Prices for rare earth oxides shot up to historical highs in 2011, even for two of the most abundant of the light rare earth elements, lanthanum and cerium. The higher prices and concerns over availability of supply led to considerable demand destruction. But where rare earth pricing is headed from here is hard to predict — especially considering the predominantly light rare earth oxide projects Mountain Pass of Molycorp (MCP-N) and Mt. Weld of Lynas Corp. (LYC-A) are slated to swing into full production in 2013.
Where does all the uncertainty leave the dozens of junior companies that count rare earth projects among their assets?
Jon Hykawy is gloomier than many analysts when it comes to prices for rare earth oxides next year. For the more common lanthanum and cerium oxides, the head of global research, clean technologies and materials at Byron Capital Markets in Toronto, forecasts a dramatic plunge from the historic peaks they reached in mid-2011.
“Lanthanum and cerium prices are projected to collapse,” he contends. “This will not happen until 2013 and beyond, but our opinion is that this is largely inevitable. Barring a newly discovered use for lanthanum and cerium at a higher price, it is our belief that prices for both lanthanum oxide and cerium oxide will collapse to levels below historical floors.”
His latest forecast predicts that lanthanum oxide will drop from US$85 per kg in 2011 to US$75 this year, and then plummet to US$10 per kg in 2013. From there, it gets worse, with prices forecast at US$3 per kg in 2016 and 2017.
Hykawy sees cerium oxide moving from US$75 per kg in 2011 to US$60 this year, and then tumbling to US$8 per kg in 2013, US$3 in 2014, and all the down to US$1 in 2017.
Even the price for neodymium will likely taper off from US$285 per kg in 2011 to US$200 this year, before tumbling to US$100 in 2013 and US$75 per kg from 2014-2017. Unlike lanthanum and cerium, neodymium is seen as a “critical” metal — one that is essential in modern technology and for which there are no ready substitutes. Neodymium is used in the manufacture of neodymium iron boron (NdFeB) permanent magnets.
As for other REEs that are especially in demand, including heavies dysprosium, terbium, and europium, Hykawy forecasts they will fall by up to 80% from their 2011 highs in just two years’ time.
Hykawy argues that prices will fall not just because more non-Chinese rare earth projects such as Mountain Pass in California and Mt. Weld in Western Australia are coming on stream later this year and next, but because the extraordinarily high prices the industry has seen since early 2010 have encouraged a number of end-users of rare earth elements to switch to cheaper substitutes or develop new technologies that don’t require the materials.
That shift began in late 2010, he maintains, kicked off at the Roskill Conference in Hong Kong in November of that year, when Japanese presenters admitted their goal was to cut their consumption of cerium by as much as 70%. Cerium is used to polish glass in many industries, including LCD manufacturing for television and computer screens.
The trend picked up steam in January 2011, when Toyota Motor Corp. decided to use REE-free induction motors in the drive trains of their new round four electric vehicle. By July 2011, several wind turbine manufacturers in China had decided to stop making turbines containing permanent rare earth magnets, and W.R. Grace, a catalyst producer for the petroleum industry, declared it had developed new low or no-REE fluid catalytic cracking products.
“What high current prices do is convince users that they must engineer around the use of rare earths, substituting new materials or technologies for REEs,” the mining analyst reasons. “While lanthanum is not a particularly good catalyst, it did have the advantage for many years of being inexpensive,” he continues. “That changed in early 2010 with the advent of much stricter Chinese export quotas. Those quotas did not differentiate between REEs, so immediately thereafter buyers of lanthanum outside of China were competing with buyers of neodymium and dysprosium or other expensive rare earths for tonnes of quota. Lanthanum prices skyrocketed, and when a material that was previously adopted because of low prices suddenly becomes expensive, demand will surely fall.”
While Hykawy sees much of the demand destruction that has already occurred as temporary — he believes manufacturers are likely to come back to REEs when their prices come down — another issue end-users are grappling with is security of supply.
For example, in the case of Toyota, the cost of rare earths is still only a fraction of the total cost of its Prius hybrid car, even at the inflated prices that exist outside of China. The amount of neodymium used in a Prius is about 700 grams or about US$66.
“A ready supply of neodymium at prices as low as US$45 per kg that is prevailing in China today (perhaps even approaching the US$94 per kg free-on-board (FOB) China today) would easily convince Toyota and all other automotive companies to maintain the use of NdFeB magnets in DC motors,” he writes in a recent report. “With good quantities of neodymium flowing out of Lynas, Molycorp and Great Western Minerals by the beginning of 2013, we further believe that the Chinese will relax their export quotas to take part in the global market, and auto manufacturers will be back to using DC motors and nothing else.”
(The same would be true of wind turbine makers, where one 3-megawatt wind turbine uses about 2 tonnes of magnet containing about 620 kg of neodymium.)
In 2013, Molycorp is expected to produce about 23,000 tonnes and Mt. Weld 22,000 tonnes. Great Western Minerals’ (GWG-V) Steenkampskraal project in South Africa will produce about 10,000 tonnes and there are four companies that appear to have ionic clay deposits containing ore that is similar to the material from which Chinese firms extract heavy rare earth elements in southern China, he says. Two of them, including OTC and Frankfurt-listed Tantalus Rare Earths (TEFFF-O), could start producing at levels of 5,000 tonnes per year as early as 2013, he maintains.
Hykawy is also of the view that production quotas in China will rise over time as state-owned enterprises successfully cut emissions from their rare earth operations and as supply comes on stream outside of China. China’s 2011 quotas went under-utilized and the country’s full-year quota for 2012 is about 31,130 tonnes, an increase of 3% over 2011 levels.
Gareth Hatch, a co-founder of Technology Metals Research in Carpentersville, Ill., points out that 2011 wasn’t the first time China’s export quotas went unused: roughly 70% of the quota wasn’t used in 2009/2010.
“Perhaps the reason that the projected quota for 2012 did not decrease was because the authorities anticipate continued declines in price for these materials,” he says.
Hatch also notes that this year is the first time that China has differentiated between light and heavy rare earths in its export quotas.
“We’ve been expecting this for a year or two because the first projects that come on stream outside of China, such as Mountain Pass and Mount Weld will be producing a lot of light rare earths so it probably makes sense from the Chinese export point of view to decouple the lights from the heavies.”
Indeed, he predicts that in a year or two it is possible that the industry will see the complete disappearance of light rare earths from China’s annual export quotas.
The question is whether companies in China will be allowed to swap export quota. Typically, rare earth companies produce only one or the other (lights or heavies) and Hatch doesn’t believe there will be any substantial new producers of heavy rare earth elements for at least a few more years. “If you’re a light rare earth producer in China and you don’t really have the circuits to make heavy rare earths, having the quota is no use to you, so it will boil down to what mechanisms are in place to swap quotas. It may be there has been some clarification on this in Chinese-language publications but I haven’t seen anything yet in English.”
In terms of prices, Hatch believes the most likely scenario this year will be the convergence between Chinese export and domestic prices. Over the last year or two there has been a disconnect between the export price and the domestic Chinese price because of quota surcharges traders were putting on exports. When the price of lanthanum reached US$140-150 per kg, he explains, as much as US$100 of that cost was profiteering by traders, and didn’t reflect the true price of increases for the raw material.
But as prices peaked above historical prices in the summer of 2011, both the China price and the export price started to come down. “If you look at the charts, it appears likely that the prices for at least the light rare earths will converge again at some point this year,” he says. “The surcharge for a tonne of export quota in such cases would decline to be close to zero.”
The question is how much further do prices have to come down before you see previous users coming back to the market, Hatch asks. “Demand is absolutely driven by price and some companies were able to adapt in terms of substitution.”
A price-floor for REEs?
Hatch doesn’t believe prices for lanthanum and cerium will drop below historic levels of US$4-5 per kg or under US$35-40 per kg for neodymium because production costs in China continue to increase due to pollution-control measures.
“The cost of production in China is a little more expensive than it used to be and that’s what you’re competing against,” he maintains. “And that’s due to stricter environmental standards and pollution control. Despite the rhetoric of the Western media, there are strong indications that the new regulations for these facilities are stricter in China than in Canada or the United States.”
That’s one reason why China split its export quotas this year into “provisional allocations” and “confirmed quota” categories in a bid to further pressure rare earth companies in the country to clean up their operations, Hatch says. Companies that have quotas in the provisional category must meet various pollution control regulations by July 2012. And while the Chinese certainly have more work to do to improve the mining side of the equation, they are making progress in cleaning up the separation and processing of rare earths.
“I’ve spoken with people firsthand who have visited China in the last six months who tell me that you can eat your dinner off the factory floor,” he continues. “They’re clean, they’re recycling water, they’re recycling reagents, they are really getting their act together. They have invested in these facilities, so I don’t think the baseline prices are going to drop below historical levels, certainly not because of pressure from the Chinese.”
John Kaiser, who follows the rare earth industry closely and is the editor of Kaiser Research Online (www.kaiserbottomfish.com), believes that Chinese domestic prices will likely settle out somewhere in the 200-300% level above the historic level and that eventually, FOB prices will converge with domestic prices as material from Lynas Corp. and Molycorp come on stream in Western markets.
“Following the juniors, the question is whether the domestic China prices have at worst another 30-40% downside — that is a critical question for them,” Kaiser says. “In the case of lanthanum and cerium, there is potential for that to go down even lower than current levels, because those are the two primary constituents for the light rare earth dominated deposits.”
Kaiser also points out that China’s 2011 export quotas went underutilized — not just because there was price resistance among Western end-users to pay FOB offer prices that were at a premium — but also because there was substantial movement of Chinese rare earths outside the country through smuggling channels.
“There was this remarkable jump reported in June of last year that Chinese domestic consumption was 86,000 tonnes,” Kaiser says. “Some of that was due to rapid movement of Western capacity to get access to this material, but another reason was simply that rare earths destined for the export market were reclassified as domestic consumption and then smuggled out so they didn’t have to pay the 25-35% duties.”
When you look at typical prices for rare earths prior to July 2010, Kaiser says, they were quite low and had essentially flat-lined for the three years before that. Since July 2011, however, the market has seen FOB prices come down substantially, as well as Chinese domestic prices. “They look like they may be stabilizing now. . . (but) will these prices be acceptable to industry?”
A changing landscape
Kaiser argues that because prices for rare earths largely impact demand (and substitution) for them, anyone who tries to project future demand is “just guessing.” What he does know is that end-users are developing relationships with the more advanced rare earth juniors outside of China and some have signed off-take and off-take financing agreements. “They are all very eager to see juniors define what their mining plans are so that they can pick and choose which ones they might want to get their mitts into and provide development financing in exchange for off-take agreements.”
What the basis for establishing a price, however, remains a mystery. “China itself is setting up a cartel type system whereby they are going to have a central buyer which purchases the rare earth elements, stockpiles them, and then makes them available on a needed basis — similar to the way De Beers used to manage the supply of rough diamonds,” he says. “This will get complicated when there are new supplies emerging outside of China.”
Kaiser believes that the market could discover that rare earths are not at all like a commodity where the production disappears through private supply channels at prices that are never disclosed. And he suspects that unless there is an effort made by a company such as Molycorp to consolidate the industry and put all the projects under one umbrella, the industry will see the more advanced juniors simply disappearing as either consortiums or being acquired by a large company like Siemens, which would then bring on board contract mining. “Because most of these are, in essence, chemical plants, the mining part is at best trivial,” Kaiser reasons.
In any case, the market is in the process of whittling down the one hundred-plus juniors that today claim rare earth assets down to a smaller group with projects that are actually workable.
“Ideally, the juniors should be bought out and all the shareholders will be happy and the managers can hand the keys to the buyers. But the strategy is now that the junior is still responsible for doing most of the work and raising most of the money and the end-user has dibs on the success that any junior may have,” Kaiser says. “The bloom is off on the REE rose. The media attention to REEs is over. It’s a three to five year march. . . By that point, deposits of heavy rare earths will come on stream and as for the heavies, we don’t need too many of them — they’re only about 15% of total consumption. And that’s roughly how the Chinese have skewed the quotas.”
In the meantime, however, it’s a horse race to the production line.
Hatch of Technology Metals believes that Great Western’s Steenkampskraal project has a strong chance of production as soon as 2013 “depending on when they build a separation facility with the Chinese,” and that Alkane Resources (ALK-A), Arafura Resources (ARU-A), Avalon Rare Metals (AVL-T), Rare Element Resources (RES-T, REE-X), Quest Rare Minerals (QRM-V, QRM-X) and Matamec Explorations (MAT-V), all have projects that are likely to become mines.
Kaiser likes Avalon, Quest, Tasman Metals (TSM-V, TAS-X) and Rare Element Resources because he believes they are the most advanced of the 2015 and beyond supply contenders and because they each have the capacity to make a significant contribution to the rest of the world’s supply problem. Of the four, Kaiser argues, only Rare Element does not have the ability to provide a meaningful supply of heavy rare earths, but its Bear Lodge deposit “is the second-highest-grade advanced project in North America and will be of interest to end-users who are locked out of the Lynas and Molycorp supply via off-take arrangements those companies have already made.”
Of Kaiser’s picks, Avalon's Nechalacho project is the most advanced with heavy rare earth content. But it also has to deal with “very high capital and operating cost due to its mineralogy” and with “the sluggish permitting bureaucracy” of the Northwest Territories. As for Tasman Metals, “it is the least advanced, but stands to benefit if it delivers a plausible initial flow sheet for Norra Karr whose dominant mineral, eudialyte, has historically posed processing problems, and publishes a favourable preliminary economic assessment.”
Because of its location close to infrastructure within the stable country of Sweden, and its very large size, Kaiser believes Norra Karr will be of interest to European end-users seeking rare earth security of supply in their own backyard.
Finally, Quest's Strange Lake deposit “ranks far above all other heavy rare earth deposits in terms of overall grade and heavy rare earth content.” Kaiser notes that its critical milestones for 2012 are delivery of a detailed flow sheet and a prefeasibility study based on a mining scenario that overcomes the location's infrastructure challenges in a manner that is satisfactory to both Quebec and Newfoundland stakeholders.
“If Quest can solve these issues it has the potential to become the world's primary long-term supplier of heavy rare earths that are not already allocated via off-take agreements,” he says.
Hykawy’s top pick in the sector is Great Western Minerals, which has finalized a joint venture on solvent extraction technology with Ganzhou Qiandong of China and is negotiating off-take agreements with a number of potential customers, including Aichi Steel for magnet alloys. He says that mining operations should start by the second half of this year.
He also likes Matamec Explorations, in part because its hydrometallurgy is “commercially viable and has the potential to be improved further” and because its current resource, sufficient for a mine life of seven years, is expandable. “There are a number of potentially good heavy rare earth projects that can be up and running relatively quickly and produce at very low cost levels and these include Matamec,” Hykawy says.
Hykawy’s also got an eye on Tantalus, which has an ionic clay deposit in Madagascar. “They have a Chinese partner, China Non-Ferrous, which obviously knows something about ionic clays and have tested their material and have suggested it is in fact leachable clay,” he says. “And that would make it the very first one I’ve seen out of China.”
As for Molycorp, Hykawy sees considerable value in its mine-to-magnet model, which was de-risked late last year in a joint venture with Daido Steel and Mitsubishi Corp. to make neodymium-iron-boron (NdFeB) permanent rare earth magnets. He also thinks Molycorp is “making the right moves to secure supplies of heavy rare earths and to expand its cash flow as much as possible by moving its materials downstream.”
Hykawy’s other picks include: Arafura Resources, Frontier Rare Earths (FRO-T), Rare Element Resources and Ucore Rare Metals (UCU-V).
— The author is a senior staff writer at The Northern Miner. This story was first published in the March 2012 issue of Mining Markets magazine.
2014 Mining Markets. All Rights Reserved.