North American REE Market Settling After Quota Cuts

Source:

"REE miners outside China saw immediate boost in investor interest."

A week after the release of the new export quotas from China, consumers in the U.S. are still gauging the short- and long-term effects from the quota cuts.

For the short-term outlook, rare earth mining ventures outside of China saw an immediate boost in terms of investor interest following the announcement of the export cuts. On July 9th, the day the export quotas were released from China's Ministry of Commerce, major rare earth miners outside China saw substantial growth. The largest movers in that one day following the release were Avalon Rare Metals Inc. (TSX:AVL; OTCQX:AVARF), which gained 17%, Lynas Corporation (ASX:LYC), which moved up 8% and Rare Element Resources Ltd. (TSX.V:RES), which saw a 21% increase.

Another company, Molycorp Minerals LLC, a Colorado-based mining group with an idled rare earth mine in California, is planning for an IPO later this year to sell over 28 million in common stock at US$15–$17 per share. Even with underwriting, the total figure Molycorp is seeking to raise is over US$400M.

"The biggest winner might be Molycorp," one U.S.-based rare earth consumer noted. "Their IPO could not be better timed with the latest news out of China."

Molycorp expects to enter into production by 2012, at an annualized rate of approximately 20,000t of light rare earths, according to industry estimates. Australia-based Lynas Corporation is similarly expected to produce around 20,000t/y of light rare earths starting in 2011. Both companies lack any significant heavy rare earth deposits.

While the immediate increase in stock price for the rare earth mining companies shows there is significant investor interest, regardless of any short-term fluctuation, the long-term production schedules of these companies will be unaffected. Assuming Molycorp receives its financing, however, production will still begin in 2012.

"Molycorp's business model is definitely ambitious," said an REE analyst at JP Morgan. "But if there was any doubt that they could raise the money, I think the latest activity shows there is at least enough demand for a rare earth producer in the U.S."

In terms of international demand, China's most-exported light rare earths in 2009 included 12,000t of lanthanum oxide in 2009, 2,392t of cerium oxide, 9,346t of cerium carbonate, 439t of neodymium oxide and 1,594t of neodymium metal, totaling 25,771t for the entire year. The U.S. was by far the largest importer of lanthanum oxide, taking in 7,225t of the total 12,000t exported from China in 2009.

Comparatively, heavy rare earths saw relatively few exports from China during 2009, with 1,155t of yttrium oxide and only 540kg of dysprosium, according to China customs statistics.

Although China export quotas dropped 51% from H110 to H210, it will still be difficult for the REE market to soak up the additional 40,000t of light rare earth production coming onstream in the next two years from Molycorp and Lynas. As a result, junior rare earth ventures outside China are focusing more on heavy rare earth production as their main market.

"The only opportunity for success that the junior ventures have is through the heavy rare earths," an analyst at Stans Energy Corporation reported to Asian Metal. "Even with the quota system from China becoming tighter, it will be impossible to compete with Molycorp and Lynas on the light [rare earths]."

Canada-based Stans Energy Corporation (TSX.V:RUU) holds concessions in Kyrgyzstan with proven a heavy to light rare earth ratio of 50/50.

Avalon Rare Metal's Nechalacho deposit in NWT Canada has a roughly 20/80 ratio of heavy to light rare earths but is likely to be the first mine to actually produce heavies in North America. Avalon is planning on beginning production in 2014. Instead of directly competing with Molycorp, Avalon intends to focus on more critical heavy rare earths including yttrium, europium, dysprosium, terbium and neodymium—metals that neither Molycorp nor Lynas have on their concessions.

"Avalon's model relies on China continuing to restrict exports and to manage its REE resources for its internal use, thereby opening the door for a very small number of outside China producers to come into the business," Avalon's VP of sales and marketing reported.

Avalon and other heavy rare earth mining prospects should see long-term gains as a result of the latest China export cuts as both pricing and availability tighten in the upcoming months.

"China is trying to consolidate its [rare earth] industry and production within China," Neatby added. "It's our belief that rare earths are undervalued, and if China wants to increase prices, inventories held by some of the international consumers must be drawn down. The latest export cuts will definitely put pressure on these stockpiles."

As evidence of China's effort to limit extensive smuggling of rare earths, it was reported last week that China's Nanning branch of the General Administration of Customs arrested seven people attempting to smuggle 4,196t of rare earths from the country.

Ultimately, production from Lynas and Molycorp is expected to fill the demand from U.S. domestic light rare earth consumers, especially those in the catalyst industry, who consume the majority of light rare earths worldwide; especially lanthanum. Until Molycorp's light rare earths hit the market in 2012, however, catalyst producers will have to continue to rely heavily on Chinese imports.

If global demand for the light rare earths surges or the quota allotment gets used up earlier than expected, U.S. catalyst producers may have no other choice but to shift part or all of their manufacturing facilities to China in order to get around the quota restrictions. Such a move is not something catalyst producers can do easily, though—especially those with proprietary manufacturing technology.

"We've definitely considered shifting our manufacturing to China, but it would take a year or maybe even two in order to complete such a transition," one of the largest rare earth-based catalyst producers in the U.S. commented.

Companies like Chevron, BP and ConocoPhillips, some of the largest catalyst consumers in the world, could even turn to lower-quality Chinese catalyst manufacturers if U.S.-based producers cannot keep up with demand. In the end, however, this may be what the Chinese have been planning all along.

Phillip Arnheim
Asian Metal
Email: [email protected]
http://www.asianmetal.com

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