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CIBC Report: A Rare Earth Element Industry Overview
 

CIBC Report: A Rare Earth Element Industry Overview

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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.

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.

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    CIBC Report: A Rare Earth Element Industry Overview CIBC Report: A Rare Earth Element Industry Overview Document Transcript

    • Institutional Equity Research Initiating CoverageMarch 06, 2011 Metals & MineralsSector Weighting: Market Weight Once Ignored On The Periodic Table, Dont Ignore Them Now A Rare Earth Element Industry Overview As China squeezes global supply and uses for rare earths continue to grow, the world needs new rare earth deposits. Those deposits with favorable grade weightings and extensive work already completed are more likely to be developed in the next 10 years than earlier-stage plays. While the market for rare earths is expected to grow at 9%-15% per year to 2015, we do not foresee every deposit going into production. As of March 6, we initiate coverage of Avalon Rare Metals (SO), Frontier Rare Earths (SO-Spec.), and Molycorp (SO) as the preferred ways to play the space. All figures in Canadian dollars, unless otherwise stated. 11-106854 © 2011 CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for importantMatthew Gibson Ian Parkinson required disclosures, including potential conflicts of interest.1 (416) 956-6729 1 (416) 956-6169 See "Price Target Calculation" and "Key Risks to Price Target" sections at theMatthew.Gibson@cibc.com Ian.Parkinson@cibc.ca end of this report, or at the end of each section hereof, where applicable.Find CIBC research on Bloomberg, Reuters, firstcall.comand ResearchCentral.cibcwm.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 (416) 594-7000
    • Once Ignored On The Periodic Table, Dont 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 .................................................. 312
    • Once Ignored On The Periodic Table, Dont 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.3
    • Once Ignored On The Periodic Table, Dont 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 Molycorps Goal Lynas Currently Lynas Goal Frontier Currently Frontiers 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/ShapeSource: 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.4
    • Once Ignored On The Periodic Table, Dont 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 ElementsBubbles 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.5
    • Once Ignored On The Periodic Table, Dont 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.6
    • Once Ignored On The Periodic Table, Dont 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.7
    • Once Ignored On The Periodic Table, Dont 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 DemandLight Rare Earths Symbol Weight Abundance (ppm) Applications (Mt)Yttrium Y 88.9 22.0 Red phosphor, fluorescent lamps, ceramics, metal alloy agent 6,706Lanthanum La 138.9 30.0 Hybrid engines, metal alloys, fluid cracking (heavy oil), flint, hydrogen storage 41,605Cerium Ce 140.1 64.0 Polishing powder, auto catalyst, petroleum refining, metal alloys 43,181Praseodymium Pr 140.9 7.1 Magnets, battery alloy, lasers 10,602Neodymium Ne 144.2 26.0 Permanent magnets, auto catalyst, petroleum refining, lasers 29,440Promethium Pm 145.0 na Nuclear battery (does not occur in nature) naSamarium Sm 150.3 4.5 Magnets 728Europium Eu 151.9 0.9 Red color for television and computer screens 387Gadolinium Gd 157.2 3.8 Magnets 899 AtomicHeavy Rare Earths Symbol Weight ApplicationsTerbium Tb 158.9 0.6 Phosphors, permanent magnets 433Dysprosium Dy 162.5 3.5 Permanent magnets, hybrid engines 1,750Holmium Hm 164.9 0.8 Glass coloring, lasersErbium Er 167.3 2.3 PhosphorsThulium Tm 168.9 0.3 Medical x-ray units 312Ytterbium Tb 173.1 2.2 Lasers, steel alloysLutetium Lu 175.0 0.3 Catalysts in petroleum refining Total Demand 136,043Source: Society Mining, Metallurgy and Exploration Inc., IMCOA.8
    • Once Ignored On The Periodic Table, Dont 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–2015EApplication Rare Earths Demand Drivers CAGR Neodymium, Praseodymium, Samarium, Terbium, Renewable power generation, hybrid vehicle electric motors, hard drives forMagnets 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 (inPolishing 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 forGlass 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.9
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 Project LocationsExhibit 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 Engineering1 Baogang Rare Earth Bayan Obo 56,392,000 55,000 Production2 Various Jianxi 9,303,300 55,000 Production3 Various Sichuan 510,000 10,000 Production4 CBMM Morro Dos Seis Lagos 11,730 650 Production5 Indian Rare Earths Limited Orissa N/A 12,700 Expansion6 JSC Sevredmet Lovozerskoye 1,150,000 4,000 Production7 Lynas Corp Mount Weld 1,183,400 22,000 Construction8 Molycorp Minerals Mountain Pass 1,840,000 42,402 Construction9 Alkane Resources Dubbo 545,340 2,580 DFS10 Arafura Nolans Project 848,400 20,000 PFS11 Avalon Rare Metals Nechalacho 3,057,000 9,296 PFS12 Great Western Hoidas Lake 62,208 5,000 RD13 Greenland Minerals Kvanefjeld 4,889,900 43,700 PEA14 Rare Element Resources Bear Lodge 398,860 10,000 PEA15 Quest Rare Minerals Strange Lake 1,147,082 12,120 PEA16 Frontier Rare Earths Limited Zandkopsdrift 947,000 17,039 RD17 Great Western Steenkampskraal 29,400 2,500 RD18 Kazatomprom/Sumitomo Ulba N/A 13,608 RD19 Matamec Explorations Zeus 31,800 N/A RD20 Montero Mining Wigu Hill N/A N/A RD21 Namibia Rare Earth Inc. Lofdal N/A N/A RD22 Neo Materials/Mitsubishi Pintinga N/A N/A RD23 Pele Mountain Resources Eco Ridge 67,222 N/A RD24 Stans Energy Kutessay II N/A 1,000 RD25 Tantalus Rare Earths AG Tantalus N/A N/A RD26 Tasman Metals Norra Karr 326,700 5,000 RD27 Ucore Uranium Bokan Mountain N/A N/A RD28 US Rare Earths Lemhi Pass 567,455 N/A RD29 Vietnam Govt Mau Xe North and South 11,740,000 30,000 RD30 Vietnamese Govt Toyota Tsucho/Sojitz Dong Pao 759,000 7,000 PEA31 Wealth Minerals Ltd Rodeo de Los Molles 1,176,000 N/A RDSource: Company reports, USGS, and U.S. Department of Energy.10
    • Once Ignored On The Periodic Table, Dont 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 DiagramSource: Society of Mining, Metallurgy and Exploration Inc.11
    • Once Ignored On The Periodic Table, Dont 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 SandSource: 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.12
    • Once Ignored On The Periodic Table, Dont 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 SXSource: 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.13
    • Once Ignored On The Periodic Table, Dont 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.14
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011Exhibit 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 BalanceSource: 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.15
    • Once Ignored On The Periodic Table, Dont 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.16
    • Once Ignored On The Periodic Table, Dont 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 OtherMagnets 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
    • Once Ignored On The Periodic Table, Dont 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.18
    • Once Ignored On The Periodic Table, Dont 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.19
    • Once Ignored On The Periodic Table, Dont 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).20
    • Once Ignored On The Periodic Table, Dont 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.21
    • Once Ignored On The Periodic Table, Dont 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.22
    • Once Ignored On The Periodic Table, Dont 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.23
    • Once Ignored On The Periodic Table, Dont 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
    • 25 Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 Exhibit 28. Select Investable Deposits In Development Outside China Mountain Pass Mount Weld Zandkopsdrift Nolans Project Dubbo Bear Lodge Hoidas Lake Nechalacho Steenkampskraal Strange Lake Kvanefjeld Norra Karr Frontier Rare Arafura Alkane Rare Element Great Western Avalon Rare Great Western Quest Rare Greenland Owner Molycorp Lynas Earths Resources Resources Resources Minerals Metals Minerals Minerals Minerals Tasman Metals Location United States Australia South Africa Australia Australia United States Canada Canada South Africa Canada Greenland Sweden Tonnage (MM tonnes) 19.62 14.61 43.78 30.30 73.69 11.53 2.56 315.01 0.17 114.82 400.81 62.35 Grade (% TREO) 9.4% 8.1% 2.2% 2.8% 0.7% 3.5% 2.4% 1.4% 17.0% 1.0% 1.2% 0.5% Grade (REO Eq) 9.8% 11.1% 3.9% 4.7% 2.7% 5.2% 4.6% 4.9% 27.8% 3.7% 2.0% 2.1% Contained REO (tonnes) 1,840,000 1,183,400 947,000 848,400 545,340 398,860 62,208 4,297,829 29,400 1,147,082 4,889,900 326,700 Bastnasite/ Bastnasite/ Mineralization Bastnasite Monazite Monazite Apatite Trachyte Monazite Apatite Fergusonite Monazite Pegmatite/ Aplite Steenstrapine Eudialyte Engineering Complete Construction Construction RD PFS DFS PEA RD PFS RD PEA PEA RD Expected Production (tonnes) 40,000 22,000 20,000 20,000 2,580 7,000 5,000 10,000 2,500 12,000 44,000 5,000 Separated/Oxide s/Metals/Alloys/ Separated Separated Separated Separated Separated Finished Product Magnets Oxides Oxides Oxides Concentrate Concentrate Concentrate Oxides N/A Oxides Concentrate N/A Capex (US$MM) 780 594 700* 430 180 89 N/A 1,100 N/A 563 2,310 N/A Opex (Total Annual) 266 154 368* 150 N/A 72 N/A 464 N/A 440 472 N/A Production Year 2012 2011 2015 2013 2014 2015 N/A 2015 N/A 2015 2,015 N/A Bullish Element Weighting 16.540 19.600 25.770 29.070 36.047 17.659 30.040 37.230 27.410 46.146 26.000 55.725 Light Weighting 99.840 99.200 98.310 99.380 94.729 99.133 97.270 93.690 98.970 87.988 97.100 89.122 Yttrium 0.100 - 4.120 1.320 15.814 0.809 0.370 11.690 5.000 28.128 7.700 36.260 Lanthanum 33.200 26.000 25.360 19.740 19.535 31.214 20.330 15.830 21.630 13.213 27.500 10.305 Cerium 49.100 51.000 44.200 47.530 36.822 47.110 42.770 35.720 46.550 27.427 42.000 22.328 Praseodymium 4.340 4.000 4.550 5.820 4.031 4.046 5.770 4.510 5.000 3.003 4.200 2.863 Neodymium 12.000 15.000 15.740 21.200 14.109 11.850 22.760 17.830 16.660 10.711 12.900 11.260 Samarium 0.800 1.800 2.310 2.370 2.171 2.341 3.660 3.910 2.500 2.603 1.600 2.290 Europium 0.100 0.400 0.590 0.400 0.078 0.549 0.720 0.490 0.080 0.200 0.100 0.382 Gadolinium 0.200 1.000 1.440 1.000 2.171 1.214 0.890 3.710 1.550 2.703 1.100 3.435 Heavy Weighting - 0.700 1.690 0.410 5.194 0.696 2.720 5.130 1.030 12.112 2.250 10.878 Terbium - 0.100 0.170 0.080 0.310 0.171 0.220 0.540 0.080 0.601 0.200 0.763 Dysprosium - 0.200 0.770 0.330 2.016 0.405 0.420 2.710 0.670 4.104 1.100 4.962 Holmium - 0.100 0.130 - 0.388 0.026 0.090 0.480 0.050 0.901 0.200 1.145 Erbium - 0.200 0.320 - 1.163 0.055 0.310 1.260 0.080 2.803 0.600 3.435 Thulium - - 0.040 - 0.155 0.004 0.080 - 0.070 0.501 0.100 0.573 Ytterbium - 0.100 0.230 - 1.008 0.032 1.300 - 0.070 2.803 0.050 - Lutetium - - 0.030 - 0.155 0.004 0.300 0.140 0.010 0.400 - - Source: Company reports and CIBC World Markets Inc.
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 Our supply forecast does not take into consideration capital constraints for developers or any permitting or political opposition to the development of projects. Overall, this creates a market for rare earth oxides that is in deficit over the next three years, then moves promptly into balance as more development-stage projects come into production. In Exhibit 29 we summarize the development progress of a number of rare earth projects outside China.Exhibit 29. Development Stages Of Select Rare Earth Projects 35% Steenkampskraal (Great Western), 30% 2,500 mtpa 25% Strange Lake (Quest Rare Minerals), 12,120 mtpa REO Eq Grade Mountain Pass (Molycorp), 42,402 20% Bear Lodge (Rare Element), Mount Weld (Lynas), 22,000 mtpa mtpa 7,000 mtpa Kvanefjeld (Greenland Minerals), 15% 43,700 mtpa Hoidas Lake (Great Western Nechalacho (Avalon), 9,296 mtpa Minerals), 5,000 mtpa 10% Norra Karr (Tasman Metals), Nolans Project (Arafura), 20,000 5,000 mtpa mtpa 5% Dubbo (Alkane), 2,580 mtpa 0% Development StageBubbles represent relative size of expected production.Source: Company reports. At the individual element level, it is apparent that each of these markets may or may not be balanced over the next five years. Light rare earths, like cerium, are likely to be in surplus over the next few years, making it likely that their respective prices correct faster than those for other elements. Elements like neodymium, praseodymium, and yttrium appear to be in deficit for the foreseeable future. It is important to consider that this supply/demand balance includes some by-product and recycled material production, although there is limited information on the potential supply from these sources. Previously, it was not deemed worthwhile to recover rare earths as by-products given the elements’ historically low prices. Mine managers that have been pumping these elements to tailings are perhaps looking at ways to capture the recent run-up in prices.26
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 Exhibit 30. Race To Full Production – Rare Earth Developers 2010E 2011E 2012E 2013E 2014E 2015E 2016E Mount Weld 3,000 5,197 20,788 20,788 20,788 Mountain Pass - 11,000 11,000 22,000 22,000 Dubbo - - - 2,580 2,580 2,580 Steenkampskraal - - - 2,500 2,500 2,500 Zandkopsdrift - - - - 12,417 23,179 Nolans Project - - - - 5,000 10,000 Nechalacho - - - - - Source: Company reports and CIBC World Markets Inc. Our analysis leads us to believe that the prices of some elements will be supported at current levels while the prices of others will drop as more supply comes online. We, therefore, see rare earth prices diverging based on the supply and demand assumptions we make for each individual element.27
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 Rare Earth Pricing Rare earth prices are based on the processing industry that occurs in China. Metals and oxides are priced excluding freight. As seen in Exhibit 31, some heavy rare earths command substantially higher prices than the lighter rare earths. Since China’s announcement in August 2010 that it would curtail exports, prices outside China have risen exponentially, while prices inside China have also steadily increased for the most part.Exhibit 31. Rare Earth Spot Prices Oxide Price FOB China (US$/kg) $- $100 $200 $300 $400 $500 $600 $700 $800 $900 Y $105.50 La $93.00 Ce $96.00 Pr $138.50 Nd $150.00 Sm $91.00 Eu $660.00 Gd $100.50 Tb $780.00 Dy $467.00 Heavy Rare Earths Light Rare EarthsSource: Metals Pages. As seen in Exhibit 32, prices for most elements have rocketed higher, though the light rare earth prices outside of China seem to be increasing more than the prices for heavy rare earths. This is counterintuitive given that we know most deposits are comprised of light rare elements. A reasonable explanation can be found upon examination of Chinese export behavior, whereby rare earth producers are restricted on exporting material based on tonnage, not rare earth element. Therefore, given the opportunity to export a tonne of any product, we believe Chinese producers are opportunistically exporting the more expensive heavier rare earths, creating a disconnect in market prices for rare earths in the spot market. We believe that this situation will continue in the near term, but correct in the long term, giving producers with leverage to heavy rare earths essentially an embedded option upon the correction.28
    • 29 0 50 100 150 200 250 300 350 400 450 500 0 100 200 300 400 500 600 700 0 20 40 60 80 100 120 140 160 - 4/13/2001 3/7/2003 4/13/2001 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 9/7/2003 4/13/2001 4/13/2002 4/13/2002 3/7/2004 4/13/2002 4/13/2003 9/7/2004 4/13/2003 Source: Metals Pages. 3/7/2005 4/13/2003 4/13/2004 9/7/2005 4/13/2004 Light Rare Earths 4/13/2004 3/7/2006 Medium Rare Earths 4/13/2005 4/13/2005 9/7/2006 4/13/2005 4/13/2006 3/7/2007 4/13/2006 4/13/2006 9/7/2007 4/13/2007 4/13/2007 3/7/2008 4/13/2007 Dy Oxide 99% min FOB China (US$/kg) Nd Oxide 99% min FOB China (US$/mt) 9/7/2008 Eu Oxide 99.9% min FOB China (US$/kg) 4/13/2008 4/13/2008 4/13/2008 La Oxide 99% min FOB China (US$/kg) 3/7/2009 4/13/2009 9/7/2009 4/13/2009 4/13/2009 3/7/2010 4/13/2010 4/13/2010 9/7/2010 4/13/2010 0 20 40 60 80 100 120 0 5 10 15 20 25 30 35 40 0 10 20 30 40 50 60 70 80 90 100 6/29/2001 11/15/2007 4/13/2001 - 20.00 40.00 60.00 80.00 100.00 120.00 2/15/2008 4/13/2001 6/29/2002 4/13/2002 5/15/2008 4/13/2002 6/29/2003 8/15/2008 4/13/2003 4/13/2003 Mixed Products 11/15/2008 4/13/2004 6/29/2004 2/15/2009 4/13/2004 6/29/2005 4/13/2005 5/15/2009 4/13/2005 6/29/2006 4/13/2006 8/15/2009 Exhibit 32. Select Rare Earth Historical Prices FOB China 4/13/2006 11/15/2009 4/13/2007 6/29/2007 4/13/2007 Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 Gd Oxide 99% min FOB China (US$/kg) 2/15/2010 Sm Oxide 99% min FOB China (US$/kg) Ce Oxide 99% min FOB China (US$/kg) 4/13/2008 RECO3 42-45% REO FOB China (US$ / mt) 6/29/2008 4/13/2008 5/15/2010 4/13/2009 4/13/2009 6/29/2009 8/15/2010 11/15/2010 4/13/2010 4/13/2010 6/29/2010 2/15/2011 0 100 200 300 400 500 600 700 800 900 0 20 40 60 80 100 120 0 20 40 60 80 100 120 140 160 - 12/12/2003 1/12/2006 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00 11/15/2007 6/12/2004 4/13/2001 5/12/2006 2/15/2008 12/12/2004 9/12/2006 4/13/2002 5/15/2008 6/12/2005 1/12/2007 8/15/2008 4/13/2003 12/12/2005 5/12/2007 11/15/2008 9/12/2007 6/12/2006 4/13/2004 Heavy Rare Earths 2/15/2009 1/12/2008 12/12/2006 4/13/2005 5/15/2009 5/12/2008 6/12/2007 9/12/2008 4/13/2006 8/15/2009 12/12/2007 1/12/2009 11/15/2009 6/12/2008 4/13/2007 5/12/2009 Pr-Nd 99% min FOB China (US$/mt) Tb Oxide 99% min FOB China (US$/kg) Pr Oxide 99% min FOB China (US$/kg) 2/15/2010 12/12/2008 Y Oxide 99.999% min FOB China (US$/kg) 9/12/2009 4/13/2008 5/15/2010 6/12/2009 1/12/2010 4/13/2009 8/15/2010 12/12/2009 5/12/2010 6/12/2010 9/12/2010 4/13/2010 11/15/2010 12/12/2010 1/12/2011 2/15/2011
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 Bubbles It is well understood that commodities can reach pinching points, whereby supply is outstripped by demand, creating significant price upswings. This has been the case with several minor metals in the last 10 years as resource-hungry China and industry changes have created demand surges. The initial phase of these swings is usually prompted by users stockpiling the commodity based on projected supply shortfalls in order to maintain their production levels. Speculators entering the mix and further bidding up prices can often compound this effect. Particularly large swings in price materialize when the commodity represents a small portion of the overall cost of an end-product, i.e., demand is relatively inelastic. Two case studies we examined closely were uranium and molybdenum. Both metals achieved stratospheric highs in the previous decade only to come crashing down. This leads us to a discussion of bubbles. Exhibit 33. Bubbles In Recent History Low Peak Base Uranium 10.9 138 48.5 Moly 3.4 39.25 15.45 Gold 103.5 850 460.7 NASDAQ 547.84 2652.05 2089.21 Low Peak Base Uranium 2003–Present 1266.1% (64.9%) Moly 2003–Present 1154.4% (60.6%) Gold 1976–1983 861.0% (45.8%) NASDAQ 1992–2005 671.4% (21.2%) Source: Bloomberg. Investors are concerned that today’s rare earth market is starting to look like a bubble. We would argue that, if this is indeed a bubble, there is still plenty of room for even higher prices given that, on average, rare earth oxide prices delivered to China have risen 706%. Compare this to uranium’s nearly 1,300% run from 2003–2007. We also note that the market for rare earths is even smaller than the markets for uranium and molybdenum; products are predominantly tailored to customers’ ultimate specifications. The lack of a standardized product may make it difficult for speculators to enter the market or, if they are able to do so, quite difficult for them to exit. We, therefore, believe that we are not in a bubble in rare earth pricing but rather in a stockpiling phase as end-users gear up for the following years of famine in the industry, waiting for more supply to be brought online. Chinese export quotas have also skewed proper price discovery in the market for light and heavy rare earths due to their quota system being based on weight and not value. In Exhibit 34, we examine the charts of different bubbles, looking at a simplified version of American economist Hyman Minsky’s bubble stages. 1. Disturbance 2. Expansion 3. Euphoria 4. Market Reversal 5. Stability30
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 It should be noted that in the chart for molybdenum the financial crisis of 2008 complicates the analysis somewhat. We believe both the molybdenum and financial bubble bursting at the same time exaggerated this correction. We also note that when these bubbles settled back down, commodity prices were substantially higher than prior to the run-up in pricing. In fact, the uranium, gold and molybdenum prices at the end of the cycle were 300%–350% higher than they were prior to the four- to six-year period of escalating prices, significantly outperforming inflation as well. So while the current rare earth market is indicating some signs of a bubble, e.g., tight supply/demand fundamentals, stockpiling and inelastic consumers, etc., we do not believe we are at or near a peak yet. Moreover, a look at individual metals prices highlights that not every rare earth element is showing signs of being caught in a bubble. China is exporting the more expensive, heavier rare earths, due to export restrictions being based on tonnage, somewhat suppressing prices. With fewer exports of light rare earth, their prices have increased significantly compared to those for heavier rare earths.Exhibit 34. Significant Historical Bubbles 1 2 3 4 5 1 2 3 4 5 14.00 10.00 9.00 12.00 8.00 10.00 7.00 8.00 6.00 5.00 6.00 4.00 4.00 3.00 2.00 2.00 1.00 - - 1/1/2003 1/1/2004 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/1992 1/1/1993 1/1/1994 1/1/1995 1/1/1996 1/1/1997 1/1/1998 1/1/1999 1/1/2000 1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 Molybdenum CPI NASDAQ CPI 1 2 3 4 5 1 2 3 4 5 14.00 8.00 12.00 7.00 10.00 6.00 5.00 8.00 4.00 6.00 3.00 4.00 2.00 2.00 1.00 - - 6/1/2003 12/1/2003 6/1/2004 12/1/2004 6/1/2005 12/1/2005 6/1/2006 12/1/2006 6/1/2007 12/1/2007 6/1/2008 12/1/2008 6/1/2009 12/1/2009 6/1/2010 6/6/1976 12/6/1976 6/6/1977 12/6/1977 6/6/1978 12/6/1978 6/6/1979 12/6/1979 6/6/1980 12/6/1980 6/6/1981 12/6/1981 6/6/1982 12/6/1982 6/6/1983 Uranium CPI Gold CPISource: Bloomberg.31
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 Price Target Calculations And Key Risks To Price Targets Avalon Rare Metals Inc. – Price Target Calculation Our price target is based on a 1.0x NAV10% multiple derived from the discounted cash flow of the Nechalacho project and the addition of net debt. Driving the per share amount is our dilutive equity issue assumption. Avalon Rare Metals Inc. – Key Risks To Price Target Our price target is based on an assumed sustained rise in rare earth oxide prices from historical levels. Should prices deviate substantially from these assumed prices, our valuation for the company could be affected. Our price forecast is also based on the assumed growth of several sectors, including automotives, electric vehicles, personal computing, and wind energy; deviations in growth rates from our forecasts could materially impact demand, the balance of supply and, thus, prices. Our price target is also based on an equity financing conducted at a higher price than current share prices; substantial deviations in the stock price from our forecast could also impact our per share NAV for the company. Valuation for the company could also be affected by higher-than-forecast capital expenditure requirements, operating costs, the price of construction inputs and reagents, and fuel and labor costs in the Northwest Territories. Frontier Rare Earths Limited – Price Target Calculation We use a 1.0x NAV multiple based on our NAV12% calculation. This methodology is consistent with that applied to other base metals names in our universe, although we use a slightly higher discount rate in this case to reflect the early-stage nature of Zandkopsdrift and the risks involved. Frontier Rare Earths Limited – Key Risks To Price Target Zandkopsdrift is an earlier-stage project and has not completed preliminary engineering or metallurgy study yet. Should recoveries, process methodology, or costs deviate substantially from our estimates (currently based on comparable projects), our price target would be affected. Political issues around Black Empowerment and the ownership of mineral exploitation rights could also impact our NAV, should they deviate significantly from our assumed ownership of the project. Our long-term rare earth oxide price forecast is higher than the three-year trailing average and below current spot prices for most elements. A deviation of prices from our forecast would materially impact our valuation and price target for the company. Currently, we assume that the market will value rare earth projects based on a 1.0x NAV methodology; given the strategic nature of the resources, they may trade as uranium, another strategic metal, does, where stocks can trade at a multiple of their NAVs. Should this occur, our price target calculation would be materially impacted.32
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 Molycorp, Inc. – Price Target Calculation Our price target for Molycorp is based on a NAV multiple of 1.0x our NAV10% estimate. This is consistent with our valuation of other base metals names in our coverage universe. We do not attribute value for the production of magnets, as the visibility of these cash flows is not clear at this time. Molycorp, Inc. – Key Risks To Price Target Key risks to our price target include significant deviations in individual rare earth prices from our forecast levels. Prices could shift based on supply-side response, demand drivers such as new uses for elements or substitution, Chinese export policy, and global growth in the industries that are heavy users of these elements (e.g., the permanent magnet industry, the flat panel display industry, and the rechargeable batteries industry). Capital cost overruns and significant deviations from our operating cost estimates could also impact our valuation and price target for the company. The Mountain Pass mine as of the date of this report is not fully financed; although preliminary agreements are in place to fund the capital shortfall, signing of these agreements under terms other than what we have assumed could impact our price target. Moving from construction to production carries with it start-up risk and risks to the timing of cash flows; deviations from our assumptions for initial production levels and for timing could also impact our valuation for Molycorp.33
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011IMPORTANT DISCLOSURES:Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, orat the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed hereinaccurately reflect such research analysts personal views about the company and securities that are the subject of thisreport and all other companies and securities mentioned in this report that are covered by such research analyst and (ii)no part of the research analysts compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed by such research analyst in this report.Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated fromrevenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment BankingDepartment. Research analysts do not receive compensation based upon revenues from specific investment bankingtransactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household fromexecuting trades in the securities of a company that such research analyst covers. Additionally, CIBC World Marketsgenerally prohibits any research analyst from serving as an officer, director or advisory board member of a company thatsuch analyst covers.In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report,CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securitiesdiscussed herein, related securities or in options, futures or other derivative instruments based thereon.Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosuresset forth below, may at times give rise to potential conflicts of interest.34
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011Important Disclosure Footnotes for Companies Mentioned in this Report that Are Coveredby CIBC World Markets Inc.:Stock Prices as of 03/06/2011:Avalon Rare Metals Inc. (2a, 2c, 2e, 2g) (AVL-TSX, C$7.12, Sector Outperformer)Frontier Rare Earths Limited (2a, 2c, 2e, 2g) (FRO-TSX, C$3.03, Sector Outperformer - Speculative)Molycorp, Inc. (2a, 2c, 2e, 2g) (MCP-NYSE, US$49.26, Sector Outperformer)Companies Mentioned in this Report that Are Not Covered by CIBC World Markets Inc.:Stock Prices as of 03/06/2011:Alkane Resources Ltd. (ALK-AUS, A$1.34, Not Rated)Arafura Resource Limited (ARU-AUS, A$1.24, Not Rated)General Electric (GE-NYSE, US$20.37, Not Rated)Great Western Minerals Group (GWG-V, C$0.82, Not Rated)Greenland Minerals And Energy Limited (GGG-AUS, A$1.25, Not Rated)Hitachi Ltd. (6501-T, ¥500.00, Not Rated)Lynas Corporation Limited (LYC-AUS, A$2.20, Not Rated)Matamec Explorations Inc. (MAT-V, C$0.49, Not Rated)Mitsubishi Corp (8058-T, ¥2296.00, Not Rated)Montero Mining Exploration Ltd. (MON-V, C$0.60, Not Rated)Neo Material Technologies Inc. (NEM-TSX, C$8.72, Not Rated)Pele Mountain Resources Inc (GEM-V, C$0.44, Not Rated)Quest Rare Minerals Ltd. (QRM-V, C$5.80, Not Rated)Rare Earth Metals Inc. (RA-V, C$0.43, Not Rated)Rare Element Resources Ltd. (RES-V, C$11.08, Not Rated)Stans Energy Corp (RUU-V, C$2.31, Not Rated)Sumitomo (8053-T, ¥1248.00, Not Rated)Tasman Metals Ltd. (TSM-V, C$5.00, Not Rated)UCore Rare Metals Inc. (USU-V, C$1.10, Not Rated)Wealth Minerals Ltd. (WML-V, C$1.13, Not Rated)Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key toImportant Disclosure Footnotes" section of this report.35
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011Key to Important Disclosure Footnotes:1 CIBC World Markets Corp. makes a market in the securities of this company.2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.2b CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months.2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months.2d CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months.2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months.2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.3a This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months.3b CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months.3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months.4a This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12 months.4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months.4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months.5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities.5b A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company.6a The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its common equity securities.6b A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity securities of this company.7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company.8 An executive of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months.9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries.10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company.11 The equity securities of this company are restricted voting shares.12 The equity securities of this company are subordinate voting shares.13 The equity securities of this company are non-voting shares.14 The equity securities of this company are limited voting shares.36
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011CIBC World Markets Inc. Price Chart No rating history data found for Avalon Rare Metals Inc.37
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 No rating history data found for Frontier Rare Earths Limited38
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011 No rating history data found for Molycorp, Inc.39
    • Once Ignored On The Periodic Table, Dont Ignore Them Now - March 06, 2011CIBC World Markets Inc. Stock Rating SystemAbbreviation Rating DescriptionStock RatingsSO Sector Outperformer Stock is expected to outperform the sector during the next 12-18 months.SP Sector Performer Stock is expected to perform in line with the sector during the next 12-18 months.SU Sector Underperformer Stock is expected to underperform the sector during the next 12-18 months.NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock.R Restricted CIBC World Markets is restricted*** from rating the stock.Sector Weightings**O Overweight Sector is expected to outperform the broader market averages.M Market Weight Sector is expected to equal the performance of the broader market averages.U Underweight Sector is expected to underperform the broader market averages.NA None Sector rating is not applicable.**Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada."Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues.***Restricted due to a potential conflict of interest.Ratings Distribution*: CIBC World Markets Inc. Coverage Universe(as of 06 Mar 2011) Count Percent Inv. Banking Relationships Count PercentSector Outperformer (Buy) 138 44.1% Sector Outperformer (Buy) 135 97.8%Sector Performer (Hold/Neutral) 128 40.9% Sector Performer (Hold/Neutral) 117 91.4%Sector Underperformer (Sell) 30 9.6% Sector Underperformer (Sell) 27 90.0%Restricted 16 5.1% Restricted 16 100.0%Ratings Distribution: Metals & Minerals Coverage Universe(as of 06 Mar 2011) Count Percent Inv. Banking Relationships Count PercentSector Outperformer (Buy) 16 48.5% Sector Outperformer (Buy) 15 93.8%Sector Performer (Hold/Neutral) 10 30.3% Sector Performer (Hold/Neutral) 9 90.0%Sector Underperformer (Sell) 2 6.1% Sector Underperformer (Sell) 2 100.0%Restricted 5 15.2% Restricted 5 100.0%Metals & Minerals Sector includes the following tickers: ADV, AVL, BAN, BIM, CCO, CLM, CS, DML, EQN, FM, FRO, GCE, GMO, HBM,IMN, IVN, LIF.UN, LUN, MCP, ML, MNB, NML, PDN, QUX, S, SGQ, TCK.B, TCM, TKO, UEC, UUU, WRN, WTN.*Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets Inc.do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC WorldMarkets Inc. has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, andsell ratings to securities rated Sector Underperformer without taking into consideration the analysts sector weighting.Important disclosures required by IIROC Rule 3400, including potential conflicts of interest information, our system forrating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the webat http://researchcentral.cibcwm.com under Quick Links or by writing to CIBC World Markets Inc., Brookfield Place, 161Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request.40
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