An Introduction to Rare Earth Elements & Rare Metals by VSA Capital
1. 14 November 2011
MINING
Commodity Report
Rare Earths
An introduction to a little known commodity class
Rare Earths aren’t actually that rare
The rare earth elements (REE) are a group of 17 chemically similar metallic elements,
15 of which comprise the group of elements known as the lanthanides. Despite their
name, the REE are actually relatively plentiful, having an overall crustal abundance
greater than silver. Having said this, much of the REE occurrences are of low quality
and rarely presented in economic concentration.
LREE v HREE
The market commonly divides the lanthanides into:
• Light rare earth elements (LREE): lanthanum through to samarium; and
• Heavy rare earth elements (HREE): europium through to lutetium plus
yttrium.
LREE generally occur in much higher concentrations around the world while HREE
deposits are less common.
Used in the widest range of consumer products
REE are used in the widest range of consumer products of any group of elements
(Castor and Hedrick, 2006). They are vital in electronic, optical, magnetic and
catalytic applications in which they play an important role in environmental protection,
improving energy efficiency and enabling digital technology. Of these end uses the
most significant are magnets, phosphors, catalysts and metal alloys. Symbol Sc, Y, La-Lu
Atomic Number 21, 39, 57-71
China dominates production and boasts the largest reserves
The US Geological Survey estimates that total world reserves of rare earth oxides are Density at 293K 3.0-9.8 g/cm3
approximately 110 million tonnes; 49 percent of which are in China. In terms of
Melting Point 798-1663 °C
production, traditionally India and Brazil were the main sources of REE; that is until
the 1940s when Australia and Malaysia began production and became the industry Lustrous and iron
leaders. Then between the 1960s and 1980s the US was the world’s primary supplier, Appearance grey to silvery in
appearance
with production principally coming from the Mountain Pass deposit (although Australia
Lanthanides (plus
still remained a major player). During the 1980s China commenced production and in Classification
Sc & Y)
1988 it claimed the position of the world’s largest supplier of REE. It maintains that
position today and in fact, with the closure of the Mountain Pass mine in 2002, it has Source: British Geological Survey (June 2010)
very little competition. Within China, the largest source of REE is the Bayan Obo
mine.
Supply risk
The 2010 report, “Critical raw material for the EU”, which analyses 41 minerals and
Analyst
metals and calculates the economic importance of those materials alongside their
supply risks, determined that the REE fall within the top 14 critical minerals. In fact, it
Jessica Pendal
showed that the REE are shown to have the highest supply risk of all minerals
jpendal@vsacapital.com
included in the study. There is hence much scope for suppliers of REE outside of
0203 005 5000
China to enter the market. This is particularly so in the longer term as China’s
domestic consumption increases and it becomes a net importer of REE (a long term
forecast supported by many analysts).
REO prices skyrocketed to highs in August 2011
While there is significant variance in the relative market value for selected rare earth
oxides, these various prices have followed a similar pattern recently, skyrocketing to a
high in August 2011 before coming down slightly in the last few months.
Molycorp and Lynas the major players outside of China
Outside of China major listed companies in the REE sphere include Molycorp
(MCP:NYSE), which owns the Mountain Pass deposit in the USA (due to
recommence production next year), and Lynas (LYC:ASX), which owns the Mount
Weld project in Australia (concentrate will start to be put through Lynas’s processing
plant in Malaysia next year). Beyond this there are a significant number of TSX.V and
ASX listed REE focused stocks with projects at an earlier stage.
1
2. INTRODUCTION
The rare earth elements (REE) are a group of 17 chemically similar metallic elements, 15 of which comprise the group of elements
th
known as the lanthanides. It was not until the 20 century that all the individual REE were identified due to their extreme similarity.
This similarity also means that the different REE can easily be substituted for one another making refinement to pure metal difficult.
The elements that comprise the REE are shown in Exhibit 1 below (alongside some of their basic chemical attributes).
Exhibit 1: Rare earth elements
Element Symbol Atomic No. Density (g/cm3) Melting Point (°C)
Lanthanum La 57 6.146 918
Cerium Ce 58 8.160 798
Praseodymium Pr 59 6.773 931
Neodymium Nd 60 7.008 1021
Promethium Pm 61 7.264 1042
Samarium Sm 62 7.520 1074
Europium Eu 63 5.244 822
Gadolinium Gd 64 7.901 1313
Terbium Tb 65 8.230 1356
Dysprosium Dy 66 8.551 1412
Holmium Ho 67 8.795 1474
Erbium Er 68 9.066 1529
Thulium Tm 69 9.321 1545
Ytterbium Yb 70 6.966 819
Lutetium Lu 71 9.841 1663
Scandium Sc 21 2.989 1541
Yttrium Y 39 4.469 1522
Source: The British Geological Survey (June 2010)
The term “rare earth” is misleading. It arose from the rarity of the minerals from which they were originally isolated but REE are
actually relatively plentiful, having an overall crustal abundance greater than that of silver. However, the crustal abundance of
individual REE varies greatly with the most abundant being cerium (with a concentration of 33.0 parts per million) and the least being
lutetium (with a concentration of 0.3 parts per million). Having said this, much of the REE are of low quality and rarely presented in
economic concentration.
The market commonly divides the lanthanides into:
• Light rare earth elements (LREE): lanthanum through to samarium; and
• Heavy rare earth elements (HREE): europium through to lutetium plus yttrium.
LREE generally occur in much higher concentrations around the world while HREE deposits are less common.
CHEMICAL ATTRIBUTES AND BASIC MINERALOGY
As refined metals the REE are lustrous and iron grey to silvery in appearance. They are soft, malleable, ductile and typically reactive.
They do not occur naturally as metallic elements but are found in around 200 different mineral types including halides, carbonates,
oxides and phosphates. Having said this, a relatively small number of minerals are or may become commercially significant; the most
commercially important REE deposits are associated with magmatic processes and are found in, or relative to, alkaline igneous rocks
and carbonatites. Nonetheless, more often than not, REE are extracted as by-products of other metals.
USES
REE are used in the widest range of consumer products of any group of elements (Castor and Hedrick, 2006). They are vital in
electronic, optical, magnetic and catalytic applications in which they play an important role in environmental protection, improving
energy efficiency and enabling digital technology.
Exhibit 2 on the following page provides an overview of the types of end uses to which the REE are put. Of these end uses the most
significant are magnets, phosphors, catalysts and metal alloys.
2
3. Exhibit 2: Range of REE end uses
Source: Johnson Matthey Plc, Mercedes-Benz and Ingrey Publishing
DEMAND (CONSUMPTION)
Exhibit 3 below shows the distribution of end uses to which REE were put in 2010. This shows that, in terms of value, manufacturers of
magnets dominated the market, making up 39 percent of total value.
Exhibit 3: REE 2010 Consumption of REE by volume and value (percentages)
45
40
35
30
25
20
15
10
5
0
Catalysts Magnets Metal Alloys Polishing Glass Ceramics Phosphors Other
Volume (%) Value (%)
Source: Cormark Securitie Inc, Technology Metals Research, LLC (2011) and IMCOA
During the last decade (from 2000-2010) the demand for REE from magnets, ceramics and metal alloys have grown by 9.5 percent,
8.8 percent and 5.8 percent respectively. The only group of end uses to see a decrease in demand is glass which has fallen by 2.4
percent over this period.
3
4. SUPPLY
World reserves
The US Geological Survey (January 2011) estimates that total world reserves of rare earth oxides are approximately 110 million
tonnes. Exhibit 5 below shows the estimated distribution of these reserves by country.
Exhibit 5: Estimated world REE reserves by country (percentage)
Other
19%
India
3%
Australia
1%
China
49%
USA
11%
Commonwealth of
Independent States
17%
Source: The US Geological Survey
Historical production
India and Brazil were the main sources of REE until the 1940s when Australia and Malaysia began production and became the
industry leaders. Then between the 1960s and 1980s the US was the world’s primary supplier, with production principally coming
from the Mountain Pass deposit (although Australia still remained a major player). During the 1980s China commenced production
and in 1988 it claimed the position of the world’s largest supplier of REE. It maintains that position today and in fact, with the closure
of the Mountain Pass mine in 2002, it has very little competition with insignificant production outside of China.
World production = Chinese production
China has dominated REE supply for decades with the majority of its product coming from the Bayan Obo mine. In 2006 world
production hit a high of 134,000 tonnes before dropping in 2007 to 121,000 tonnes. In 2008, 2009 and 2010 world production of REE
was estimated to be 126,000, 133,000 and 130,000 tonnes respectively. China is reported to have produced between 95 and 99
percent of this REE output.
Supply risk
The 2010 report, “Critical raw material for the EU”, which analyses 41 minerals and metals and calculates the economic importance
of those materials alongside their supply risks determined that those 14 raw materials that fell within the top right cluster of Exhibit 6
(on the following page) are critical. REE is shown to have the highest supply risk.
4
5. Exhibit 6: Critical raw material for the EU
Source: European Commission (30 July 2010)
There is hence much scope for suppliers of REE outside of China to enter the market. This is particularly so in the longer term as
China’s domestic consumption increases and it becomes a net importer of REE (a long term forecast supported by many analysts).
Interestingly, a recent report has calculated that of the REE, dysprosium, yttrium, terbium, europium and neodymium are the top five
REE in terms of supply risk (Technology Metals Research, August 2011).
Japan is the world’s largest REE importer (importing between 19,000 and 42,000 tonnes per annum over the past five years) and in a
bid to lessen its reliance on China the Japanese government has entered into an agreement with the Vietnamese government for the
future supply of REE. This supports a deal between Japanese traders, Toyota Tsusho and Sojitz, and Vietnamese state run mining
company, Lavreco, to develop the Dong Pao project which is expected to commence production in 2013 with a capacity of 3,000
tonnes per annum rare earth oxides (REO) before increasing production to 6, 000 tonnes per annum.
Other projects that are due to come on line over the next few years are Lynas’s Mount Weld mine in Australia, Molycorp’s Mountain
Pass mine in the USA (although note it has been processing its stockpiles) and Great Western’s Steenkampskraal mine in South
Africa. Beyond 2014 various other projects outside of China should commence production. It was expected that Lynas would begin
putting concentrate through this year but delays in construction at Lynas’s processing plant in Malaysia have meant that this will not
now commence until next year.
PRICING
As with many minor metals, there are no exchanges on which REE are traded. Instead, both the metals and their oxides are sold by
specialist REE-trading companies (Vulcan, 2008). REO are generally supplied on long term confidential contracts and prices are set
by producers. Further, there is significant variance in the relative market value for selected REO and these prices depend on the
purity level (which is largely set by the specifications for each application).
Exhibit 7 below shows how the prices of various REO have skyrocketed recently, although they have come down a little from the
highs of August 2011. Exhibit 7 also shows domestic Chinese prices which are significantly lower than world prices (although note
that there may be some timing differences between the movements of internal and external China prices).
Exhibit 7: REE prices
Low High Low High Low High
REE Oxide (99%, large purchases,
(9 Nov (9 Nov (Aug (Aug (8 Nov (8 Nov China (Nov 2011)
FOB China, US$/kg)
2009) 2009) 2011) 2011) 2011) 2011)
Samarium oxide 30* 35* 125 135 110 120 16
Praseodymium oxide 19 - 240 250 220 235 120
Neodymium oxide 19.50 - 320 400 260 320 143
Lanthanum oxide 5.20 - 153 173 70 95 19
Europium oxide 490 - 5400 5880 3800 4300 2504
Dysprosium oxide 295* 305* 2520 2850 2300 2500 1189
Cerium oxide 3.20 4.00 140 159 60 90 22
Source: Industrial Minerals (* earliest data is 20 December 2010, hence these figures are from this date and not 9 November 2009)
5
6. REE export prices really started to move in July 2010 when China drastically cut its export quotas. Similarly, Chinese domestic prices
started to increase at the end of 2010 when China cracked down on polluting operators and limited production. Exhibit 8 below
graphically depicts the price movements of some of the REO over the past year.
Exhibit 8: REE prices (Dec 2010 – Nov 2011)
Neodymium oxide, 99% large purchases, FOB China, $/kg
450
400
350
300
250
200
150
100
50
0
Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
Low Price High Price
Europium oxide, 99%, large purchases, FOB China, $/kg
7000
6000
5000
4000
3000
2000
1000
0
Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
Low Price High Price
Dysprosium oxide, 99%, large purchases, FOB China, $/kg
3500
3000
2500
2000
1500
1000
500
0
Dec-10 Jan-11 Jan-11 Feb-11 Mar-11 Mar-11 Apr-11 May-11 May-11 Jun-11 Jul-11 Jul-11 Aug-11 Sep-11 Sep-11 Oct-11 Nov-11
Low Price High Price
6
7. Cerium oxide, 99%, large purchases, FOB China, $/kg
180
160
140
120
100
80
60
40
20
0
Dec-10 Dec-10 Jan-11 Feb-11 Feb-11 Mar-11 Apr-11 Apr-11 May-11 Jun-11 Jun-11 Jul-11 Aug-11 Aug-11 Sep-11 Oct-11 Oct-11
Low Price High Price
Source: Industrial Minerals
THE INDUSTRY
Major players and strategic investments
Outside of China major listed companies in the REE sphere include Molycorp (MCP:NYSE), which owns the Mountain Pass deposit
in the USA, and Lynas (LYC:ASX), which owns the Mount Weld project in Australia. Beyond this there are a number of TSX.V and
ASX listed REE focused stocks and Exhibit 9 below lists the most advanced of these projects outside of China and India.
Exhibit 9: Advanced REE projects (outside of China and India as of July 2011)
Project Location Owner(s)/ Partner(s)
Bear Lodge (Bull Hill Zone) USA Rare Element Resources Ltd
Bokan (Dotson/ I & L Zones) USA Ucore Rare Metals Inc
Navigator Resources Ltd & Kimberley Rare Earths
Cummin Range Australia Ltd
Dubbo Australia Alkane Resources Ltd
Eco Ridge (Elliot Lake) Canada Pele Mountain Resources Inc
Eldor (Ashram Zone) Canada Commerce Resources Corp
Hoidas Lake Canada Great Western Minerals Group Ltd
Kangankunde Malawi Lynas Corporation Ltd
Kutessay II Kyrgystan Stans Energy Corp
Kvanefjeld Greenland Greenland Minerals & Energy Ltd
Nechalacho (Thor Lake) Canada Avalon Rare Metals Inc.
Nolans Bore Australia Arafura Resources Ltd
Norra Karr Sweden Tasman Metals Ltd
Sarfartoq (ST1 Zone) Greenland Hudson Resources Inc.
Steenkampskraal South Africa Great Western Minerals Group Ltd
Strange Lake (B Zone) Canada Quest Rare Minerals Ltd
Zandkopsdrift South Africa Frontier Rare Earths Ltd & Korea Resources Corp
Zeus (Kipawa) Canada Matamec Explorations Inc
Source: TMR, Critical Rare Earhs: Global Supply & Demand Projections and the Leading Contenders for New Sources of Supply (GP Hatch, August 2011)
With regard to the junior sector, this is a commodity where there has yet to be any serious action by the major mining companies or
end users (noting that nonbinding offtake agreements are futile). In order to guarantee supply this will have to change. However,
some isolated cases are arising. For example the US$4 billion investment by a consortium of Korean and Japanese entities and a
group of Chinese companies into CBMM’s Araxá niobium deposit (which has substantial REE). It is assumed some of this investment
will be directed towards the REE resources. Deals such as this benefit the entire junior end of the market.
7
8. Strategic Energy Technology Plan shows demand for Dy and Nd will increase
A new European Commission study has concluded that its Strategic Energy Technology Plan will increase the demand for
dysprosium and neodymium (which are required in the manufacturing of permanent magnets used in wind energy technology).
Exhibit 10 below shows by how much demand is expected to increase in both 2020 and 2030 with regard to their use in wind energy
technology.
Exhibit 10: Expected demand increase of Dysprosium and Neodymium
Use in wind
2010 energy tech % increase % increase
Output (kg/MW) by 2020 by 2030
Dysprosium 1,200 2.8 2.5 4
Neodymium 18,000 40.6 2.4 3.8
Source: Strategic Energy Technology Plan
Congressional Rare Earth Caucus planned
US Congressman Mike Coffman has announced a decision to organise a Congressional Rare Earth Caucus to help guide federal
policy on rare earth issues as US policymakers respond to increasing warnings about the US’s dependence on China. In fact the
move came less than a month after RARE, The Association for Rare Earth, sent an open letter to House and Senate members urging
the creation of such a caucus. The announcement also came less than two months after a US Defense Department report warned
that the US is overly reliant on foreign sources of REEs.
China to introduce measure to stop over exploitation of REE
The Secretary General of the Chinese Society of Rare Earths said earlier this month that China will introduce a new invoice system
for the REE industry this year in a bid to stop over exploitation of the minerals. The charge will apply to mining and processing
sectors. China had set this year's REE exploration target at 93,800 tonnes (80,400 tonnes of LREE and 13,400 tonnes of ion-
absorbed REE) but that target has already been achieved.
8
9. Disclaimer and Key Contact Details
Chief Executive/ Head of Sales Andrew Monk +44 (0) 203 005 5001 amonk@vsacapital.com
Head of Research Bruce Davidson +44 (0) 203 005 5006 bdavidson@vsacapital.com
Head of Corporate Finance Peter Damouni +44 (0) 203 005 5007 pdamouni@vsacapital.com
Group Finance Director Peter Joy +44 (0) 203 005 5003 pjoy@vsacapital.com
IMPORTANT NOTICE
This research report is exempt from the general restriction on the communication of invitations or inducements to enter into investment activity and has therefore not been approved
by an authorized person, as would otherwise be required by Section 21 of the Financial Services and Markets Act 2000 (the "Act"). Persons who do not fall within the above category
should return this research report to VSA Capital Limited, 14 Austin Friars London EC2N 2HE, immediately. This research report is not intended to be distributed or passed on, directly
or indirectly, to any other class of persons. It is being supplied to you solely for your information and may not be reproduced, forwarded to any other person or published, in whole or
in part, for any purpose, without out prior written consent.
Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives
related to such securities.
The information and opinions contained in this research report have been compiled or arrived at by VSA Capital Limited (the "Company") from sources believed to be reliable and in
good faith but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. All opinions and estimates contained in the research report
constitute the Company's judgments as of the date of the report and are subject to change without notice. The information contained in the report is published for the assistance of
those persons defined above but it is not to be relied upon as authoritative or taken in substitution for the exercise of the judgment of any reader.
The Company accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein. The company does not make any
representation to any reader of the research report as to the suitability of any investment made in connection with this report and readers must satisfy themselves of the suitability in
light of their own understanding, appraisal of risk and reward, objectives, experience and financial and operational resources.
The value of any companies or securities referred to in this research report may rise as well as fall and sums recovered may be less than those originally invested. Any references to
past performance of any companies or investments referred to in this research report are not indicative of their future performance. The Company and/or its directors and/or
employees may have long or short positions in the securities mentioned herein, or in options, futures and other derivative instruments based on these securities or commodities.
Not all of the products recommended or discussed in this research report may be regulated by the Financial Services and Markets Act 2000 and the rules made for the protection of
investors by that Act will not apply to them. If you are in any doubt about the investment to which this report relates, you should consult a person authorized and regulated by the
Financial Services Authority who specializes in advising on securities of the kind described.
The Company does and seeks to do business with the companies covered in its research reports. Thus, investors should be aware that the Company may have a conflict of interest that
may affect the objectivity of this report.
The analyst who prepared this report has not and will not receive any compensation for providing a specific recommendation or view in this report.
Investors should consider this report as only a single factor in making their investment decision.
The information in this report is not intended to be published or made available to any person in the United States of America (USA) or Canada or any jurisdiction where to do so would
result in contravention of any applicable laws or regulations. Accordingly, if it is prohibited to make such information available in your jurisdiction or to you (by reason of your
nationality, residence or otherwise) it is not directed at you.
VSA Capital Limited is authorised and regulated by the Financial Services Authority.
Copyright 2011, VSA Capital Limited, all rights reserved.
9