An Introduction to Rare Earth Elements & Rare Metals by VSA Capital

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An introduction to rare earths, a liitle known commodity class.

An introduction to rare earths, a liitle known commodity class.

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