Two minute briefing: Rare earths
Rare earth metals make a compelling story, but have proved a more volatile investment proposition.
Their ability to resist heat, strong magnetic properties and conductivity has made them key components in a range of new technologies and smart products.
iPhones, batteries, motors, eco-friendly hybrid cars, wind turbines and missiles all depend critically on rare earth metals to function.
Use of these products is growing rapidly and demand for some rare earths is hugely outstripping supply, a situation exacerbated by China's decision to restrict its exports for strategic reasons.
As China currently accounts for 97% of the world's supplies, this has prompted a scramble among western countries and miners for alternative supply sources.
There are seventeen main rare earths - none of which are household names.
At the core is a group of 15 specific elements known as lanthanides, plus scandium and yttrium.
All have different properties and uses, but for investors the key is whether they are heavy or light.
Light rare earth elements, which include lanthanum (La), cerium (Ce), praseodymium (Pr), neodymium (Nd), and samarium (Sm) are expected to be in surplus over the next few years.
Reflecting that, prices have fallen sharply in the last few months of 2012.
Lanthanum has fallen in price by almost 90% in a year, cerium by a similar amount and neodymium by two-thirds.
Heavy rare earth elements, however, are less common and deemed to be much more valuable.
These elements, which include europium (Eu), gadolinium (Gd), terbium (Tb), dysprosium (Dy), holmium (Ho), erbium (Er), thulium (Tm), ytterbium (Yb), Yttrium (Y) and Scandium and lutetium (Lu) sell for substantially more than light rare earths.
"Light rare earths range from tens of dollars per kilogram whilst heavy rare earths range up to thousands of dollars per kilo," said Will Dawes, chief executive of Malawi-based explorer Mkango Resources (CVE:MKA).
One problem faced by both rare earths explorers and investors is the attitude of China, which has announced a number of sometimes seemingly conflicting directives to control REE mining this year.
Its latest move was to halve the number of rare earths mining licences to 63, though traders point out that much of the country's output is mined illegally anyway.
According to the US Geologic Survey, world production of rare earths was 130,000 tonnes in 2010, but the total could have been as high as 190,000 tonnes allowing for China's illegal production by artisanal miners.
Brokers say China's move on licences is in response to the slump in prices, especially at the light end, and the prospect of more output to come on stream soon from non-Chinese giants such as Aussie group Lynas.
Most companies exploring for rare earths now focus on the rarer heavy end elements and brokers say potential investors should adopt a similar focus.
Five rules to consider when looking at rare earth companies are: grade; type of elements produced; processing issues - eg capital cost and operating costs; speed to first production and access to capital.
Brokers emphasise that metallurgy (processing) is especially important in rare earths given the number of elements that are present and that can be extracted, as while the ore may be abundant a particular metal may not be.
