TORONTO (Reuters) - Rare earth elements are essential components in everything from iPhones to wind turbines, yet the average investor has never heard of them.
That may soon change. The buzz around this obscure group of 17 metals is growing as green technology fuels demand at the same time as supplies are shrinking. China, which produces over 90 percent of the world's supply, is chopping exports by almost half this year.
A looming global shortage has pushed numerous Canadian miners into the spotlight, all of them eager to chase down the Holy Grail of a massive rare earth deposit.
But like the legendary Grail, a viable rare earth mine outside of China may be difficult to find. Processing costs are huge, making it difficult to compete with Chinese producers even as promising new deposits are identified.
"We're going to run into shortages of rare earths within the next year or two," said Byron Capital Market analyst Jon Hykawy, adding that the heavy rare earths, used in electric vehicles, will likely run out first.
"But simply identifying a potential mine is not a reason to celebrate victory," he said. "I would say it is very tough to make a go of producing rare earths without at least separation and purification as a part of the model."
In the end, analysts say, it will take a deposit with the right mix of rare earth elements to make a non-Chinese mine into a profitable operation.
This means Canadian rare earth companies like Avalon (AVL.TO), Great Western Minerals (GWG.V) and Quest Rare Minerals QRM.V face a daunting challenge breaking into a market dominated by the Chinese.
Cheap labour and lax environmental policies allowed China to undercut other global producers in the 1990s, leading to rare earth mine shutdowns around the world. Then, China reduced export quotas to build up its refining, processing and alloy production industry.
Currently, there are only a few non-Chinese companies that produce the rare earth powders and metal alloys needed for green technologies, military use and consumer electronics.
One of these companies is Great Western, a Saskatoon, Saskatchewan-based outfit that buys concentrates from China and makes alloys to sell to most major magnet manufacturers.
With China tightening its rare earth exports, Great Western has secured the rights to the Steenkampslraal mine in South Africa, which has high concentrates of rare earth oxide.
By 2013, Great Western plans to take rare earths through the entire process from mining to finished product, putting it in direct competition with the Chinese.
"Because of our full integration, we are unique in the industry," said Chief Executive Jim Engdahl. "We already have clients that are magnet manufacturers around the world."
The key to Great Western's potential is its mine-to-market model, said Hykawy, adding that vertically integrated miners are best placed to benefit from rapidly rising metal prices.
Cerium oxide, the lowest value rare earth, has jumped 930 percent since 2007 to over $35 (22.69 pounds) per kilo, while the more valuable dysprosium has jumped 220 percent to $286 (185.43 pounds) per kilo.
"The math is easy," Hykawy said.
HEAVY VS LIGHT
But is vertical integration enough to ensure rare earth success? Independent commodities commentator and strategic metals expert Jack Lifton isn't so sure.
He puts more emphasis on mineral concentrations, favouring the heavy rare earths.
All rare earth deposits contain the 17 elements in varying concentration. The heavy rare earths are in far shorter supply, and as such, are more valuable.
"The Chinese have such enormous reserves of light rare earths that I find it very, very improbable that there could be a profitable light rare earth company developed outside of China," he said.
To get at the heavy elements, miners must also process the less valuable light ones. This could spell disaster for companies whose deposits are low in heavies, said Lifton.
"If I make 9,600 white Chevrolets, and 400 black ones, and only the black sell, please don't tell me that's good economics," he said. "Making something is not what counts, it's selling something that's important."
Avalon Rare Metals is one company that will have a lot of heavy rare earths to sell, if it can raise the money it needs to bring its Nechalacho mine into production.
The mine, located in northern Canada, has a low total concentration, but is rich in valuable dysprosium and terbium.
"That greater enrichment in heavy rare earths makes for a more valuable ore in the ground," said Avalon Chief Executive Don Bubar. "And much bigger potential profit margin on production."
Avalon's goal is to further increase profit margin by including a mill and a hydrometallurgical plant on site.
But because of the remote location and heavy infrastructure needs, the project will cost an estimated C$844 million ($792.6 million) to bring into production, which analysts see as a tough pill for investors to swallow.
"If Avalon came online it would solve the world's problems, but it wouldn't solve Avalon's problem," said Lifton. "Their problem is how do you raise that kind of money?"
One idea is to approach the Chinese for funding. While China has over half the global deposits of rare earths, its heavy resources are almost depleted, said Hykawy.
"If the 'heavy' deposits were to approach the Chinese for certain guarantees, it might make their financing approaches much simpler," he said. "Right now, we believe they are going to have a tough time."
(Reporting by Julie Gordon; Editing by Frank McGurty)