Investors love rare earths and there are many junior rare earth exploration companies jumping on the bandwagon and raising money in the market because of this attention. But are all of these companies going to succeed in the global rare earths market?
Recently, the San Francisco Hard Assets Investment Conference was followed up by a highly focused and more technical Hard Assets Rare Earths Investment Summit – a specialized gathering of experts to help investors and companies understand the rare earths "climate".
One of the speakers at the conference was Dr. Garth Hatch, co-founder of Technology Metals Research, which specializes in research and consulting on metals used in technological applications. Dr. Hatch's speech was entitled "Recent Supply, Demand and Pricing Dynamics within the Rare Earths Sector" and gave investors a brief overview of the history of rare earth supply and demand to help them understand how the market has changed. We have summarized Dr. Hatch's speech below. Where possible, we've provided direct quotations.
Dr. Hatch started with a quick overview of the use and importance of rare earths. He said: "We use rare earths for a reason: Rare earths exhibit special properties, which mean that these elements are enablers. They can have a profound effect on the performance of engineered systems."
Then Dr. Hatch started by describing the demand side of the rare earths equation and how we are using more and more rare earths for more and more applications.
Because of their special properties, their use is increasing. Dr. Hatch told the audience: "We use rare earths more and more every year. There was something like 600 million computer hard drives shipped last year and every one of those contains components that use rare earths. Vehicles use rare earths." Rare earths are also used in military and industrial applications. And aside from growth from existing industries, Dr. Hatch highlighted a new industry that will demand even more rare earths: "The growth in the forecasted demand is coming from clean energy – electric vehicles, hybrid vehicles, batteries, wind turbines, [etc.]"
So the demand is there, in spite of the pressure to (as Dr. Hatch explained), "reduce the amount of [rare earths] material used per component. That is being driven in the last 6 to 12 months by the price of these materials."
After briefly describing the demand side of the rare earths equation, he shifted focus to the supply side.
Dr. Hatch provided statistics that showed how China supplies most of the rare earths assets in the world: Other countries supply some but China supplies 96%. One of the main reasons behind this is that China's low-cost production helps China be the main supplier.
Also impacting demand is the disproportionate need for individual rare earths, which tend to occur together in a deposit. Dr. Hatch said: "Rare earths are difficult to separate from each other. It also means that the demand dynamics for one rare earth affect them all. When we look at the ongoing demand for each individual element, and you compare that to the average occurrence of these in the ground, they don't match. So there's some extra material. Some rare earths will end up in a surplus while others will end up in a deficit."
This reality should compel investors to consider how their potential rare earth investments will deal with surpluses and deficits. Dr. Hatch explained: "You have to ask the question, 'can a project deal with the fact that they will deal with [some rare earths that aren't needed] to get the Neodymium or Dysprosium that you want?"
Going forward, the need for rare earths in energy will grow. Dr. Hatch highlighted a recent report put out by the Department of Energy that listed critical resources needed for energy. Five of the six elements listed were rare earths, "with Dysprosium being the most critical."
As a result of supply and demand – plus some other interesting factors – Dr. Hatch traced the history of rare earth prices: Up until the middle of 2010, prices were flat. Then there was an inflection point in approximately July of 2010 in which prices rose because China revealed global demand was greater than their ability to supply it. However, at this time, there was also a separation of prices between rare earths bought from China and rare earths bought elsewhere. The prices peaked in July or August of 2011 and started to decline after that. Changes in how China measures, tracks, and invoices rare earths have impacted the price of rare earths (and will continue to impact prices in the future).
Last, Dr. Hatch explained what his company, Technology Metals Research does. "We are tracking about 240 companies in about 35 countries that claim to have a total of about 400 rare earth projects. Clearly not all projects are equal." He then told investors what to watch for when they are looking at rare earth companies to invest in: "Be mindful of the origin of some of this information. The vast majority of these projects are in very early stages and aren't likely to succeed."
Technology Metals Research tracks these companies to "separate signal from noise; so we look at projects that have defined mineral resources. We have an index of companies who have a 43-101 estimate. We feel it's a good filtering system. There is production in China, India, and Russia. In addition to current production, there are countries in the engineering and construction stage – including Australia, South Africa, Southeast Asia, [and elsewhere]. There are projects in the pilot stage and they need to scale up their processes in Canada and Australia." He listed projects in North America and Australia that he described as "leading contenders in supply."
So, how can investors use this information? Although highly technical, Dr. Hatch's speech helped give investors some context into who is supplying rare earths to the world and when it's likely that non-Chinese rare earths will come on-stream, and from where. Investors should also pay attention to how changes in different industries – from computers to cars to clean energy – will increase or decrease the need for rare earths in their individual applications.
Technology Metals Research: http://www.techmetalsresearch.com/
Garth Hatch: http://www.techmetalsresearch.com/about-us/gareth-hatch/
Hard Assets Rare Earths Investment Summit: http://www.hardassetsres.com/conference/speakers/