Why Rare Earth Elements are Rare, Really!January 12, 2011
Matthew B. Smith
The rare earth element equities have been the strongestmovers over the past year, even the past 18 months if one were to look that farback. We feel that we have done a good job highlighting individual equitiesfor investors, however based on some of the questions we have received andrecent market events where companies have been identified as rare earth elementcompanies but which certainly were not, we believe that we should highlight thebasics for our readers.
Rare earth elements are special due to their properties.They are found in many consumer products including iPods, flat screentelevisions, computers, tablet PCs, smart phones and electric hybrid vehiclesas well as industrial products ranging from oil refining equipment to the highstrength magnets found in wind turbines. Also of importance are their militaryapplications for missile guidance/propulsion systems and their applications forother military gear such as night vision goggles and their uses on aircraft.
Obviously these rare earth elements might be the oil of thefuture and much has been said about the companies scattered throughout theworld in various media outlets, however they seem to be blown away by the tremendousgains. It is our opinion that we are in the early innings of this bull market,and rather than focusing on what the rare elements are, or what these companiespossess, they (once again the media) throw them all together and talk about howamazing the gains are and some editorialize about whether they think this movecan continue going forward.
But many still do not know what rare earth elements are, asthey are seldom broken out by themselves as a standalone investment. A case inpoint is the Market Vectors Rare Earths/Strategic Metals ETF (REMX) by Van Eck,which is commonly, but incorrectly, referred to as an REE ETF. Fact is it hasREE exposure in the fund, however it is far from a pure-play for investors asit has significant exposure to molybdenum and other metals (thus the strategicmetals reference in the name). So what are they? Rare earth elements (REEs)are a group of elements/metals generally defined as the 15 lanthanides andYttrium. One can further break down the rare earth elements into two districtgroups, the light lanthanides (commonly referred to in the mining industry aslight rare earth elements or LREEs) and heavy lanthanides (these being referredto as heavy rare earth elements or HREEs). Yttrium is included in the rareearth element group due to its characteristics that are similar to the heavyrare earth elements.
There seems to be a lot of confusion in the market placerelated to what constitutes a rare earth element. So remembering thatlanthanides are the scientific name for this group, here is the list of 15lanthanides along with Yttrium so there is no confusion regarding what is or isnot a REE.
The Rare Earth Elements are as follows:
The Non-Lanthanides:
Yttrium
The 15 Lanthanides:
Light Rare Earth Elements (LREEs)
Lanthanum
Cerium
Praseodymium
Neodymium
Promethium
Samarium
Heavy Rare Earth Elements (HREEs)
Europium
Gadolinium
Terbium
Dysprosium
Holmium
Erbium
Thulium
Ytterbium
Lutetium
It is important to keep in mind that Yttrium is considered aHREE, so that would be the column we put it in if we had only broken it downbetween HREEs and LREEs.
Most people do not know what rare earths are, where they arefound, what the deposits are like, or whether these REEs are rare or not. Solet us cover that as well. Anyone telling investors that, as a group rareearth elements, as we have described above, are rare are lying. That is thetruth. If one were to look at their parts per million (known as ppm in theindustry) measurement in the earth’s crust, they would find that Cerium andLanthanum are the most common of the bunch (60 and 30 ppm respectively) withNeodymium not far behind (28 ppm). Although not a HREE, the rarest isPromethium, which is a bit of a trick as it is not found in the earth’s crust becauseit is only stable for a short while in laboratories. According to our researchwe have accumulated over time, the LREEs are the most abundant of Lanthanidesand the HREEs, those that are Lanthanides, are far rarer (Yttrium at 33 ppm ismuch more common in the crust, thus why we stated Lanthanides in the previousstatement).
Most who either are bearish on the industry, or simply donot know what they are talking about, like to point out that Cerium, Lanthanumand Yttrium are quite common as measured against other metals with industrialuses and thus these REEs, as a whole must be overvalued and thus need to comedown to a realistic price. Here is where the REEs become really special, andone begins to appreciate the overall investing theme.
Although on the surface, at first glance if you will, theREEs are common, you have to first find them in a deposit. This is where itgets really tricky for the REE exploration companies. First, one does not goout and try to find a Terbium, Europium or Ytterbium deposit due to the factthat REEs are found in deposits together, all may not be present ineconomically mineable quantities or there at all, but generally they are foundtogether also accompanied by either uranium or thorium. Most deposits can bebroken down into a LREE or HREE deposit, with the HREE deposits being the morevaluable ones. Generally speaking, HREE deposits are approximately 50% HREEsand the rest LREEs (this depends on the deposit of course, but getting over 50%HREEs in an economic deposit is rare). So once one finds a deposit, the easypart is over (yes, we said easy, because from here on out it gets much harder!)because the company must figure out whether the national government will allowthem to extract radioactive materials and either process them for sale or discardinto a tailings pile. Even if the national government allows the radioactivematerials to be processed, it is likely the local governments from astate/province level with have further barriers along with municipalities and,in some cases, even First Nations/Native lands issues. Many projects cannoteven get past these issues to drill, let alone build a mine and produce fromit!
Around the world there are many REE deposits, however theysimply are not economic. Even uranium mines that are currently mined todayhave REEs that they simply throw into the tailings, it just is not economic totry to make the REEs a by-product for the mines. There are some in Kazakhstan,Eastern Europe and most notably BHP’s Olympic Dam, but in all cases it is avery small amount. Even if you found a huge REE deposit, much like the onesfound in Russia, that are by some estimates the largest undeveloped REEdeposits in the world, there is a chance that they would still not beeconomical.
Many current companies are drilling and proving up REEdeposits around the world right now, however the most important fact when itcomes to mining, especially when dealing with more than one target, is themetallurgy. We are not going to call anyone out in this article, however nomatter how rich, how large, or how close to the surface your deposit is, if youcannot separate the REEs out of the ore you mine, there is no way you will havea producing mine.
If this were not enough to convince one of the merits of theREE industry, even if you discover that your metallurgy is good, one cannotexpect to simply provide the market with a mixed concentrate of your totaloutput. Customers want the refined highly pure stuff, so one has to build aspecial plant in order to get the prices everyone quotes from China. The bestway I can explain this in a way most investors will understand is that itresembles the oil market. Everyone looks at the NYMEX Light Sweet Crude as abenchmark, however a refinery who buys oil will not buy heavy, thick tar sandsoutput at the same price as it requires more work. The same thing goes forREEs, except customers needing them do not have the capability of purifyingthese, so really the miner needs to do it. The processing plant and equipmentis what really adds to the cost of the mine, so yet another barrier to entryhere.
This final step is one which has caused some varyingopinions here in the western world. Some argue that the companies themselvesneed to step up and do just as Molycorp and Great Western Metals are doing andactually make the magnets and other materials to sell to the end user. This iswhere a lot of money could be left on the table, by the miners if they do not,however with the Chinese, Japanese, South Koreans, Molycorp, Great WesternMetals, Neo Materials Technologies, and others capable of making these magnetsand other materials, there are ample customers with plenty of demand to makehealthy profits at current prices.
To summarize why rare earth element DEPOSITS are rare:
Barriers to Entry:
Finding a deposit
Jurisdiction/Mining friendliness of where deposit is located
Making sure deposit is economical
Proving that the metallurgy is suitable for mining
Being able to separate your production into highly purifiedconcentrates
Possibly having to manufacture the products from yourproduction (if prices go down from here)
One must also remember that all rare earth elements are notcreated equal. Investors will make more money off of HREE mines, than thosefocused on the LREEs. HREE mines will also provide investors with the fullspectrum of REEs and will be much better suited should an environment existwhere REE pricing power disappears and their value begins to fall. All of thecurrent mines coming online over the next few years are mines we would considerLREE deposits. Currently they will make money, and as they plan to be minersas well as manufacturers we expect them to be even more profitable as we havepreviously stated.
For those investors just arriving to the REE arena, webelieve that this summary should guide you to make wise investment decisions.It should also bring many of you up to speed on the industry much faster thanthose who have been involved with these various companies from early stages.Using these parameters should help highlight those companies which are the realdeal, and those who are merely pretenders.