direct “leverage” to the price movements of that commodity. Even if we assume the price of the commodity will rise over time, the success of the producer relies on volume of production and the per-unit cost of that volume.

Cost will dependent on the size of the ore deposit, the ease of extraction of that ore, the grade of target elements within that ore, and the ease of separation of the elements from the ore. The iron ore “fines” mined for decades in Western Australia would sit high on the “simplicity” scale, offering easy access to ore, iron grades in excess of 60%, and separation by simply crushing. We can move down the scale to metal “bellwether” copper, for which grades in double digit percentages would be considered exciting, before the nature of the ore (oxide, sulphide) offers up different separation cost scales. When we get to gold, whole percentage grades are hard to find, but then gold is a lot more valuable than copper. And then perhaps at the bottom end of the simplicity scale, or call it the top end of the complexity scale, lie REEs.

As previously noted, REEs are actually abundant in the earth’s crust. However REEs do not readily concentrate in the crust by natural processes, making commercially viable deposits “rare”. Once discovered, it is relatively easy to extract the REE ore from the crust, but that’s where the “ease” ends. Extracting and separating the REEs from the ore is a very difficult, complex and costly process. While REE deposits tend to be identified as either offering “light” REEs, which are found in higher grades, are easier to extract but attract a lower price, or “heavy” REEs, which are found in low grades, are more difficult to extract but attract a higher price, the truth is every REE deposit pretty much has some balance of the full REE basket. The value of that REE basket is thus dependent on the grade distribution of the different REEs within the basket.



UK-based Greenfields Research suggests there are around 250 known ex-China “new” REE projects across the globe representing around 110 million tonnes of estimated reserves. Of the 250, around forty (or 42mt worth) have identified a “compliant” resource, satisfying the agreed industry standard of resource definition. Of those, fourteen (22mt) are at or beyond the scoping stage, seven (17.5mt) of those have reached pre-feasibility stage, three (3.1mt) of those have passed the feasibility stage, and one (1.0mt) is in operation (Molycorp).

The timeline from exploration to production is around ten years or more. Even when a REE project has reached pre-feasibility there are still several more years of work to look forward to. Lynas could shortly join Molycorp in the “operational” category having been beset with delays that have stretched the company’s timeline out to twelve years to date. However those delays have also mean Lynas has been burning cash (spending money but not selling product), resulting in the company potentially facing finance repayment issues, now more pressing given yet another delay.

If we assume that the REE deposits claimed by the 250-odd hopefuls, following the ex-China REE exploration frenzy of 2008-11, are all there is, then we can assume “phase one” is over. We now move into “phase two” -- development.

Lynas is the one Australian-listed REE hopeful readily identifiable to investors, given its near-operational status and the stock analysis coverage it has thus drawn from major Australian and global stockbroking houses. However, several of those 250, at varying stage of development, are also Australian-listed companies. As “speculative” investments at this stage, they attract little broker coverage, and none from the major houses. They include the aforementioned Hastings Rare Metals, Alkane Resources, Arafura Resources (ARU.AX), Northern Minerals (NTU.AX), TUC Resources (TUC.AX) and Peak Resources (PEK.AX). If there are others, they are currently flying too low under the radar to attract attention.

Hastings Rare Metals’ heavy REE project in Western Australia is advancing toward the pre-feasibility stage. First production is currently forecast for 2016.

Alkane Resources’ REE project in Dubbo, New South Wales, is not a primary REE project, which is evident from the project name – the Dubbo Zirconium Project. However the DZP boasts one of the world’s largest resources – collectively – of zirconium, hafnium, niobium, tantalum, yttrium and REEs. Dubbo thus offers diversification, and indeed Alkane has further project interests including copper-gold. Alkane is aiming for REE production from 2014, after 15 years of development.

Arafura Resources’ Nolans Bore project in the Northern Territory contains deposits of uranium, gypsum and phosphate as well as REEs. Arafura is aiming for REE production from mid-2014 following 12 years of development.

Formally Northern Uranium, Northern Minerals changed its name in 2011 after expanding its horizons to include the Browns Range REE project in the Northern Territory. Test drilling is underway at Browns to define the REE resource. Formerly the Territory Uranium Company, TUC Resources also changed its name in 2011 and has much in common with Northern Minerals. TUC’s Stromberg REE project is at a similarly early stage and both projects boast valuable heavy REE deposits contained in xenotime ore – a mineralisation reminiscent of Chinese REE deposits – which offers greater ease of REE extraction and separation than more common REE-bearing ores.

Peak Resources is the odd one out in the group, given the company’s globally significant, high-grade REE deposit is located in Tanzania rather than Australia. As is the case for Northern and TUC, Peak’s Ngualla project is currently in the early stages of development.



The above table was prepared by Greenfields Research and assigns a dollar value to the varying baskets of REEs defined in various global REE projects. Northern Minerals and TUC Resources miss out in this study but we can identify Hastings, the two Mount Weld projects (Lynas), Dubbo (Alkane), Nolans Bore (Arafura) and Ngualla (Peak), and the lone operational project Mountain Pass (Molycorp). However as Greenfields director John Sykes was at pains to point out at the conference, one cannot assume this table to represent a descending order of project end-value (and thus use it to extrapolate share price valuations). This table assumes the 100% recovery of all basket REEs, and 100% recovery is a Holy Grail.

From the definition of a resource to commercial rare earth oxide production, one must apply scales of reserve recovery, mining recovery, grade, processing recovery, cracking recovery and separation recovery. As each step must precede the next, final recovery is a function of the percentages of each recovery level multiplied along the process. The permutations are as good as endless, but Greenfields demonstrates its point with three theoretical scenarios. They are 90% recovery at all stages, 75% recovery at all stages, and 50% at all stages. Multiply each of these, and the 90% scenario provides 59% product, the 75% scenario provides 24% product, and the 50% scenario provides 3% product. And these scenarios must also be applied to the specific grade.



The point Sykes is trying to put across is that there is a risk in dividing REE projects into two simple categories based on “light” and ‘heavy” REE deposits, and making the assumption that heavy will always be a more valuable proposition than light. Each REE project contains some level of each REE – there is no strict delineation into heavy and light. The recovery percentage examples above suggest that “grade” can be misleading at first because what matters is what can actually be recovered. This above table is another comparison of global REE projects, this time unnamed. The table considers ultimate grade of the supposed king of the REEs – dysprosium – and the conclusion is not what one might expect. In simple terms, light REE projects may actually provide the greatest source of heavy REE oxides.

So if the future demand-supply assessment provided in this Report is not confusing enough for the potential investor, or at least uncertain, the whole argument of which REE project is more valuable than the others is quite simply a minefield.

Greenfields Research has attempted to make the valuation prospect at least a little easier by creating the following quadrant-based assessment.



If we simplify REE production into two stages – mining the ore and then processing the ore – we can assign a value to the ore that comes out of the ground based on the complexity of recovering the REEs contained (y-axis) and the value to the REEs once recovered (x-axis), noting the recovery rate examples aforementioned. The balance of the two leads us towards a greater understanding of potential project value.

Quadrant-wise, Greenfields has labelled those projects with the most easily recoverable, high-value REE baskets, as the “stars”, those with high levels of high-value REEs that are difficult to recover as the “problem children”, those with easily recoverable lower-value REEs as the “cash cows”, and those with difficult to recover lower-value REEs as the “pet projects”.

A “cash cow”, suggests Greenfields, is a project that can gain market share via a low cost, high grade asset. The assets are already advanced, are very competitive, and have first mover advantage. A cash cow example is Lynas –if granted LAMP processing approval- (and Molycorp), which falls into the “advanced light” category.

The advantage gleaned by a “second mover” is that the first movers have spent the money on R&D and second movers can hang off their technology coattails. Financing will also be easier to obtain for a second mover if a first mover offers a viable example. A light REE “problem child” will thus benefit from the Lynas experience and will have possibilities to leverage scale, albeit capital costs will likely be significant and light is not as attractive as heavy. Greenfields suggests Arafura Resources and Peak Resources fit into this group.

The heavy REE “problem child” has the advantage of being in a potentially high growth market with little competition, but faces high capital costs, a long development timeframe and tricky financing. Greenfields puts Hastings Rare Metals in this category.

A potential “star” among the Australian-listed group is TUC Resources, Greenfields suggests, given its heavy REE weighting and easier-recovery xenotime ore. However despite the capacity for TUC to reach the production stage faster than others, Greenfields warns the as yet undeveloped resource may miss the best years of the REE market.



Alkane Resources is considered by Greenfields to be in a slightly different category, which it calls the “by-product cash cow”. As REEs are not the primary product of the Alkane project, REE investors may not be all that interested. However, Alkane’s other products provide a potential hedge against volatile REE pricing, offer an earlier cashflow from the project than other REE-specific projects, and should be easier to finance.

While Northern Minerals’ project has similarities with that of TUC Resources, Northern appears to have escaped Greenfields’ attention.

So is that all clear?

Conclusion

If those outside the rare earth industry find the rare earth industry confusing, rest assured that those within the industry are also confused. It is difficult enough for analysts to attempt to forecast demand-supply balances into the future for a bellwether metal such as copper, and when it comes to providing forecasts for rare earths there is a considerable complexity of variables to consider.

There is little doubt the world is progressing down a “green” and “smart” path which offers no return, and the path would not exist without rare earths. By 2015 China’s output of rare earths is projected to be 140,000 tonnes per annum, with Chinese domestic demand reaching 110,000tpa. Demand is rising faster than supply, and supply is also subject to government controls for varying reasons. Global demand, inclusive of China, is forecast to reach somewhere between 125,000 and 175,000tpa by 2015. Demand for light REEs is projected to grow at 7%pa and demand for magnets and alloys (heavy REEs) is projected to grow at 10-20%pa.

These numbers are projections only, subject to the aforementioned complexity of variables.

If all goes to plan, by 2015 the rest of the world should be bringing on new production to reduce Chinese dominance of supply. Indeed, some commentators warn of a supply “glut” after this time. However, if China both increases domestic demand for rare earths and continues to limit production, talk of a supply glut should prove off the mark.

It will nevertheless come down to the raft of rare earth projects which are still very much in the developmental stage and far from first production. Reaching first production will depend on successful outcomes regarding rare earth prices, complexity of processing, available financing and overall feasibility. Rare earth prices will be subject to a global demand-supply balance which at this stage remains a point of conjecture.

Any analysts’ forecasts of rare earth demand and/or supply into the future are subject to potentially huge variance.

Stock markets do not like uncertainty, but uncertainty also renders certain stocks “speculative”. Speculative stocks offer high risk but also potentially high reward, and the resources sector provides a deep pool of speculative junior miner opportunities. Investors looking to exploit opportunities in the rare earth space – if they haven’t already been scared off by the bubble-and-burst of rare earth prices over the past three years -- need to be fully aware of the risk/reward specifics of the industry.

This Report identifies seven Australian-listed rare earth aspirants. Of the seven, only Lynas Corp is significantly covered by stockbroker analysis given it is the only aspirant with the potential to move to the production stage. The others are all at early stages of development, and Lynas’ own individual problems highlight the fact nothing is a given in the investment world. At the time of



publication, Lynas is facing the risk of having its Malaysian plant disapproved, which would be a significant set-back for the company.

On Friday October 19, the seven stocks noted closed at the following share prices (AUD): Lynas $0.69; Hastings $0.11; Alkane $0.88; Arafura $0.19; Northern Minerals $0.21; TUC Resources $0.09; and Peak Resources $0.20.

Shares prices cannot, of course, be directly compared due to market capitalisation variances, but these prices do provide a hint as to the speculative and as yet “junior” nature of the operations. Speculative investors like stocks which trade in cents rather than dollars – it suggests the potential for rapid upside. Yet in most cases, cents rather than dollars reflects is a good indicator of risk.

This Report has highlighted just how difficult it is to forecast the potential success or otherwise of any speculative rare earth company, and that’s aside from questions over the future global rare earth demand-supply equation.

It is quite possible that after the turmoil of the past few years, the rare earth industry will settle down and begin to slowly mature. Maturity will serve to rein in some of the forecast variance and a clearer path will begin to emerge (notwithstanding the next, as yet unknown, technological revolution). The price volatility experienced in rare earths mirrors activity last decade in uranium, and also in nickel and other base metals. In each earlier case, volatility has now subsided as markets have come to better appreciate demand-supply balances and forecasts. Mineral sands prices have suffered similar fluctuations in the same timeframe as rare earths.

Speculative bubble-and-bursts are not new.

Respected advice suggests investors looking to exploit opportunities in speculative assets such as rare earth mining stocks should do so only as a small and affordable proportion of a well diversified investment portfolio. The individual nature and complexity among the various rare earth mining stocks would also suggests that a diversified rare earth mining stock portfolio within a wider portfolio of diversified investments provides a balance against the risk of picking one stock that turns out to be the “wrong” choice. Chances are some or even many of the world’s listed rare earth hopefuls will succeed. Many will not.

Further reading: An archive of articles pertaining to rare earth elements is available on the FNArena website at www.fnarena.com. FNArena intends to continue coverage of developments in the rare earth industry.

Copyright: This report is subject to copyright and strictly may not be republished without the expressed permission of FNArena Ltd. Disclaimer: This report is intended to be general in nature and should not be considered as financial advice. For financial advice it is recommended the reader contact a stockbroker or other licensed financial advisor.

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