Rare earth elements (REEs) have been the
mystery metals of the mining world for years. Now, suddenly, everyone’s
heard about them.
Before we delve into the reasons behind all the publicity,
here’s the basic skinny on REEs: One, they
are rare, at least sort of. Two, they are indispensable to modern technology.
Three, the number of active, dedicated producers is tiny, with more than 90%
of the world’s supply coming from China.
If you took high school chemistry, you probably remember the periodic
table of the elements. But if you’re like most of us, even if you
pulled a 95 on the chem final, you may not recall
many of the details today. And there’s a better than even chance you never bothered to memorize the names
of the REEs. It’s time to get
reacquainted.
They’re generally clustered in a separate grouping at the bottom
of the table, are known collectively as the lanthanoids,
and these are their names, in order of atomic number (57-70): lanthanum,
cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium,
terbium, dysprosium, holmium, erbium, thulium, and ytterbium. Yttrium (39) and lutetium (71) are also sometimes included.
Need to know, point 1: Rarity.
Fact is, we begin with something of a
misnomer. These elements are not, strictly speaking, rare. Earth’s
crust is full of them. True, they’re not as common as iron, carbon, or
silicon, but are about on a par with nickel, copper, and zinc. Even the
scarcest is way more abundant than gold, platinum, or palladium.
What is rare about them is
that they’re widely dispersed. Very seldom are they found in economically
exploitable deposits. Complicating matters further is that there are so many
of them, and they clump together. They have to be separated first from the
ore and then from each other.
Thus REE production comes primarily from other mines’ byproducts. The miner strips off the metal he’s
really after, then sends the REE clusters to a specialty refiner.
Need to know, point 2: Applications.
It’s safe to say that life as we know it would be very different
without the REEs. The more our technological accomplishments
pile atop one another, the more crucial these metals become. Because of their
unique properties, there are generally no substitutes for them.
Of all the REEs, the one people may have
heard of is neodymium. Alloys containing it have revolutionized permanent
magnet technology, allowing miniaturization of all sorts of electronic
components in appliances, A/V equipment, computers, communication systems,
and military gear. Your hard drive probably has neodymium in it. So does your
DVD player.
Liquid crystal displays depend on europium. Fiber-optic
cables can’t function without erbium. Virtually all specialty glass
products, from mirrors to precision lenses, are polished with cerium oxide. Several
REEs are essential constituents of both petroleum
fluid cracking catalysts and auto emissions-control catalytic converters. Half
a dozen REEs go into the manufacture of the
energy-efficient fluorescent bulbs that will soon be mandatory. Lanthanum-nickel-hydride
rechargeable batteries are replacing older ones based on lead or cadmium. And
no REEs, no electric cars. Nor next-generation wind
turbines.
That’s only a partial list. But what makes REEs
an increasingly sensitive topic is their role in national defense.
Here are a few small items that have become dependent on them: jet fighter
engines, missile guidance systems, underwater mine detectors, range finders,
space-based satellite power plants, and military communications systems.
Think the Pentagon is very, very interested in maintaining a steady
REE supply?
Need to know, point 3: Supply.
95% of the world’s REE production originates in China. If
you’re looking for reasons why we’re so nice to the premier
Communist power left standing, this is a biggie.
We weren’t always so dependent. Not long ago, mines such as Mountain Pass
in California
made us nearly self-sufficient in REEs. But in the
early ‘90s, China
flooded the market with cheaper product, until it had driven all of its
competitors out of business.
Today, Mountain
Pass is being revived,
but the start-up of an old mine is a lengthy and costly process. There are
also some from-scratch REE development projects under way in the U.S., as well as Canada
and Australia.
But for the moment, China
holds the hand with all of the high cards in it.
Forget your hard drive. Forget 11th-grade chemistry
experiments. This is a national security issue. The American government
cannot afford to lose that supply source, period. Maybe someday, but not now.
And that’s what’s behind the recent furor
over these obscure elements. Because China threatened just that, a cutoff. The one thing that really gets Washington’s knickers in a twist.
In August, the story broke in the mainstream press. Sources in China leaked
news of a draft copy of a report from the Ministry of Industry and
Information Technology. It allegedly calls for a total export ban on five of
the rare earths, with the rest restricted to a combined export quota of
35,000 metric tons a year, far below annual global consumption of 125,000
tons, and rising fast.
This doesn’t look like a move they’d follow through on, if
only because of the lost trade revenues. And it’s only a
recommendation; final approval rests with China’s State Council. But
consider it an opening shot across our bow, if you wish. Or perhaps
they’re telling us they need their REEs for
the domestic economy, and we’d best go find our own supplies. Either
way, the scramble is on to find alternatives.
That could backfire. REE prices and demand were already dropping last
fall as the recession deepened, and China maintains a decided
competitive advantage beyond control of supply: lax environmental standards
(many REEs are highly toxic). Thus the new
companies could spend the fortunes required to come on line, only to find
themselves victims of yet another market glut engineered by the Chinese. Still,
these metals are so important, it wouldn’t surprise us if the U.S.
government subsidized domestic production, rather than risk a squeeze.
The Market
The market took due notice of the China
story, driving the stocks of Western REE
producers, and would-be producers, nearly straight up. Since late August,
Avalon Rare Metals has gained 120%, Arafura Resources is up 75%, Rare Element
Resources has added 72%, and Lynas Corp. is 50%
higher (China,
ever the master strategist, exploited the credit crisis to grab 25% of
Arafura and more than 50% of Lynas). Lurking in the
background is Molycorp, the private company
redeveloping Mountain
Pass. It’s
planning an IPO that may well come out of the gate red hot.
With market action this frantic, the sector is on the frothy side at
the moment. The heady market caps being awarded to these companies are
obviously not based on fundamentals, and a savvy investor takes care not to
get caught on the wrong side of a bubble.
Even though the Chinese export ban may never materialize, the
ever-growing need for REEs is dead serious. And
while the current bubble may pop any day, the long-term prospects for
successful miners are outstanding.
The team at Casey’s International Speculator
are experts in all things natural resources. In this month’s
issue, Senior Editor Louis James writes about rare earth opportunities in Canada’s Northwest Territories. After some hands-on
research, he’s putting a new company on his watch list that could
become a real breakout winner in this sector. That hands-on and
boots-on-the-ground research, by the way, is what Casey editors do on a
regular basis – to ensure that the companies we recommend are really what
they say they are. You can get this issue of Casey’s
International Speculator and much more with your 3-month, risk-free trial subscription.
Doug Hornig
Caseyresearch.com
Also
by Doug Hornig
Doug Hornig is a senior editor for Casey Research, publishers
of Doug Casey’s International
Speculator… for over 27
years providing investors with unbiased and carefully researched
recommendations for high-quality gold and other natural resource stocks with
the very real opportunity for a 100% or better gain within a 12-month
horizon.
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