Rare Earth Elements (REE)

[Tommy]

Investing In Rare Earth Elements Part 1: An Introduction To Rare Earth Elements

http://seekingalpha.com/article/1288861-investing-in-rare-earth-elements-part-1-an-introduction-to-rare-earth-elements?source=email_portfolio&ifp=0

This is Part 1 of a two part article series on investing on Rare Earth Elements (REEs, hereon). In this part I introduce the reader to REEs. Specifically I explain why investors should consider taking positions in REE-related investments. I then provide some basic background information pertaining to REEs. Finally I provide specific details about some of the more important REEs that investors will need to be familiar with before researching individual REE-related investments. In Part 2, I will discuss specific investment opportunities based upon the conclusions I arrive at in this article.

1: Why Investors Should Consider REEs

REEs are essential resources in many products that modern society cannot live without. Global government defense departments consider REEs to be strategic resources that are essential to national security. REEs are also essential for the production of clean energy technologies. Furthermore, REEs are needed to build electronic devices, medical devices, and products used in modern scientific experimentation.

What distinguishes REEs from other metals that satisfy the above claims (such as copper, silver, zinc, PGMs...etc.) is that the vast majority of all REE production comes from China. Specifically most REE production currently comes from the ion-adsorption clay ores in southern China. Estimates vary as to the extent of this monopoly, and it differs from REE to REE, but in general China controls at least 90% of global REE production at the present time, and in the case of some of the rarer REEs this figure exceeds 99%. Furthermore, while there are many REE projects in the Western world currently under development, China controls over half of the world's REE in-ground resources.

These two realities, coupled with the fact that REE demand is generally inelastic, make for incredibly favorable supply-demand fundamentals that will greatly benefit well-informed REE investors.

2: REE Basics

A: REEs

The term "Rare Earth Element" is a blanket statement that refers to the lanthanides -- a group of 15 metals with particular atomic properties -- plus scandium and yttrium: elements that share chemical properties with the lanthanides and that are often found in the same ore deposits.



What follows is a list of the 17 REEs in order of atomic weight:

1-Scandium (Atomic weight: 21)

2-Yttrium (39)

3-Lanthanum (57)

4-Cerium (58)

5-Praseodymium (59)

6-Neodymium (60)

7-Promethium (61)

8-Samarium (62)

9-Europium (63)

10-Gadolinium (64)

11-Terbium (65)

12-Dysprosium (66)

13-Holmium (67)

14-Erbium (68)

15-Thulium (69)

16-Ytterbium (70)

17-Lutetium (71)

B: Rare Earth Minerals

REEs are not found in the ground as independent elements. Rather, they are found in minerals which must be separated chemically in order to obtain them. The minerals containing REEs are called Rare Earth Minerals (REMs, hereon), a list of which can be found here. No REM consistently contains the same set of REEs, although some REMs always contain one or two of the same REEs. For example, the REM monazite always contains cerium. It almost always contains lanthanum, and it may contain small amounts of dysprosium, terbium, as well as other REEs.

As a result, geologists who are projecting resource quantities and densities for these companies will generally be subjected to a greater level of unpredictability, and investing in REE mining companies is inherently more speculative than investing in mining companies that focus on other metals, although there are exceptions to this, which I will discuss in Part 2.

C: REE Applications

Different REEs have different applications, some of which I will discuss in greater detail below. Industries that use REEs include electronics production, defense, clean energy, medical devices and scientific equipment (equipment used in scientific experiments). Primary applications include magnets, batteries, lasers, X-rays, computer chips, lighting technology and more.

3: Which REEs Will Make the Best Investments?

Given that there are 17 REEs, the notion of investing in REEs is far too vague to be actionable. Successful REE investors must select specific elements from this list that have the best supply-demand fundamentals and then find investments that focus on these elements. REE mining companies will provide investors with exposure to many REEs, and so we need to find companies that will get most of their revenues from the best of them.

In what follows I will give a brief summary of the REEs that are most important to investors. I must note that up to date price data for REEs is generally not available to the public except to paid subscribers of certain reports such as metalprices.com. Consequently, the prices I give are roughly 1 month out of date, as it would be unfair to metalprices.com for me to provide Seeking Alpha readers with this privileged information.

Cerium

As I discussed earlier REEs are not found alone; rather they are found in REMs. The most commonly found REMs, particularly bastnaesite and monazite, are composed predominantly of cerium. As a result cerium is the most abundant of the REEs and it has the least favorable supply-demand fundamentals. Furthermore most REE mining companies will produce more cerium than any other REE. Companies that mine mineral ore that is rich in cerium but not in the other REEs will tend to be losers. That is not to say that cerium mining will not be profitable or that cerium is not useful. The price of cerium on February, 17 2013 was roughly $32,000 per metric ton. Some of the industrial uses of cerium include: catalytic converters, glass manufacturing, light flints, and permanent magnets.

Dysprosium

Dysprosium is frequently cited by the U.S. Defense Department as a strategic metal that is essential the national security. It is also used in many clean energy technology products. Dysprosium has several industrial applications including permanent magnets, neodymium-iron-boron magnets used in hybrid cars, neutron-absorbing control rods in nuclear reactors, and data storage (which requires magnetic compounds).

China currently controls virtually all of the world's dysprosium production. There are currently some mines in early development that will produce some dysprosium outside of China but none of them will be in production until 2014 at the very earliest, and many of the larger producers will not be producing dysprosium until 2016 or later.

As of February, 17 2013, the price of dysprosium was $1,374 per kilogram, and currently dysprosium production is at roughly 100 tons per year.

Given that dysprosium supply is so low it may have the best supply-demand fundamentals of any REE. REE expert Jack Lifton implies that this is the case in an interview he gives published by The Critical Metals Report -- The Only Five Rare Earth Elements that Matter. As a result, dysprosium miners will probably be among the best performing REE mining companies.

Terbium

Terbium is one of the rarest REEs and consequently it is among the most valuable. Some applications of terbium include calcium fluoride, sonar devices, sensors, and solid state charge carriers. As of February 17, 2013 terbium cost $1,730 per kilogram.

Terbium, like dysprosium, is considered by the U.S. DoD to be a critical metal for America's national security. While currently terbium production is greater than dysprosium production at a couple hundred tons (cf. Lifton), future production will be limited. For example, Lifton states that Ucore Rare Metals' (UURAF.PK) Bokan Mountain project anticipates 120 tons of annual dysprosium production, but only 20 tons of terbium production. As a result it is unlikely that any REE mining company will emerge as primarily a terbium miner; nevertheless investors should look for terbium resources when researching individual companies.

Yttrium

Yttrium is not a lanthanide but it is still classified as an REE because of its chemical properties and the fact that it is found in REMs. Yttrium is used in cathode ray tubes, superconductors, and as a material strength enhancer for metals such as aluminum and magnesium. Yttrium is not incredibly rare as it is found in the Earth's crust at a rate of 32 parts per million and cost just $32,500 per metric ton as of February, 17 2013, yet demand is rising.

The U.S. Department of Defense considers yttrium to be a strategic metal of the highest significance considering its estimates of future demand (given yttrium's use as an enhancer for aluminum this makes sense). According to a June, 6 2012 American Resources Policy Network report, yttrium, along with 13 other metals (none of which are REEs), was ranked as being the most significant to America's national security (see p. 11). Furthermore, while over 20% of in-ground yttrium resources are in the United States, it is currently completely dependent on imports to meet its yttrium needs as most of these reserves are held at mines that are still in development such as Bokan Mountain in Alaska (Ucore Rare Metals) and Bear Lodge in Montana [Rare Element Resources (REE)].

Other REEs

For the most part, investors in REE mining companies or in Dacha Strategic Metals (DCHAF.PK) (a holding company for certain REEs) will not be able to get exposure to other REEs except in small amounts, the gains from which will be dampened by cerium exposure. As a result I have decided not to provide detailed descriptions of the other REEs. However investors should look into europium and neodymium which along with dysprosium, terbium, and yttrium are mentioned by Lifton as being among the five REEs that "matter." Investors should also look at lanthanum which is mentioned by the American Resource Policy Network report cited above as a metal that is critical to America's national security (cf. p. 11).

4: Conclusion

To summarize:

1: REEs are essential in the production of many modern-day products, including some that are important for our national defense.

2: Almost all current REE production occurs in China.

3: The term "Rare Earth Elements" refers to 17 different metals which have similar chemical properties, but which have distinct characteristics and industrial applications.

4: REEs are found in minerals. Some of the rarer REEs do not necessarily comprise any of these minerals, and consequently mining companies have difficulty in predicting their future production of some of the REEs that make the most attractive investments.

5: Cerium is the most common REE and consequently it has poor supply-demand fundamentals and makes for a poor investment relative to other REEs.

6: Dysprosium and terbium are extremely rare and make for excellent investments relative to other REEs.

7: Yttrium is not so rare, but it has particular usages that make it an attractive investment.

In Part 2 I will discuss strategies for choosing specific REE investments. I will also discuss some individual companies that investors should consider purchasing if they agree with the information in this article and if they are willing to take on some risk in order to potentially achieve substantial gains.