Once ignored on the periodic table, don't ignore them now. CIBC World Markets Inc. released the following institutional equity research coverage on the rare earth element industry.
2. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Table of Contents
Why Rare Earths? ...................................................................................... 3
How To Play Rare Earths.......................................................................... 4
The China Factor .................................................................................... 5
Bayan Obo ....................................................................................... 6
The Basics ................................................................................................ 8
Project Locations .................................................................................. 10
Processing ........................................................................................... 11
Supply And Demand ................................................................................ 14
CIBC’s Rare Earth Forecast .................................................................... 15
Demand .............................................................................................. 16
Permanent Magnets ........................................................................... 17
Wind Energy ................................................................................... 18
Hybrid Electric Vehicles .................................................................... 20
Phosphors ......................................................................................... 20
Rechargeable Batteries ....................................................................... 23
Supply................................................................................................. 24
Rare Earth Pricing.................................................................................... 28
Bubbles ............................................................................................... 30
Price Target Calculations And Key Risks To Price Targets ........................... 32
Table of Exhibits
Exhibit 1. CIBC’s Rare Earth Coverage ..................................................... 3
Exhibit 2. The Rare Earths Value Chain .................................................... 4
Exhibit 3. Bullish Rare Earth Elements...................................................... 4
Exhibit 4. REO Eq Grade And Leverage To Bullish Elements ........................ 5
Exhibit 5. China’s Rare Earth Export Quotas ............................................. 6
Exhibit 6. Bayan Obo Mine Site ............................................................... 7
Exhibit 7. Rare Earth Elements................................................................ 8
Exhibit 8. Rare Earth Oxide Usage By Industry (2010E) ............................. 9
Exhibit 9. Rare Earth Uses And Demand Drivers ........................................ 9
Exhibit 10. Select Global Earth Deposits................................................... 10
Exhibit 11. Generalized Bastnasite Beneficiation Flow Diagram ................... 11
Exhibit 12. Generalized Flow Diagram For Extraction Of Monazite
And Xenotime From Ti-Zr-REE Mineral Sand ......................... 12
Exhibit 13. Mountain Pass Previous Separation Process Using SX ................ 13
Exhibit 14. Supply And Demand Projections ............................................. 14
Exhibit 15. Supply And Demand Balances – Select Rare Earth Elements....... 15
Exhibit 16. CIBC Rare Earth Forecast....................................................... 16
Exhibit 17. Long-term Rare Earth Forecast ............................................... 16
Exhibit 18. End-use By Metal .................................................................. 17
Exhibit 19. Differences In Electric Generators ........................................... 17
Exhibit 20. Direct-drive Wind Turbine ...................................................... 19
Exhibit 21. Global Installed Wind Capacity 2002–2030E (Moderate Case) ..... 20
Exhibit 22. Uses For Permanent Magnets In Hybrid Cars ............................ 20
Exhibit 23. Personal Technology Demand Outlook ..................................... 21
Exhibit 24. A Plasma Television Pixel ....................................................... 21
Exhibit 25. The Range Of CFL Lightbulbs .................................................. 22
Exhibit 26. Electric Vehicle Sales 2007-2020E........................................... 23
Exhibit 27. NiMH Car Battery For A Toyota Prius ....................................... 23
Exhibit 28. Select Investable Deposits In Development Outside China ......... 25
Exhibit 29. Development Stages Of Select Rare Earth Projects.................... 26
Exhibit 30. Race To Full Production – Rare Earth Developers....................... 27
Exhibit 31. Rare Earth Spot Prices ........................................................... 28
Exhibit 32. Select Rare Earth Historical Prices FOB China ........................... 29
Exhibit 33. Bubbles In Recent History ...................................................... 30
Exhibit 34. Significant Historical Bubbles .................................................. 31
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3. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Why Rare Earths?
The rare earth (RE) story is one of robust demand growth coupled with an
uncertain supply-side response, creating a deficit market in many elements and
the foundation for significant increases in prices. Rare earth demand is driven, in
large part, by two of the fastest-growing sectors on the planet, energy and high
technology. In the energy square, neodymium, praseodymium, and dysprosium
are used in the manufacturing of rechargeable batteries, hybrid/electric cars,
and wind turbines. Cerium and lanthanum are used in fluid cracking catalysts
and catalytic converters. In the high tech sector, elements like europium and
yttrium are used in flat panel displays, lasers, radar, and weapon guidance
systems. Neodymium, praseodymium, yttrium, europium and terbium have
substitutes but they are not as effective and other elements have none at all in
specific applications. Unlike base metals, new applications are also being
constantly developed for rare earths given their unique attributes.
China produces 97% of the world’s rare earth elements and has begun
restricting exports, reducing permits from 66,000 tonnes in 2004 to
30,000 tonnes in 2010. Additional measures, such as shutting down
environmentally dangerous production and instituting heavy levies (15%–25%)
on exports, have left the rest of the world in the lurch. As a result, prices outside
of China have risen 706% on average since January 2009 and several projects
are being progressed through to production. In our opinion, Molycorp (MCP–SO),
Avalon Rare Metals (AVL–SO), and Frontier Rare Earths (FRO–SO-Speculative)
are excellent vehicles through which investors can participate in the rare earth
industry, as they have a broad range of projects from near-term production to
early-stage development.
Exhibit 1. CIBC’s Rare Earth Coverage
Company Ticker Rating Price (Mar 3) NAV P/NAV
Molycorp MCP SO US$49.83 US$78.88 0.6x
Avalon AVL SO C$7.31 C$9.50 0.8x
Frontier FRO SO-S C$3.11 C$7.30 0.4x
Source: Bloomberg and CIBC World Markets Inc.
We believe that the tight market has created opportunities for new producers to
enter the market, although not every company that flaunts a rare earth resource
will necessarily go into production. It takes an average of 10 years for a typical
deposit to move from discovery to production and in that time we believe the
market opportunity will have passed. It is important for investors to pick
companies with the first-mover advantage, large resources, technically
competent management teams, and favorable weightings to what we term the
“bullish” metals – those elements tied to what we foresee as the tightest
markets within the rare earth complex going forward.
Elements used as phosphors – yttrium, terbium, and europium – are our natural
favorites, followed by those used in permanent magnets – neodymium,
praseodymium, and dysprosium. These elements lie in what has been termed
the light and heavy rare earths. The distinction stems from the relative atomic
weights of each element and the fact that some heavier rare earths sell for
substantially higher prices than light rare earths. While every deposit has a
naturally occurring grade weighting to the 17 rare elements, giving them
strategic value in the market place, there are additional ways in which to
increase this leverage.
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4. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
As seen in Exhibit 2, Molycorp will increase its leverage to neodymium and
praseodymium by focusing on the downstream production of alloy and magnets.
In doing so, the company will capture more of the value-added margin related to
the rare earth elements in its deposit, rendering these metals a higher portion of
its operating profits.
Exhibit 2. The Rare Earths Value Chain
Exploration and Development Mining and Production of Rare Separation into Individual Rare Upgrading Oxides to Rare Earth Converting Metals into Alloy Powders Component Manufacturing (80%
Earth Concentrate (97% China) Earth Oxides (97% China) Metals (100% China) (80% China, 20% Japan) China, 17% Japan, 3% Europe)
Molycorp Currently Molycorp's Goal
Lynas Currently Lynas' Goal
Frontier Currently Frontier's Goal
Avalon Currently Avalon Currently
Neo Material Technology Currently
RE Concentrate Nd Oxide FOB China Nd Metal FOB China Nd Magnet Powder Permanent Magnets
Price: US$38.00/kg Price: US$150/kg US$203/kg ~US$444/kg Price: ~US$696/kg
MCP Margin: US$145/kg MCP Margin: 192/kg MCP Margin: 348/kg Margin: Depends on Size/Shape
Source: Company reports.
How To Play Rare Earths
We believe that exposure to bullish elements within the rare earth complex will
be the best way to achieve above-average returns in the space. The elements
listed in Exhibit 3 not only offer exposure to the fastest-growing markets but the
limited supply coming online in the next 10 years, due to the forecasted grade
weightings of projects moving into production, gives them significant strategic
value.
Exhibit 3. Bullish Rare Earth Elements
Light Rare Earths Applications Industry CAGR 2010E–2015E
Yttrium Red phosphor, fluorescent lamps, ceramics, metal alloy agent 30.00%
Praseodymium Magnets, battery alloy, lasers 16.00%
Neodymium Permanent magnets, auto catalyst, petroleum refining, lasers 16.00%
Heavy Rare Earths Applications Industry CAGR 2010E–2015E
Terbium Phosphors, permanent magnets 30.00%
Dysprosium Permanent magnets, hybrid engines 16.00%
Source: IMCOA and CIBC World Markets Inc.
Besides the development potential of a deposit, one must also consider how
much exposure a company will offer investors to the elements outlined in
Exhibit 3. Molycorp will generate a significant amount of leverage to the
neodymium and praseodymium markets given its focus on the downstream
production of NdFeB alloy powders and permanent magnets. Avalon’s
Nechalacho deposit represents the best way to play heavy rare earths currently,
we believe, as its deposit is 25% weighted to elements like terbium, dysprosium
and yttrium, and is further along the development timeline than most. Frontier
will have more leverage to the battery metals and, as its flowsheet is derisked, it
should offer patient investors substantial returns as it re-rates to a valuation
more in line with its peers.
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5. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Other considerations in an investment analysis are the capability of management
teams to develop the assets, the potential flowsheet of a project, the extent to
which a region is mining-friendly, a project’s proximity to infrastructure, and a
company’s ability to access financial markets to support its development plan.
We believe that Molycorp, Avalon and Frontier all fit this bill, albeit with different
risk profiles.
Exhibit 4. REO Eq Grade And Leverage To Bullish Elements
20.0%
Steenkampskraal (Great
Western)
15.0%
Mountain Pass (Molycorp)
Grade (% REO)
10.0%
Zandkopsdrift (Frontier)
Mount Weld (Lynas) Nolans Project (Arafura)
Nechalacho (Avalon)
5.0% Hoidas Lake (Great
Bear Lodge (Rare Element) Western) Dubbo (Alkane)
Kvanefjeld (Greenland Strange Lake (Quest)
Minerals) Norra Karr (Tasman)
0.0%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Grade Weighting in Bullish Elements
Bubbles represent the size of the deposit.
Source: Company reports.
The China Factor
The Chinese government has reduced the export of rare earths for the first half
of 2011 by 35% compared to H1/2010. The quota has been set at
14,446 tonnes to be split among 31 different companies and further cuts may
transpire in the near term. The Chinese Commerce Ministry has formally stated
that this policy is in response to what it sees as a dwindling natural resource,
one that China will require for its own future.
In addition, the government has begun cracking down on illegal mining,
consolidating the industry into fewer, larger, and more technically advanced
companies, and introducing environmental regulations that will dampen
increases in Chinese production going forward. Wang Guoqhen, a former VP of
China Nonferrous Metals, has estimated that these reforms will double
production costs inside China.
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6. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
A recent study undertaken by the Chinese Society of Rare Earths estimates that
Chinese production will decline from 120,000 tpa in 2010 to ~100,000 tpa in
2015. Combined with a 15% per year demand growth, this study estimates that
western suppliers will have to address a gap of 80,000 tpa as China likely moves
from a net importer to a net exporter.
Exhibit 5. China’s Rare Earth Export Quotas
70,000
60,000
Rare Earth Oxides (tonnes)
50,000
40,000
30,000
20,000
10,000
-
2004 2005 2006 2007 2008 2009 2010
Chinese Ex port Quotas JV Quota
Source: Chinese Ministry of Commerce.
The good news is that there are multiple deposits outside of China that remain
undeveloped; in fact, rare earths are not that rare. Some rare earth elements
are as common in the earth’s crust as copper. However, high-grade deposits
close to infrastructure and in mining-friendly jurisdictions are a little harder to
come by. At best, it will take years for these new deposits, even the furthest
along, to move into production. We do not believe that China will cut off all rare
earth supply, but even undertaking the measures it has will keep the market
outside of China extremely tight, thus supporting high prices. We believe that
China’s policy is partially politically motivated as it attempts to encourage
hardware manufacturers that use these elements to establish facilities in
mainland China – in order that the country can capture more of the value-add
activities related to the industry and absorb more technical knowledge. At the
same time, we believe that the country will encounter extensive demand as the
Chinese consumer becomes more tech savvy and as the development of green
energy remains a staple in policy platforms, limiting the possibility of Chinese
production upsetting the market.
Bayan Obo
Bayan Obo is a giant polymetallic REE-Fe-Nb hydrothermal deposit located in
Inner Mongolia, China. In 2010 it was expected to produce 55,000 tonnes of
rare earth oxide (REO), representing 46% of Chinese production and 42% of
global supply. It is by far the largest rare earth deposit in the world, containing
some 56.3MM tonnes of REO, according to U.S. Geological Survey (USGS)
estimates, although there are a number of other wide-ranging estimates for the
deposit’s size. The deposit is weighted mostly to light rare earths, containing
roughly 73% cerium and lanthanum and only 2.2% heavy rare earths.
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7. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Exhibit 6. Bayan Obo Mine Site
Source: Google Earth.
The deposit was discovered in 1927 by interests controlled by the former USSR.
It began production in 1957 and, although it has been mined from
approximately 20 different sites, the bulk of production has come from two large
deposits, the Main and East ore bodies (seen clearly in Exhibit 6). Mining occurs
at approximately 15,000 tpd using electric shovels and rail haulage. Due to a
lack of water onsite, ore is transported to Batou via rail for processing. During
the high REO price environment of the late 1970s and early 1980s, selective
mining was not practiced. According to a study conducted by the USGS in 1990,
REO production comes strictly from bastnasite ore found in certain zones of the
deposit, though their processing techniques follow a typical monazite flowsheet.
There is limited detail available on the mine plan and the production potential of
Bayan Obo. Some industry experts believe that the mine may be moving away
from REO-rich regions, resulting in a forecast decline in production from the
mine over the next five years.
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8. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
The Basics
The rare earths are a moderately abundant collection of 17 elements, 15 of
which are known as lanthanides plus scandium and yttrium. The elements were
first isolated in the 18th and 19th centuries, and were named rare earths due to
the difficulties scientists had in refining them into pure metal. Due to the
elements’ chemical similarities, efficient separation processes were not
developed until the 20th century. Rare elements are actually not that rare. In
fact some elements, such as cerium, the most abundant rare earth, are more
common in the earth’s crust than copper or lead. Most rare elements have a
commercial market, though some of the heavier rare earths essentially only
trade by special order.
Each element’s unique properties have led to new applications being developed
consistently over the last 50 years, and research into new uses continues. In
certain applications substitutes do exist, but these rarely work as effectively.
Given the small overall cost represented by these elements in end-products and
the lack of effective substitutes, we foresee continued strong demand for these
metals.
Exhibit 7. Rare Earth Elements
Atomic Upper Crust 2010E Demand
Light Rare Earths Symbol Weight Abundance (ppm) Applications (Mt)
Yttrium Y 88.9 22.0 Red phosphor, fluorescent lamps, ceramics, metal alloy agent 6,706
Lanthanum La 138.9 30.0 Hybrid engines, metal alloys, fluid cracking (heavy oil), flint, hydrogen storage 41,605
Cerium Ce 140.1 64.0 Polishing powder, auto catalyst, petroleum refining, metal alloys 43,181
Praseodymium Pr 140.9 7.1 Magnets, battery alloy, lasers 10,602
Neodymium Ne 144.2 26.0 Permanent magnets, auto catalyst, petroleum refining, lasers 29,440
Promethium Pm 145.0 na Nuclear battery (does not occur in nature) na
Samarium Sm 150.3 4.5 Magnets 728
Europium Eu 151.9 0.9 Red color for television and computer screens 387
Gadolinium Gd 157.2 3.8 Magnets 899
Atomic
Heavy Rare Earths Symbol Weight Applications
Terbium Tb 158.9 0.6 Phosphors, permanent magnets 433
Dysprosium Dy 162.5 3.5 Permanent magnets, hybrid engines 1,750
Holmium Hm 164.9 0.8 Glass coloring, lasers
Erbium Er 167.3 2.3 Phosphors
Thulium Tm 168.9 0.3 Medical x-ray units 312
Ytterbium Tb 173.1 2.2 Lasers, steel alloys
Lutetium Lu 175.0 0.3 Catalysts in petroleum refining
Total Demand 136,043
Source: Society Mining, Metallurgy and Exploration Inc., IMCOA.
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9. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Exhibit 8. Rare Earth Oxide Usage By Industry (2010E)
Others
Phosphors 4%
6%
Magnets
Glass Additives 25%
6%
Polishing Powder
14%
Battery Alloy
14%
FCC
15%
Metallurgy ex batt
Auto catalysts 9%
7%
Source: Roskill.
The permanent magnet industry is the largest user of rare earth elements,
representing approximately 25% of current demand. We expect that as this
market grows it will represent over 30% of the rare earth market by 2015. We
also predict that the battery alloy market will increase in importance in terms of
tonnes demanded by 2015. We summarize in Exhibit 9 the uses and projected
CAGRs of the sectors that use rare earths (from 2010–2015).
Exhibit 9. Rare Earth Uses And Demand Drivers
2010E–2015E
Application Rare Earths Demand Drivers CAGR
Neodymium, Praseodymium, Samarium, Terbium, Renewable power generation, hybrid vehicle electric motors, hard drives for
Magnets Dysprosium computers, mobile phones, MP3 players, cameras 16%
Battery Alloy Lanthanum, Cerium, Praseodymium, Neodymium Hybrid electric vehicles, hydrogen absorption alloys for rechargeable batteries 18%
Europium, Yttrium, Terbium, Lanthanum, Dysprosium,
Phosphors Cerium, Praseodymium, Gadolinium LCDs and PDPs, energy-efficient fluorescent lights 30%
Fluid Cracking Lanthanum, Cerium, Praseodymium, Neodymium Petroleum production – heavy oil and tar sands 6%
Auto Catalysts Cerium, Lanthanum, Neodymium NOx, Sox reduction, recycling of rare earths not prevalent 8%
Mechano-chemical polishing powders for TVs, monitors, mirrors and (in
Polishing Powders Cerium nano-particulate form) silicon chips 15%
Ceramics Lanthanum, Cerium, Praseodymium, Neodymium, Yttrium Ceramic capacitors PSZ in advanced ceramics (turbine blade coatings) 3%
Cerium cuts down transmission of UV light. La increases glass refractive index for
Glass Additive Cerium, Lanthanum, Neodymium, Europium digital camera lenses. 4%
Fiber Optics Erbium, Yttrium, Terbium, Europium Signal amplification 30%
Source: IMCOA, U.S. Geological Survey, CIBC World Market Inc.
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10. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Project Locations
Exhibit 10. Select Global Earth Deposits
26 6
11 13
12 15
27
18
23 19
28 24 1
14
8
2 3
5 29 30
4 22
20 25
21 10
16 17 7
31 9
Company Project Resources Production Capacity Completed Engineering
1 Baogang Rare Earth Bayan Obo 56,392,000 55,000 Production
2 Various Jianxi 9,303,300 55,000 Production
3 Various Sichuan 510,000 10,000 Production
4 CBMM Morro Dos Seis Lagos 11,730 650 Production
5 Indian Rare Earths Limited Orissa N/A 12,700 Expansion
6 JSC Sevredmet Lovozerskoye 1,150,000 4,000 Production
7 Lynas Corp Mount Weld 1,183,400 22,000 Construction
8 Molycorp Minerals Mountain Pass 1,840,000 42,402 Construction
9 Alkane Resources Dubbo 545,340 2,580 DFS
10 Arafura Nolans Project 848,400 20,000 PFS
11 Avalon Rare Metals Nechalacho 3,057,000 9,296 PFS
12 Great Western Hoidas Lake 62,208 5,000 RD
13 Greenland Minerals Kvanefjeld 4,889,900 43,700 PEA
14 Rare Element Resources Bear Lodge 398,860 10,000 PEA
15 Quest Rare Minerals Strange Lake 1,147,082 12,120 PEA
16 Frontier Rare Earths Limited Zandkopsdrift 947,000 17,039 RD
17 Great Western Steenkampskraal 29,400 2,500 RD
18 Kazatomprom/Sumitomo Ulba N/A 13,608 RD
19 Matamec Explorations Zeus 31,800 N/A RD
20 Montero Mining Wigu Hill N/A N/A RD
21 Namibia Rare Earth Inc. Lofdal N/A N/A RD
22 Neo Materials/Mitsubishi Pintinga N/A N/A RD
23 Pele Mountain Resources Eco Ridge 67,222 N/A RD
24 Stans Energy Kutessay II N/A 1,000 RD
25 Tantalus Rare Earths AG Tantalus N/A N/A RD
26 Tasman Metals Norra Karr 326,700 5,000 RD
27 Ucore Uranium Bokan Mountain N/A N/A RD
28 US Rare Earths Lemhi Pass 567,455 N/A RD
29 Vietnam Gov't Mau Xe North and South 11,740,000 30,000 RD
30 Vietnamese Gov't Toyota Tsucho/Sojitz Dong Pao 759,000 7,000 PEA
31 Wealth Minerals Ltd Rodeo de Los Molles 1,176,000 N/A RD
Source: Company reports, USGS, and U.S. Department of Energy.
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11. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Processing
Given the chemical similarities of rare earth elements, developers and producers
face challenges to process these elements economically. Most rare earth
deposits primarily comprise mineralization in the form of monazite or bastnasite.
Here we examine these two processing techniques.
The first step is mining – undertaken using traditional hard rock mining
techniques, either open-pit or underground mining methods. This step in the
process does not account for a significant portion of overall operating costs
given the low tonnage nature of these operations.
Ore is transported to a mill where standard floatation methods increase the
concentration of REO. Molycorp’s Mountain Pass deposit previously used
floatation techniques to create a 60% REO concentrate similar to that produced
by Bayan Obo. From here the next step really depends on the type of
mineralization being processed. For bastnasite, additional upgrading of the
concentrate can be achieved through leaching. At Mountain Pass, leaching using
HCl, along with roasting, was previously used to increase concentrate and
oxidize the material (see Exhibit 11 for a simplified flow diagram). Exhibit 12
details a simplified flowsheet for monazite concentrate production.
Exhibit 11. Generalized Bastnasite Beneficiation Flow Diagram
Source: Society of Mining, Metallurgy and Exploration Inc.
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12. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
At Bayan Obo, concentrate undergoes the “cracking” process, whereby
concentrate is baked with sulfuric acid at temperatures of 300o Celsius to
600o Celsius and processed further. Ore from Avalon’s Nechalacho deposit,
which principally contains monazite ore, will also require this step. As “cracking”
is most often associated with monazite processing, Bayan Obo ore is believed to
contain significant amounts of this rare earth-bearing mineral.
Exhibit 12. Generalized Flow Diagram For Extraction Of Monazite And Xenotime From Ti-Zr-REE Mineral Sand
Source: Society of Mining, Metallurgy and Exploration Inc.
These steps take a company to the point at which it has a workable rare earth
element (REE) concentrate on site. 43% RE concentrate sells today for
US$38.00/kg. A significant value-added margin can be captured in the value
chain by moving to the next step in the refining process – producing separated
rare earth oxides. This step is costly, however, both in terms of capital and in
accounting for ~70% of the operating costs of the overall operation. The
majority of these costs are related to power and reagents.
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13. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Rare earth elements are quite similar chemically, making them difficult to
separate. Fractional crystallization and ion-exchange techniques have proven
effective at separating these elements but only on a small scale. Large-scale
operations, such as the one at Mountain Pass or Mount Weld, will likely use
liquid-liquid solvent extraction (SX). Exhibit 13 illustrates the process used
previously at Mountain Pass. Molycorp, Avalon, and Frontier all plan to become
separated rare earth oxide producers.
While each of the steps detailed in Exhibit 13 uses well-known technology,
determining the number of steps required to reach the end-result requires a
significant amount of testing to ensure the right processes and reagents will be
used in the chemical plant. This knowledge base is a significant barrier to entry
for projects that have not yet started this work in earnest.
Exhibit 13. Mountain Pass Previous Separation Process Using SX
Source: Society of Mining, Metallurgy and Exploration Inc.
Molycorp plans to take processing one step further through the conversion of
oxides to metals, metals to alloys, and alloys to finished rare earth magnets.
These steps increase operating costs but also realized prices. Molycorp estimates
that its operating margins will increase 62% as it moves through processing
neodymium oxides to alloys.
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14. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Supply And Demand
Our forecast growth rates for applications in which rare earth elements are a
component are primarily in the double digits to high single digits. We expect the
five-year CAGR for overall REO demand to be 12.5% to 2015. This forecast
assumes that 245,000 Mtpa of REO will be required by 2015, an estimate higher
than most forecasts currently in the marketplace but consistent with the Chinese
Rare Earth Association. While the aggregate graph below (Exhibit 14) would
suggest that the REO market is balanced, it does not reflect the markets of each
individual element, which is a far more accurate way to look at the rare earth
market, in our view. Each element has a unique set of demand drivers and
production profiles, making each element a market unto itself.
Exhibit 14. Supply And Demand Projections
300,000
250,000
200,000
REO (tonnes)
150,000
100,000
50,000
-
2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
REO Existing Supply REO New Supply REO Demand
Source: Roskil, USGS, and CIBC World Markets Inc.
In an effort to establish a supply/demand forecast for each of these markets, we
estimate: 1) the individual element requirements for each of the various
industries that comprise the demand side of the equation; and, 2) the varying
deposit compositions that will come into production over the next five to
10 years, forming supply. By combining estimated production rates with
estimated demand growth rates for the various end-user industries, we create a
matrix through which to forecast individual supply and demand balances for
each element.
As is evident in Exhibit 15, we forecast elements like cerium, which comprises
the bulk of rare earth deposits, to be in a surplus for the foreseeable future
while we estimate that magnet elements like neodymium and praseodymium will
be in deficit. Deficit markets will likely drive prices higher and support a
longer-term supply-side response. Note that information on recycling,
anticipated by-product production, and the actual start dates of most mines are
our best estimates at this time.
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15. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Exhibit 15. Supply And Demand Balances – Select Rare Earth Elements
55,000
45,000
35,000
25,000
Oxide Tonnes
15,000
5,000
(5,000)
(15,000)
(25,000)
La Ce Pr Nd Sm Eu Gd Tb Dy Y
2010E Supply Demand Balances 2015E Supply Demand Balance 2020E Supply Demand Balance
400%
350%
300%
Surplus / Shortfall as % of Demand
250%
200%
150%
100%
50%
0%
-50%
-100%
La Ce Pr Nd Sm Eu Gd Tb Dy Y
2010E Supply Demand Balances 2015E Supply Demand Balance 2020E Supply Demand Balance
Source: CIBC World Markets Inc.
CIBC’s Rare Earth Forecast
To generate our rare earth pricing forecasts, we reviewed the key supply and
demand drivers for each of the metals in the sector. We believe that supply
generated by recycling, by-product production, and new projects coming online
in the near term have the potential to flood the market, triggering a drastic drop
in price for some of the light rare earths, particularly cerium and lanthanum.
These we have labeled the Bearish Elements. Elements for which we anticipate a
sustained deficit in our supply/demand forecast we have labeled as Bullish and
we expect their prices to increase substantially. Other elements we have labeled
as Neutral and these we forecast to post more modest price increases.
Bullish elements, in our opinion, are praseodymium, neodymium, terbium, and
yttrium. Neutral elements are lanthanum, europium, dysprosium and
gadolinium. Finally, bearish elements are cerium and samarium.
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16. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Exhibit 16. CIBC Rare Earth Forecast
1600%
Percentage Increase From Base Year
1400%
1200%
1000%
800%
600%
400%
200%
0%
2009A 2010A 2011E 2012E 2013E 2014E 2015E
Neutral Elements Bearish Elements Bullish Element
Source: CIBC World Markets Inc.
To form our long-term forecast, outlined by metal in Exhibit 17, we estimate
that prices will re-base similar to other large increases in commodity prices at
200%–400% higher than our initial year of study, that being 2009. The path a
particular element takes depends on our projected supply/demand balance
looking out five years from now.
Exhibit 17. Long-term Rare Earth Forecast
REO Spot Prices 2010A 2013E 2015E
Yttrium US$/kg $105.50 $26.07 $107.60 $67.25
Lanthanum US$/kg 93.00 22.53 17.49 17.49
Cerium US$/kg 96.00 21.52 16.60 12.45
Praseodymium US$/kg 138.50 46.44 120.32 75.20
Neodymium US$/kg 150.00 47.56 122.85 76.78
Samarium US$/kg 91.00 16.62 18.00 13.50
Europium US$/kg 660.00 552.89 1,392.57 1,392.57
Gadolinium US$/kg 100.50 22.29 54.99 54.99
Terbium US$/kg 780.00 537.02 1,055.70 1,055.70
Dysprosium US$/kg 467.00 229.36 688.08 688.08
Source: Metals Pages and CIBC World Markets Inc.
Demand
We take a top-down approach to generate our demand forecast. Using industry
growth rates and average historical weightings for metal usage by industry, we
first distinguish those industries that are particularly heavy users of rare earths;
we then forecast each industry’s usage by metal. This method allows us to
capture the cross-utilization of metals in different industries and the variability of
growth rates across sectors. While it is possible that demand intensity will
change due to new uses for rare earths (e.g., development of magnetic
refrigeration), it is difficult to forecast these changes. Given the unique
characteristics of these metals, new uses are being discovered and developed
every day, making the possibility of greater-than-anticipated demand growth a
distinct possibility.
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17. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
The usage allocation per industry, outlined in Exhibit 18, then drives our forecast
demand for each rare earth element. We believe that the fastest-growing areas
of demand – particularly permanent magnets, rechargeable batteries, and
phosphors – will be the most important to the rare earth industry moving
forward. Elements like neodymium, praseodymium, dysprosium, yttrium,
terbium are tied to the fastest-growing industries.
Exhibit 18. End-use By Metal
Metal Usage (% Of Total Demand)
Application La Ce Pr Nd Sm Eu Gd Tb Dy Y Other
Magnets 23.4% 69.4% 2.0% 0.2% 5.0%
Battery Alloy 50.0% 33.4% 3.3% 10.0% 3.3%
Metallurgy Ex-batt 26.0% 52.0% 5.5% 16.5%
Auto Catalysts 5.0% 90.0% 2.0% 3.0%
FCC 90.0% 10.0%
Polishing Powder 31.5% 65.0% 3.5%
Glass Additives 24.0% 66.0% 1.0% 3.0% 2.0% 4.0%
Phosphors 8.5% 11.0% 4.9% 1.8% 4.6% 69.2%
Ceramics 17.0% 12.0% 6.0% 12.0% 53.0%
Others 19.0% 39.0% 4.0% 15.0% 2.0% 1.0% 19.0%
Source: IMCOA.
Permanent Magnets
Permanent magnets are highly sought after given their strength and ability to
maintain their magnetism over extremely long periods of time. Magnets derived
from rare earth elements such at neodymium, praseodymium, and dysprosium
are the strongest-known permanent magnets. Their strength allows components
to be reduced in size and weight, as can be seen in Exhibit 19, and can be made
resistant to temperature changes like excessive heat generated from the friction
of moving parts in a vehicle or generator.
Exhibit 19. Differences In Electric Generators
Source: Avalon Rare Metals.
17
18. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Rare earth magnets, typically NdFeB, are the strongest and most resistant to
heat degradation. There are few manufacturers of these types of magnets
outside of China and Japan: 80% of production comes from China, 17% from
Japan and 3% from Europe. There are two types of Nd magnets: bonded and
sintered. Sintered magnets are stronger, pure magnets, while bonded magnets
are better suited for smaller applications like disk drives and small motors. On
June 8, 2010, Molycorp signed a letter of intent with Neo Material Technologies
(NEM–TSX), a North American company with processing facilities in Canada and
China. The agreement is for a technology transfer: Neo’s principle product –
bonded NdFeB magnet powder – in exchange for offtake from Molycorp’s
Mountain Pass mine once in production. Subsequently, Molycorp signed a
Memorandum of Understanding (MOU) with Hitachi (6501–T) for the license of
technology in order to produce sintered NdFeB magnets. There are only nine
other companies worldwide with access to these rights, giving Molycorp a
strategic advantage through this significant barrier to entry. While the cost of
the strategy is not well known at this time and magnet production will represent
only a small component of Molycorp’s business, there is potential value creation.
Today’s rare earth industry is fragmented, with a number of companies
undertaking separation, upgrading, converting and magnet manufacturing.
Vertically integrating these steps under one banner and at fewer sites can
engender a dramatic reduction in transportation costs and the capture of
value-added margin at each of these steps. Molycorp estimates that operating
margins on its neodymium line can be increased by 62% by further processing
oxides to alloys.
This strategy also demonstrates how rare earth miners could potentially skew
their leverage to particular rare earth commodities by conducting further
value-added activities down the rare earth value chain. The Mountain Pass mine
is not necessarily endowed with above-average quantities of neodymium, but
through upgrading and value-added processing, neodymium, praseodymium and
dysprosium actually comprise the majority of the company’s projected revenues.
Wind Energy
Wind turbines have traditionally used large gearboxes to drive electrical
generation. One of the biggest challenges facing renewable energy and, in
particular, wind energy is capacity utilization. Replacing the gear-driven turbine
with a direct-drive permanent magnet generator increases the availability and
reliability of each turbine given fewer breakdowns and less routine maintenance
downtime. GE’s (GE–NYSE) newest direct-drive wind turbine boasted 25%
efficiencies over those turbines using gear boxes.
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19. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Exhibit 20. Direct-drive Wind Turbine
Source: GE.
Prior to the financial crisis, the wind energy industry was growing at 20% per
year, and we anticipate it to ramp back up to these levels by 2012–2013.
Moreover, with permanent magnets displacing more traditional turbines, the
growth in the wind sector may be much higher, according to Keith Delaney,
Executive Director of the Rare Earth Industry and Technology Association.
Molycorp estimates that for every MW of installed capacity a turbine will require
approximately a quarter tonne of REO in the form of neodymium, praseodymium
and dysprosium. To calculate this we first look at the end-product,
differentiating between oxides, metals and alloys:
• Each 1 MW turbine will require 500 kg of permanent magnets. These
magnets are an alloy typically made up of iron, boron, and didymium metal,
which is a mixture of neodymium, praseodymium, and often dysprosium.
• A 500 kg permanent magnet would require 160 kg of didymium metal.
• To produce 160 kg of the metal, 243 kg of didymium oxide is required or a
quarter of a tonne.
China is expected to be the largest growth region for wind power going forward
with announced plans to install 150 GW of capacity by 2020. If this capacity
were solely driven by direct-drive turbines, this initiative alone would equate to
all of the estimated 2010 global production of Nd and Pr.
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20. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Exhibit 21. Global Installed Wind Capacity 2002–2030E (Moderate Case)
2000 8%
Installed Wind Capacity (GW)
1500
1000 13%
18%
500
32% 25%
21% 26% 27% 28%
26% 24%
0
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009A
2010E
2015E
2020E
2030E
Installed Wind Energy Capacity CAGR %
Source: Global Wind Energy Organization
Hybrid Electric Vehicles
Permanent magnets also have developing applications in hybrid-electric cars.
Estimates from Avalon Rare Metals suggest that there will be 1 kg–2 kg of REO
equivalent required for each hybrid vehicle manufactured (for electric brakes
and the drive motors for all types of electric vehicles). See our discussion of
rechargeable batteries later for industry growth rates. Other potential growth
areas for permanent magnets include other renewable power applications
(run-of-river, tidal power), electric bicycles, and magnetic refrigeration.
Exhibit 22. Uses For Permanent Magnets In Hybrid Cars
Source: Shin-Etsu Rare Earth Magnets.
Phosphors
Rare earth elements are used extensively as phosphors in the electronics and
lighting industries. Color televisions and LCDs use heavy rare earth elements like
europium, terbium, and yttrium for their unique ability to change colors upon
sending an electrical current through them (also called
electro-phosphorescence).
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21. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Terbium and europium are also used in energy-efficient lighting. We believe that
this area of growth for the rare earth sector will be the most robust, given there
are few substitutes that work as effectively, recycling these elements is difficult,
and the overall growth of energy efficiency, as well as that of personal television
and computing, seems to be continually expanding. These factors combine to
create most of the pricing differences between light and heavy rare earths and
we believe will continue to support prices going forward, as there is little
downside risk, barring a disruptive technology.
Exhibit 23. Personal Technology Demand Outlook
900.0
55%
800.0
700.0
Vehicle Sales (MM)
600.0 55%
500.0
400.0 55%
300.0 55%
200.0 66% 40%
100.0 8% 134% 8% 46% 8% 13% 8% 6% 7% 4%
0.0
2010A 2011E 2012E 2013E 2014E 2015E
Smart Phones Laptops and Netbooks Tablets Smart Phone Growth Tablet Growth Laptop Growth
Source: Forrester.
Exhibit 24. A Plasma Television Pixel
Source: www.beingmanan.com.
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22. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
The energy-efficient lighting industry is constantly trying to find an alternative to
the incandescent light bulb, which, given its production of waste heat, is one of
the most inefficient sources of light energy. While new technology has been
proven to work and consumers can now replace incandescent light bulbs with
those that use 20%–30% less electricity, these new light bulbs tend to be more
expensive and require a warm-up period to reach full potential. However, they
can also save a user US$40 over the five-year life of a bulb, on average. Multiply
this by 30 lights in a house and there could be a saving of US$440–US$1,500
per annual electricity bill. A further initial drawback to these newer lights was
that they cast a more unnatural light than incandescent bulbs. It was found that
by adding a coating of terbium and europium to the inside of the tubes in these
lights they could be made indistinguishable from traditional light bulbs. Needless
to say, if this industry is to continue it will need to continue to use these rare
elements.
Exhibit 25. The Range Of CFL Lightbulbs
Source: U.S. Department of Energy.
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23. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Rechargeable Batteries
Rare earths are used in nickel-metal-hydride (NiMH) batteries. The metal “M” is
most commonly a combination of rare earths lanthanum, cerium, neodymium
and praseodymium combined with nickel, cobalt, manganese and/or aluminum.
These batteries are used in various applications already, including car batteries
in hybrid electric vehicles (HEV), electronic devices, and power tools.
Exhibit26. Electric Vehicle Sales 2007-2020E
4.5
14%
4.0
8%
3.5 13%
Vehicle Sales (MM)
13%
3.0
17%
2.5 23%
2.0 39%
39%
1.5 32%
28% 18%
25%
1.0 41% 38% 21%
0% 73%
0.5 346% 147%
160% 211% 473%
0.0
2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015E 2016e 2017E 2020E
Hybrid and Plug In Hybrid Vehicles Battery Electric Vehicles Hybrid Growth Rate Battery Electric Growth Rate
Source: JD Power & Associates.
These batteries offer comparable energy densities to lithium batteries
(power/weight), explaining why they have been used exclusively in hybrid cars
produced today. The key disadvantage of the technology is the limited shelf life,
as the batteries lose their charge over time (1% per day). There is a significant
risk that lithium-ion batteries will be used more prevalently going forward,
similar to the substitution that has occurred in hand-held devices and laptop
computers. However, with the amount of growth anticipated in the sector we
believe it is plausible that both technologies are used going forward.
Exhibit 27. NiMH Car Battery For A Toyota Prius
Source: Toyota.
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24. Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011
Supply
Our supply forecast is predicated on a bottom-up approach, taking current
production levels in China and elsewhere and adding near-term production and
development projects that are sufficiently advanced to come online in the next
10 years. Exhibit 28 summarizes select development projects held by publicly
listed companies.
24
