Has the Rare Earth Bubble Finally Burst?

Rare earth investors have experienced a slippery slide of late and things do not seem to be settling down just yet.

Global commodities faced uncertainty during the first half of 2012, and some speculators are now arguing that the rare earth elements (REEs) market is a ticking time bomb, begging the question: “has the rare earth bubble finally burst?”

This question was asked by investors following what many consider to be brazen comments made about the sector by one of the world’s leading rare earth experts.

Jack Lifton of Technology Metals Research announced that he feels the REE bubble has burst, and that market valuations are finally coming back down to earth. Lifton is a respected voice within the metals sector and advises the institutional investment community on natural resource issues that impact proposed business models and high-volume manufacturing plans for the mass market.

In a recent interview he confirmed that he believes the landscape that the current REE market is facing is entirely different than it was twelve months ago, and as a result is going through a shakeout.

Overvalued projects

“We had a bubble last year – an anomalous speculative blip – that ran REE prices to the sky. It happened just as the junior miners were coming into full bloom. At that time, I would say most of the junior REE exploration companies were overvaluing their projects something fierce. Then the market herd jumped in and ran the prices way up.”

Highlighting the severity of the marketplace, Lifton noted that of the approximately 260 listed REE public companies, only one is currently in production – Molycorp (NYSE:MCP) – and as a result, valuations of juniors will soon come “down to earth.” Between 90 and 95 percent of the remaining junior miners will be “wiped out.”

Investor understanding needs to change

Lifton went on to state that because investors have placed too much emphasis on REE groupings as opposed to individual elements, production of many REES is set to exceed demand moving forward.

“Investors should understand there is no single REE market. There is a market for some of the individual REEs – the critical REEs. But for at least half of the REEs, production and usage are tiny and there is no ‘market’ to speak of,” he said.

Lifton underlined that he disagrees with the theory that all REE prices will collapse, and forecast that critical elements will maintain strong demand and pricing because there is no significant production outside of China.

Rare earth in the US

Commenting on whether he feels there is adequate government support for the development of domestic sources of REEs in the US, Lifton noted that the government seems to be ignoring industrial needs. Lifton made this point earlier in the year when he openly criticized the Pentagon’s report to Congress, which states that US domestic supplies will sufficiently meet its defense industry’s needs by 2013.

At the time, Lifton referred to the report as “so lame I can’t believe it,” before suggesting that the military seems content with Molycorp’s REE supply as its source. Some might argue that this is be true, especially considering Molycorp’s announcement that the proven and probable reserves at its Mountain Pass, California facility have increased by 36 percent.

Lynas project insight

Lifton also provided insight into the delays experienced by Lynas Corporation (ASX:LYC) at its Malaysia-based REE plant, which has fallen victim to countless delays as a result of protesters claiming the plant creates a risk of dangerous radiation. Lifton was part of the international team that inspected the project.

“The opposition to the plants says that this will be the Fukushima of Malaysia, a potential radioactive disaster. The plant is really a big chemical plant, and nothing more. It’s easy to twist words,” he said. “I don’t want to comment on Malaysian politics, but it’s interesting to me that one of the fellows in our inspection group is a very prominent person in decommissioning nuclear reactors. His position is that the issue here is background radiation – nothing more.”

Last week Lynas cleared the final hurdle for its delayed $800 million plant after Malaysian lawmakers urged the government to issue a temporary operating license, despite community safety concerns.

Market inadequately prepared

Lifton also touched on the global availability of REEs, adding that the market was inadequately prepared for occurrences such as the Chinese quota system. The market has been on edge ever since the Asian giant introduced what many consider restrictive export quotas; some speculators have argued that China’s goal is to create the ultimate monopoly by driving up export costs to the point that manufacturers are forced to relocate facilities to the People’s Republic.

“We saw what happened when China squeezed availability. The whole REE industry is suddenly running around like Chicken Little,” he said.

When asked whether the market was reacting as a result of China’s export policy or due to speculative free market price behavior, Lifton noted that last year’s price movements might have resulted from speculation; however, over the long-term, price rises were the result of a market ill-prepared for the future.

“I remember when this was happening. I said, ‘What are we going to do if China’s demand exceeds its domestic supply, or the Chinese decide they don’t want to do this anymore?’ I was told that it would never happen. Well, it just seems to have happened. We need domestic supplies – of everything.”

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.