The world of rare earth metals is at once fascinating and alarming. It involves violent price shocks, the future of energy, an environmental catastrophe in Inner Mongolia, swathes of the modern technology we take for granted, and Japanese researchers’ journey to the bottom of the Pacific Ocean. And like almost any other commodity you can think of, it also involves the dominance of China.
What is perhaps most surprising about rare earth metals – the collective name for 15 or so elements at the foot of the periodic table – is that they are neither that rare or earth-like. They are simply exceptionally difficult to produce economically. For UK-based investors, this combination of obscurity, a global market desperate for new supplies, and massive projected demand growth might seem like a winning formula. However, opportunities to date have indeed proved rare.
In rare form
Before we take a closer look at those options, it’s first worth untangling the world of rare earths. These wonderfully-named elements – lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, and lutetium (along with scandium and yttrium, depending on which classification system you use) – are unremarkable in their chemical properties.
Where they diverge is in their physical properties – such as magnetism and conductivity – which make them indispensable to modern technology. That said, although all rare earths have their applications – including promethium, which can only be synthesised in a laboratory – just a handful make up the bulk of the demand by volume and value.
But rare earths are ubiquitous. From super-powerful magnets and lasers (praseodymium, neodymium, samarium) to speciality glasses, optics and electrodes (lanthanum), speciality steel alloys (erbium) and wherever you see the colour green in your television screen (terbium), you will find rare earths. Their use is also growing at a clip.
At the centre of this multibillion-dollar global market is China, which by some measures commands 90 per cent of rare earth production, as well as around two-thirds of consumption, according to commodity consultancy Roskill.
As currently configured, this is doubly unsustainable. For one, China is so dominant in global rare earth production not because the quality of its mineralised deposits and ores surpasses all others, but because its overheads are lower than anywhere else. The hidden cost of this has been the wholesale disregard for the environments where China’s rare earths are mined and processed, as seen in the agricultural and public health crises in places such as Baotou in Inner Mongolia.
But change is afoot. China’s government has vowed to provide more support to reduce waste discharges, improve environmental standards and help to clean up the enormous environmental damage in rare earth hotspots in Inner Mongolia and Jiangxi. At the same time, authorities have been cracking down on illegal mining, which is periodically blamed for suppressing global prices. In recent years, a crackdown on unauthorised rare earth mining has paved the way for further consolidation of domestic production in the hands of six state-owned concerns.
Still, this leaves the rest of the world reliant on one country. This can be hugely disruptive, as proved the case in 2010 when the People’s Republic restricted exports of the metals, and even briefly locked Japan out of the global market. Last year, the issue of supply security again loomed into focus, after the US banned imports of super-strong, Chinese-made samarium-cobalt and neodymium-iron-boron magnets. With global neodymium demand forecast to grow at a huge 8.2 per cent a year until 2024, it’s easy to imagine the possibility of market volatility in the years ahead.
For industrial users, that’s never welcome. As such, there’s an enormous incentive to develop clean, secure and economically viable sources of rare earth metals outside of China. The celebration that greeted last year’s discovery of a “semi-infinite” trove of rare earth oxide near the Japanese island of Minamitori therefore speaks volumes, not least because the global mining industry is yet to find a way to extract thinly-dispersed minerals from the ocean floor at scale.
A route in?
feasible route to diversification is likely to come in the shape of fiscal incentives, such as Russia’s recent reduction in the tax rate for rare earth metal extraction.
Like Japan and the US, Russia’s strategic prioritising of rare earths hasn’t gone unnoticed – not least because the US Geological Survey estimates the country is home to one of the world’s largest reserves of rare earths. A year ago, Polymetal International (POLY) chief executive Vitaly Nesis told this magazine he was interested in the opportunities to explore rare earths in the country. And while the precious metals group has “no short- or medium-term plans to develop this category”, according to a spokesman, major Polymetal shareholder ICT Group does. The group, headed by Mr Nesis’s older brother Alexander, is currently developing a rare earth project in Yakutia in Siberia.
However, rare earth-hungry UK investors must look to the junior end of the sector, and to stocks such as Mkango Resources (MKA). This week, the miner reported a 60 per cent increase in its total measured and indicated rare earth oxide resource at its Songwe Hill exploration project in Malawi, which is currently the subject of a feasibility study. Until a clear idea of Songwe’s economic and environmental feasibility emerges, investors should view this as an extremely speculative prospect, perhaps particularly given that seven years have elapsed since a first mineral resource estimate was made.
That health warning is applied equally to micro-cap miner Rainbow Rare Earths (RBW), which claims to be the world’s highest-grade producer of rare earths via its Gakara project in Burundi. Unusually for a miner so small, Rainbow has been selling concentrate from the plant, to offtake partner thyssenkrupp, for more than a year. Unfortunately, the 300 tonnes of concentrate sold in the three months to December cost $2,827 (£2,179) a tonne to produce, and only fetched $1,884 a tonne at the gate, suggesting the miner’s growth aspirations could be arrested by cash flow issues, even after last month’s funding.
Extreme caution should also be applied to whatever eventually becomes of the company into which Aim-traded Premier African Minerals (PREM) plans to divest its (very early-stage) Katete rare earths project in Zimbabwe.
In other words, for all of the City’s pedigree as a major capital market for global mining, the nature of the rare earth industry has left UK investors with few tangible options. Indeed, those keen for exposure may need to look to Australia or North America.
