This post lays out a case for the value of mining companies that produce Rare Earth Elements (REEs).  REEs are used in refining petroleum, especially sour oil,  magnets, and Nickel Metal Hydride (NiMH) batteries, among other uses.  A list of companies that mine or plan to mine REEs is provided below.  I own shares in one of them, Lynas Corporation, an early stage Australian company.

The logic of the case is as follows:

  1. There is a great deal of pressure on car companies to produce hybrid and plug-in hybrid vehicles which require a new cheap, safe, high capacity, quickly rechargeable battery.  It must work for the consumer and be profitable for the car company.  Opinion is divided as to which battery is likely to be optimal, the lithium-ion battery being developed by A123, Nissan, and others or the old NiMH battery.

  2.  Some claim that the cost of li-on batteries is too high right now and for the foreseeable future for it to be profitable.  That is why Toyota and Honda are planning to bring most of their next generation of HEV and PHEV to market in 2010 - 2012 using an upgraded version of the NiMh battery. 

3.  NiMH batteries use lanthanum, a REE.  China currently supplies nearly 100% of REE’s, but it has recently announced that it is cutting back it REE exports.  The prices of REEs have been rising along with demand for REEs and both are expected to continue up and to the right going forward for some time based on the above logic.  

Here are excerpts from an essay on the subject by Jack Lifton that was posted on ResourceInvestor.com and which I previously posted in its entirety.  I have underlined the parts that relate most directly to lanthanum:

It is important that you know that every hybrid vehicle today mass produced for sale by Toyota, Honda, GM, Ford, and Chrysler utilizes a nickel-metal-hydride (NiMH) battery. Even more importantly you need to know that in the 2007 model year GM made or sold 9,000 ‘hybrid’ vehicles and that all 9,000 were recalled to replace a defective NiMH battery. In the same year Toyota sold more than 250,000 Priuses and there is no report of any 2007 model year battery failure. Note well that Toyota makes its own NiMH batteries in-house and that GM buys its battery components from a Japanese manufacturer-not Toyota-and has them assembled by the joint venture between Chevron and Energy Conversion Devices, Inc called COBASYS, which has been in existence for most of the twenty-first century, has burned through more than $200 million of Chevron’s money and has never made a profit! General Motors, Ford, and Chrysler have been forced to try to develop a lithium-ion technology based vehicle for the simple reason that due to mismanagement and short sighted planning they have no way whatsoever to obtain either the critical raw materials for, or NiMH batteries themselves. GM, for example, is only trying to make an expensive niche market lithium-ion plug-in hybrid, because it, through its own shortsightedness, cannot make a Prius fighter based on NiMH technology

Toyota and Honda have clearly decided that a small hybrid vehicle utilizing safe, reliable, long-life NiMH batteries is the bridge to a future mixed fleet of slowly disappearing internal combustion (alone) powered vehicles and vehicles using mixed or pure electric propulsion of some type. This is evidenced by the fact that both companies have now committed to producing substantial volumes of NiMH battery equipped hybrids in the next five years. For Toyota this will be a ramp up from 1,000 to 3,000 per day of its soon to be enlarged Prius family of vehicles; for Honda this is a commitment to introduce and produce up to 500,000 hybrid vehicles a year by 2011. Both of these manufacturers will have dedicated, in-house battery-manufacturing facilities. In Toyota’s case those facilities will be located only in Japan, so that even when Toyota is finished converting its new assembly plant in Mississippi—from large pickup truck production to Prius assembly—only the sheet metal , interior components, and chassis likely will be produced in North America. The critical components for the Prius power train, the battery and its management system, will be produced only in Japan. … Unlike OEM, American owned-and-operated automotive assemblers, Japanese OEMs value their in-house developed technology highly and do not just give it away …

Toyota’s current NiMH battery, which is a direct descendant of the original NiMH battery invented by Energy Conversion Devices, Inc., in the 1980s and licensed for manufacturing and use in vehicle propulsion to Toyota in the mid 1990s. It requires at least 12 kg (26 lbs) of the rare-earth metal, lanthanum, per Prius-sized battery.  Today’s Prius, utilizing such a battery, has a range of 500 miles on a 10.1 gallon tank of fuel at a top speed (capability) of over 90 miles per hour…Reportedly the next generation Prius, due in 2009, will use a larger NiMH battery to achieve a fuel economy of 71 miles per gallon; it will require a battery made with 20 kg (44 lbs) of lanthanum.

Dudley Kingsnorth, arguably one of, if not , the world’s leading authorities on the fundamentals and end uses of rare earth metals, has corresponded with me on these topics recently, and he has kindly permitted a quote from one of his emails;:

“Until recently lanthanum has been the ‘poor cousin’ of the rare earths – low priced and readily available – so it is probably coming as a shock to many … catalyst producers and the petroleum refiners that they have to think/purchase more than 12 months out if they are to secure sufficient material.”

…..

“Toyota and Honda may well have a choice – simply put, if they corner the lanthanum market for their batteries (excluding the growing market for rechargeable tools) then there may be none left for …cracking catalysts, i.e. no gasoline to fuel them, so no car sales! So they need to think about the impact of their lanthanum purchases! It is likely that Toyota (who have a large share in the only company in Japan making batteries for hybrid vehicles) have a forward looking purchasing policy and probably have sufficient metal for the next 2 years or so.. The price of lanthanum (La) metal is currently about $13/kg and for the oxide $9/kg, compared with $8.5 and $4.75 at the beginning of the 2008 year and $4.50 and $2 a year ago! Spot prices of $16/kg La₂O₃ have been quoted in Japan recently, so clearly there is a measure of concern! Toyota has announced that their first lithium-ion battery hybrid will be in production in 2011 and that 1 million hybrids is a target for 2011, whereas two to three years ago they were considering 2-3 million in 2011….”

China has recently, as pointed out last week, reduced its exports of rare earth metals to a total below that of the current demand just by Japan. In addition China has raised the export taxes on rare earth metals effectively raising the price of those metals directly to those who can still obtain them from China.

Take particular note that the only current producer of lanthanum is China. And its demand for rare earth metals for domestic use in batteries and magnets, for example is rapidly approaching 100% of its production of rare earth metals. The Central Committee of the Communist Party of the People’s Republic of China publishes a five-year plan for the country’s economic growth. The last one called for consolidation and growth in the rare earth mining industry; the next one, which will be promulgated (it is not published as a ‘suggestion;’ it is promulgated as a mandatory decree.) in 2010-11. It is expected that the next one will call for priority for the utilization of Chinese natural resources for the development of the domestic economy. This certainly does not bode well for end users of rare earth metals whose markets are not in China.

Toyota and Honda, the two most profitable and successful, OEM car makers in the world have separately come to the same conclusion. The changeover of the personal vehicle industry from utilizing the hydrocarbon fueled internal-combustion engine as the sole motive power to a completely electric, probably fuel-cell powered, vehicle will go in stages and will stay in any one stage until the technology for the next stage is: developed, tested, and economical.

Toyota and Honda have committed each to having hybrids comprise at least 10% of their manufactured vehicles in the 2011-12 time frame. Both companies see NiMH batteries being used overwhelmingly to make those cars. They hope to achieve as much as 25% conversion of their manufacturing to such hybrids by 2014-15.

It is important for investors to note that the only way for Toyota and Honda to meet these goals is for them to find additional sources of lanthanum outside of China. Because neither company will plan for what is today the remote possibility that, before the beginning of the 21^st-century’s third decade, an equivalent lithium-based battery system will be: ready, tested, in mass production, and as reliable and long lived as the NiMH battery, and as cheap to make! If the lanthanum is not found then the world will continue to drive petroleum fueled, internal-combustion engine, powered personal vehicles. 

It is possible and, perhaps, even likely that within three years, at most, there may not be enough lanthanum exported from China to enable Toyota and Honda to fulfil their plans to modify their product mix….

  Some say that in order for even Toyota’s and Honda’s plans to be successful at the lowest level there needs to be production from rare-earth metal mines in existence now or within only two to three years. Simply put, in order for the markets which critically depend on rare earth metals to go forward as planned—reducing demand for petroleum hydrocarbons and total energy—feasible non-Chinese sources of rare earth metals already known have to be brought into full production within the next five years at most.

Once again these six sources are:

Australia—

• Lynas Corporation Ltd (LYC:ASX)

• Arafura Resources Limited (ARU)

Canada—

• Great Western Minerals Group LTD (GWG)

• Avalon Ventures Ltd (AVL)

United States—

• Chevron Mining   Inc. (CVX)

• Thorium Energy, Inc.

The first five companies listed above are publicly traded; the sixth, Thorium Energy, inc. is privately held and, reportedly, not seeking public financing. All have extensive web sites.

Additional information on REE comes to me from a reader of this site, P.W., who I believe is an Australian scientist located in Canberra.  P.W. writes as follows:

- Rare earths. Supply: 85-90% of worldwide production comes from China and they are increasingly limiting export due to increasing internal demand. Demand: lanthanum is used for NiMH batteries in hybrid cars, as a catalyst for refining oil (more is needed for sour crude), neodymium is used for magnets in electric motors (again, hybrid cars). Other uses of rare earths include a broad range of electronic gadgets (compact fluorescent lightning, flat panel screens, ..). …

The non-Chinese companies all seem to be scrambling to start producing asap but they’re not there yet. I don’t believe there’s any publicly traded RRE-producing company out there yet. I believe, both LYC and ARU are poised to become important REE producers within a few years, but patience will be required…

In Australia, ARU is clearly further away from production than LYC. ARU
still seems to be searching for JV partners in Japan and China. In
addition, I gather that LYC’s Mount Weld site is considered to be
Australia’s best known REE project: the ore grade is 15%, compared to
ARU’s Nolans Bore at 3.1%. The RREs at Nolans Bore project, however, are
richer in neodymium than any other known RRE site 

LYC’s main shareholders are: the CEO Nick Curtis (4.6%), JP Morgan
(5.25%), Goldman Sachs (7.0%), Merrill Lynch (5.7%), Tell Capital (6.1%)
and The Capital Group Companies (5.6%). ARU doesn’t have such “prominent”
list of main shareholders.

Finally, LYC already seems to have some customer contracts in place.
According to …[a] report more than 50% of their product is already scheduled to go to Japan, which nicely fits the Toyota/Honda picture. In this report they also say that commercial production is scheduled to commence between July and September, 2009.

The above information comes from the following report at www.steelguru.com:

August 08, 2008

Lynas to supply over 50% of rare earth products for Japan

JMB reported that Australian rare metal producer, Lynas Corporation supplies rare earth products to Japanese market with 3 to 5 years contract by developing Mt Weld mine in Western Australia.
The firm already started construction of concentration plant in Australia and plant in Malaysia to process and refine concentrate from Australia.
Mr Nicholas Curtis executive chairman of Luncas Corporation said the firm starts the commercial production in July to September 2009 and the sales to Japanese customers would represent more than half of the total sales.

P.W. reports that Lynas C.E.O. Nick Curtis has an impressive track record of success in the mining world.  He was originally a banker, then spent most of the 90’s in China with the Chinese National Non-Ferrous Corp. (CNCC) working on acquisitions and then working in their gold division to crate Sino Gold (ASX:SGX), which delivered a gain of more than 500% to its early shareholders. In 2005 he bought into Lynas perhaps anticipating the unfolding REE story (Lynas had an option from Rio Tinto on the Mount Weld project). 

A consultant’s feasibility report for Lynas’ Rare Earth project can be reviewed here.  The company’s web site contains what seem to me to be impressive progress reports including the latest quarterly report that indicates financing, mining approvals, plant construction, and sales discussions that resulted in Letters of Intent all having been achieved.  

Here is a section of the web site that summarizes Lynas’ corporate strategy:

Lynas has a strategy of creating a reliable, fully integrated source of supply from mine through to customers, and to become the benchmark for security of supply and environmental standards in the global Rare Earths industry.

Lynas owns the richest deposit of Rare Earths in the world at Mt Weld, 35km south of Laverton in Western Australia.  A feasibility study has been completed on the Rare Earths deposit and all Australian approvals required for project development have been received.

Over the last year Lynas has observed a trend in Chinese Government policy decisions which is leading to an increase in Government control of the Rare Earths industry in China and the tightening of supply due to the imposition of mining production quotas, and the reduction and restrictions on trading of the existing export quota.  These policy decisions have followed the removal of VAT rebates for exports of Rare Earths oxides and an increased enforcement of China’s stringent environmental standards which resulted in the closure of non-compliant Rare Earths plants. 

Shortly after the introduction of production quotas in China the company determined it was prudent to investigate potential sites other than China that would be suitable for the company’s proposed processing plant for Mt Weld ore.  The drivers for this decision were the:

• Increasing Government control of the Rare Earths industry in China, thereby increasing the project risk for our plant
• Escalating operating costs in China due to the Government policies noted above, and also inflation affecting cost of reagents, utilities and labour
• Favourable tax environments available in alternative countries
• Opportunity to reduce cost base denominated in Renminbi, and thereby benefit from a  strengthening Chinese currency

The first stage was to relocate the concentration plant from China back to Mount Weld, and the next phase was to develop an Advanced Materials Plant to process the concentrate through to the final product.
Following a detailed evaluation of several possible sites, Kuantan, in the state of Pahang, Malaysia, was chosen for its favourable investment climate, the high quality workforce, the excellent infrastructure servicing the proposed site and the readily available reagents used by the Plant.

Lynas has been granted the “strategic pioneer status” by the Malaysian Industrial Development Association (MIDA), which has a number of associated benefits including a 12 year tax free period.
Kuantan offers a highly skilled and educated labour force with experience in the chemical industry and a key benefit is also their English proficiency.

The state has a robust and first-class transport network, comprehensive communications networks and reliable supply of natural gas, electricity and water at competitive prices.  Kuantan has excellent port facilities for handling bulk liquid chemicals and containers to accommodate the transport of. Mount Weld concentrates to Gebeng in sealed containers.

Of significant advantage for the Gebeng Industrial Estate site is the fact that manufacturers of key reagents required for the process (lime, sulfuric acid, and hydrochloric acid) are already established in close proximity to the proposed plant site.

Lynas has received the environmental and municipal approvals from the Malaysian authorities and has commenced construction of the Advanced Materials Plant in the Gebeng Industrial Area in Kuantan.

Tags: peak oil energy investments

This entry was posted on Thursday, August 7th, 2008 at 4:51 pm and is filed under Investment Ideas, Rare Earth Element Miners, batteries, electric vehicles, hybrid vehicles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.