You Have To Know What You’re Doing To Invest In The Rare Earths Sector

by Robin Bromby – The Australian – Published: September 13, 2010

FOR the second time this year, we feel it is time to strike a note of caution in regard to rare earths.

Further evidence that a bubble is occurring — similar to that with uranium a few years back — came on Thursday when shares in Orion Metals (ORM) rose by 76.5 per cent on heavy turnover. The company had announced the acquisition of two tenements in Western Australia where work in 1969 had identified the presence of heavy rare earths.

Orion added that the tenements were near the Browns Range rare earths projects owned by Northern Uranium (NTU), a company that was recently targeted (unsuccessfully) by Chinese interests.

All well and good, and certainly heavy rare earths are the more attractive economically of the rare earths complex.

And, yes, rare earths are vital to many hi-tech products — hybrid vehicles, mobile telephones, wind turbines, computers and television sets, and energy-efficient lights.

And, yes again, the West needs to produce more now that China, which controls more than 90 per cent of world production, is reducing exports.

But rare earths are not like gold or copper or iron ore where there is, one, a large market and, two, you just dig it up and the processing is pretty straightforward.

This is how an American expert on rare earths, Jack Lifton, put it last week: the economics of rare earths mining are difficult and challenging. If the goal of a mining company is just to produce unseparated concentrates, it will most likely fail as a free-standing economic enterprise.

Earlier this year, we quoted Perth-based rare earths expert Dudley Kingsnorth, who runs Industrial Metals of Australia. He made the point that these rare earths elements need to be produced to meet the specifications of end users, so it is a case of first find your customer, then tailor your production to their needs.

Both men expect the light rare earths market to be oversupplied, but heavy rare earths to be in deficit. A Canadian brokerage has identified the main ones in the latter category to be terbium and dysprosium, used in high-strength magnets. Lifton says that US demand for light rare earths will be oversupplied in a massive way once the Mountain Pass mine in California is back in production, and Australia’s needs met once Lynas Corp (LYC) has Mt Weld in Western Australia up and running. Kingsnorth estimates world demand by 2015 for rare earths will be about 197,000 tonnes a year. To put that in perspective, the newspaper Guangzhou Daily is reporting that China’s rare earths producer, Inner Mongolia Baotou Steel Rare Earth, is building six rare earths storage facilities capable of stockpiling a total 300,000 tonnes.

The Canadians are making big progress. Great Western Minerals, for example, both explores for rare earths and also operates two plants producing alloys.

In India, Toyota has joined up with Indian Rare Earths to build a rare earths processing plant in Chatrapur to produce 10,000 tonnes a year of lanthanum, cerium, samarium, neodymium and praseodymium. In other words, mining and customers are joined at the hip.

Toronto-based Byron Capital Markets, in a new report looking at several emerging companies, has a buy on Sydney-based Lynas. The company plans to separate and purify the rare earths elements at Mt Weld, then process them at its advanced materials plant in Malaysia into products ready for the market. Again, in rare earths, it’s all about vertical integration.

Trent Allen, who has just compiled a rare earths and minor metals report for Resource Capital Research, also underlines the complexity of this sector. Rare earth projects, due to their chemical complexity, can take a long time to develop, so only advanced or geochemically simple projects will be able to come online in the next five years, he writes. (Incidentally, there is a great deal of useful material in this report, especially on minor metals, so we’ll post an item online about this later today.)

There is no doubt that rare earths will be in short supply in the coming years. But be careful: you really have to know what you’re doing to invest in the sector.

Focus on Dubbo

ONE other rare earths play getting a great deal of attention at present is Alkane Resources (ALK), which has its project near Dubbo, NSW.

Managing director Ian Chalmers was in the east on a meet and greet during the week coinciding with a flurry of reports.

Alkane shares have moved from a low of 41c in the past month to an intraday high of 71c, mainly on the rising interest in the Dubbo zirconia-rare earths deposit. Foster Stockbroking summed it up last week as a world-class zirconia project which also includes niobium, yttrium and other rare earths and will have a 100-year mine life. A demonstration plant has been operating for two years producing product samples for the potential South Korean and Japanese customers (underlining the earlier point about the need to meet very specific needs).

StockAnalysis in Perth has upgraded its ALK valuation to 76c a share while Fat Prophets has a buy on the stock, noting that Dubbo has a number of the heavy rare earths. The Resource Capital Research report is more specific, noting that 25 per cent of Dubbo’s rare earths are at the heavy end of the complex.

As we have pointed out, there are other players in the mix. Lynas has taken a stake in the aforementioned Northern Uranium and BGF Equities has been reminding its clients that Navigator Resources (NAV) has its Cummins Range rare earths project in Western Australia. NAV has focused on its Bronzewing goldmine and there’s been little said regarding Cummins Range. But the company has made the point the latter has similarities to Mt Weld. As we pointed out here in July 2007 when first alerting you to the project, the old CRA drilled this area in the 1980s and estimated rare earths grades of between 2 and 4 per cent.