TORONTO (Reuters) - Rare earth stocks were the darlings of 2010. Now investors are casting a far more discerning eye over the sector, betting that only a handful of companies will survive in the race to supply the world with the high-tech metals of the future.
Critical to a company's success is the quality of its ore deposits and its technological prowess in extracting and processing the metals. Analysts estimate that half a dozen companies might make the grade.
Currently, China has a near-monopoly over supply of the 17 rare earths, producing more than 95 percent of the global supply of the essential metals used in smartphones, electric car motors, wind turbines and high-tech industrial equipment.
Even the slightest changes in China's export quotas have lifted the shares of any rare earth company that was aiming to become an alternative supplier. But in 2011, investors are increasingly dropping the long-shots and buying into projects that at least have a good chance of crossing the finish line.
"We're starting to see a bit of the separation in terms of the potential of individual names," said Byron Capital Markets analyst Jon Hykawy. "Investors are interested in the potential and finding out whether some of these properties might actually bear fruit."
Australia's Lynas is expected to become the first major producer outside of China as early as next year. Its shares have quadrupled since the beginning of August.
Right behind Lynas is industry juggernaut Molycorp, which already processes about 3,000 tonnes of rare earths a year from stockpiled concentrate and could start producing new material as early as 2012. Shares of the Colorado-based company hit a high of $62.80 on Jan. 5, just five months after listing on the New York Stock Exchange at $13.25.
At the other end of the spectrum is Medallion Resources, which skyrocketed last fall only to tumble 22 percent since October. Also at the bottom of the pile is Frontier Rare Earths, which listed with much fanfare at C$3.25 in November and is now still at C$3.25.
With the shakeout establishing who is at the front or back of the pack, savvy investors are focusing on those in the middle.
"There's probably room in this space for no more than five or six projects outside of China," said Hykawy, who said investors need to be picky about which projects they back.
Annual demand for rare earths outside China is about 44,000 tonnes, with China set to export about 30,000 tonnes in 2011.
By 2015, rare earth experts say global demand could reach 200,000 tonnes, with demand outside China about 70,000 tonnes, seemingly creating a massive deficit.
Lynas and Molycorp will have the potential to produce over 60,000 tonnes of rare earths a year between them within three years, leaving a relatively small window for rivals.
That means that while hundreds of outfits are promoting rare earth finds, the vast majority will not make it into production.
"If the deposit is middle of the road, and you've got 200 hundred similar projects to choose from, I think those are ultimately roadkill," Hykawy said.
PICKS OF THE PACK
The quality of the deposits, metallurgy and processing capability are some of the most important considerations in drawing the line between winners and also-rans.
"The ore grade really links into the production costs," said Jacob Securities analyst Luisa Moreno. "A project could simply be not feasible if the grades are really small."
This could be bad news for Tasman Metals, Stans Energy and Quest Rare Minerals, all of which are exploring projects with ore grades below 2 percent.
Quest will have to process over 86 tonnes from its Strange Lake project in Quebec to get just one tonne of rare earths. In contrast, Molycorp at the Mountain Pass mine in California will have to process only around 12 tonnes of ore for one tonne of rare earths.
That's just a first step.
Miners also have to remove the rare earths from other minerals in the host ore, an expensive and often tricky process involving acids and extreme heat. Then they must separate the rare earth concentrate into individual oxides and process those into materials that end users like technology companies can use.
Processing adds value, giving smaller companies like Stans and Great Western Minerals an advantage over rivals.
Stans plans to restart the Kutessay II mine and processing plant in Kyrgyzstan, which produced 80 percent of the Soviet Union's rare earth oxides and alloys between 1961 and 1991.
Great Western holds a controlling stake in the high-grade Steenkampskraal mine in South Africa and plans to have the project back online by 2013 to feed its own rare earth alloy and rare earth metal facilities.
Kutessay II and Steenkampskraal have historically produced just small amounts of rare earths, but the infrastructure is already in place, meaning they will have a head start.
Shares of Stans and Great Western have doubled since the end of 2010, as investors see the potential for the two companies to be the next to market after Molycorp and Lynas.
"I think timing is really important," said Moreno. "There's a lot of projects out there. But those that are coming in the next five or six years, I think they're going to position themselves really well."
BANG FOR BUCK
Elsewhere, Neo Material Technologies is a rare earth play that is benefiting from present demand.
The Toronto-based company buys Chinese rare earth concentrate and processes it for the global market. Its shares rose to record highs four times so far this year.
"We're one of the very few companies that benefit from the high rare earth oxide price environment outside of China," said Chief Executive Constantine Karayannopoulos. "We're talking record profits."
Karayannopoulos said demand, and prices, should stay high for the next two years, as companies run down stockpiles, and China trims quotas further to meet its own rare earths needs.
But most analysts don't expect high prices to last.
"As Molycorp ramps up and as Lynas ramps up, you're going to have the world probably go into surplus for some particular types of rare earths," said Dahlman Rose analyst Anthony Young. "You can see prices pull back from the current levels."
Prices of the most common rare earths, lanthanum and cerium, surged to $60 a kilogram from about $5 during 2010, and will likely fall back first.
But Young said heavy rare earths, along with certain light rare earths used in magnets, will likely remain in hot demand.
For Molycorp's chief executive, Mark Smith, the possibility of lower rare earth oxide prices isn't cause for concern.
His company was a top global producer of rare earths like cerium and europium until the Chinese cornered the market with cheap product in the 1990s.
"It's absolutely a completely different ball game now," said Smith. "We feel very, very confident that we will now be the low cost producer in the world, which gives us a lot of confidence about not repeating history here."
(Reporting by Julie Gordon; editing by Janet Guttsman)
Trending On Reuters
Nepali police and local volunteers found the bodies of about 100 trekkers and villagers buried in an avalanche set off by last month's devastating earthquake and were digging through snow and ice for signs of dozens more missing, officials said on Monday. Full Article | Slideshow
- Everest not officially closed to climbers, Nepal says
- Video: Nepalese leave Kathmandu and return to villages
- Monsoons could bring disease, a second crisis, to Nepal - UNICEF
- Insight - Soul-searching over quake ends Everest climbing season
- Video: Relief goods for Nepal quake victims held up, remote areas awaiting aid
Facebook launches open Internet.org platform amid net neutrality debate in India Full Article