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Selling the rare earths story

- By: John P Sykes
Posted in: Blog, Commodities, Conferences, Exploration, Mining, Travel


It has been hard not to notice the recent furore over “rare earth elements”. China provides over 90% of the mined supply of these elements, and for some elements, all of the world’s supply. This has worried governments and consumers in North America, Europe and non-Chinese Asia. A scramble to develop rare earth mines outside China has begun and miners, investors and the market have begun to take note.

Rare earth elements are used in magnets and batteries, for applications including consumer electronics, hybrid cars, wind turbines and military hardware, all sectors which have seen strong growth recently.

Greenfields has encountered rare earths a few times this year, whilst undertaking some market analysis consultancy for a junior mining company in Perth, Australia in January, and at the Objective Capital Minor Metals Seminar in London in February. More recently, during a visit to Vancouver, I met with junior mining companies involved in the sector.

This article includes the basic ‘what and where’ answers that many analysts are hurrying to provide, but we have also tried to provide some of the how, when and why answers that will allow miners and investors to begin to make decisions about how to profit from the current market frenzy.

What is a “rare earth metal”?

There is still confusion over what “rare earth elements” are and some companies are capitalising on this, marketing properties as “rare element” meaning elements such as tantalum, niobium, indium, lithium, beryllium etc.

The actual “rare earth elements” are lanthanum to lutetium on the periodic table, a definition which sometimes also includes scandium and yttrium. The “lanthanides” (the fourteen elements from lanthanum to lutetium) are one of the lines of elements that are shown separately at the bottom of the periodic table.

Part of the confusion is due to the fact that most of the light rare earth elements are geologically more common than most base metals, tantalum, niobium, lithium and beryllium, whereas the heavy rare earth metals are less common than all of these. Indium is in fact rarer than all these “rare elements”. As such there is some argument by miners with indium or tantalum deposits, about why should rare earth miners get the “rarity” branding, when they have deposits with even rarer elements.

Some miners object to the chemical definitions of the elements as inadequate, arguing instead that the elements should be grouped as naturally occurring, for example there should be a clearer distinction between light and heavy rare earth elements and that at least niobium should be included in the category as it is frequently found with light rare earth elements. Uranium and lithium are also commonly found with light rare earth elements, and over the last few years we have seen properties that were first spruiked as uranium properties during the 2007 uranium boom, become lithium properties during the 2008 lithium excitement and now have become rare earth properties.

Will we find more rare earth oxide deposits?

Some junior explorers believe that nearly all (about 90%) of rare earth properties have been found. This is because the properties are radioactive and most of the prospective areas of North America and Australia have been radiometrically assessed in previous uranium booms, either in the 1970s or more recently. It is not clear if such work has been done elsewhere, although there are only a few countries where it is acceptable to explore and mine radioactive ores.

The main threat to most junior explorers is the discovery of a heavy rare earth bearing ionic clay outside of China. Geologically, there is no reason why this could not occur; all that is required is a primary heavy rare earth element resource in a monsoon region. The large annual fluctuations of the water table, due to the monsoon will quickly laterise the primary source, which could lead to the formation of a rare earth element enriched clay. It is thought that one decent sized resource of this type would be enough to supply the whole world’s requirement of heavy rare earth elements. The economics of the heavy rare earth element ionic clays in southern China, which currently supply all of the world’s heavy rare earth elements, are not well understood, but it is generally thought to involve a lot of inefficient bonded labour, and that a modern mining operation, mining the clays cheaply and putting them on a well run leach pad, would be much more competitive and environmentally friendly.

The discovery and development of a heavy rare earth element ionic clay outside of China would not only end China’s dominance of this market, but could also end most junior mining companies hopes of bringing a hard-rock heavy rare earth mine onstream. Since most light rare earth element projects will also rely on substantial revenues from heavy rare earth elements, it is likely these projects would become worthless as well. Currently, there are no publically announced heavy rare earth element ionic clays outside of China, although Greenfields has heard of potentially one discovery, and of other companies exploring for them (generally on a desk study, travel rumour type basis).

It would appear there is a genuine structural shortage of heavy rare earth deposits.  Possibly so much so that this may be a market that never really gets off the ground – as prices soar alternative metals for the various end uses will have to be found.

Most rare earth deposits have fiendishly complicated mineralogy, even light rare earth deposits, all of which will challenge most metallurgists. The problem is particularly acute in heavy rare earth metal deposits, such as Thor Lake, where the mineralogy is not even understood on a geological and mineralogical level yet, never mind on a metallurgical level.

Consensus amongst the industry insiders we spoke to was that every rare earth metal deposit was unique and that every rare earth metal deposit had a problem on either a mineralogical, metallurgical or marketing level, if not all three.

How can you make money out of rare earth oxide deposits?

Companies intending to build a mine are probably better off focusing on light rare earths, as so far outside of China and the former Soviet Union, no heavy rare earth element mine has ever been built, nor have any feasibility studies been conducted for such an operation. The market for light rare earth elements is also larger and more open, so it is easier to sell your mine products. Some heavy rare earth elements have only one or two buyers and sellers and tiny, illiquid markets. For these reasons, light rare earth properties could be more likely to get the bank debt financing required to build a mine.

Companies looking to use a rare earth property just to raise equity, or to sell on, will more likely benefit from a heavy rare earth property. The market fundamentals for heavy rare earth elements are significantly better than for light rare earth elements, which could possibly face oversupply, if just a few new mines started up. Currently, heavy rare earth elements are only produced in China, and it looks set to remain this way for some time, unlike the light rare earth element market. Sophisticated investors have already started to define the difference between light and heavy rare earth elements, so properties with significant heavy rare earth elements are more likely to attract equity finance and other investors, despite the unknowns of how heavy rare earth elements will be processed and sold. If you’re not planning on building a mine, these issues don’t really matter!

Once again a consensus seemed to form around the concept that a light rare earth element deposit, with a reasonable amount of heavy rare earth elements (say more than the ratio at Mountain Pass, USA or Bayan Obo, China) would be the best combination for attracting both equity and debt finance required to build a mine, whilst retaining the opportunity to divest the asset.

The problems only begin at the mine stage!

Problems processing rare earth elements

The challenges faced in processing rare earth elements after they are mined are formidable. There are perhaps only ten or so metallurgists and process engineers in the world currently able to run a rare earth processing facility. Many of these are now in their 70s or 80s. Reports from those who have visited the Mountain Pass facility in California (the only rare earth processing facility to have operated outside of China and the Soviet Union), involve descriptions of “mad scientists” and “valves, levers and pipes everywhere”.
Just how complicated processing can be is demonstrated on the Stans Energy website, a company that owns several closed down former Soviet Union rare earth mines in Kyrgyzstan, where it was believed the Kutessay II mines concentrate was processed into over 120 refined compounds.

The only rare earth mineral that has a known processing route is course bastnaesite, which is what is processed at Mountain Pass. Consequently, light rare earth properties which include, or are mainly, course bastnaesite may fetch a premium over other light rare earth element properties. There are few course bastnaesite projects around, though it is rumoured there is a privately held one in Tanzania.

There is potential progress on the processing of eudialyte of which there are several projects globally. Probably the most advanced is Dubbo in Australia, owned by Alkane Resources, who have announced they have developed a way of processing the mineral economically. It is thought to involve baking the sludge produced during the liberation of the rare earth metals, which tends to jam up the processing.

Much of the “other” global production of rare earths over the last 100 years or so has come from alluvial, mineral sand type properties in Brazil, India, Thailand and Malaysia. It is thought that the mineral produced here is monazite, though the processing method is still unclear.

For the above reasons, the practice of looking at a basket of rare earth oxides in a resource and then multiplying by current prices is not really the best way to compare project resources. There really should also be a factor for recovery levels, which may be near zero for some of the oxides, as well as some way of looking at what the actual received price may be.

Processing facilities for a rare earths mine are likely to be very expensive, making a rare earths mine more expensive than an equivalent size gold or base metals operation, which have simpler processing.  Although in favourable jurisdictions, such as Canada and Australia, many rare earth deposits are in remote locations which  require substantial infrastructure construction. Such extra capital cost requirements are a heavy burden on already risky projects.

Issues with radioactivity

Many rare earth minerals are radioactive, particularly monazite, which can contain up to 1% uranium and 30% thorium (itself not that radioactive but it readily decays into highly radioactive radium). Bastnaesite and eudialyte are also mildly radioactive.

Monazite is found in a lot of heavy mineral sands throughout South America, Asia and Australia, and was the main supply of (light) rare earths until the start-up of Mountain Pass in the 1960s. In many developed countries, such as Australia, not only is alluvial mining heavily restricted but so is the processing of monazite. Greenfields knows of large stockpiles of monazite in Indonesia, as a by-product of offshore alluvial tin mining there, which the tin miners are not entirely sure what to do with. At the moment it is monitored by the Indonesian government.

Consensus was that a thorium level in a deposit of above 550ppm would make a deposit uneconomic, as the required compensatory higher grade to cover the extra processing costs is unlikely to occur in a large enough deposit. In general, miners were sceptical of companies suggesting that thorium could be mined as an economic by-product that would be used in nuclear reactors instead of the more expensive uranium. Very little of the cost of running a nuclear reactor is in the cost of the uranium raw material, so the cost benefit would be marginal, in the face of the capital cost and risk of completely re-designing a nuclear reactor.

Now you have some rare earths, all you have to do is sell them – good luck!

The marketing of rare earth oxides and other rare earth mine products faces challenges. Companies that have experience in other opaque supply chains such as tantalum, niobium and indium may have an advantage.

An unproved anecdote involves an American consumer of rare earth metals, who in the late 1990s sourced rare earth oxides from an American supplier. He was approached by a Chinese supplier, offering a price ten times lower for the same basket of rare earth oxides. Worried about security of supply and happy with his long standing relationship with the American supplier, the American consumer refused the deal. The frustrated Chinese supplier then told the American consumer, that he knew exactly who supplied his rare earth oxides and what he paid for them, because he also supplied the “American supplier”, who was essentially re-branding the Chinese material as “American” playing on supply security fears, and charging a ten times mark up.

Few companies are aware that to complete a feasibility study on a heavy rare earth metals project, a “contract of sale” is required, unlike exchange traded commodities such as copper and gold. As no feasibility study has yet been completed for a rare earth mining project, a lot of the issues that will have to be faced have not yet been addressed. Not only are there very few independent companies in the world that could successfully undertake such a feasibility study, but a number of issues to do with sales and prices will have to be addressed.

Although there are published historical prices these are not very reliable for some of the more unusual rare earths. These markets are very illiquid, with perhaps only a couple of trades each year, so it is not easy to determine an “annual price”. The price is very much dependent on the buyer, for example a regular industrial buyer will seek as good a value price as possible, whereas a university needing a one off amount for academic research would be more happy to pay a higher price.

Many rare earth mine projects in North America and Australia will need a significant lift in rare earth prices to produce an economic project. Both ethical and strategic issues could help raise prices to these levels. Historical prices, which feasibility studies are generally based on, are deemed to be artificially low by some juniors, one view being that China deliberately flooded the market and depressed prices in the 1990s to knock out competition elsewhere in the world.

A major issue is the small size of most of the rare earth markets. Even a modest sized mine project would be looking at supplying 10% or more of the global market – unlike the large exchange-traded commodities this means sales contracts would have to be made substantially in advance of any major expenditure on the project. One company, Great Western Minerals, has tried to address this problem by buying downstream facilities (a rare earth alloy maker in the UK) to help secure off-take.

The prevalence of light rare earth properties and lack of heavy rare earth projects means that a two-tier market may develop, with a liquid but oversupplied light rare earths market and an illiquid but tight heavy rare earths market. It is believed some miners are trying to negotiate supply contracts, where if you buy their heavy rare earth oxides, you must also buy their light rare earth oxides, so that the mine can guarantee sales. This will further benefit mine projects with a good blend of heavy rare earth oxides.

The final issue about marketing rare earth concentrates, is the blend of the concentrate. Not only is the quality of a concentrate judged on the type and ratio of rare earth oxides it contains (of which most involved in the market seem aware), but they are also judged on the amount of deleterious elements in the concentrate, which can include radioactive elements (uranium, thorium, radium), other heavy metals (such as bismuth), poisonous metals (such as arsenic) and the relative levels of iron. So far, other than some discussion about thorium levels, there has been little discussion about deleterious elements in concentrates. Again this is an issue likely to come up at feasibility stage.

What of “ethical” and “strategic” rare earth metals?

The focus on “free trade”, “ethical”, “green” and “strategic” metals may be key to the future development and pricing of rare earth metals. We have already seen this issue being addressed in other metal industries, for example, tantalum mainly comes from illegal and frequently exploitative mining in the DR Congo, as such two end user industry groups have been formed to increase transparency and audit the tantalum supply chain. The Electronic Industry Citizenship Coalition (EIGG) led by Intel and the Global E-Sustainability Initiative (GeSI) led by Motorola. The effective embargo on Congolese production may increase the tantalum price by 80% over historic levels, which would allow producers from Australia and Canada to come on stream, allowing end users to purchase more “ethically sourced” tantalum from these locations. Although the tantalum price increase is quite substantial, it affects the end user little. For example, RIM (who make the Blackberry) has estimated that an 80% increase in the tantalum would lead to a US2.5¢ increase in the production cost of a Blackberry – a cost that could easily be passed onto the consumer. Indeed, this could be an opportunity to increase margin by promoting it as an “ethical” product.

The issue of bonded labour and environmental damage in mining heavy rare earth elements in southern China has already featured in several New York Times articles and may become the focus of opposition to the rare earth metal supply chains. It is not possible to pressure the miners in China at source, so campaigning pressure is usually focused on end user corporations, who are conscious of brand damage. In the case of tantalum, computer companies such as Intel and telecoms companies such as Motorola; but perhaps for rare earth elements it could be hybrid car manufacturers such as Toyota; and consumer electronics manufacturers such as Sony. Efforts led by such companies to increase transparency in the supply chain could be of benefit to potential rare earths producers in Canada, Australia and the USA, both by increasing prices, due to selective buying, allowing new more expensive (but more ethical supply) to come on stream, and as preferred suppliers due to the higher environmental and labour standards inherent in these countries.

A further issue that could help Australian, US and Canadian rare earth companies is the concept of “strategic metals”. This year there have been a number of reports produced by the US Government pointing to the importance of rare earth metals in military hardware and that maybe a strategic stockpile should be built. Indications are that the US will start building up a strategic stockpile. Historically, the US has held strategic stockpiles of most metals, though over the last 20 years most of these have been sold. SE Asian countries, such as South Korea, Japan and China all keep strategic metal stockpiles as well.

Indications are that China is beginning to stockpile rare earth metals, possibly because they want to reduce damaging production from the ionic clays in southern China and see a possible restriction in future supply.  Or possibly it is an effort to fix rare earth prices as done in the late 1990s by stockpiling now and flooding the market later, wiping out new supply. EU countries have not held strategic stockpiles of metals and the rumours are that the EU (including the UK) does not have a clue what to do about the issue.

“Urban myths” in rare earth demand

Some claims about rare earth element demand do not hold up.  For example, reverse engineering of a hybrid car battery seems to indicate they contain only a couple of kilograms of rare earth elements (mainly lanthanum – the batteries in hybrid cars are nickel-lanthanum hydride batteries), rather the often quoted 10-20 kilograms. It is also often not mentioned that car companies are actually looking to replace nickel-lanthanum hydride batteries with lithium-ion batteries in hybrid cars, though this roll out has been somewhat halted by the problems of lithium-ion batteries in laptops setting fire, leading to many recalls over the last few years. Minor metals bulls looking towards hybrid car demand should therefore be bullish on either lithium or rare earths, but not both.

More answers about rare earths needed!

There are still many questions surrounding the future of the rare earth oxides mining industry. The bottleneck in the supply chain seems to be at the oxide processing and separation stage, not the mining stage as is common with many metals (for example copper and tin). This means there will be significant value creation at the processing and separation stage, at the expense of the mining stage, a situation many miners will be unused to. With many deposits but still only a small volume of demand there can only be a few winners among the potential miners. Those that fully address the issues to do with processing and marketing rare earth oxides seem the most likely to succeed.