Resource Deficit

by Larry MacDonald – Canadian Business Online – Published: August 12, 2010

There are well over a dozen rare-earth elements on the periodic table, with names like neodymium, lanthanum and europium. Much is heard about the growing supply deficit in crude oil and other raw materials but the one developing in the rare earths could also have an adverse impact. On the positive side, there could be a range of opportunities for entrepreneurs and investors.

Rare earth elements are used to make miniature magnets, phosphors and other components necessary to the functioning of iPods, BlackBerrys, LCD screens, disk drives, MRIs, hybrid cars, wind turbines, catalytic converters, batteries, lasers, guided missiles, smart bombs and other consumer, green and military technologies.

Demand for rare earths is growing vigorously as penetration rates for these technologies catch up to those in developed countries. As well, ongoing technological innovation is augmenting demand. There is “a wild demand dynamic,” to use a phrase from John Kaiser, editor of the Kaiser Bottom-Fishing Report.

On the supply side, rare earths are not rare per se. In fact, they are ubiquitous in the Earth’s crust. What’s rare is finding them in high enough concentrations for economical extraction.

At present, the richest deposits are located in China — so much so that the country currently supplies more than 90% of the world’s demand. “There is oil in the Middle East; there are rare earths in China,” said Deng Xiaoping, the architect of China’s economic revolution.

As its internal needs grow, China is steadily reducing the amount available for export. And as trade frictions escalate, the West could be cut off sooner than expected, warns Jack Lifton, a rare-earths expert who publishes the Jack Lifton Report.

Indeed, China slashed rare-earth exports dramatically in July, leaving the quota for 2010 at 30,258 tons, 40% less than the 50,145 tons allowed in 2009. The squeeze on prices just got a lot tighter.

As prices climb for rare earths, there will be an incentive for mining operations outside of China to ramp up operations. But most are years away from production, so the rise in prices could potentially go far before supply catches up. In turn, the price and availability of products requiring rare earths could be negatively affected.

Entrepreneurs and investors might be interested in becoming more acquainted with the rare-earth sector, as well as the mining companies headed toward becoming producers in the West. The latter include:

• Avalon Rare Metals Inc. (TSX: AVL) has a project near Great Slave Lake in the Northwest Territories with an extremely high concentration in the more valuable “heavy” rare earths.

• Saskatoon-based Great Western Minerals Group Ltd. (TSX-V: GWG) has a South African interest that should be one of the first to reach production, says Mr. Lifton.

• Quest Uranium Corp. (QUC) has a deposit near Strange Lake in northern Quebec and is a favourite of Mr. Kaiser because it can be “open-pit mined for faster payback.”

• Molycorp Inc. (NYSE: MCP) was the most important rare-earth mine in the U.S. until it closed in 2002 due to low prices; it now has financial backing from the likes of Goldman Sachs and did an initial offering of shares on the NYSE in July.

• Australian company Lynas Corp. has seen strong price action in its shares on the Australian Stock Exchange since Chinese exports were slashed in July (also trades as an ADR over the counter in North America, under the symbol LYSDY).