Will Rare Earth Prices Fall by 2013?

- May 9th, 2011

Goldman Sachs released an assessment of the rare earth market that predicts rare earth prices may fall by 2013 due to supply being brought online by the likes of Molycorp and Lynas Corp. However, many familiar with the complexity of the rare earth processing don’t share the same view.

By Michael Montgomery—Exclusive to Rare Earth Investing News

Since the sweeping cut backs to rare earth exports from China last year, supply and demand fundamentals in the rare earth market have caused prices to skyrocket. Investors flocked to the rare earth sector to capitalize on many junior mining companies looking to produce rare earth oxides around the globe. The inflow of capital has helped many junior mining companies accelerate plans to produce on their deposits.  However, as two major rare earth players, Molycorp (NYSE:MCP) and Lynas Corp. (ASX:LYC) are getting close to entering the market with their supply, what effect will their supply have on the price of the metals themselves, and the share prices of the other junior mining companies in the sector?

At full production both Molycorp and Lynas could inject a much needed boost to supply. Lynas has stated that at full production, their Mt. Weld deposit will produce approximately 22,000 tonnes of REO. The company also has a ten year off-take agreement with Sojtiz of Japan, 8,500 tonnes per year.

Molycorp has stated that their Mt. Pass mine will be at full production in 2012, and should produce an estimated 19,500 tonnes of REO. With the ‘Phase 2’ expansion of their mine, the company could produce up to 40,000 tonnes per year.

By the end of 2012, at full production the two companies should be able to put in excess of 41,500 tonnes of rare earth oxides on to the market. There are also other firms that are rapidly accelerating their plans to produce.

Great Western Minerals (TSXV:GWG) just received approval of their Steenkampskraal project in South Africa that will start production by the first quarter of 2012. The company has stated that it could produce up to “5,000 t/y of rare earth oxides – nearly double the previously announced level of 2,700 t/y,” reported Liezel Hill, for Mining Weekly.

The effects of these projects on the fundamentals at play in the rare earth market are starting to come into question. Recently, Goldman Sachs released an assessment of rare earth supply and the impact on the market.

“We envisage a closely balanced market in 2013, and modest surpluses thereafter—at least, for some of the more abundant light rare earths—with some price softening in the 2013-2015 period,” according to the report.

The inflow of supply of REE’s from miners mentioned earlier at full production could certainly bring balance to the supply and demand fundamentals, consequently bringing down prices. However, there are other factors at play than simply a numbers game.

First, China may become a net importer of the metals to satiate their own domestic demand and most expect further reductions to export quotas, keeping prices high. Secondly, the sheer complexity of processing rare earths into separated and pure individual metals, and high value final goods such as magnets is not likely to be achieved by western producers by 2013.

Certainly companies like Great Western Minerals, Molycorp, and Lynas are vertically integrating their business models to produce separated REE’s and final use products. However, the skill needed to produce these efficiently come only after painstaking trial and error.

“The production of high-purity metals is as much an art as it is science and engineering. It requires diligent attention to operational details and missteps that can contaminate, and thus ruin the end product… I am reluctant to believe that junior miners with only, at best, limited knowledge of the chemistry and metallurgy of the rare earths, will even be able to produce separated commercially pure chemical compounds,” stated Jack Lifton, for Resource Investor.

The analysts at Goldman Sachs have limited knowledge of the complexity of processing rare earths. The process is staggering, costly and not likely to be perfected by western companies by 2013 as Goldman Sachs wants you to believe. Mr. Lifton, a noted expert in the rare earth field, added, “I think that Goldman Sachs’ analysts are wrong… I think it will be more than 5 years before we see a new competitor to China and Japan in this category, if ever.”

To these ends, a few miners have set up their companies in the way Mr. Lifton has deemed vital for survival in the industry. Molycorp has acquired rare earth producer Silmet in Estonia, has partnered with Hitachi and Sumitomo, as well as purchasing Santoku America, a magnet producer. Great Western Minerals already has two processing facilities, one in England, the other in the US. And Lynas Corp is building their LAMP processing plant in Malaysia, although it is being met by protests from citizen and environmental groups.

Whether these companies and other junior mining firms can acquire the skills to produce these products economically in such a short period of time is yet to be known. Maybe they can. However, if they do not produce these products at the levels they are currently telling investors, the price of rare earth oxides are not likely to come down as fast as Goldman Sachs is predicting.

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