Rare Earths - A Brief Summary and Focus Elements

I have occasionally written on rare earth elements and some of the factors influencing prices.  What I have never written is a background report on rare earths, the uses of them and market conditions.  Here is my attempt at rectifying that oversight as well as addressing those rare earths that I feel will offer the most upside potential.

There are many who currently believe that the rare earth market is super hot, on the verge of bubble. To this I offer the following:

• One country controls the supply chain, and when that one country decides to tighten supplies (export quotas) while demand increases, price increases naturally follow.
• While I believe that China is currently "flexing its muscle" with export quotas, and that these quotas will be loosened somewhat, China will be increasing domestic usage that will ultimately catch up with production capacity.
• Given defense concerns (in the US and abroad), countries will be forced to diversify their raw material sources, leading to further development of non-Chinese mines and production facilities.
• The lead time required to begin mine production is significant enough that demand will continue to outpace supply in the near-term. This will continue to drive prices of rare earth elements up until production capacity comes online.  

With that said, I continue.

Description

There are 17 rare earth elements (REEs), 15 within the chemical group called lanthanides, plus yttrium and scandium. The lanthanides consist of the following: lanthanum, cerium,
praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium,
dysprosium, holmium, erbium, thulium, ytterbium, and lutetium. Rare earths are moderately abundant in the earth’s crust, some even more abundant than copper, lead, gold, and platinum.

The lighter lanthanides, when compared with their heavy analogues, have an enhanced distribution in the crust. This crustal enrichment relative to the mantle is most pronounced for Lanthanum and tails off relatively smoothly towards Lutetium, the last member of the series. The light lanthanides are thus significantly more abundant than the heavies.

Rare-earths production is derived from the rare-earths ores bastnasite, monazite, xenontime, and ion-adsorption clay. Bastnasite is the world's principal source of rare earths and is produced in China and the United States. Significant quantities of rare earths are also recovered from the mineral monazite. Xenotime and ion-adsorption clays account for a much smaller part of the total production but are important sources of yttrium and other heavy-group rare earths.

In 1990, rare earths were produced by at least 14 countries. The United States was the largest rare-earths-producing country, followed by China, Australia, India, and Malaysia. Except for one primary mine in the United States, essentially all rare earths are produced as byproduct during processing for titanium and zirconium minerals, iron minerals, or the tin mineral cassiterite.


Location

Most rare earth elements throughout the world are located in deposits of the minerals
bastnaesite and monazite. Bastnaesite deposits in the United States and China account for the largest concentrations of REEs, while monazite deposits in Australia, South Africa, China, Brazil, Malaysia, and India account for the second largest concentrations of REEs.

Rare earth element reserves and resources are found in Colorado, Idaho, Montana, Missouri, Utah, and Wyoming. Heavy rare earth elements (HREEs) dominate in the Quebec-Labrador (Strange Lake) and Northwest Territories (Thor Lake) areas of Canada. There are high-grade deposits in Banyan Obo, Inner Mongolia, China (where much of the world’s REE production is taking place) and lower-grade deposits in South China provinces providing a major source of the heavy rare earth elements.  Areas considered to be attractive for REE development include Strange Lake and Thor Lake in Canada; Karonga, Burundi; and Wigu Hill in Southern Tanzania.  



End Uses

Clean energy technologies:  Lanthanum, cerium, praseodymium, neodymium, cobalt and lithium are used in electric vehicle batteries. Neodymium, praseodymium and dysprosium are used in magnets for electric vehicles and wind turbines. Samarium is also used in magnets. Lanthanum, cerium, europium, terbium and yttrium are used in phosphors for energy-efficient lighting. Indium, gallium and tellurium are used in solar cells.

The U.S. Department of Energy (DOE) released a report examining the role of rare earth metals in clean energy based on data collected and research performed during 2010 . Its main conclusions include:
• Several clean energy technologies—including wind turbines, electric vehicles, photovoltaic cells and fluorescent lighting—use materials at risk of supply disruptions in the short term. Those risks will generally decrease in the medium and long term.
• Clean energy technologies currently constitute about 20 percent of global consumption of
critical materials. As clean energy technologies are deployed more widely in the decades
ahead, their share of global consumption of critical materials will likely grow.
• Of the materials analyzed, five rare earth metals (dysprosium, neodymium, terbium,
europium and yttrium), as well as indium, are assessed as most critical in the short term. For this purpose, “criticality” is a measure that combines importance to the clean energy economy and risk of supply disruption.

Defense and military systems: The primary defense application of rare earth materials is their use in four types of permanent magnet materials commercially available: Alnico, Ferrites, Samarium Cobalt, and Neodymium Iron Boron. Neo magnets, the product derived from Neodymium Iron Boron, and Samarium Cobalt, are considered important to many defense products. They are considered one of the world’s strongest permanent magnets and an essential element to many military weapons systems.

Here is a brief summary:

Supply and Demand

World demand for rare earth elements is estimated at 134,000 tons per year, with global

production around 124,000 tons annually. The difference is covered by previously mined above-ground stocks. World demand is projected to rise to 180,000 tons annually by 2012, while it is unlikely that new mine output will close the gap in the short term. New mining projects could easily take 10 years to reach production. In the long run, however, the USGS expects that global reserves and undiscovered resources are large enough to meet demand.

The following is taken from the US DoE Critical Materials Strategy report dated December 2010 (full report here: DoE critical-materials-strategy well worth the read):

 

And the medium-term assessment:

What these graphs mean to me is that the rare earths that should be focused on are:  Dysprosium, Neodymium, Terbium, Europium and the quasi-rare earth Yttrium.

Future Production Potential

While given the current market for REE many companies are in the process of beginning or expanding REE production capacity, there are currently some companies with recognized (ie, on the map and feasible) plans for increased production of REEs.

Molycorp, which has an exploration program underway to further delineate its rare earth mineral deposits, has plans for full mine production in the second half of 2012 and has plans to modenize its refinery facilities. Molycorp’s Mountain Pass deposit contained an estimated 30 million tons of REE reserves and once produced as much as 20,000 tons per day. Mountain Pass cut-off grade (below which the deposit may be uneconomic) is, in some parts, 7.6%, while the average grade is 9.6%. U.S. Rare Earth (another U.S. based company), in the pre-feasibility stage of mine development, has long-term potential because of its large deposits in Idaho, Colorado, and Montana.

Canadian deposits contain the heavy rare earth elements dysprosium, terbium, and europium, which are needed for magnets to operate at high temperatures. Great Western Minerals Group (GWMG) of Canada and Avalon Rare Metals have deposits with an estimated high content (1%-2%) of heavy rare earth elements.  Avalon is developing a rare earth deposit at Thor Lake in the Northwest Territories of Canada. Drilling commenced in January 2010. Thor Lake is considered by some in the industry to contain one of the largest REE deposits in the world with the potential for production of heavy REEs.

GWMG owns a magnet alloy producer in the U.K. When GWMG begins production in Canada and elsewhere, they plan to have a refinery near the mine site allowing greater integration and control over the supply chain. Great Western’s biggest advantage could be its potential for a vertically integrated operation.  


Regulatory Sidebar

Rep. Mike Coffman (R-CO) made the following statement on the House Floor today during consideration of an amendment he has offered to the National Defense Authorization Act for Fiscal Year 2011.  Coffman’s amendment, which builds on the GAO report he pushed for in last year’s defense bill, would require the Department of Defense to develop a plan for establishing a domestic rare earth magnet capability.  Rare earth magnets are currently used in many critical weapons systems:

“The Department of Defense is facing a near-term shortage of key “rare earth” materials necessary to support our defense weapon systems, and rare earth magnets are especially critical.  Currently, over 97% of rare earth production is controlled by China.”

“Today, the United States does not have a manufacturer of neodymium iron boron rare earth magnets, yet they are found in our precision guided munitions, ships, aircraft, and other critical weapons systems.”

“One key finding of the GAO report was their determination that some U.S. defense contractors are currently utilizing “neo” magnets from Chinese sources and incorporating them into the weapons platforms delivered to the Department of Defense.   At present, we have almost no alternatives to these Chinese components, as the United States is not currently producing these magnets.  Though America is not currently producing these magnets, we have the technological know-how to do so, combined with significant deposits of rare earths.”

This is a brief overview of the rare earth market, I hope it helps.  The next part of my analysis (due very soon) will focus on the firms that are involved in the mining and production of the critical rare earths identified earlier.

Bank of America - Equity Raise Acheived

Another headline on the tape for BAC this morning:

Bank of America Corp. (BAC) has received confirmation from the Federal Reserve that the company fulfilled its commitment to boost its equity by $3 billion, a spokesman for the bank said Monday morning.

The bank, the largest U.S. bank by assets, committed to raising $3 billion in equity capital when it received approval to repurchase $45 billion in preferred stock in December 2009 acquired as part of the Troubled Asset Relief Program. The Charlotte-based bank faced a year-end deadline to raise the equity.

Bank Of America sought to raise the capital by selling assets.

If the bank hadn't raised the capital by the deadline, it said it might have to pay some employees' bonuses in stock instead of cash. The bank also warned investors it might need to make a dilutive share offering to raise the capital.

Bank of America sold such assets as 51.2 million shares in BlackRock Inc. (BLK) and the right to purchase additional shares in China Construction Bank Corp. 

I am somewhat torn on the Blackrock sale weighing core business vs. investment prospects.  That said, the combination of some legacy agency put-back issues being put to rest and the equity all clear by the Fed puts a nice base under the company.  I believe the equity and debt will have a good year this year and are decent investment candidates.  Admittedly, I am long BAC common and Merill preferreds.  I have a bigger position in Citi, however, as I believe it is better positioned, has less headline risk and wikileaks doesn't seem to be in the cards.

Bank of America - Deal Reached, Put Backs Increased

Way back in October, I wrote that I did not believe that BAC was reserving enough for Put back provisions (seekingalpha.com/article/230817-addressing-bofa-s-mortgage-data-reps-and-warranties) well, It looks as if I was right:

Bank of America Corp., the biggest U.S. bank by assets, resolved disputes with Freddie Mac and Fannie Mae by agreeing to pay more than $2.6 billion to settle disputes that it sold loans based on faulty information.

The lender advanced 4.6 percent in early trading after saying fourth-quarter results would include a $2 billion impairment charge and a $3 billion provision.

Mortgage buyers including McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae are trying to force lenders to buy back loans that may have been made with incorrect data on income and home values. Before the settlement announced today, Bank of America faced $12.9 billion in unresolved putback demands on soured mortgages, with about half related to government-sponsored entities, according to an Oct. 19 presentation to investors. The company said in October it had reserved $4.4 billion for costs related to the problem.

“Bank of America believes that it has addressed its remaining exposure to repurchase obligations for residential mortgage loans sold directly to the GSEs,” the Charlotte, North Carolina-based company said in a statement today.

Hopefully this will go a long way in the effort to put this to bed and move on - until the next BAC issue.

Disclosure:  Long BAC equity and Merill preferred

Brazil - More of the Right Moves

Brazil is reducing taxes on foreign investments.  As they have specified that private equity and venture capital is the focus of the cut, it ought to help draw funds into these sectors.  Timing is good as investors ate looking for the EM investments and Brazil continues to try to build out early stage investment as well as non-exchange based investments.  These are the two areas the country needs to draw funds into as they typically help the country and its economy more than just exchange based investment.  I believe the currency will continue to strengthen from here given its growth rate and real yield.  This could also help attract investment to assist in the closing of the current account gap.


The investment climate has also been helped by President Dilma Rousseff showing she might be more market friendly than her predecessor.

RIO DE JANEIRO, Jan 3 (Reuters) - Brazil's government reduced taxes on foreign investments in private equity funds and some stock investments in a bid to increase long-term financing in the country.

The government cut to 2 percent from 6 percent the so-called IOF tax on foreign exchange transactions by overseas investors into private equity funds, or FIPs, and venture capital funds, according to a decree published on Friday.

The change also affects currency transactions by overseas investors shifting funds from some types of foreign direct investment into stocks, the decree said. Investors bringing money into the country's stock market after canceling depositary receipts abroad will also pay a tax of 2 percent, down from 6 percent.

The government had raised the IOF tax on some investments twice in October, initially doubling it to 4 percent then hiking it further to 6 percent, to curb foreign exchange inflows that had been blamed for sparking a surge in the national currency, the real BRBY.

UAW - U Are Whacked

I saw this on the Wall Street Journal site and couldn't resist posting it (full article here: WSJ - UAW).  This, to me, is amusing at best.  What are the odds that workers will test corporate patience and attempt to unionize?  Perhaps the union should have waited until all the stories of them bankrupting (and then stealing shares in) the US auto manufacturers were out of sight.  Lets see if they can find the next golden goose to strangle.

The United Auto Workers union said it is prepared to spend hundreds of millions of dollars in a bid to organize employees, including a new push for hourly factory workers at foreign-owned car plants in the U.S.

 The effort is part of a major shift in focus by the UAW, which had spent most of the past 75 years extracting better wages and benefits from the three Detroit auto makers.

 Now, after two of the Big Three were forced into bankruptcy, in part because of uncompetitive labor contracts, the union's new president intends to make a major push this year to organize workers at U.S. plants owned by makers such as Toyota Motor Corp., Volkswagen AG and Hyundai Motor Co.

"I think this is an unprecedented effort by the UAW and pivotal to its survival," said Harley Shaiken, a professor at the University of California, Berkeley, who specializes in labor issues. But he said the union faces many barriers, including pay at many of these plants that is on par with the Detroit Three's and efforts by the foreign companies to paint the union as unnecessary and counterproductive.

UAW President Bob King signaled in an interview the union is willing to take a much less confrontational approach to foreign car makers than it did decades ago in battles to become established at the Big Three.

But if the companies don't agree to a set of rules being promoted by the union to ensure what it calls free and fair union elections, he indicated the fight could turn nasty—and global.

The UAW, he said, would hold demonstrations at the corporate headquarters of these companies outside the U.S. as well as at their U.S. plants. In addition, it would picket their dealerships in the U.S. and abroad, and sports events globally that are sponsored by the car companies. 

 Wish 'em the best of luck - NOT!

Goolsbee - Letterman Next? SNL is a Better Fit.

Ok, I saw this on Bloomberg and had to comment.

Austan Goolsbee, chairman of the U.S. Council of Economic Advisers, said if Congress fails to raise the debt ceiling, the “impact on the economy would be catastrophic.”

“I don’t see why anybody’s playing chicken with the debt ceiling,” Goolsbee said today on ABC’s “This Week” program. “If we get to the point where we damage the full faith and credit of the United States, that would be the first default in history caused purely by insanity.”

Perhaps economics and politics is best played out in the media, but, if true, this truly saddens me.  “If we get to the point where we damage the full faith and credit of the United States, that would be the first default in history caused purely by insanity.”  Really?  Damage to the full faith and credit of the US is a default?  Umm, not for nothing but you don't think the full faith and credit has already been damaged?  And as for the first default caused by insanity, where do I begin?  Soundbytes rock!


Yep, just another year in the third world. 

Metals and Mining - Can You Dig It?

As commodities continue to roar into the new year, we continue to see deals being proposed (and upped) as more firms continue to try to source raw materials and financial players see the potential for decent returns.


I believe we will continue to see more deals taking place and more capital being spent on purchasing and developing resources.  This will, of course, continue until firms start paying uneconomic prices for resources, believing that growth - and hence prices - will continue to rise for the foreseeable future.  Thats said, you don't stand in the way of a speeding train - you try your best to board it, ride it and jump before the tracks give way.



From the FT:

The rival bidders for Baffinland Iron Mines have both sweetened their bids over the new year period, escalating the battle for control of a vast undeveloped iron ore deposit in Canada’s high Arctic.

Nunavut Iron, an acquisition vehicle backed by Energy and Minerals Group (EMG), a US private-equity firm, said late on Friday night that it would offer C$1.45 a share for Baffinland, valuing the company at about C$570m.

Nunavut’s move came less than a day after ArcelorMittal, the world’s biggest steelmaker, lifted its bid to C$1.40 a share.

ArcelorMittal is bidding for all Baffinland’s shares while EMG would buy only 60 per cent.

The battle underlines a global scramble for access to raw materials amid concerns of looming shortages. The latest offers value Baffinland at double the amount offered by Nunavut when it made its first hostile approach in September.

With planned annual production of 18m tonnes over a life of at least 20 years, it is viewed as one of the world’s best undeveloped deposits. Baffinland plans to develop the deposit into a mine at a cost of C$4bn.

 Full story here: FT on Baffinland

And how has that train performed so far, you ask?  Here's the parent sector:

And the sub-sector:

Pretty well I have to say.

Drilling down (yeah, I am that clever):

Source:  Finviz.com

Looking at the above table with respect to forward P/E, it would appear that there is further room for growth.

I am still a buyer of select basic materials (metals/mining) debt and equity as there is still room for fundamental growth and momentum.  That said, I am also wary of M&A activity as the potential balance sheet erosion could affect these firms.  As always, analysis is the key - look for balance sheet headroom, covenant headroom and business location.