1 Rare Earth Elements Enablers of High Tech Applications & Green Energy Technologies
2 Used in relatively small amounts, rare earths allows magnetic, electrical, and chemical processes to occur at significantly lower energy levels, allowing for increased energy efficiency and smaller scale products. Over the next decade, demand for rare earths is expected to grow at 7-9% pa, driven largely by a continued shift to energy efficient green products, increased use of mobile electronics, and electric vehicles. China currently produces ~97% of global rare earths. In July 2010 China announced significant reductions to rare earths export quotas (~40%) claiming protection of a strategic and dwindling resource. At the same time China has made efforts to reduce illegal rare earths mining (~25% of production). Collectively, this has resulted in a sharp increase in prices and a signal to the rest of the world to secure new sources of production. Since 2006 rare earths prices have increased 1,000-10,000%. Rare Earths Markets In July 2010, rare earths, the largely unheard-of metals, made mainstream news headlines as China announced significant reductions to rare earths export quotas. China, which accounts for ~97% of global rare earths production, began imposing export quotas on rare earths in The July 2010 ~40% reduction in rare earths quotas resulted in a sharp increase in prices and a signal to the rest of the world to secure new sources of production. Since 2006 rare earths prices have increased 1,000-10,000%. Used in relatively small amounts, rare earths allow magnetic, electrical, and chemical processes to occur at significantly lower energy levels, allowing for increased energy efficiency and small scale products. We estimate that demand for rare earths will grow at an average of 7-9% pa over the next decade, increasing from ~125,000 t in 2010 to
3 239, ,000 t in It is estimated ~25% of rare earths production in China was sourced from illegal mining (~50% of heavy rare earths). In an effort to improve environmental standards and consolidate the industry, China is likely to see minimal increase in rare earths production. The greater challenge in meeting forecast rare earths demand is the over/under supply of individual rare earth metals. A large shift is forecasted in relative demand of individual rare earths metals, but expect new projects entering production to have a similar distribution to current supply, leading to significant oversupply risks for individual rare earth metals. Projects with a significant heavy rare earths grade (not relative distribution, just grade) are our focus for development potential. The most advanced rare earths mine developers range in production potential from 5,000 tpa to 20,000 tpa. It is expected that all of the dozen most advanced rare earths projects are needed to meet forecast demand. Based on the development timeline of these projects the critical rare earths (neodymium, europium, terbium, dysprosium, and yttrium) look to remain in short supply. Prices for rare earths have increased 1,000-10,000% from their 2006 levels, but for consumption to grow at 7-9% pa over the next decade prices must fall significantly. Molycorp and Lynas have the opportunity to realize 3-4 years of high pricing, but rare earths prices have likely peaked and a slow decline is expected until the bulk of new projects achieve production ( ). Similar to other industrial commodity booms such as uranium, molybdenum, and lithium; almost overnight the number of rare earths exploration companies jumped from a handful to more than a hundred. Within two years the world has figured out that, rare earths are not rare.
4 Despite the relative abundance of rare earths deposits, it is near-term production from workable projects that is likely to remain in short supply for the next decade. High capital costs, difficult metallurgy, marginal heavy rare earths grades, and a lack of people with significant rare earths processing experience are major hurdles to bringing new mines to production. The combination of an abundance of projects and peak pricing should not be interpreted as a sector in decline, instead a maturing of the sector and shift in focus to development assets. The rare earths sector differs from past industrial mineral booms in several ways: current producers are not increasing production, capital and technical hurdles to production are much higher, and advanced rare earths development projects remain attractive when an +80% drop in prices is forecast. Rare Earth Metals Used in relatively small amounts, rare earths allow magnetic, electrical, and chemical processes to occur at significantly lower energy levels, allowing for increased energy efficiency and smaller scale products. Over the last decade rare earths have seen rapid growth for use in technology and are critical to continued growth in mobile and green industries. The term rare earths generally refers to 17 elements of the periodic table (see Figure 1); 15 elements of the lanthanoid group as well as yttrium and scandium which are chemically similar and/or occur within rare earths deposits.
5 Figure 1 Period Table Of Elements With Rare Earth Elements Highlighted Sources: Technology Metals Research, LLC. (2011) Rare earths ( TREO ) can be segmented into light and heavy on the basis of atomic weight with yttrium generally grouped in with heavy rare earths (see Figure 2). Light rare earths ( LREO ) are more often found in carbonatites while heavy rare earths ( HREO ) tend to occur in a number of less common mineral types or in ion-absorbing clays. The division of light and heavy rare earths is also used as a measure of relative scarcity; light rare earths tend to be more commonly occurring and significantly lower priced versus the less commonly occurring and significantly more expensive heavy rare earths. Yttrium is often grouped with heavy rare earths due to its geologic occurrence and physical properties, though it is significantly lower priced.
6 The global hunt for rare earths deposits has had a strong focus on heavy rare earths mineralization due to their much higher value, critical need in end uses, and significantly lower risk of long-term oversupply. While advertising that rare earths deposits have a high percentage of heavy rare earths relative to total mineralization has become popular, it is misleading. Having a high heavy rare earths grade can be significantly different than having a high percentage of heavy rare earths relative to total rare earths grade. Figure 2 Definition Of Light & Heavy Rare Earths Sources: Technology Metals Research, LLC. (2011) Rare Earths Role in Technology Rare earths have a broad range of uses; the most common uses being catalysts, magnets, and phosphors. Catalysts have historically been the largest end use for rare earths but the growth of mobile electronics and green technologies has spurred the development of compact and high efficiency motors, utilizing rare earth magnets, which now consume the largest amount of rare earths (see Figure 3).
7 Figure 3 Rare Earths Consumption By End Use (2010) Ceramics Glass 6% 9% Polishes 15% Consumption By Volume Other 6% Magnets 20% Phosphors 12% Consumption By Value Glass Polishes 4% Ceramics 2% 10% Other 2% Magnets 39% Phosphors 7% Alloys 18% Catalysts 19% Alloys 15% Sources: Cormark Securities Inc., Technology Metals Research, LLC. (2011) and IMCOA Catalysts 16% The most notable use of rare earths is in magnets; rare earth magnets are much more powerful than ferrite magnets providing the ability to manufacture smaller, lighter, and more energy efficient motors. A 31:68:1 ratio of neodymium, iron, and boron is used to produce rare earth magnets with small amounts of dysprosium and terbium added to increase the magnets strength at high temperature and praseodymium to augment magnetic field strength. Compact and high efficiency motors allow for increased capabilities in mobile electronics, electric vehicles, and wind turbines. Virtually all permanent magnet based electric motors can be made smaller and more energy efficient using rare earth metals. Not only mobile electronics benefit from rare earths, household items such as washers and dryers can be made more energy efficient using rare earth magnets. The development of electric cars relies on both powerful batteries and energy efficient motors to provide driving range and power comparable to combustion engine vehicles. Lanthanum and cerium, the most commonly occurring of the rare earths, are used in the petroleum industry to covert heavy crude oil into gasoline and other refined products due to their ability to interact with hydrogen atoms in long-chain hydrocarbons. Cerium, and to a lesser degree lanthanum and neodymium, are used in catalytic converters, in combination with platinum group metals, to reduce the emission of
8 pollutants from an internal combustion engine. Phosphors are materials that emit light when exposed to an electrical current. LCD, LED, and plasma displays make use of compounds containing europium, yttrium, and terbium for their specific color properties and high electricity to light conversion efficiency. The ever improving capabilities of each generation of mobile phones are a great demonstration of the ability of rare earths to increase energy efficiency and reduce size. Beyond the three major uses for rare earths noted above, other end uses include such items as glass, fiber optics, ceramics, plastics, polishes, and lasers (see Figure 4).
9 Figure 4 End Uses Of Rare Earths By Element (2010) Element Symbol Main Applications Lanthanum Cerium Praseodymium Neodymium Samarium La Ce Pr Nd Sa FCC catalysts, alooys/mischmetal (for nimh batteries, hydrogen absorption, & creep resistent magnesium), optical glass, additive to produce nodular cast iron, lighter flints, phosphors Catalytic converters, glass, ceramics & plastic pigments, polishing, deoxidant and desulfurizer in the steel industry, selfcleaning ovens, carbon-arc lighting, michmetal NdFeB magnet corrosion resistance, high-strength metals, yellow glass and ceramic pigment NdFeB magnets, glass and ceramic pigments, autocatalysts, lasers Magnets, carbon arc lighting, lasers, biofuel catalysts, mischmetal, gological dating, nuclear application, medical uses, optical glass Europium Eu Phosphors, fuel cells, neutron absorbers Gadolinium Gd Contrast agents to enhance MRI imaging, GdY garnets, superconductors, phosphors, glass and ceramics Terbium Tr Phosphors, fuel cells, lighting, magnets Dysprosium Holmium Erbium Dy Ho Er NdFeB magnets, lasers, chalcagenide sources of ifrared radiation, ceramics, nuclear applications, phosphors, lighting, catalysts Magnets, nuclear (control) rods, medical uses, lasers, red & yellow pigments in glass & zirconia, calibration of gamma ray spectrometers Colorant in glassware & ceramics, metal alloys, repeaters in fibre optic cables, muclear applications (medical) Thulium Tm medical imaging, phosphors, lasers Ytterbium Lutetium Yttrium Yb Lu Y Bibre optics, radiation source for x-ray machines, stress gauges, lasers, doping of stainless steel, doping of optical materials Specialist x-ray phosphors, single crystal scintillators (baggage scanners, oil exploration) Phosphors, stabilized zirconia, metal alloys, garnets, lasers, catalyst for ethylene polymerization, ceramics, radar technology, superconductors Sources: Technology Metals Research, LLC. (2011), Roskill and IMCOA
10 Rare Earths Demand and Forecast Since 2000, demand for rare earths has grown at ~4.7% pa (see Figure 5). Over the next decade we forecast an average growth rate in rare earths demand of 7-9% (see Figure 6). By examining the growth potential for different rare earths end uses and the percentage of each metal used (see Figure 7) we can forecast underlying metal demand growth rates. On this basis we observe significantly higher growth in demand for rare earths such as dysprosium, terbium, europium, neodymium, and yttrium, collectively referred to as the critical rare earths ( CREO ) (see Figure 8). Figure 5 Rare Earths Demand Growth ( ) Magnets Ceramics Metal Alloys Other Polishes Phosphors Catalysts Glass Total (2.4%) 5.8% 5.8% 5.1% 3.5% 3.4% 4.7% 8.8% 9.5% (5.0%) (2.5%) 0.0% 2.5% 5.0% 7.5% 10.0% Sources: Cormark Securities Inc., Technology Metals Research, LLC. (2011), Roskill and IMCOA Over the last decade the use of rare earth magnets has grown at an average of 9.5% pa. The significantly higher strength of rare earth magnets has allowed for higher energy efficiency, greater performance, and reduced size in motors, loudspeakers, hard-disks, cordless power tools, and mobile electronics. We expect demand for rare earth magnets to continue to grow at similar rates due to the continued transition from traditional magnets to rare earth magnets in all applications. In addition to
11 growing market share of the magnets market, electric cars and direct drive wind turbines will further accelerate the growth in demand for rare earth magnets. Demand for rare earths in catalyst applications has grown slightly faster than the global economy in the last decade. As production of oil continues to shift to heavy oil sources we see demand for catalysts growing at above average rates. Catalysts used in automotives to reduce environmentally harmful emissions will also see above average growth rates as the world shifts to higher tier engine emission standards. Demand for catalytic converters is likely to grow faster than the underlying demand for vehicles and generators. Rare earths demand in metal alloys has grown at an average of 6.8% pa over the last decade. While we expect continued growth for use in non-battery alloy applications, battery applications are likely to grow in line with the global economy. Rare earths are used in nickel metal hydride batteries which have been supplanted by lithium batteries as the performance battery of choice. Nickel metal hydride batteries are likely to continue to be used in applications that favor cost savings over energy and power performance and will see growth in demand in line with the economy. As the world shifts to higher energy efficiency lighting we expect demand for rare earths in phosphors to grow at accelerated rates. The global shift away from incandescent lighting to CFL and LED sources will see increased demand for rare earth metals. Growth in LCD, LED, and plasma screen displays as well as mobile electronics with large and fullcolor displays, will result in increased demand for phosphors and rare earth metals.
12 Rare earths based polishes are used in the manufacture of CRT and some types of LCD monitors, as well as high-quality mirrors and architectural glass products. The secondary and fast growing use of rare earths based polishes is in electronic components which has grown at 8-12% pa over the last decade. Collectively demand for rare earths based polishes should continue to grow slightly faster than the global economy. The notable exception to large growth in the rare earths sector is for use in glass. CRT monitors are commonly made using cerium oxide stabilized glass. The rapid transition to LCD, LED, and plasma displays has led to a significant drop in demand in CRT monitors and subsequently for rare earths in glass. To offset the decline, lanthanum has seen a growing use in glass to reduce passage of UV rays and is now commonly used in camera lenses. Rare earths are used in ceramics for a range of applications; from coloring additives to improving refractory, electrical, and hardness properties. We expect this sector to grow slightly above world economy growth rates due to increasing demand for high technology products and continued development of new applications. Figure 6 Rare Earths Demand Forecast By End Use 2010 Rare Earths Demand Forecast End Use 2010 Demand Growth Rate 2020 Demand (t) (t) Magnets 26,000 12% - 14% 80,800-96,400 Catalysts - Petroleum Refining 7,800 8% - 10% 16,800-20,200 Catalysts - Automotive 16,700 6% - 8% 29,900-36,100 Alloys - Batteries 13,400 2% - 4% 16,300-19,800 Alloys - Excluding Batteries 8,600 4% - 6% 12,700-15,400 Phosphors 8,500 8% - 10% 18,400-22,000 Polishes 19,000 4% - 6% 28,100-34,000 Glass 11,000 2% - 4% 13,400-16,300 Ceramics 7,000 6% - 8% 12,500-15,100 Others 7,000 4% - 6% 10,400-12,500 Total 125,000 7% - 9% 239, ,000 Note: Totals may not sum exactly due to rounding. Source: Cormark Securities Inc. Inc.
13 The exciting potential for rare earths is how many new uses have yet to be commercialized or discovered. Above and beyond the current uses and growth rates for rare earths are the exciting opportunities for new applications. One such example is Molycorp s rare earths based water purification technology. Many of the least common rare earth elements have never been thoroughly investigated for potential applications simply because the metals were unavailable. As new mines enter production and global production of erbium, holmium, thulium, and ytterbium increase it is likely that new applications will be found for their unique physical, chemical, thermal, and electrical properties. Forecasts for individual rare earth metals demand is based on the current distribution of rare earths in the major end uses (see Figure 7). New technologies and end uses for rare earths are upside to the estimates. Figure 7 Percentage Of Rare Earth Metals Used Per End Use (2010) Rare Earth Metals End Use La Ce Pr Nd Sm Eu Gd Tb Dy Y Other Magnets 23.0% 69.0% 0.8% 2.0% 0.2% 5.0% Catalysts - Petroleum Refining 90.0% 10.0% Catalysts - Automotive 5.0% 90.0% 2.0% 3.0% Alloys - Batteries 50.0% 33.4% 3.3% 10.0% 3.3% Alloys - Excluding Batteries 26.0% 52.0% 5.5% 16.5% Phosphors 8.5% 11.0% 4.9% 1.8% 4.6% 69.2% Polishes 31.5% 65.0% 3.5% Glass 25.0% 67.0% 1.0% 3.0% 3.0% 1.0% Ceramics 17.0% 12.0% 6.0% 12.0% 53.0% Others 19.0% 39.0% 4.0% 15.0% 2.0% 1.0% 19.0% 1.0% Sources: Cormark Securities Inc. and IMCOA Combining the forecast growth rates (see Figure 6) with the relative amounts of each rare earth metal consumed (see Figure 7) gives forecast demand for each of the rare earth metals (see Figure 8). The forecast for individual rare earth metals demand is based on the current distribution of rare earth metal in the major end uses and new technologies and end uses are an upside to our estimates.
14 Figure 8 Rare Earth Metals Demand Forecast Rare Earths Demand Forecast 2010 Demand Growth Rate 2020 Demand (t) (t) Lanthanum 28,770 5% - 7% 45,930-55,490 Cerium 48,980 4% - 6% 75,460-91,260 Praseodymium 8,700 10% - 12% 22,700-27,150 Neodymium 23,420 11% - 13% 63,840-76,300 Samarium 790 6% - 8% 1,390-1,670 Europium 420 8% - 10% 900-1,080 Gadolinium % - 13% 2,050-2,450 Terbium 440 9% - 11% 1,010-1,200 Dysprosium 1,300 12% - 14% 4,040-4,820 Yttrium 11,250 7% - 9% 21,740-26,090 Other 180 3% - 5% Total 125,000 7% - 9% 239, ,000 Note: Totals may not sum exactly due to rounding. Source: Cormark Securities Inc. Figure 8 demonstrates the critical ranking of rare earth metals such as dysprosium, neodymium, terbium, and europium, and yttrium, which have high forecast growth rates. Compounding the issue for critical rare earths is the potential supply side reaction. The dozen most advanced rare earths projects collectively have a similar rare earths distribution to current production and the relative percentage of each rare earth metal produced is unlikely to change. This imbalance between rare earths metal supply distribution and forecast demand distribution will result in oversupply issues for select elements (see Figure 9). In a balanced supply/demand scenario new mines would continue to enter production until the basket value of their production reached break even. On this basis we expect the basket value of rare earths to decrease over time. Rare earths such as lanthanum and cerium are likely to sharply decrease in price as they enter significant oversupply. Rare earths such as dysprosium, terbium, and europium are more likely to see a small decline in prices as they remain in short supply.
15 Figure 9 Rare Earths Demand Distribution Forecast 2010 Production 2020 Demand Change In Oversupply Distribution Distribution Relative Demand Risk Lanthanum 23.0% 19.2% (16%) High Cerium 39.2% 31.6% (19%) High Praseodymium 7.0% 9.5% 36% Low Neodymium 18.7% 26.6% 42% Low Samarium 0.6% 0.6% (8%) High Europium 0.3% 0.4% 12% Low Gadolinium 0.6% 0.9% 44% Low Terbium 0.4% 0.4% 19% Low Dysprosium 1.0% 1.7% 62% Low Yttrium 9.0% 9.1% 1% Low Other 0.1% 0.1% n/a n/a Total 100.0% 100.0% Source: Cormark Securities Inc. The estimated demand for rare earths will grow at an average of 7-9% pa over the next decade, increasing from ~125,000 t in 2010 to 239, ,000 t in One of the many challenges in meeting forecasted rare earths demand is the over/under supply of individual rare earth metals.