AM Insight: North American rare earth market still settling after quota cuts
2010-07-21 08:39:01 【Print】
PITTSBURGH (Asian Metal) 20 Jul 10 - A week after the release of the new export quotas from China, consumers in the US are still gauging the short-term and long-term effects from the quota cuts.
For the short-term outlook, rare earth mining ventures outside of China saw an immediate boost in terms of investor interest following the announcement of the export cuts. On July 9th, the day the export quotas were released from China's Ministry of Commerce, major rare earth miners outside China saw substantial growth. The largest movers in that one day following the release were Avalon Rare Metals (TSX:AVL) which gained 17%, Lynas Corporation (ASX:LYC) which moved up 8%, and Rare Element Resources (TSX.V:RES) which saw a 21% increase.
Another company, Molycorp Minerals LLC, a Colorado-based mining group with an idled rare earth mine in California, is planning for an IPO later this year to sell over 28 million common stock at USD15-17 per share. Even with underwriting, the total figure Molycorp is seeking to raise is over USD400 million.
"The biggest winner might be Molycorp," one US-based rare earth consumer noted. "Their IPO could not be better timed with the latest news out of China."
Molycorp expects to enter into production by 2012, at an annualized rate of approximately 20,000t of light rare earths, according to industry estimates. Australia-based Lynas Corporation is similarly expected to produce around 20,000t/y of light rare earths starting in 2011. Both companies lack any significant heavy rare earth deposits.
While the immediate increase in stock price for the rare earth mining companies shows there is significant investor interest, regardless of any short-term fluctuation, the long-term production schedules of these companies will be unaffected. Assuming Molycorp receives its financing, however, production will still begin in 2012.
"Molycorp's business model is definitely ambitious," said a rare earth analyst at JP Morgan. "But if there was any doubt that they could raise the money, I think the latest activity shows there is at least enough demand for a rare earth producer in the US."
In terms of international demand, China's most exported light rare earths in 2009 included 12,000t of lanthanum oxide in 2009, 2,392t of cerium oxide, 9,346t of cerium carbonate, 439t of neodymium oxide, and 1,594t of neodymium metal totaling 25,771t for the entire year. The US was by far the largest importer of lanthanum oxide, taking in 7,225t of the total 12,000t exported from China in 2009.
Comparatively, heavy rare earths saw relatively few exports from China during 2009, with 1,155t of yttrium oxide and only 540kg of dysprosium, according to China customs statistics.
Although China export quotas dropped 51% from H1 2010 to H2 2010, it will still be difficult for the rare earth market to soak up the additional 40,000t of light rare earth production coming on-stream in the next two years from Molycorp and Lynas. As a result, junior rare earth ventures outside China are focusing more on heavy rare earth production as their main market.
"The only opportunity for success that the junior ventures have is through the heavy rare earths," an analyst at Stans Energy Corporation reported to Asian Metal. "Even with the quota system from China becoming tighter, it will be impossible to compete with Molycorp and Lynas on the light [rare earths]."
Canada-based Stans Energy Corporation (TSX.V:RUU) holds concessions in Kyrgyzstan with proven a heavy to light rare earth ratio of 50/50.
Avalon Rare Metal’s Nechalacho deposit in NWT Canada has an approximately 20/80 ratio of heavy to light rare earths, but is likely to be the first mine to actually have an active production of heavies in North America. Avalon is planning on beginning production in 2014. Instead of directly competing with Molycorp, Avalon intends to focus on more critical heavy rare earths including yttrium, europium, dysprosium, terbium, as well as neodymium; metals that neither Molycorp nor Lynas have on their concessions.
“Avalon’s model relies on China continuing to restrict exports and to manage its REE resources for its internal use, thereby opening the door for a very small number of outside China producers to come into the business,” Avalon Vice President of Sales and Marketing Pierre Neatby reported to AM.
Avalon and other heavy rare earth mining prospects should see long-term gains as a result of the latest China export cuts as both pricing and availability tighten in the upcoming months.
“China is trying to consolidate its [rare earth] industry and production within China,” Neatby added. “It’s our belief that rare earths are undervalued, and if China wants to increase prices, inventories held by some of the international consumers must be drawn down. The latest export cuts will definitely put pressure on these stockpiles.”
As evidence of China’s effort to limit extensive smuggling of rare earths, it was reported last week that China’s Nanning branch of the General Administration of Customs arrested seven people attempting to smuggle 4,196t of rare earths from the country.
Ultimately, production from Lynas and Molycorp is expected to fill the demand from US domestic light rare earth consumers, especially those in the catalyst industry, who consume the majority of light rare earths worldwide; especially lanthanum. Until Molycorp's light rare earths hit the market in 2012, however, catalyst producers will have to continue to rely heavily on Chinese imports.
If global demand for the light rare earths surges or the quota allotment gets used up earlier than expected, US catalyst producers may have no other choice but to shift part or all of their manufacturing facilities to China in order to get around the quota restrictions. Such a move is nothing a catalyst producer can do easily though; especially ones with proprietary manufacturing technology.
"We've definitely considered shifting our manufacturing to China, but it would take a year or maybe even two in order to complete such a transition," one of the largest rare earth-based catalyst producers in the US commented.
Companies like Chevron, BP, and ConocoPhillips, some of the largest catalyst consumers in the world, could even turn to lower-quality Chinese catalyst manufacturers if US-based producers cannot keep up with demand. In the end, however, this may be what the Chinese have been planning all along.
