TORONTO, Feb 14 (Reuters) - Rare earths stormed into the public spotlight in 2010 over fears that China’s policy of curbing exports will cause global shortages.
In 2011, the game is shifting, as investors look for winners in the race to break China’s stranglehold on this tightly controlled group of high-tech metals. [ID:nN02198726]
Here is a look at the key factors analysts say investors should look for when investing in rare earth plays, and the top four prospects by market cap:
In mining, ore grade is always important as it determines how expensive and time consuming it will be to access a deposit.
The general rule of thumb, according to most analysts, is to look for rare earth projects with an ore grade over 2 percent. Ore grades over 10 percent are considered very good.
While rare earth oxide prices are high right now, analysts warn that lower grade projects will not be economical should rare earth prices fall.
The process of “cracking” rare earths from the host ore can be difficult and expensive. It often involves using acids or extreme heat.
Since every deposit is unique, it is difficult to say if something will work or not based on the host mineral.
Analysts say investors should look for projects with proven metallurgy, like previously producing mines or projects that have done commercial scale studies.
Investors should also look for companies that have plans to separate the oxides, process them into alloys and metals, or into magnet materials. Rare earth concentrate is not as valuable as processed rare earths.
A lot of fuss is made over light versus heavy rare earths. Some light rare earths, like cerium and lanthanum, are very common, and therefore not as valuable.
Certain heavy rare earths like terbium and dysprosium are rare indeed and therefore much more valuable.
But there are heavy rare earths that don’t have any use and therefore are not valuable. At the same time, there are lights, like neodymium and praseodymium, that are in high demand to make magnets, and therefore are valuable.
Investors should pick companies that have high values of dysprosium, terbium, europium, neodymium and praseodymium. But analysts warn that grade and proven metallurgy trump distribution.
As with any mining operation, the closer a project is to existing infrastructure, the better. Investors should look for projects close to existing roads or railways, with nearby power and water sources.
The more remote a project, the more money it will cost to develop it, and the more unlikely that a project will happen if rare earth prices fall.
While rare earths are crucial for certain technologies, global demand for the group of 17 elements is not that high. Analysts believe there is room for five or six projects outside China.
With Molycorp and Lynas well on their way to production, only three or four other mines will likely survive. The first ones to make it to market will be the winners.
Investors should look at how far along a project is, and how much work still needs to be done, before investing.
Market cap: $3.9 billion
Flagship project: Mountain Pass, California
Current stage: Construction
Planned production: 19,000 tonnes a year by 2012, 40,000 tonnes a year by 2013
Pros: Mountain Pass is a very large, relatively high grade resource. Construction is well under way on the mine and processing facilities. The mine previous produced rare earths from the 1950s until the 1990s.
Cons: The project will produce a mix that is skewed toward the light rare earths, primarily cerium and lanthanum. To counter that, it will also produce europium, dysprosium and neodymium.
Market cap: $3.2 billion
Flagship project: Mount Weld, Australia
Current Stage: Construction
Planned production: 22,000 tonnes a year by 2012
Pros: Mount Weld is large resource and is very high grade at over 12 percent. Construction is well under way on the concentration and separation facilities. The company is drilling to expand its resource.
Cons: Much like Molycorp’s project, Mount Weld will produce a mix of rare earths that is skewed toward lights, mainly cerium and lanthanum. It will also produce neodymium, dysprosium and europium.
Avalon Rare Metals (AVL.TO)
Market cap: $697.8 million
Flagship project: Nechalacho, Canada
Current stage: Prefeasibility complete, working on feasibility
Planned production: 10,000 tonnes a year
Pros: Nechalacho, also known as Thor Lake, is a very large resource that is skewed toward the heavy rare earths.
Cons: The project is low grade at under 2 percent. It is located in a remote region of the Northwest Territories with little infrastructure in place. Development costs, including a separation facility, are well over $1 billion.
There is no clear date in place for construction or production.
Rare Element Resources RES.V
Market cap: $583.9 million
Flagship project: Bear Lodge, Wyoming
Current stage: Scoping study complete, working on prefeasibility
Planned production: 10,000 tonnes a year
Pros: The project is a good grade at over 6 percent. It has a good amount of neodymium and heavy rare earths. One of its biggest pros is location, as the mine is in the United States and could been seen as a takeout target for Molycorp.
The project also boasts gold deposits.
Cons: There is still no prefeasibility study and no timeline for construction. The project will require some infrastructure investment.
From company websites, Jacob Securities, USGS, Byron Capital Markets, Thomson Reuters data (Compiled by Julie Gordon; editing by Frank McGurty)