The Rare Earth Revolution has investors stampeding, sometimes to mega-hit ‘Avatar'

Hallgarten & Company analyst Christopher Ecclestone suggests that Rare Earths bugs may find something eerily familiar about the humans' quest for "Unobtainium" in the fantasy film "Avatar."

Author: Dorothy Kosich
Posted: Wednesday , 13 Jan 2010

RENO, NV -

In the blockbuster movie Avatar the obscure object of desire is an element called "Unobtainium", worth $20 million per ounce.

Metals analyst Christopher Ecclestone suggests the hunt for Unobtainium storyline reminds him "of some of the talk surrounding Rare Earths (REE) these days."

Since China shouted the equivalent of "fire" in the cinema early last year by threatening to ban REE exports, Ecclestone said "the mining space has been in a ferment trying to get its brain around elements (we would not call them metals...yet) that they have not heard of since high school chemistry and seemingly not in some schools of mines."

THE REE REVOLUTION

"The word ‘technology' has a special resonance for U.S. investors and they charged at the REE space without knowing what the technological issues were," he noted. Rare Earth Elements are a collection of 17 chemical elements on the periodic table, mainly Scandium, Yttrium and the 15 lanthanoids. The phrase "rare earth" arises from the rare earth metals from which they were first isolated in the late 18th Century.

In general group properties include:

--At elevated temperatures many rare earths ignite and burn vigorously

--Relatively soft metals

--Many REE compounds fluoresce strongly under ultraviolent light

--Reacts with water to liberate hydrogen gas, slowly in cold water, quickly in hot water

--Most REE compounds are strongly magnetic

---High melting and boiling points

REE usages can include batteries, camera lens, glass and ceramics, self-cleaning ovens, magnets, lasers, computer memory, fluorescent lamps, vanadium steel, chemical agents, and hydrogen storage.

China's massive Bayan Obo mine in Inner Mongolia hosts the world's largest known REE resource, which is a major key to China's dominance of the market for REE. The mine was first discovered as an iron ore deposit in 1927.

As Ecclestone noted, "The Chinese have been ripping REE out of the ground for many decades now at Bayan Ono and the question arises about how long this pace can go on. Is the reserve boundless? Is it getting more expensive to extract as times goes on? Has the mine peaked?"

Ecclestone said the Chinese discussion of banning REE exports was "clearly a not too subtle shakedown of the end user. ...The Chinese action had an entirely different effect and have now alerted all and sundry to their creeping dominance of the REE space. This shout went beyond the corridors of the corporate world and found resonance in Washington and other capitals where suddenly it was realized that a whole industry had been forsaken to the Chinese."

THE REE/URANIUM CONNECTION

Ecclestone asserts that Rare Earths actually aren't that rare. Nevertheless, he suggested there are more nuanced complications which included:

--The real business is in the downstream processing

--Many of the new up-and-comers in the REE space have uranium and/or thorium to deal with in their mix

--Many REE projects "are years away from production"

"A lot of the current stories in the REE space are re-inflated uranium stories," Ecclestone noted. "REE commonly appear with uranium and in excellent grades. It even more commonly appears with thorium, a much more lightly radioactive element. The problem is one has to justify the uranium mine on its own merits before the REE can ever come out of the ground."

"Beware uranium (and/or thorium) will probably not be a barrier to exploration of concurrent REE in emerging economies, but could well stymie mine plans in areas near populations or watersheds in Western counties," Ecclestone warned.

Contrary to its name, REE deposits could be geographically scattered around the world, except for South America where deposits have yet to be identified. "In any case, five years from now, we should have 40-50% of world production emanating from Australia, Canada, the US and South Africa," Ecclestone suggested. "Then there is the possibility that other exotic locales like Kyrgyzstan, Sweden, Greenland and Argentina may be in the mix."

"It is somewhat ironic that we are hearing of all these new deposits around the globe and hearing nothing of new sites in China," he quipped.

NOT EVEN 20 REE NAMES

Names in the REE space include Australia's Lynas Corporation (AX: LYC) and Arafura Resources (AX: ARU), Great Western Minerals Group (TSX-V: GWG) of Saskatchewan, A/S Silmet of Estonia, Triebacher AG of Austria, Avalon Rare Metals (TSX: AVL) and Neo Material Technologies (TSX: NEM), both headquartered in Toronto, Molycorp, which is based near Las Vegas, Nevada, Wyoming's Rare Element Resources (TSX-V: RES), Stans Energy Corp (TSX-V: RUU), which operates mainly in Kyrgyzstan, Greenland Minerals & Energy (AX: GGG) offering projects in Greenland, Tasman Metals (TSX_V: TSM) with projects in Scandinavia, Quest Uranium (TSX-V: QUC) and Ontario's Pele Mountain (TSX-V: GEM), which are both based in Toronto.

While Ecclestone acknowledged that the REE rush has produced a proliferation of names, it is "nowhere near the 80-plus uranium miners that appeared out of the ether in 2007 when that element took off."

"In the REE space, there are not even 20 names and some clearly are not holders of viable deposits as long as they are heavily uranium dependent or have deposits that do not justify the capex on plant that may be required," he advised.

"We also reiterate that the race will go to the five or eight companies that get into production first," he stressed.

"The object of this note is not to direct investors towards one company or another but rather to highlight some of the more practical issues that are often obscured in the flim-flam of chemistry, locations and the excitement of the moment." Ecclestone declared.

"Demand for REE is rising; the Western World dropped its guard and finds itself temporarily dependent on a less than certain source of supply. This should have been foreseen," he concluded.