Rare Earths 2.0: Rise of the Heavies

A year ago, it was China's announcement of its second half export quotas that sparked a frenzy in the world of rare earth elements. The world woke up to a perception of acute shortages in ingredients vital to our western quality of life, and the prices of individual rare earths rose dramatically. Export prices (FOB) for the so-called light rare earths (LREE) samarium and cerium showed gains of over 2,500% in 2010. The share prices of companies looking for rare earths in the ground followed suit, and made a number of early adopters significantly wealthier. This year's announcement of second half export quotas has not caused quite the same shock, but a price explosion has ensued nonetheless. This time it is the turn of the heavy rare earths (HREE).

The export prices of three HREE have exploded since China's July announcement, whilst the LREE have remained immobile. Dysprosium (Dy), arguably the most important of the rare earths due to its irreplaceability in high performance magnets that are central to many high-tech innovations, has more than doubled in a matter of weeks. Europium (Eu) and to a lesser extent terbium (Tb) are in hot pursuit.

Gathering data from metal-pages.com, I have indexed the prices of the REE at Jan. 1 of this year, and it is apparent that since then, the export price of dysprosium has gone up an astounding 1,000%, half of this rise was achieved during the last month.

REE FOB prices indexed at Jan. 1, 2011 - source metal-pages.com

What have the exploration companies done over this period? I have looked at the share prices of six juniors with the most advanced HREE projects, each of which expect to produce significant quantities of either europium, terbium, dysprosium, or yttrium by 2016. Since January, they have risen a paltry 3.6% average, and since the July announcement, they have declined 12.2%.

What explains the disconnect? Well, besides the global fear for an impending stock market crash as a consequence of the various currency and political crises, the REE sector appears to be hit especially hard by a nagging doubt whether the whole story still has validity. The media has blasted us with reports of technology innovation moving away from REE because of the high prices, vast deposits being found under water, recycling successes and the so-called glut that the combination of Molycorp and Lynas will cause once they reach full production. On top of this, a number of once-respected analysts have shown an obvious bias towards companies that they benefit from in some form or other, which hasn't made this extremely complex industry any more transparent. Most of the recent news items appear to be subject to some interest or other, be it financial or political, making it very hard for the average investor to read through the lines to get to the facts. This has made many insecure about the long term viability of investments in the rare earth sector, and has caused them to turn away.

Is there a lasting market for rare earths? Well the answer is a resounding yes, and this will not change for a while. Given the unique properties of the REE, the heavies in particular, their application is virtually limitless, and they are on the whole not substitutable without an unacceptable loss in performance. China has admitted it will run out of HREE within a year or two, and will need to resort to imports. This ensures that there will be a demand for the heavy rare earth supply for an indefinite period and whosoever can get their hands on it and do wise things with it, will have a technology edge lasting for decades.

Terence van der Hout is a researcher for the Netherlands-based Gold&Discovery Fund.