You are on page 1of 83

Australia Equity Research

11 July 2013

Australian Resources
Addressing the rare earths balance issue
Rare earths have a balance issue: the supply and demand of individual rare earth elements have to be equal at any time; otherwise there will be shortages or excesses in certain elements. New supply growth suggests the overall market will likely remain over-supplied. However, our analysis suggests the surplus will come mainly in cerium and other elements (such as Nd-Pr) will likely be short. With current low prices resulting in production curtailments, we believe there are reasons to be optimistic about the medium-term outlook. We estimate total demand growth of ~3% CAGR to 133kt in 2020: Based on our bottom-up analysis, we estimate total demand for rare earths will increase from 101kt in 2013 to 133kt by 2020. The majority of demand growth will likely come from Neodymium-Praseodymium (Nd-Pr) used in the manufacture of high strength magnets for applications such as wind turbines, and generators in automobiles. We also forecast strong growth in demand for Lanthanum used primarily in fluid cracking catalysts (FCCs). Supply growth to be driven by Lynas and Molycorp: The majority of production growth since the 1980s has come from China, which now represents ~90% of total supply. However, increasing restrictions in the form of export and production quotas will likely mean limited supply growth from the region in future. The majority of new production will come from Lynas Mount Weld and Molycorps Mountain Pass projects. We forecast aggregate rare earth supply growth of 4% CAGR to 173kt in 2020. The overall market is likely remain oversupplied but this misses the balance issue: We estimate the overall market will see an increasing surplus from 21kt in 2013 to 39kt in 2020. However, this simple analysis misses the balance problem with rare earths. We estimate the surplus will come predominately from cerium, with other elements (such as Nd-Pr, Dysprosium and Lanthanum) likely to be structurally short. Current prices are not supportive of sustainable supply, let alone new production: Consolidation, and an increasing focus on the environmental impact of mining have seen operating costs in China increase. In response to falling prices Chinas largest mine announced production curtailments in December 2012. Western producers have also indicated there are likely to be delays to growth projects, and Lynas announced it would look to set a floor for prices. While we believe prices could to continue to fall in the shortterm, we expect light-rare earth basket prices to increase from US$16/kg currently to US$18/kg in 2014, US$22/kg in 2015 and US$27/kg in 2016.

Metals & Mining Mark Busuttil


AC

(61-2) 9003-8619 mark.busuttil@jpmorgan.com Bloomberg JPMA BUSUTTIL <GO>

Lyndon Fagan
(61-2) 9003-8648 Lyndon.fagan@jpmorgan.com

Joseph Kim
(61-2) 9003-8615 joseph.x.kim@jpmorgan.com

Luke Nelson
(61-2) 9003-8618 luke.nelson@jpmorgan.com J.P. Morgan Securities Australia Limited

New supply the most significant near-term risk: Our U.S. Metals & Mining analyst Michael Gambardella remains concerned about information reliability in an opaque market. There is also a risk the significant new supply coming from Lynas and Molycorp could continue to force rare earth prices to decline. Therefore, more conservative price forecasts have been used in the modeling and valuation of Molycorp (Neutral Rating, US$6/share Price Target). The potential for startup problems with only moderate liquidity cushions remains another risk for both companies. Source for front page pictures: Molycorp, USGS See page 81 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Table of contents
Executive Summary .................................................................3 Rare earths elements ...............................................................8
Rare earths are classified as light, medium and heavy ..............................................8 Rare earths are only rare in high concentrations....................................................9 Most rare earths production comes from bastnsite ores .........................................10 Properties of rare earths metals..............................................................................11

Demand ...................................................................................14
Demand has grown at 3% per annum over the last 20 years....................................14 Recycling is becoming an increasingly important factor .........................................17 Bottom up demand forecasts..................................................................................19 Permanent magnets: we forecast growth of 7% per annum .....................................21 Metal Alloys: we forecast growth of 4% per annum ...............................................24 Catalysts: we forecast growth of 3% per annum .....................................................25 Phosphors: we forecast demand to fall 6% per annum ............................................26

Supply .....................................................................................27
China now represents 90% of total supply..............................................................27 Lynas....................................................................................................................36 Molycorp ..............................................................................................................38 Other existing sources of supply ............................................................................40 New sources of supply ..........................................................................................41 Supply forecasts ....................................................................................................43

Supply and demand balance .................................................45


We expect the overall market to be in surplus out to 2020 ......................................45 However, certain elements will likely remain in tight supply..................................45

Prices for rare earths .............................................................48 Applications for rare earths...................................................51


Permanent magnets (24% of demand)....................................................................51 Metal Alloys (25% of demand)..............................................................................62 Catalysts (20% of demand)....................................................................................64 Glass (17% of demand) .........................................................................................67 Phosphors (8% of demand)....................................................................................69 Other (5% of demand)...........................................................................................70

Appendix I: Individual rare earths elements ........................71 Appendix II: Rare earth geology............................................74 Appendix III: Mining and processing ....................................77 Appendix IV: Timeline of magnet development ...................80

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Executive Summary
Figure 1: Key rare earth elements
57 Lanthanum LIGHT 58 Cerium 60 Neodymium MEDIUM 62 Samarium 63 Europium 64 Gadolinium 65 Terbium 66 Dysprosium 67 Holmium HEAVY 68 Erbium 69 Thulium 70 Ytterbium 71 Lutetium 39 Yttrium
Source: J.P. Morgan

La Ce Nd Sm Eu Gd Tb Dy Ho Er Tm Yb Ly Y

59 Praseodymium Pr

Rare earths are a group of 17 elements, which share similar properties and are often found together in geological deposits. The elements are not necessarily that rare (their commonality sits somewhere between base and precious metals). However, rare earths are seldom found in high grade, discrete orebodies and as a result, the elements went largely undiscovered until the nineteenth century. Furthermore, until recently the scarcity of high-grade orebodies meant fewer uses were developed, and less exploration and development work was conducted to increase supply. Over the last few decades, the number of applications has increased materially with the unique properties of the elements providing superior qualities to alternative metals. Today, rare earths are mostly used to make high-strength permanent magnets, metal alloys (including in NiMH batteries), auto catalysts, and phosphors in fluorescent lights, as well as in the manufacture of glass products. The rapid evolution of rare earth use has seen overall demand increase at over 5% per annum between 1992 and 2008. The above-GDP demand growth rate was partly driven by increasing government regulations on such things as emissions control, renewable energy, energy efficient lighting etc; as well as technological changes and innovations like high-strength magnets, hybrid electric vehicles, ultra high-quality glass polishing for flat-screen devices etc. Rare earths are predominately sourced in China, where production has grown significantly since the mid-1980s. The country now represents close to 90% of global supply. As highlighted in a recent Chinese Government whitepaper, much of the supply growth was environmentally damaging, and in some instances from illegal mining. Consequently, the government has looked to impose both production and export restrictions. A significant lowering of export quotas in 2010-2011 resulted in consumers looking to build inventories ahead of a perceived shortage of material. During a six month period in early 2011, rare earths prices spiked more than 600%. However, since mid-2011, prices for rare earths elements have steadily declined, in most cases down 80% or more. We believe the consistent decline over the last three years has been due to: 1) reduced use of rare earths elements in manufacture; 2) changes to manufacturing techniques particularly increased use of recycling; and 3) destocking from consumers that had built inventories in 2010 to 2011 with the expectation of restricted supply. While the very high prices in 2011 resulted in changes to demand in a number of sectors (in some case structural), the crisis did not last long enough to trigger actual substitution away from rare earths to former technologies. Nonetheless, we believe there are reasons to be optimistic over the medium-term outlook given: 1) Chinese production is currently being curtailed because cash operating costs are close to current rare earths prices, 2) Western production growth is also being delayed to offset weak prices; 3) producers are looking to implement price floors, and 4) evidence of demand returning to applications previously affected by thrifting from process changes.

Figure 2: Rare earth price [US$/kg China Domestic based on Lynas basket of products]
100

75

50

25

0 2011

2012

2013

Source: Asian Metal, J.P. Morgan estimates

Overall, we forecast new supply growth will see the total market for rare earths to be in surplus for the foreseeable future. However, this does not consider that rare earths producers face a balance problem that is, the distribution of elements in the main producing mines do not match the consumption levels of each element. Based on our analysis, while the aggregate market looks over-supplied, we believe certain elements will likely be in short-supply which will lead to price increases.

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Figure 3: Cerium and lanthanum prices [US$/kg China Domestic]


35 LaO 30 25 20 15 10 5 0 2011 CeO

Reviewing the market for rare earths This report provides details into a comprehensive study into the supply/demand and pricing for individual rare earths elements. We have looked at the mineralogy, and mining and processing of rare earths, the main applications for the elements, and new and existing sources of supply. The key conclusions we make from the analysis are: Information reliability is a risk: We note the market for rare earths is extremely opaque and information reliability is a concern. Key datapoints that are uncertain and could have an impact on the results of our analysis include: inventory levels at manufacturers and customers, exact use of each rare earth element in each application (noting a wide range of end uses as well as ongoing changes to manufacturing techniques), supply from illegal mining activities in China, as well as others. Nonetheless, for the analysis described in this report, we have used a myriad of sources and believe the data used is the best available. Additionally, we believe we have been appropriately conservative with our forecasts to reflect the risks associated with information reliability. We forecast demand for rare earths will grow at 3% CAGR to 2020: Based on detailed bottom-up estimates of demand for each application, we forecast total consumption of rare earths to increase 3% per annum from 101kt REO in 2013 to 133kt in 2020. Within this forecast, we assume that recycling increases from 1% of demand in 2011 to 3% by 2020. The majority of our estimated demand growth comes from rare earths in permanent magnets (driven predominately by automotive and wind turbine applications) and auto-catalysts, each of which we estimate will grow at 7% per annum. On an elemental basis, we see most growth coming from NeodymiumPraseodymium (+6% per annum) which are largely used to make permanent magnets, and lanthanum (+3% per annum) which predominately goes into fluid cracking catalysts. Rare earths provide important qualities but can be substituted with poorer quality materials in certain applications: We note there are many applications (such as permanent magnets) where rare earths can be substituted with alternative metals. Invariably the substitution of materials with inferior qualities impacts the value of the product being manufactured. However, this likely provides a longterm price cap for rare earths oxides, in our view. Conversely, an increasing global focus on environment and sustainability (rather than cost) could mean greater use of rare earths in many applications considering the important weight reduction and catalytic properties of the elements. We estimate total supply growth of 4% CAGR to 173kt REO in 2020: The supply side is undergoing significant changes with the Chinese government signaling the country is not prepared to continue to supply rare earths to the rest of the world. Chinese production of rare earths has actually been declining from the peak of 133kt in 2006 to current levels of ~95ktpa. In the near-term, production growth will likely come from Lynas' Mount Weld project in Western Australia and Molycorps Mountain Pass in California. Longer-term, new supply could come from projects such as Dong Pao in Vietnam, Steenkampskraal in South Africa, Dubbo Zirconia in Australia and Kutessay II in Krygystan.

2012

2013

Source: Asian Metal, J.P. Morgan estimates

Figure 4: Nd-Pr and SEG prices [US$/kg China Domestic]


350 NdPr 300 250 200 150 100 50 0 2011 SEG

2012

2013

Source: Asian Metal, J.P. Morgan estimates

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

The rare earths balance problem: the supply and demand of individual rare earth elements have to be equal at any time; otherwise there will be shortages or excesses in some elements. The balance problem means that aggregate supply/demand analyses are not a true reflection of the outlook for individual elements.

The rare earths balance issue will keep the overall aggregate market in surplus to the end of the decade: We estimate the total market for rare earths is currently ~21kt in oversupply, representing almost 20% of total demand. With overall supply expected to grow faster than demand, we believe this overall surplus will only increase by the end of the decade. Looking at the entire market clouds the view on pricing individual elements: While the forecast oversupply does not appear positive for pricing, the outlook for each of the 17 rare earths oxides differs because the end markets have different projected growth rates and use a unique quantity of each element. This is the so-called balance problem: the supply and demand of rare earth elements have to be equal at any time; otherwise there will be shortages or excesses in some elements. We note certain elements appear structurally over-supplied (such as cerium) and these account for the entire forecast surplus. The issue for rare earths suppliers is that the ratios of rare earth elements produced are constrained by what is in the ore-body. Therefore to meet shortages of some elements, producers need to oversupply others. The outlook for Nd-Pr, Dysprosium and Lanthanum are positive: Based on our elemental supply/demand analysis, we believe Nd-Pr, Dysprosium and Lanthanum appear to be in the shortest supply. For Nd-Pr and Dysprosium we estimate the market will remain in deficit to 2020. On our forecasts, lanthanum will be in deficit to 2018 after which it will depend on a second phase expansion of Molycorps Mountain Pass mine (which is currently on hold and requires funding). Our base case assumes the second phase commences by CY2018 and results in the lanthanum market being well supplied in the latter part of the decade. Heavy rare earth economics driven by Yttrium and Dysprosium: Contrary to commonly-held belief, we do not believe the market for heavy rare earths looks tight with global supply able to meet our demand forecasts. This is particularly so for Yttrium given: 1) demand predominately comes from China which is selfsufficient and 2) demand for rare earths in phosphors (the key driver for Yttrium demand) is likely to decline over time. Dysprosium which is used in high temperature magnet applications has been highlighted for some time as a critically short element. However, we see a less critical shortage of the element due to ongoing technology changes. One such example is grain boundary diffusion (explained on page 56) which reduces the need for Dysprosium in high temperature applications. Prices have yet to reach a floor: Prices for rare earths oxides are now low enough to cause significant supply-side issues. Furthermore, on the demand side, the thrifting trends of recent years have started to reverse and this could help tighten the market. Nonetheless, we believe the ongoing weakness in global economies means inventory destocking will likely continue resulting in further declines to prices in the short-term. Anecdotally, we understand some buyers built up to four years of excess inventory in 2010-11 expecting Chinese export quotas to restrict supply of material.
5

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

We expect prices to rise over the medium-term: Prices for rare earths have declined almost 80% from the peak in 2011. While still above prices in 2010 and earlier, as we mentioned earlier there are reasons to be optimistic over the medium-term predominately driven by production curtailments and demand returning to applications previously affected by high prices. The table below shows our rare earths price forecasts. We expect the production curtailments implemented by rare earths producers will likely result in higher prices for lanthanum, Nd-Pr and SEG from the second half of 2013 and into 2014.
Table 1: Historical and forecast rare earths prices
US$/kg REAL Lanthanum Cerium Nd-Pr SEG Lynas basket ** 2011 17.84 20.72 114.26 139.14 46.41 2012 11.62 11.97 59.50 89.56 25.80 2013F 5.62 5.52 45.00 50.87 16.55 2014F 6.25 4.00 52.50 47.50 17.70 2015F 7.50 5.00 65.00 60.00 21.91 2016F 9.00 5.00 85.00 65.00 27.32 2017F 10.00 5.00 90.00 70.00 28.93 Long-term 7.00 5.00 80.00 70.00 25.77

Source: Asian Metal, J.P. Morgan estimates. ** Lynas basket price comprises 23.5% Lanthanum, 48.5% Cerium, 24.5% Nd-Pr, 3% SEG.

There is no such thing as a basket price: We note the concept of a basket price was developed by Lynas as a way for investors to conceptualize an average selling price as if their suite of products was a single commodity.

Light rare earth basket price likely to be driven predominately by Nd-Pr: While cerium is the largest component of a light rare earths basket by weight at close to 50%, we estimate the element currently contributes only 15% of the price. Conversely, Nd-Pr is less than 24% of the basket by weight but contributes upwards of 70% at current prevailing prices. The implication is the outlook for Nd-Pr is likely to be the key driver for a light rare earths basket price. Key takeaways from supply/demand modeling: A summary of our supply/demand model is shown in Figure 5 on page 7. We make the following points about the analysis: Lanthanum: We see the lanthanum market entering a deficit from 2013 which could last until close to the end of the decade. Based on our forecasts, beyond 2018 the lanthanum market relies on a Phase 2 expansion at Molycorps Mountain Pass asset. Cerium: Being the most common of the elements, we believe the cerium market will see the biggest surplus. In previous years, cerium and lanthanum prices have been closely aligned, but we believe this relationship will likely break down with differing outlooks for the two elements. Neodymium-Praseodymium: We forecast a growing deficit of Nd-Pr. In our view, the shortage of material could actually result in alternative, inferior materials being used in magnet applications. Trends in recent years suggest end-users will accept prices up to US$90-$100/kg for Nd-Pr after which thrifting and destocking will likely impact demand. Dysprosium: Dysprosium is particularly important in high-temperature magnet applications. In 2011, the Department of Energy classified dysprosium as a critical rare earth because of its scarcity. However, we believe technology improvements are reducing the requirement for the element in magnet production.

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Figure 5: Supply/demand forecast


2011 Supply and Demand Balance
Total REO supply Total REO demand Total Surplus/(Deficit) REO supply Lanthanum Cerium Praseody mium Neody mium Samarium Europium Gadolinium Terbium Dy sprosium Samarium Other t t t t t t t t t t t 25,088 46,247 4,853 17,030 2,577 211 1,956 283 1,252 9,835 2,516 24,665 44,676 4,676 15,980 2,322 208 1,768 214 1,175 9,601 2,096 29,624 52,173 5,367 17,971 2,486 242 1,804 211 1,176 9,597 2,111 31,559 55,640 5,761 19,300 2,656 279 1,869 217 1,187 9,622 2,167 34,484 60,895 6,363 21,333 2,917 336 1,969 226 1,204 9,660 2,251 35,632 63,043 6,585 22,048 3,013 343 2,020 229 1,222 9,789 2,284 36,483 64,760 6,771 22,681 3,114 347 2,094 236 1,270 10,158 2,294 40,346 70,439 7,273 24,124 3,236 362 2,148 242 1,306 10,412 2,294 43,908 75,551 7,713 25,350 3,318 375 2,170 245 1,311 10,423 2,294 43,908 75,551 7,713 25,350 3,318 375 2,170 245 1,311 10,423 2,294 t t t 111,846 96,144 15,702 107,380 90,293 17,087 122,763 101,336 21,427 130,258 106,245 24,013 141,636 111,194 30,442 146,208 116,329 29,879 150,208 120,322 29,886 162,183 124,238 37,945 172,658 128,577 44,081 172,658 133,435 39,223

2012

2013

2014

2015

2016

2017

2018

2019

2020

Total
REO demand Lanthanum Cerium Praseody mium Neody mium Samarium Europium Gadolinium Terbium Dy sprosium Yttrium Other

t
t t t t t t t t t t t

111,846
28,773 31,763 7,204 19,824 470 430 256 409 1,250 5,720 45

107,380
23,434 31,114 7,131 19,765 502 451 272 429 1,265 5,883 46

122,763
32,141 31,903 7,487 21,193 481 392 225 371 1,380 5,716 48

130,258
35,763 31,435 7,889 22,880 451 326 169 306 1,435 5,541 49

141,636
36,742 32,850 8,561 24,838 475 312 165 293 1,536 5,371 51

146,208
37,740 34,043 9,320 27,091 501 298 162 280 1,638 5,204 52

150,208
38,579 35,223 9,920 28,839 528 269 153 253 1,675 4,829 54

162,183
39,008 36,370 10,628 30,852 556 241 144 226 1,694 4,462 56

172,658
39,428 37,569 11,433 33,146 586 214 136 200 1,703 4,105 57

172,658
39,839 38,821 12,359 35,796 618 187 128 175 1,698 3,756 59

Total
REO balance Lanthanum Cerium Praseody mium Neody mium Samarium Europium Gadolinium Terbium Dy sprosium Yttrium Other

t
t t t t t t t t t t t

96,144
-3,685 14,484 -2,352 -2,794 2,106 -219 1,699 -126 2 4,115 2,471

90,293
1,231 13,562 -2,456 -3,785 1,820 -242 1,495 -215 -91 3,718 2,050

101,336
-2,517 20,270 -2,120 -3,222 2,005 -150 1,579 -160 -203 3,881 2,063

106,245
-4,204 24,205 -2,128 -3,579 2,204 -47 1,700 -89 -248 4,081 2,118

111,194
-2,258 28,045 -2,198 -3,505 2,441 24 1,803 -66 -332 4,289 2,200

116,329
-2,108 29,000 -2,736 -5,043 2,512 45 1,858 -51 -415 4,585 2,232

120,322
-2,096 29,537 -3,148 -6,158 2,586 77 1,941 -17 -404 5,329 2,240

124,238
1,338 34,068 -3,355 -6,727 2,679 121 2,004 16 -388 5,950 2,239

128,577
4,480 37,982 -3,720 -7,796 2,732 162 2,034 44 -392 6,318 2,237

133,435
4,069 36,730 -4,646 -10,446 2,700 189 2,043 69 -387 6,667 2,235

Total
Lanthanum Cerium Praseody mium Neody mium Samarium Europium Gadolinium Terbium Dy sprosium Yttrium Other

t
t t t t t t t t t t t

15,702
-13% 46% -33% -14% 448% -51% 663% -31% 0% 72% 5533%

17,087
5% 44% -34% -19% 363% -54% 549% -50% -7% 63% 4456%

21,427
-8% 64% -28% -15% 417% -38% 702% -43% -15% 68% 4299%

24,013
-12% 77% -27% -16% 488% -14% 1005% -29% -17% 74% 4284%

30,442
-6% 85% -26% -14% 513% 8% 1090% -23% -22% 80% 4319%

29,879
-6% 85% -29% -19% 501% 15% 1148% -18% -25% 88% 4255%

29,886
-5% 84% -32% -21% 490% 29% 1269% -7% -24% 110% 4147%

37,945
3% 94% -32% -22% 482% 50% 1389% 7% -23% 133% 4023%

44,081
11% 101% -33% -24% 466% 76% 1498% 22% -23% 154% 3903%

39,223
10% 95% -38% -29% 437% 101% 1601% 40% -23% 178% 3786%

REO balance as a percentage of demand

Total

16%

19%

21%

23%

27%

26%

25%

31%

34%

29%

Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates 7

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Rare earths elements


Rare earths are a group of 17 elements which consist of the lanthanides along with Yttrium and Scandium. The elements are generally grouped because they occur together in geological deposits and share many similar properties.
Figure 6: Rare earth elements in the periodic table

Sc
21

Y
39

La
57

Ce
58

Pr
59

Nd
60

Pm
61

Sm
62

Eu
63

Gd
64

Tb
65

Dy
66

Ho
67

Er
68

Tm
69

Yb
70

Lu
71

H Li Na K Rb Cs Fr Be Mg Ca Sr Ba Ra Sc Y La Ac Ti Zr Hf Rf V Nb Ta Db Cr Mo W Sg Mn Tc Re Bh Fe Ru Os Hs Co Rh Ir Mt Ni Pd Pt Ds Cu Ag Au Rg Zn Cd Hg B Al Ga In Tl C Si Ge Sn Pb N P As Sb Bi O S Se Te Po F Cl Br I At

He Ne Ar Kr Xe Rn

Source: J.P. Morgan

Rare earths are classified as light, medium and heavy


Rare earths are typically segmented into light, medium and heavy. The classification is on the basis of atomic weight, with yttrium generally grouped in with heavy rare earths due to its geologic occurrence and physical properties. Light and medium rare earths are more often found in carbonatites while heavy rare earths tend to occur in a number of less common mineral types or in ion-absorbing clays (we discuss rare earth mineralogy from page 74). 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 as a result are priced significantly lower than heavy rare earths. While yttrium is grouped with heavy rare earths, it is significantly lower priced than the other heavy rare earths.
Figure 7: Rare earth categorization

Source: J.P. Morgan, Company data.

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Rare earths are only rare in high concentrations


Despite their name, rare earth elements are chemically not that rare. Within the earths crust, light rare earth metals have a similar abundance to the less common base metals and even heavy rare earth metals are more common than silver. As shown in Figure 8, precious metals, such as gold and the platinum group elements are less common than rare earths. To a certain extent this is reflected in the price of rare earth metals which generally fall somewhere in between the price of the rarer base metals and silver.
Rare earths are not overly rare, but are not often found in discrete, high-grade deposits

Figure 8: Relative abundance of chemical elements

Source: USGS

While relatively common, due to their chemical compatibility rare earths infrequently form discrete deposits (as occurs with crustally less common but more incompatible metals, such as gold and platinum), and are never found as native metals (like the base and precious metals). Rare earth oxides are also typically found with other incompatible elements, such as titanium, phosphorus, niobium, barium, potassium, sodium, rubidium, strontium, thorium, uranium and fluorine. The scarcity of enriched deposits of rare earth metals meant that the elements went undiscovered for longer than other metals. Furthermore, less uses were developed, demand was lower and there was less exploration for rare earth deposits. The implication is that there are currently very few rare earth deposits known of, when compared to base and precious metals. We discuss mining and processing of rare earths from page 77.

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Most rare earths production comes from bastnsite ores


World production of light rare earths is dominated by the processing of bastnsite at Baotou in Inner Mongolia, where it is a by-product of iron ore mining. Monazite and xenotime are usually extracted as by-products of mineral sands and tin operations often from placer deposits. The less abundant, but more valuable yttrium and heavy rare earths are mainly sourced from ionic absorption clays in southern China. The relative rare earths content of major deposits around the world are shown in the table below. For a description of rare earth geology refer to the appendix on page 74.
Table 2: Rare earth types and percentage contents of major contributing source minerals
LIGHT MEDIUM HEAVY

Praseodymium (Pr)

Neodymium (Nd)

Dysprosium (Dy)

Gadolinium (Gd)

Lanthanum (La)

Samarium (Sm)

Europium (Eu)

Ytterbium (Yb)

Holmium (Ho)

Thulium (Tm)

Terbium (Tb)

Lutetium(Lu)
0.1 0.4 0.2 0.1 -

Cerium (Ce)

Erbium (Er)

Location Currently Active Bastnsite Rare earth laterite Ion adsorption clays Loparite Various Various Bastnsite Secondary monazite Bayan Obo, Inner Mongolia Xunwu, China Longnan, China Lovozerskaya, Russia India Brazil Mountain Pass, USA Mt Weld, Australia

23.0 43.4 1.8 28.0 23.0 N.A. 33.2 23.9

50.0 2.4 0.4 57.5 46.0 49.1 47.6

6.2 9.0 0.7 3.8 5.0 4.3 5.2

18.5 31.7 3.0 8.8 20.0 12.0 18.1

0.8 3.9 2.8 4.0 0.8 2.4

0.2 0.5 0.1 0.1 0.1 0.5

0.7 3.0 6.9 0.2 1.3

0.1 1.3 0.1 0.1

0.1 6.7 0.1 0.3

1.6 0.1

4.9 0.3

0.7 -

0.3 2.5 0.1

Possible in next 5 years Monazite Monazite Fergusonite Bastnsite & Parisite Alanite & apatite Trachyte Eastern Coast, Brazil Steenkampskraal, South Africa Nechalco, Canada Dong Pao, Vietnam Hoidas Lake, Canada Dubbo Zirconia, Australia 24.0 22.0 16.9 32.4 19.8 19.5 47.0 46.0 41.4 50.4 45.6 36.7 4.5 5.0 4.8 4.0 5.8 4.0 18.5 16.6 18.7 10.7 21.9 14.1 3.0 2.5 3.5 0.9 2.9 2.5 0.1 0.1 0.4 0.6 0.1 1.0 1.7 2.9 1.3 2.1 0.1 0.1 1.8 0.1 0.3 0.4 0.7 0.7 0.4 2.0 0.1 1.4 5.0 7.4 1.3 15.8

Potential beyond 5 years RE thorium minerals Lehmi Pass, USA Nangang, China Eastern Coast, Brazil Monazite North Capel, Australia North Stradbroke, Australia Green Cove, USA Apatite Nolans Bore, Australia 7.0 23.0 24.0 23.9 21.5 17.5 20.0 19.0 42.7 47.0 46.0 45.8 43.7 48.2 3.0 4.1 4.5 5.0 5.3 5.0 5.9 18.0 17.0 18.5 17.4 18.6 17.5 21.5 11.0 3.0 3.0 2.5 3.1 3.1 2.4 4.0 0.1 0.1 0.1 0.8 0.8 0.4 11.0 2.0 1.0 1.5 1.8 1.8 1.0 0.5 0.7 0.1 0.3 0.3 0.1 4.0 0.8 0.4 0.7 0.6 0.6 0.3 0.5 0.1 0.1 0.1 0.1 0.2 0.3 0.1 0.2 0.2 0.2 0.2 0.5 2.4 0.1 0.1 0.1 20.9 2.4 1.4 2.4 2.5 2.5 -

Source: US Department of Energy, J.P. Morgan

10

Yttrium(Y)
8.0 65.0 0.1 -

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Properties of rare earths metals


Rare earth elements are metals with high lustre and electrical conductivity. In colour, they are typically silver, silvery-white or grey that tarnish when exposed to air, thereby forming oxide compounds. Chemically, rare earths are strong reducing agents, their compounds are generally ionic, and they display high melting and boiling points. Rare earths are relatively soft in their metallic state metals, the hardness of which increases with higher atomic numbers. Rare earths react with other metallic and non-metallic elements to form a wide range of compounds, each with specific chemical behaviours. These compounds commonly fluoresce strongly under ultraviolet light, which may assist in their identification. The compounds generally react with water or dilute acid to liberate hydrogen gas and many compounds are strongly paramagnetic (materials suitable to be magnetized). Specific properties of the key rare earth elements are shown in the table below.
Table 3: Properties of rare earth elements
Catalytic Lanthanum Cerium Praseodymium Neodymium Samarium Europium Gadolinium Terbium Dysprosium Erbium Yttrium
Source: IAM Gold

Magnetic

Electrical

Chemical

Optical

La Ce Pr Nd Sm Eu Gd Te Dy Er Y

The unique properties of rare earths have resulted in new applications being found consistently over the past fifty years. These include applications such as catalytic converters and the development of permanent magnets which have enabled greater efficiency, miniaturization, durability and speed in electric and electronic components. Substitutes exist, but rarely work as effectively.

11

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

The following table shows the key end uses for each element.
Table 4: End uses of rare earths by element
Element Symbol Main Applications Used in the manufacture of fluid cracking catalysts and to make rechargeable lanthanum nickel metal hydride batteries the type used in electric and hybrid vehicles, laptop computers, cameras; fibre optics to increase transmission rates, highend camera lenses, telescopes, binoculars as lanthanum improves visual clarity; infrared absorbing glass for night vision goggles, used to reduce the level of phosphates in patients with kidney disease. Used to polish glass, metal and gemstones, computer chips, transistors and other electronic components; automotive catalytic converters to reduce pollution, added in glass making process to decolourize it, gives compact fluorescent bulbs the green part of the light spectrum. Used in combination with neodymium, its primary use is to make high power magnets. Used to make welder and glass blower goggles as praseodymium oxide protects against yellow flare and UV light; plastic, vibrant yellow ceramics. An elemental twin of praseodymium, the principal use of Neodymium is in the manufacture of permanent magnets. Other important applications include laser range finders and guidance systems. Primary use is in the production of permanent magnets but also in X-ray lasers, precision guided weapons and white-noise production in stealth technology. Primarily used in phosphors used in pilot display screens, televisions (reddish-orange), and energy efficient fluorescent lights (reddish-orange and blue). Used to enhance the clarity of MRI scans by injecting Gadolinium contrast agents into the patient. Used in nuclear reactor control rods to control the fission process. Primarily used in phosphors, particularly in fluorescent bulbs and tubes (yellow-green), high intensity green emitter used in projection televisions and X-ray intensifying screens (yellow-green, violet, and blue). Most commonly used in the manufacture of neodymium-iron-boron high strength permanent magnets. Dysprosium-165 is injected into joints to treat rheumatoid arthritis. Dysprosium is used in radiation badges to detect and monitor radiation exposure. Magnets, nuclear (control) rods, medical uses, lasers, red & yellow pigments in glass & zirconia, calibration of gamma ray spectrometers Used in glass coloring, as an amplifier in fiber optics, and in lasers for medical and dental use. Used in medical imaging, phosphors, and lasers. Key markets include fibre optics, radiation source for x-ray machines, stress gauges, lasers, doping of stainless steel, doping of optical materials Lutetium is used in specialist x-ray phosphors, single crystal scintillations (baggage scanners, oil exploration) Yttrium phosphors are used in energy efficient fluorescent lamps and bulbs. Yttria stabilized zirconium oxide is used in high temperature applications, such as thermal barrier coating to protect aerospace high temperature surfaces. Can increase the strength of metallic alloys.

Lanthanum

La

Cerium

Ce

Praseodymium

Pr

Neodymium

Nd

Samarium Europium Gadolinium

Sa Eu Gd

Terbium

Tr

Dysprosium

Dy

Holmium Erbium Thulium Ytterbium Lutetium

Ho Er Tm Yb Lu

Yttrium

Source: IAMGold

12

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Rare earths are currently used in a range of applications. They include more traditional applications such as glass additives, polishing powders, catalysts and pigments. Most of the growth for rare earths, however, is being driven by metals and alloys (including permanent magnets) that reduce the weight and energy consumption of the products in which they are used and therefore allow for greater efficiency, speed, thermal stability and miniaturization.
Figure 9: 2012 demand for rare earths by end use [kt]

Source: Molycorp

Figure 10 shows the distribution of total rare earth demand by key end-use segments. We discuss each of these segments in detail from page 51.
Figure 10: 2012 demand for rare earths by end use [kt]
25 20 15 15% 10 11% 5 5% 0 Other Glass Auto- Phosphors NiMH Glass Fluid Metal Alloys Magnets Additives Catalysts Batteries Polishing Cracking Catalysts 6% 8% 8% 11% 13% 24%

Source: J.P. Morgan estimates

13

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Demand
Demand has grown at 3% per annum over the last 20 years
Total demand for rare earths has increased 3.5% per annum for the last twenty years. However, as shown in the chart below, demand has been particularly volatile in recent years. The global financial crisis in 2009 and rising rare earths prices in 2010 saw total demand moderate and demand in 2012 has continued to fall below the peak set in 2008. Excluding the recent moderation, demand growth from 1992 to the peak in 2008 was 5.5% per annum.
Figure 11: Rare earth demand by end use [kt]
120 110 100 90 80 70 60 50 40 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: J.P. Morgan estimates, Company data.

The table below shows our estimate of the percentage of each rare earth element in the major end-use groups.
Table 5: Estimated proportion of rare earth elements in end use in 2012
Praseodymium Dysprosium

Neodymium

Gadolinium

Lanthanum

Samarium

Europium

Terbium

Yttrium

Cerium

Magnets NiMH Batteries Auto-Catalysts Fluid Cracking Catalysts Metal Alloys Phosphors Glass Polishing Glass Additives Other
Source: J.P. Morgan estimates. 14

25.0% 5.0% 90.0% 26.0% 8.5% 31.4% 40.0% 19.0%

50.0% 85.0% 10.0% 52.0% 11.0% 65.1% 60.0% 39.0%

23.7% 5.0% 5.0% 5.5% 3.5% 4.0%

71.0% 15.0% 5.0% 16.5% 15.0%

1.0% 2.0%

1.0% 4.9% -

1.0% 1.8% 1.0%

1.0% 4.6% -

5.4% 1.0% -

69.2% 19.0%

1.0%

Other
-

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

The chart below shows rare earth demand by element.


Figure 12: Rare earth demand by element [kt]
120 100 80 60 40 20 0 2003 2004 2005 Cerium Terbium 2006 2007 2008 2009 2010 Samarium Other 2011 2012 Lanthanum Gadolinium Praseodymium Neodymium Dysprosium Yttrium Europium

Source: J.P. Morgan estimates, Company data.

As shown in Figure 13, cerium represented by far the largest proportion of demand at 45% in 2012, followed by neodymium at 19%, and lanthanum at 17%. Excluding Yttrium, heavy rare earths represented only 2-3% of total demand in 2012.
Figure 13: Rare earth demand by element [proportion of 2012 total demand]
Samarium: 0.6% Europium: 0.5% Gadolinium: 0.3% Terbium: 0.5% Dysprosium: 1.4% Other: 0.1% Lanthanum 26%

Yttrium 7%

Neodymium 22%

Cerium 34% Praseodymium 8%


Source: J.P. Morgan estimates, Company data.

Historical demand charts for selected rare earth elements are shown on page 16.

15

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Figure 14: Historical Lanthanum demand [kt]


35 30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 15: Historical Cerium demand [kt]


40 35 30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 16: Historical Praseodymium demand [kt]


9 8 7 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 17: Historical Neodymium demand [kt]


30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 18: Historical Samarium demand [kt]


0.6 0.5 0.4 0.3 0.2 0.1 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 19: Historical Europium demand [kt]


0.6 0.5 0.4 0.3 0.2 0.1 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 20: Historical Gadolinium demand [kt]


0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: J.P. Morgan estimates, Company data.

Figure 21: Historical Dysprosium demand [kt]


1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

16

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Recycling is becoming an increasingly important factor


In 2011, less than 1% of rare earths demand came from recycled material. This was due to inefficient collection, technological difficulties and lack of incentives. However, with China reducing export quotas and prices increasing materially in 2010-11, Western consumers implemented permanent changes to manufacturing techniques to make use of recycled material. Furthermore, more ways to recycle rare earths elements are being sought to reduce requirements for primary supply. In general, recycling of rare earths come from three sources: Pre-consumer scrap: This source of recycled material comes from material left over from the production process. In rare earths, it is predominately the reprocessing of manufacturing swarf and rejects from the production of permanent magnets. End-of-life products: This comprises the recovering material from used products. In rare earths it consists predominately of NiMH batteries, permanent magnets and phosphors. Industrial residues: This is mainly processing of material in land-fill as well as tailings or residues from mining and industrial processing.
Figure 22: Recycle processes

Source: J.P. Morgan.

We address the key areas where recycling has been implemented below. Magnet swarf recycling With the main rare earth elements used in production of magnets (Neodymium, Praseodymium and Dysprosium in particular) expected to be in the shortest supply, recycling processes have been implemented in many applications. We understand that up to 30% of the starting rare earth alloy can be lost during the manufacturing process.

17

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

The three main sources of recycled material are: 1) swarf (or off-cuts) from the manufacture process; 2) small magnets in end-of-life products; and 3) direct recycling of large magnets particularly from electric vehicles and wind turbines. With the exception of the direct re-use of large magnets, recycled magnet material generally needs to be reprocessed. In some cases, for certain applications where there are common distributions of elements (such as magnets in hard-disk drives), this is as simple as powder processing, or remelting of recycled magnets to master alloys to be made into new magnets. However, in most applications, the individual rare earth elements in the recycled material need to be separated. There are a number of techniques to reprocess magnet material including: Reprocessing of alloys to magnets after hydrogen decrepitation Hydrometallurgical methods Pyrometallurgical methods Gas-phase extraction Rare earth recycling in Nickel Metal Hydride Batteries Until 2011, recycling of NiMH batteries focused mainly on the recovery of other metals in the battery particularly nickel and rare earths elements were lost in the process. However, since then, hydrometallurgical methods have been developed to recover nickel, cobalt and rare earths from used NiMH batteries. In 2011, Rhodia and Umicore indicated that a process has been jointly developed to recycle rare earths from NiMH batteries and the two companies have since built an industrial-scale pilot plant in Hoboken in Belgium. Details of the process have not been released, but we believe the plant has an annual capacity of 7,000 tonnes. Re-use of phosphors Recycling of material from used lamp phosphors is more straightforward than other applications for rare earths mainly because end-of-life lamps are collected in many countries because they contain mercury, which is a hazardous waste. The three methods to recycle rare earths from used phosphors are: 1) direct reuse of phosphors in new lamps; 2) recycling of individual phosphor components by physiochemical separation methods; and 3) chemical processing of phosphors to recover rare earth elements. In the second two methods, the mercury present in fluorescent lamps can be a potential hazard, and the removal of this is a major challenge. Slurry recycling in polishing powders Cerium-rich rare earths, used in glass polishing powders, can be extracted from slurry waste in the application by oxidative roasting and acid leaching and purified through selective precipitation. We believe this process was adopted by manufacturers in 2011 resulting in a 20% drop in demand.

18

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Bottom up demand forecasts


Using bottom-up forecasts for each of the end markets, we estimate demand for rare earths will increase 3% per annum to 133kt by 2020, as shown below. This is broadly in line with trends that have been seen since the early 1990s. Within our demand forecasts, we assume that recycling rates increase from 1% in 2011 to 3% in 2020.
Figure 23: Demand forecasts [kt]
160 140 120 100 80 60 40 1992 FORECASTS

Impact of recycling

1995

1998

2001

2004

2007

2010

2013

2016

2019

Source: J.P. Morgan estimates.

As shown in the charts below, we expect most of the growth in demand to come from the use of permanent magnets, which we forecast will represent 32% of demand in 2020, up from 24% currently.
Figure 24: Proportion of demand by application in 2012 Figure 25: Proportion of demand by application in 2020

2012

Glass Additives 6% Glass Polishing 11% Phosphors 8%

Other 5%

Magnets 24% NiMH Batteries 11% Auto-Catalysts 7% Fluid Cracking Catalysts 13%

2020

Glass Additives 5% Glass Polishing 11%

Other 4%

Magnets 32%

Metal Alloys 15%


Source: J.P. Morgan estimates.

Phosphors 3% Metal Alloys 13% Fluid Cracking Catalysts 14%

NiMH Batteries 9% Auto-Catalysts 9%

We discuss the derivation of our demand forecasts in more detail from page 21.

19

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Table 6: Demand forecasts by application and by element


kt REO Magnets NiMH Batteries Auto-Catalysts Fluid Cracking Catalysts Metal Alloys Phosphors Glass Polishing Glass Additives Other Total 2011 21,943 8,512 6,111 17,228 13,394 7,039 12,500 4,951 4,466 96,144 2012 21,588 9,616 6,850 11,600 13,400 7,239 10,300 5,100 4,600 90,293 2013F 23,636 10,409 7,567 17,574 14,008 6,942 11,200 5,200 4,800 101,336 2014F 26,090 11,104 8,302 17,750 14,458 6,650 11,592 5,356 4,944 106,245 2015F 28,557 11,722 9,099 17,927 14,918 6,363 11,998 5,517 5,092 111,194 2016F 31,431 12,371 9,609 18,107 15,387 6,080 12,418 5,682 5,245 116,329 2017F 33,589 12,822 10,151 18,288 15,870 5,495 12,852 5,853 5,402 120,322 2018F 36,151 12,705 10,726 18,470 16,370 4,921 13,302 6,028 5,565 124,238 2019F 39,079 12,553 11,338 18,655 16,885 4,358 13,768 6,209 5,731 128,577 2020F 42,466 12,367 11,988 18,842 17,417 3,806 14,250 6,395 5,903 133,435 CAGR 7% 4% 7% 1% 3% -6% 1% 3% 3% 3%

kt REO Lanthanum Cerium Praseodymium Neodymium Samarium Europium Gadolinium Terbium Dysprosium Yttrium Other Total

2011 28,773 31,763 7,204 19,824 470 430 256 409 1,250 5,720 45 96,144

2012 23,434 31,114 7,131 19,765 502 451 272 429 1,265 5,883 46 90,293

2013F 32,141 31,903 7,487 21,193 481 392 225 371 1,380 5,716 48 101,336

2014F 35,763 31,435 7,889 22,880 451 326 169 306 1,435 5,541 49 106,245

2015F 36,742 32,850 8,561 24,838 475 312 165 293 1,536 5,371 51 111,194

2016F 37,740 34,043 9,320 27,091 501 298 162 280 1,638 5,204 52 116,329

2017F 38,579 35,223 9,920 28,839 528 269 153 253 1,675 4,829 54 120,322

2018F 39,008 36,370 10,628 30,852 556 241 144 226 1,694 4,462 56 124,238

2019F 39,428 37,569 11,433 33,146 586 214 136 200 1,703 4,105 57 128,577

2020F 39,839 38,821 12,359 35,796 618 187 128 175 1,698 3,756 59 133,435

CAGR 3% 2% 6% 6% 3% -8% -7% -8% 3% -4% 3% 3%

Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

20

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Permanent magnets: we forecast growth of 7% per annum


As shown in the chart below, we forecast rare earth demand into permanent magnets to increase 7% per annum to 43kt by 2020.
Figure 26: Demand forecasts for rare earths into permanent magnets [kt]
45 40 35 30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates.

To arrive at these forecasts, we estimate demand for rare earths into: wind turbines, autos, electric vehicles and bicycles, hard disk-drives, and other. Wind turbines As shown in the chart below, we base our forecasts for permanent magnet demand in wind turbines on the middle of the upper and lower cases within the Global Wind Energy Outlook 2012 report by the Global Wind Energy Council.
Figure 27: Global wind energy forecast compared to GWEO upper and lower case [GW]
1,400 1,200 1,000 800 600 400 200 0 2011 OECD North America EU 27 Latin America Africa Eastern Europe China Non-OECD Asia OECD Pacific India Middle East Other Global Wind Energy outlook upper case

J.P. Morgan estimates

Global Wind Energy outlook lower case

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: J.P. Morgan estimates., Global Wind Energy Outlook

21

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

We also make the following assumptions: Permanent magnet generators used increase from 45% to 77% as more direct drive turbines are built; Magnets used in generators decrease from 600kg/MW currently to ~400kg/MW by 2020 as more hybrid (or half speed) generators are built; We assume dysprosium content of 3% falling to 1% by 2020. Based on these assumptions, we expect demand for rare earths into permanent magnets for wind turbines of 15kt in 2020. Autos excluding electric vehicles We base our magnet forecasts on global vehicle sales increasing from 92 million in 2011 to 144 million in 2020 as shown below. This represents a compound annual growth rate of 5%.
Figure 28: Global vehicle sales [millions]
160 140 120 100 80 60 40 20 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Wards Auto, J.P. Morgan estimates.

Light vehicle sales

Commercial vehicle sales

We also include increasing use of permanent magnets in cars are a way to reduce weight and improve fuel consumption. We estimate permanent magnet use to increase from 0.25kg/vehicle in 2011 to 0.30kg/vehicle in 2020. Similar to wind turbines, we assume 30% rare earth metal in a neo magnet, and 79% metal in oxide. Electric Vehicles We use JD Power forecasts for global electrical vehicle sales as shown below.
Figure 29: Global electric vehicle sales [thousands]
4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: JD Power, J.P. Morgan estimates. 22

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

We estimate EVs use approximately 2kg of permanent magnets per unit. This includes the magnets in the electric drive motors as well as other parts of the car. Based on these assumptions, we expect magnet demand to increase from 3,400t in 2012 to 7,800t by 2020. Hard-disk drives We use our global research teams forecasts for hard disk drive sales (shown below) and apply a unit rate of 0.02kg/unit for permanent magnet use.
Figure 30: Hard disk drive sales [millions]
720 700 680 660 640 620 600 580 560 540 520 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: IDC, Company forecasts, J.P. Morgan estimates.

Based on these forecasts, we estimate magnet demand into HDDs to increase from 11,500t in 2012 to 13,800t by 2020. Overall rare earth demand forecast into permanent magnets Our demand forecast for rare earths into permanent magnets is shown below.
Figure 31: Rare earth oxide demand into permanent magnets [kt]
45 40 35 30 25 20 15 10 5 0 2011 Lanthanum Gadolinium 2012 2013 Cerium Terbium 2014 2015 2016 2017 2018 Samarium Other 2019 2020 Praseodymium Neodymium Dysprosium Yttrium Europium

Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

23

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Metal Alloys: we forecast growth of 4% per annum


As shown below, we forecast demand to rare earths into metal alloys to increase 4% per annum to 30kt by 2020.
Figure 32: Demand forecasts for rare earths into metal alloys [kt]
35 30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

Nickel Metal Hydride batteries We use the JD Power forecasts for electric vehicle sales for our estimate of NiMH batteries, but assume that the take-up reduces from 80% to 60% by 2020 as Lithiumion batteries gain share.
Figure 33: Rare earths in NiMH batteries [kt]
16 14 12 10 8 6 4 2 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates.

Electric Vehicles

Other

Other key assumptions include: 7kg of alloy in a NiMH battery used in an electric vehicle, 30% metal in alloy, 1.26kg oxide in 1kg of metal. Other metal alloys Our forecasts for rare earths use in other metal alloys are based around our global teams steel production forecasts. Overall, we expect rare earth oxide demand into other metal alloys to increase from 13.4kt to 17.4kt by 2020.

24

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Catalysts: we forecast growth of 3% per annum


We forecast demand into catalysts to step up in 2013 (driven predominately by fluid cracking catalysts which we detail below), then increase 3% per annum to the end of the decade.
Figure 34: Demand forecasts for rare earths into catalysts [kt]
35 30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

Fluid cracking catalysts As we described on page 65, restricted supply visibility provided incentives for catalyst manufacturers to reduce rare earth content. With the perceived supply crisis now over, FCC producers have moved back to the base-case 3% REO in the zeolite. This should provide a step up in demand for rare earths in 2013. Beyond 2013, we expect only modest growth in FCC demand of 1% per annum to 2020. Auto-catalytic converters We estimate demand for rare-earths into auto-catalytic converters to increase from 6.8kt in 2012 to 12.0kt in 2020. This is driven by the following key assumptions: Global light and commercial vehicle sales to increase from 98 million in 2012 to 148 million in 2020 this is in line with our vehicle sales used in our permanent magnet forecasts; We estimate take-up of auto-catalysts to increase from ~80% currently to 96% by 2020; We estimate 0.08kg of rare earth oxide is used in an auto-cat for a light vehicle, and 0.12kg in a commercial vehicle.

25

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Phosphors: we forecast demand to fall 6% per annum


As shown in the chart below, we expect demand for rare earths into phosphors to decline materially over the next decade as new and replacement sales of linear fluorescent and compact fluorescent decline and LED lights gain share.
Figure 35: Demand forecasts for rare earths into phosphors [kt]
10 9 8 7 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

We have based our forecasts of light sales on a McKinsey report: Lighting the way: Perspectives on the global lighting market.
Figure 36: New and replacement bulbs [millions]
2,500 2,000 1,500 1,000 500 0 2011
Source: McKinsey

Linear fluorescent replacement Compact fluorescent replacement

Linear fluorescent new Compact fluorescent new

2012

2013

2014

2015

2016

2017

2018

2019

2020

We also use the following estimates to generate our rare earths demand forecasts: 3 grams of phosphors per linear fluorescent bulb and 1.5g for a compact fluorescent; Phosphors contain 60% rare earths oxides.

26

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Supply
As shown in the chart below production of rare earths oxides have increased 3% per annum for the last 27 years. All of the growth has come from China, which now represents more than 90% of supply (versus only 20% in 1985). Prior to 1990, the US was the largest producer of rare earths oxides largely from its Mountain Pass mine in California, which was eventually closed in 2002.
Figure 37: Global rare earths supply [kt REO]
160 140 120 100 80 60 40 20 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Other US China

Source: Company sources

China now represents 90% of total supply


China produced approximately 95kt of rare earth oxides in 2012. While supply has increased more than 9% per annum since 1985, the trend in recent years has been lower. Since production peaked at approximately 135kt in 2006, supply of rare earths in China has fallen 29% largely due to Government measures to reduce production and exports (we discuss these measures in more detail from page 28).
Figure 38: Supply of rare earths from China [kt REO]
140 120 100 80 60 40 20 0 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: Company sources

27

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

History of rare earth supply in China Chinas scientists originally discovered rare-earth resources in Bayan Obo in Inner Mongolia in 1927 and production of concentrates started in 1957. Since the introduction of reform in the late 1970s, Chinas rare earth industry has seen rapid development. As shown in the chart below, from the early 1990s, China became the dominant producer of rare earth oxides.
Figure 39: China as a percentage of global supply
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: Company sources

Rare-earth resources have now been discovered in 21 of Chinas Provinces and Autonomous Regions: Fujian, Gansu, Guangdong, Guangxi, Guizhou, Hainan, Henan, Hubei, Hunan, Jiangxi, Jilin, Liaoning, Nei Mongol, Qinghai, Shaanxi, Shandong, Shanxi, Sichuan, Xinjiang, Yunnan, and Zhejiang. China holds 50% of the worlds reserves (55 million metric tons out of 110 million metric tons) according to the most recent USGS estimate. China has been implementing measures to control production & export growth Between 1990 and 2000 Chinas production of rare earths increased over 450% from 16,000t to 73,000t. Through this period and into the 2000s, the Chinese government has looked at various measures to control production and exports as a means of conserving the countrys mineral resources and protecting the environment. These measures included: Production and export quotas; Increased export taxes; and Restrictions on licensing resulting in consolidation of producers. Chinas rare earths production quotas Since the early 1990s, Chinas Ministry of Land and Resources (MLR) has been responsible for developing production plans for the countrys strategic commodities, including rare earths. The plans include overall production quotas, as well as quotas for individual Provinces. Provincial governments are then responsible for managing their allocated quota and for assigning output quotas to individual mining companies.

28

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

In 2008, the Rare-Earth Office (which was part of the State Development and Planning Commission) was transferred to the Ministry of Industry and Information Technology (MIIT), which started issuing rare-earth production quotas for the country. The production quotas were initially regarded only as guidelines and the output of rare earths was much higher than the targets (as shown below). In addition, a significant amount of the over-quota production was by miners who worked without proper mining licenses and who used obsolete mining technology that caused significant environmental damage, especially in the Provinces of Guangdong, Jiangxi, and Sichuan.
Figure 40: China's production versus its quotas
140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: J.P. Morgan estimates, USGS

Production

Quota

However, in 2011, the MIIT indicated that companies exceeding their quotas could lose their licence to operate, and since then production has been more in line with the quotas. China also issues export quotas In addition to setting production quotas for rare earths, China also sets quotas on the amount of rare earths that can be exported. These quotas are typically announced twice a year and are split between light and medium/heavy rare earths. The Chinese export quota has been reduced substantially since from 66kt in 2005 to 31kt in 2012. Nonetheless, as shown in the table below, Chinese exports have consistently fallen below the export quotas anyway.
Figure 41: China's export quotas versus actual exports
60 50 40 30 20 10 0 2008
Source: J.P. Morgan estimates, USGS

Export quota

Actual exports

2009

2010

2011

2012

29

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

and higher export taxes China taxes mineral production to raise revenue and to regulate the mineral industries. In the 1990s, the Government encouraged enterprises to export their products by refunding the value-added tax that producers paid on exported products. In early 2000, owing to increased domestic consumption, the Government reduced the export rebate for many strategic commodities. In 2005, the rebate on exported rare earths was eliminated, and trade of rare-earth concentrate was banned. In 2007, the Government introduced an export duty on rare-earth products to restrict the export of rare earth products. These export rates have increased, as shown in the table below.
Table 7: China's rare-earth export duty rates [%]
Lanthanum oxide Cerium oxide Neodymium Praseodymium oxide Heavy rare earths Mixed rare earth carbonates Rare earth ore
Source: USGS

2007 10 10 10 10 10 10

2008 15 15 15 25 15 10

2009 15 15 15 25 15 15

2010 15 15 15 25 15 15

2011 15 15 15 25 15 15

Licence restrictions are leading to industry consolidation In 1990, the Chinese Government declared rare earths to be a protected and strategic mineral. As a consequence, foreign investors were prohibited from mining rare earths and restricted from participating in rare-earth smelting and separation projects except in joint ventures with Chinese firms. All projects for rare-earth mining and smelting, whatever their size, required approval from the State Development and Planning Commission (SDPC), which included the Rare-Earth Office. Sino-foreign joint-venture projects had to be approved by both SDPC and the Ministry of Commerce (MOC). In September 2012, the number of mining licences in China was cut from 113 to 67 with most of the reduction taking place in Jiangxi where there has been significant illegal mining. Since 2006, the Government has stepped up enforcement of its policies and regulations and shut down illegal mines in the Provinces of Guangdong, Jiangxi, and Sichuan. The Chinese government is actively trying to consolidate the rare earth industry into major mining groups to assert state control over the supply of rare earths which it views as a strategic asset. These groups will centre on the three main rare earth production areas in China: Northern District: Baotou Hi-Tech (representing the Inner Mongolia government) is taking the lead in the Baotou area which predominantly produces light rare earths. This region accounted for 50-60% of Chinas total rare-earth concentrate output during the past decade; Western District: JiangXi Copper Corp is taking the lead in consolidation in the Sichuan area which produces mainly light rare earths. The Sichuan Province was the second leading rare-earth concentrate producer, accounting for 24-30% of production during the past decade;
30

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Southern District: In the Ionic clay region in the south of China it is expected that consolidation will result in 3 producing groups, China Minmetals, Chinalco and China Mining. This is where most of Chinas heavy rare earths are produced.
Figure 42: China production of rare earths

Source: Company sources, J.P. Morgan

Northern District Baotou is situated in the central part of Inner Mongolia, on the Tumochuan and Hetao Flatlands, with the Yellow River to the south and Mongolia to the north. Baotou is the largest rare earth industrial base in China, and is also famous for its facilities for the production of iron and steel, machinery, non-ferrous metals, and textiles. In May 2011, the Inner Mongolia autonomous region government issued a plan for rare earth enterprises in the region to be integrated into Chinas largest rare earth
31

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

producer: Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co (Baotou). The plan listed 35 rare earth miners and processors within the framework with Baotou Steel Rare-Earth (Group) Hi-Tech in charge of mining, selection of mine locations, processing, management and separation. By April 2012, 22 of the 35 rare earth companies had closed and only the remaining enterprises were to be integrated into Baotou. The final list of companies to be integrated include: Baotou Jinmeng Rare Earth Co Limited, Baotou Xinyuan Rare Earth Hi-tech and New Material Co Ltd and Baotou Xinye New Material Co Ltd. Baotou signed an integration agreement in December 2012 with 12 rare earths producers. Under the agreement, the 12 companies and their shareholders agreed to handover 51% of their company shares to Baotou who would be responsible for marketing and sales strategy and their industry and product layout. As shown below, export quotas for rare earth production in the Northern District are ~51.5ktpa (50ktpa from Baotou and 1.5ktpa from Shandong). The majority of production is of light rare earths. According to a White Paper from the Chinese Government in 2012, only one-third of the original volume of rare earth resources is available in the main mining areas of Baotou.
Figure 43: Production quotas for the Northern District [kt REO]
60 50 40 30 20 10 0 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports.

In October 2012, Baotou announced it had halted some of its production in an effort to stabilize prices amid weak demand. The company indicated that rare-earth demand has been low and prices have been falling since the second half of the year on the back of the economic slowdown. Western District In 2009, Jiangxi Copper Co. established a joint venture with Sichuan Province Mining Investment Group Co., Ltd. to develop Sichuan rare earth deposits. The company owns the mining license of Maoniuping rare earth based in Mianning, the second large rare earth mine in China. Jiangxi Copper Rare Earth Co., Ltd has an annual capacity of 20,000t rare earth concentrate, 2,000t metal and 4,000t NdFeB sheet, smelting and separating 16,000t material. The majority of production is light rare earth oxides with a relatively high proportion of Neodymium. A rare earth industrial park is being developed in the area which will cover: mining, smelting, separating and processing meaning the operation will be fully integrated.
32

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

In 2012, Chairman Li Yihuang indicated that output of rare-earth oxide at the Mianning mine will eventually reach 50,000 metric tons a year. However, no timeframe was provided. Furthermore, rare earth oxide quotas for the region remain ~24ktpa as shown below.
Figure 44: Production quotas for the Western District [kt REO]
35 30 25 20 15 10 5 0 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports.

Southern District The main Ion-Absorption Clay deposits are located in the Southern District. These are important because they contain high levels of heavy rare earth oxides. There are a number of mines in the Southern District as shown in Figure 42 and a number of key producers looking to consolidate in the region: Ganzhou Rare Earth: In December 2004, Ganzhou Rare Earth Mineral Industry was established to reunite the original 88 enterprises of rare earth mining in the region. Since then the company has merged with local rare earth companies to form the state owned Ganzhou Rare Earth Group Co. Ltd. The entity owns most of the mining licenses for rare earths in the Jiangxi province, which is the nation's largest producer of ion-absorbed type rare earths. Guangdong Rising Nonferrous: Guangdong Rising Nonferrous set up the Guangdong Rare Earth Industry Group in 2012. The company has been restructuring rare earth mines in the province and is the only legal mining company in the Guangdong region. Xiamen Tungsten: Xiamen Tungsten owns four of the five rare earth exploration certificates in the Fujian province and is setting up an industrial park in Longyan. Guangxi Non-Ferrous Metals Group: Guangxi Nonferrous Rare Earth Co. is the primary platform of rear earth resource development and industry in Guangxi, and owns several rare earth mines and production companies in Chongzuo, Hezhou and others in the region. Most of the southern ion absorption rare earth deposits are located in remote mountainous areas. There are so many mines scattering over a large area that it is difficult and costly to monitor their operation. As a result, illegal mining has severely depleted local resources, and mines rich in reserves and easy to exploit are favored over the others, resulting in a low recovery rate of the rare earth resources. However, since 2006, the Government has stepped up enforcement of its policies and regulations and shut down illegal mines in the
33

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Provinces of Guangdong, Jiangxi, and Sichuan. Consequently, production of rare earths has been approximately level during the past 5 years
Figure 45: Production quotas for the Southern District [kt REO]
20 18 16 14 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports.

Chinas rare earth development plan China released a plan for the rare earths industry in 2009. The plan was proposed to control the export of rare-earth primary products, such as rare-earth salts, and to encourage the export of new rare-earth downstream material products. The 2009 plan included the following points: Annual rare-earth production may be limited to between 130 and 140kt during the period from 2009 to 2015. The export quota for rare-earth products may be about 35ktpa, and the Government may allow 20 domestic rare-earth producers and traders to export rare earths. The Government will not ban the export of dysprosium and terbium but will limit the volume of export for these two elements. The Government will not approve any new rare-earth separation projects before 2015. To protect rare-earth resources, rare-earth producers will be required to have a minimum mine output capacity of 300ktpa of ore for light rare earths and 3ktpa for ion-absorption rare earths. The Government will ban monazite mining if the monazite contains radioactive elements. For rare-earth separation, producers will be required to have a separation output capacity of 8ktpa of mixed rare earths, 5ktpa of bastnsite, and 3ktpa of ionabsorption rare earths. Metal smelting producers must have an output capacity of 1.5ktpa. Rare-earth producers will be required to meet the environmental emission standards; otherwise, they will be shut down.

34

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

China's 2012 rare earth white paper highlighted environmental concerns In June 2012, the Chinese government released a white paper over the state of the domestic rare earths industry. The report indicated that the rapid growth of the rare earths industry in China had caused significant problems including: 1) excessive exploitation of resources, 2) severe damage to ecological environment; and 3) a divergence between received prices and perceived value of rare earths. As a result, the government looked to introduce additional tightening supervision over the industry. Key points from the white paper include: Current production rates are likely unsustainable: Currently, China supplies over 90 percent of the global market Rare Earths needs with 23 percent of the worlds total reserves New supply growth is likely to be limited: the state has put a moratorium on accepting new registration applications for Rare Earth prospecting and mining, and prohibits existing mines from expanding their production capacities. The state exercises strict control over the total Rare Earth mining and production volumes to reduce resources development intensity, slow the depletion of resources, and advance sustainable development." Operating costs for Chinese production are likely to increase: The Rare Earth industry and its enterprises have been urged to put in more than four billion yuan on pollution control and technology upgrading, markedly enhancing the environmental protection level of the industry." The Government will look to restructure the industry: The state will quicken its steps to implement the conglomerate strategy it will push forward merger and reorganization in the Rare Earth industry, and develop large-scale, highly efficient and clean production enterprises. Higher prices are required for sustainable production: Over quite a long period of time, the price of Rare Earth products has remained low and failed to reflect their value, the scarcity of the resources has not been appropriately represented, and the damage to the ecological environment has not been properly compensated for."

35

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Lynas
Lynas Corporation is an integrated rare earths producer. The company is currently completing the final stages of customer qualification and is expected to be at full Phase 1 capacity of 11ktpa by June 2013. Lynas produces rare earth concentrate from its Mount Weld deposit in Western Australia, which is then shipped to a dedicated process plant in Malaysia for separation. A Phase 2 expansion project to reach 22ktpa of capacity is in the last stages of construction and is being readied for commissioning. Mount Weld rare earths deposit The Mount Weld Deposit is located 35km south of Laverton, in Western Australia. Mount Weld contains three major deposits, the Central Lanthanide Deposit (CLD), the Crown Polymetallic Deposit and the Swan Phosphate Deposit, which contains a high concentration of rare earths as well as precious metals, such as titanium and tantalum, and phosphates.
Figure 46: Location of Mt Weld

Source: Company reports

At the end of the March 2013 quarter, 15,593 dry tonnes of concentrate containing 5,540 tonnes of REO were bagged ready for export. The concentration plant was handed over to the construction contractor at the start of March 2013 for the final tie-ins and commissioning of the Phase 2 circuit. Dry and wet commissioning activities were successfully completed during March in preparation for ore commissioning commencing in April.

36

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Malaysian Advanced Materials Plant Lynas Advanced Materials Plant (LAMP) is located in the Gebeng Industrial Area, Kuantan, Malaysias 9th largest city and capital of the state of Pahang. The LAMP receives 40% REO concentrate from the plant in WA and processes the material into at least five products: Lanthanum-Cerium Carbonate Lanthanum Carbonate Cerium Carbonate Samarium Europium Gadolinium (SEG) + Heavy Rare Earths (HRE) Carbonate Neodymium, Praseodymium (Didymium) Oxide
Figure 47: Advanced Materials Plant layout

Source: Company presentation

In February 2013, Lynas achieved first production of separated Rare Earths products for customers and commenced a process of customer product qualification. The LAMP has now produced the full suite of Rare Earths products and has achieved targeted Phase 1 nominal capacity of 11ktpa REO in the upstream cracking and leaching unit. Ongoing rates of production in the separation and product finishing units will be determined according to the rate of product approval by customers, and by market demand. Construction of the Phase 2 expansion of the production capacity of the LAMP to 22,000 tonnes per annum REO was near completion at the end of the quarter. However, current rare earths prices provide evidence of weak demand, and in June 2013, Lynas announced that it would only operate at Phase 1 capacity until market conditions and pricing improved.

37

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Molycorp
Molycorp is an integrated producer that currently has the ability to mine, crush, mill and separate rare earth ore to produce rare earth oxides (REOs) from its Mountain Pass facility in California. As a result of several downstream acquisitions, the company is now positioned to produce rare earth metals, alloys, and magnets.
Figure 48: Molycorps mine-to-magnets supply chain

Source: Company presentation

1. Rare Earth Mining and Concentrate Production: Molycorp mines and produces rare earth concentrate at the Mountain Pass in California. 2. Rare Earth Oxide Separation: Rare earth oxides are produced at four locations around the world: Mountain Pass, California; Sillame, Estonia; Jiangsu, China; and Shangdong, China. 3. Rare Earth Metal Manufacture: The oxide is manufactured into rare earth metal at Molycorps facilities in Tolleson, Arizona; Sillame, Estonia; and at other facilities around the world. 4. Rare Earth Alloy Manufacture: Molycorp manufactures rare earth alloys at Molycorp Metals & Alloys, in Tolleson, Arizona; Molycorp Silmet, in Sillame, Estonia; and at the Molycorp Magnequench facilities in Tianjin, China and in Korat, Thailand. 5. Rare Earth Magnetic Material Manufacture: Through Intermetallics Japan, Molycorps joint venture with Daido Steel and Mitsubishi Corporation, the company expects to manufacture sintered, permanent NdFeB magnets. Mountain Pass The Mountain Pass deposit sits near the eastern edge of the Mohave Desert in the northeastern corner of San Ber-nardino County, California. Small scale production began in 1952 and the larger scale facilities at Mountain Pass were originally built in the 1960s, and was expanded in the 1970s and 80s. From the 1960s to the 1990s, the mine supplied most of the worlds rare earth elements but was closed in 2002, in response to both environmental restrictions and lower prices for REEs. The mine remained inactive post 2002, though processing of previously mined ore continued at the site. In December 2010, Molycorp announced that it secured all the environmental permits needed to begin construction an expansion and modernization project of Mountain Passs facilities at achieve capacity of 19ktpa.
38

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Construction of the so-called Project Phoenix began in January 2011 and active mining at Mountain Pass recommenced in December of 2010, for the first time since 2002. The project is close to completion and Molycorp anticipates being able to achieve a Phase 1 run rate of 19ktpa of rare earth oxide equivalent by mid-2013.
Figure 49: Molycorps Mountain Pass facility

Source: Molycorp

Molycorp has also indicated that Mountain Pass has the capability to expand to a Phase 2 production capacity of 40ktpa REO. However, in 2012 with rare earths prices falling, the company announced it would defer the expansion project unless market demand, product pricing, capital availability, and financial returns justify such additional production.
Figure 50: Potential Mountain Pass Capacity Expansion [ktpa]
45 40 35 30 25 20 15 10 5 0 Initial Full Scale Production Rate
Source: Molycorp

Other NdPr La Ce

Phase 2

39

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Other existing sources of supply


Outside of China, Lynas and Molycorp, supply of rare earths comes from Brazil, India, and Russia. Total supply from these regions was approximately 4kt in 2012 as shown in the chart below.
Figure 51: Supply of rare earths from other regions [kt REO]
20 18 16 14 12 10 8 6 4 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: Company sources

Indstrias Nucleares Do Brasil In Brazil, rare earth supply comes as a by-product of uranium mining by INB (Indstrias Nucleares Do Brasil). The Buena Unit, located in the Municipality of So Francisco de Itabapoana, is responsible for the prospection and research, mining, industrialization and marketing of monazitic sands. These sands contain ilmenite, rutile, zirconite (zircon silicate) and monazite (rare earths phosphate). Based on USGS data, we estimate the capacity of Brazilian rare earths supply to be ~300tpa REO. Orissa, India Rare earths supply from India is as a by-product of mineral sands production. The Manavalakurichi plant is situated 25kms north of Kanyakumari, the southern most tip of the Indian sub-continent. The plant produces approximately 3ktpa of monazite as well as 95ktpa of ilmenite and rutile, 10ktpa of zircon and 10ktpa of garnet based primarily on beach washing supplied by fishermen of surrounding five villages. The monazite is then sent to a processing plant in Aluva where the ore is chemically treated to remove the thorium from the rare earth oxides. This plant was commenced operations in 1952 and has the capacity to process 3.5ktpa of monazite. Toyota Tsusho Corp. and its Indian subsidiary (Toyotsu Rare Earths Orissa Pvt. Ltd.) have been promoting a plan to build a plant in Orissa with a capacity of 3-4ktpa to process the monazite into separate rare earths. Based on USGS data, we estimate the capacity of Indian rare earths supply to be ~2,700tpa REO.

40

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Lovozerksy, Russia The Lovozersky Mining and Concentrating Plant is located in the Kola peninsula in the far northwest of Russia. The loparite is processed into a rare earth carbonate at the Solikamsk processing plant in the Urals, after which it is shipped to Estonia, Kazakhstan, Austria and China for further processing. Annual production from the mine is about six thousand tons of loparite (30-35% REO, 8-12 % Nb2O5 and 0.6-0.8% Ta2O5). The Solikamsk Magnesium Plant converts the loparite to 1.5-2.5kt of rare earth oxide. The rare earth elements in the loparite are: 28% La, 57.5% Ce, 3.8% Pr, 8.8% Nd. There are plans to double the production rate at Lovozereky by 2015.

New sources of supply


In addition to Lynas and Molycorp, there are a number of smaller rare earth endeavours looking to introduce new supply over the next decade. We would note, however, that with the exception of Dong Pao in Vietnam, most of these new projects have been pushed out because of the recent weakness in rare earths prices. Dong Pao, Vietnam The Dong Pao Rare Earth Mine, the largest in Vietnam, covers a total area of 11km2 and has estimated reserves of 5 million tonnes. In 2012, Lai Chau-VIMICO Rare Earth Joint Stock Co. (LAVRECO) and the Japanese Dong Pao Rare Earth Development Company agreed to jointly develop the mine with production expected to start this year. Plans call for the production of 23kt by 2013 and rising to 5ktpa. Dubbo Zirconia, Australia Dubbo Zirconia is 100% owned by Alkane Resources, a listed company in Australia. The project is based around a deposit of zirconium, hafnium, niobium, tantalum, yttrium and rare earths, located 30 kilometres south of the large regional centre of Dubbo in the Central West of NSW. After extensive process development work from 1999 to 2003, Alkane has been working with the Australian Nuclear Science and Technology Organisation (ANSTO) since 2006 to optimize the process flowsheet for production of high purity zirconium, niobium and rare earth products. The Definitive Feasibility Study for the A$1.2 billion project was based on a 400ktpa ore processing operation producing 3.5ktpa light rare earths and 1.1ktpa heavy. However, first production is not expected until at least 2016. Kutessay II, Kyrgyzstan Stans Energy, a C$30 million listed company in Canada, is looking to develop the Kutessay II heavy rare earths mine in Kyrgyzstan. The Kutessay II deposit was originally discovered in 1943 and in 1956, due to increasing demand for rare earth materials, the Sredaztcvemetrazvedka holding organized the Kutessay Exploration Group with the objective of re-sampling for rare earths, metallurgical tests for recovery, reserves calculations and determination of the overall prospects for the rare earth mining for the whole Aktyuz ore field.

41

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Prospecting for rare earths at Kutessay II occurred in the 1950s and mining commenced soon afterwards. Between the 1960s and 1990s, the mine produced 80% of the former Soviet Unions rare earths. However, in 1995, mining activities were suspended and the mine was temporarily closed down. In 2010 Stans Energy acquired 100% of the Kutessay II deposit along with 100% of the Kalesay Beryllium deposit from the Government of Kyrgyzstan for US$855,000 by acquiring 100% of "Kutisay Mining" on the Central Asian Stock Exchange. Stans Energy is progressing with a feasibility study on restarting production at Kutessay II potentially as early as 2014. However, production is only expected to be 500tpa. Nolans Bore, Australia Nolans Bore is 100% owned by Arafura Resources, a A$50 million publicly listed company in Australia. The Nolans Project comprises mining, concentrating, and chemical processing operations at the Nolans Bore site in Australia. Nolans Bore is located about 135 kilometres north-west of Alice Springs in the Northern Territory. The project is underpinned by a rare earths resource which has sufficient resources to support mining and chemical processing operations for 20 years. Capital costs are estimated at A$2 billion (albeit the company is currently looking to reduce costs) and Arafura is targeting production of 20ktpa of rare earth oxides. With financing still be to be completed, first production is not likely until next decade, in our view. Steenkampskraal, South Africa The former-producing Steenkampskraal Mine is located approximately 70 kilometers north of the town of Vanrhynsdorp in the Western Cape Province of South Africa and approximately 350 kilometers north of Cape Town. The mine is 74%-owned by Rareco, a wholly-owned subsidiary of Great Western Minerals Group. The Steenkampskraal mine originally operated through a subsidiary company of Anglo American Corporation from 1952 to 1963, making a monazite concentrate that was sold mostly for its thorium content. However, Steenkampskraal monazite was also processed in the US, producing the full suite of rare earth elements, including heavy rare earth products. In 1989, Rareco acquired the mine with the intention of becoming a rare earth elements producer. However, until recently the operation has been on hold due to weak market conditions. Current resources are 454kt at an average grade of ~16% REO. The mine is expected to produce at a rate of 5ktpa for a life of 11 years. Exploration work is ongoing, and the company has indicated additional resource estimate and block model is planned for the second half of the year. Production of mixed RECl (concentration and hydrometallurgical stages) is projected to commence within 24 months of the completion of required Project financing, at a design capacity of 5ktpa of contained REOs.

42

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Supply forecasts
Our supply forecasts are shown in the chart below. As shown, we expect production to increase 6% per annum between 2012 and 2020. As expected, the majority of new supply is expected to come from Lynas and Molycorp.
Figure 52: Rare earth supply forecasts [kt]
200 180 160 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

China

Lynas

Molycorp

Other existing

Other new

FORECASTS

The key assumptions in our supply analysis are as follows: Chinese production remains 94ktpa, in line with current production quotas. While there is the possibility that illegal mining could contribute additional supply, the government is introducing tighter measures and therefore we believe additional supply is unlikely. Lynas ramps up to 22ktpa by 2016. We note this means current weak market conditions only result in a one year delay to reach Phase 2 capacity. Molycorp introduces its Phase 2 expansion at Mountain Pass in 2017. As noted previously, management view the expansion as an option and has currently deferred the project unless market demand, product pricing, capital availability, and financial returns justify such additional production. New supply comes from: Dong Pao (first production in 2013 ramping up to 5ktpa by 2016), Steenkampskraal (first production in 2016 ramping up to 5ktpa by 2017), Dubbo Zirconia (first production in 2017 ramping up to 3ktpa by 2018), Kutessay II (first production in 2015 ramping up to 0.5ktpa by 2016).

43

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Table 8: Supply forecasts by source and by element


kt REO China Lynas Molycorp Other - existing Other - new Total 2011 105,000 0 3,516 3,330 0 111,846 2012 95,000 0 9,000 3,380 0 107,380 2013 93,800 4,033 19,050 3,380 2,500 122,763 2014 93,800 10,695 19,050 3,380 3,333 130,258 2015 93,800 20,989 19,050 3,380 4,417 141,636 2016 93,800 21,978 19,050 3,380 8,000 146,208 2017 93,800 21,978 19,050 3,380 12,000 150,208 2018 93,800 21,978 29,525 3,380 13,500 162,183 2019 93,800 21,978 40,000 3,380 13,500 172,658 2020 93,800 21,978 40,000 3,380 13,500 172,658 CAGR -1% N/A 28% 0% N/A 4%

kt REO Lanthanum Cerium Praseodymium Neodymium Samarium Europium Gadolinium Terbium Dysprosium Yttrium Other Total

2011 25,088 46,247 4,853 17,030 2,577 211 1,956 283 1,252 9,835 2,516 111,846

2012 24,665 44,676 4,676 15,980 2,322 208 1,768 214 1,175 9,601 2,096 107,380

2013 29,624 52,173 5,367 17,971 2,486 242 1,804 211 1,176 9,597 2,111 122,763

2014 31,559 55,640 5,761 19,300 2,656 279 1,869 217 1,187 9,622 2,167 130,258

2015 34,484 60,895 6,363 21,333 2,917 336 1,969 226 1,204 9,660 2,251 141,636

2016 35,632 63,043 6,585 22,048 3,013 343 2,020 229 1,222 9,789 2,284 146,208

2017 36,483 64,760 6,771 22,681 3,114 347 2,094 236 1,270 10,158 2,294 150,208

2018 40,346 70,439 7,273 24,124 3,236 362 2,148 242 1,306 10,412 2,294 162,183

2019 43,908 75,551 7,713 25,350 3,318 375 2,170 245 1,311 10,423 2,294 172,658

2020 43,908 75,551 7,713 25,350 3,318 375 2,170 245 1,311 10,423 2,294 172,658

CAGR 6% 5% 5% 4% 3% 6% 1% -1% 0% 1% -1% 4%

Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

44

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Supply and demand balance


We expect the overall market to be in surplus out to 2020
As shown in the chart below, we expect the overall market for rare earths to be in surplus for the foreseeable future with growth in supply from Lynas and Molycorp more than offsetting reduced output from China and any demand growth.
Figure 53: Supply / demand balance [kt]
180 FORECASTS 160 140 120 100 80 60 40 1992 Demand Supply 1995 1998 2001 2004 2007 2010 2013 2016 2019

Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

However, certain elements will likely remain in tight supply


While we expect the overall market to be in surplus, on an elemental basis we forecast Lanthanum and Neodymium/Praseodymium to be in deficit (as shown below). The bulk of the oversupply is likely to come in Cerium which we forecast will see a growing surplus.
Figure 54: Supply / demand balance for certain elements [kt]
50 40 30 20 10 0 -10 -20 Lanthanum
Source: J.P. Morgan estimates.

2013

2015

2020

Cerium

NdPr

SEG

Dysprosium

Total

45

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Lanthanum increasing use in NiMH batteries to result in a deficit until Mountain Pass Phase 2 comes online As shown in the chart below, we expect lanthanum to be in deficit for the next five years. Beyond 2018, our estimates assume Molycorps Mountain Pass reaches Phase 2 capacity and this new supply results in the market moving again into surplus.
Figure 55: Lanthanum supply / demand balance [kt]
50 45 40 35 30 25 20 Demand Supply FORECASTS

15 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates.

Cerium growing surplus in production We believe the cerium market will see the largest (and growing) surplus and as a result will likely receive the weakest prices. However, suppliers will look to higher prices for other rare earths to offset production costs.
Figure 56: Cerium supply / demand balance [kt]
85 75 65 55 45 35 25 Demand Supply FORECASTS

15 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates.

46

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Neodymium/Praseodymium increasing use of rare earths magnets to result in an increasing deficit of NdPr As shown in the chart below, we believe the market for NdPr has been in deficit for sometime, but forecast growth in demand will likely see a growing deficit to the end of the decade. This is largely underpinned by magnet demand which we forecast to increase by 7% per annum to 2020.
Figure 57: Neodymium/Praseodymium supply / demand balance [kt]
50 45 40 35 30 25 20 Demand Supply FORECASTS

15 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

Heavy rare earths not in such short supply Contrary to popular belief, we do not believe the market for heavy rare earths will be in such short supply. As shown in the chart below, while these materials have the highest prices, we do not forecast much growth in demand for Samarium/Europium/ Gadolinium (SEG). Therefore, we expect the market to be in oversupply.
Figure 58: SEG supply / demand balance [kt]
7 6 5 4 3 2 1 Demand Supply FORECASTS

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: J.P. Morgan estimates. Actuals are from various sources including company reports, USGS, and J.P. Morgan estimates

47

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Prices for rare earths


Rare earths are prices between precious and base metals Rare earth oxides sell for a variety of prices dependent on the individual supplydemand balance of the particular oxide, however, generally most are priced somewhere between copper metal and silver metal on a per unit basis. In general, heavy rare earth metals are more valuable than light rare earth metals. These values reflect the relative geological abundance of the rare earth oxides, with heavy rare earth oxides considerably rarer than light rare earth oxides. Outside the supply side dynamics, the differing end uses of the rare earth metals also considerably affects their relative prices. Two of the most valuable rare earth oxides - europium and terbium are in high demand because they are used as phosphors in TVs and monitors, with europium providing red and blue colour and terbium providing green colour. Terbium is also used heavily in energy efficient fluorescent bulbs, providing a good example of the importance of rare earth metals to the green economy, and supporting the long term strong demand side price fundamentals of the rare earth metals. Prices for rare earths oxides are quoted in US$/kg on an FOB China and domestic China (the price inside China) basis. The domestic price is related to the FOB price and can be calculated by taking FOB price less VAT, less export taxes (which range for 15% to 25%), the export quota cost; there may be some timing differences between the movements of internal and external China prices. Rare earths prices have declined materially since the peak in 2011 The chart below shows prices for rare earths oxides back to 2008. Neodymium and Praseodymium are generally grouped together because both elements are used predominately in the manufacture of magnets and therefore the two do not need to be separated.
Figure 59: Rare earth oxide prices China Domestic [US$/kg]
35 30 25 20 15 10 5 0 2008
Source: Bloomberg, Asian Metals

Lanthanum

Cerium

Nd-Pr [RHS]

SEG [RHS]

350 300 250 200 150 100 50 0

2009

2010

2011

2012

2013

48

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

In general, rare earth metals have performed better than other industrial metals, such as copper, over the last decade. Whilst the small, illiquid markets for these oxides means prices are volatile, this volatility has provided more price upside than downside, despite the recent financial crisis. However, since 2011 prices for all rare earths oxides have been on a steady decline. This has been due to two factors: 1) destocking following a large inventory build in 2010-11 which came about because of a step-down in Chinese export quotas; and 2) changes to manufacturing techniques incorporating the use of recycled material; and 3) thrifting in certain applications such as FCCs. Production curtailments are likely to arrest further price declines over the medium term Notwithstanding the steady fall over the last two to three years, there are reasons to be optimistic about the medium term outlook for rare earths prices: Production curtailments from Chinese producers: According to an analysis from Lynas, Chinese cash costs for light-rare earths are ~US$16/kg (see page 50), in line with the current basket price of ~US$16/kg (based on Lynas' suite of elements) and as a result, the producers have been curtailing production. Evidence of this came in December 2012 (when the basket price was US$25/kg) with Baotou announcing it would extend a shutdown of certain facilities to offset the low price. Increasing environmental costs in China and tighter measures preventing illegal mining: Chinese production of rare earths has increased materially in recent years, with a significant portion coming from illegal mining. With a greater focus on environmental considerations, the government is looking to reduce illegal mining and impose greater regulations. We believe these measures are gaining traction, and will limit further production growth going forward. Growth curtailments from Western producers: Lynas and Molycorp have both indicated that current prices do not support their growth projects. Lynas has already completed construction of Phase 2 but will not ramp up to full capacity under current market conditions. Molycorp, similarly, has indicated that it would not consider a Phase 2 expansion of Mountain Pass given weak prices. Lynas announcing a price floor: In mid-June 2013, Lynas indicated that current prices are 25% below the minimum sustainable level for producers. Consequently, the company is looking to implement a minimum price schedule for its rare earths products, effective 1 July 2013. Demand returning previous applications: Most importantly, we understand there is evidence of demand returning to applications which had been impacted by the high prices seen in 2011. These applications include FCCs and motors and generators in automotives where manufacturers had reduced rare earth use to offset high prices.

49

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Medium term price forecasts As shown in the charts below, we forecast price rises in Nd-Pr, Lanthanum and SEG. We estimate the basket price will increase from current low prices to ~US$25-$30/kg by 2016-17. We believe any further price increases will likely result in substitution, similar to what occurred in 2011.
Figure 60: Individual rare earth oxide prices [US$/kg China domestic]
25 20 15 10 5 FORECASTS 0 2010 2011 2012 2013 2014 2015 2016 2017 Lanthanum [LHS] Nd-Pr [RHS] Cerium [LHS] SEG [RHS] 160 140 120 100 80 60 40 20 0

Figure 61: Basket price [US$/kg China domestic]


50 45 40 35 30 25 20 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017

FORECASTS

Source: Asian Metals, J.P. Morgan estimates.

Source: Asian Metals, J.P. Morgan estimates.

Chinese production costs are increasing The chart below shows estimated production costs in China. Chinese light rare earths producers require basket prices of ~US$16/kg to be cash flow breakeven.
Figure 62: China production costs
30 25 20 15 10 5 0
Source: Lynas

Other impacts on Chinese costs: wage increases, energy and chemical cost increases, China CPI

Consolidation and environmental depreciation US$5-10/kg

Cash operating costs are ~US$16/kg

Environmental operating costs including energy and chemicals US$4-$6/kg

Historical Chinese cost base

We note that with greater regulation production costs will likely increase in future. Our long-term price forecast of US$26/kg is based on China cash costs plus additional costs of consolidation and environmental depreciation. We note that the clean up and rationalisation of the supply base in China is driving costs of production higher because environmental protection measures typically account for about half the operating costs of producing rare earths.
50

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Applications for rare earths


Permanent magnets (24% of demand)
As shown in the chart below, demand for rare earths into permanent magnets was approximately 22kt in 2012, representing 24% of overall demand. While demand has been largely flat for the last five years (and actually peaked in 2008), rare earth use in permanent magnets has increased 7% a year since 2003.
Figure 63: Total rare earth demand in permanent magnets and percentage of overall demand [kt]
30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports, J.P. Morgan Estimates

24% 22% 20% 19% 16%

24% 28%

24% 23% 24%

Permanent magnets Permanent magnets are materials that retain their magnetic properties in the absence of an inducing field or current. A good permanent magnet should produce a high magnetic field with a low mass, and should be stable against the influences which would demagnetize it. The desirable properties of magnets are typically stated in terms of: Remanence (Br): the amount of magnetization it retains at zero driving field, and Coercivity (Hcj): amount of reverse driving field required to demagnetize.
Figure 64: Hysteresis Loop

M
Remanence: a measure of the
remaining magnetization when the driving field is dropped to zero

Saturation

H
Coercivity: a measure of the reverse
field needed to drive the magnetization to zero after being saturated

Strength of magnetizing signal

Saturation
Source: J.P. Morgan 51

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

As shown in the chart below, there are a number of materials used to make permanent magnets.
Figure 65: Various types of permanent magnets

Source: Electron Energy Corporation, J.P. Morgan

Until the 1960s, most permanent magnets were based on iron in combination with other transition metals such as cobalt and nickel. The discovery of ferrite magnets in the 1950's substantially replaced Alnico (a combination of aluminium, nickel and cobalt) and, despite the subsequent discovery of rare earth magnets, ferrite remains the predominant magnetic material comprising more than 85% of worldwide magnet sales by weight. Ferrite is essentially a special form of iron oxide which makes it relatively inexpensive and corrosion resistant. Magnets using rare earths were discovered in the 1960s by researchers at Wright Patterson Air Force Base. This new class of magnets was based on samarium and cobalt (SmCo). Neodymium iron boron (Nd-Fe B) magnets were discovered by Normal Koon at the Naval Research Laboratory in 1981 and rapidly commercialized by General Motors, Sumitomo Special Metals Corporation and numerous other companies. There are two different types of Neodymium magnets: Sintered: Sintered magnets are heat-treated to produce the higher performance required for electric-drive and larger wind turbine applications. Bonded: Bonded NdFeB magnets generally have low magnetic properties from gluing the powder in a mold. Bonded magnets can be used in other applications, such as electronics. Generally these magnets are lower magnetic strength due to dilution of the non-magnetic binder of the bonded magnet. However, bonded magnets offer shape flexibility so find use in numerous applications such as consumer electronics.

52

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Development of new materials has seen magnet size decrease The development of rare earths magnets improved magnet strength significantly. This meant that magnets could be made smaller without impacting strength.
Figure 66: Improvements in magnet strength

Source: Arnold Magnetic Technologies, J.P. Morgan

BHmax is a measure of maximum energy product. This is an indication of what volume of magnet material is required to project a given level of magnetic flux.

Despite the superiority of rare earths as permanent magnets, all of the materials in the chart are still in use today in various applications. For example, while ferrite magnets are far weaker than rare earths, they continue to dominate sales on a weight basis representing 85% of permanent magnets sold globally. This is because size is not important for most applications, and some applications are very price sensitive benefiting from the less expensive ferrite magnets. The other important consideration in magnet selection is the temperature of the application which also puts constraints on material choices. Ferrite magnets are only useful between temperatures of -40 and 150oC while Neodymium magnets only perform satisfactorily above 80oC when combined with Dysprosium.
Figure 67: Practical, usable temperature ranges for common magnet materials
Ferrite performs to over 250 , but experiences significant reduction in magnetic output with increasing temperature To perform at elevated temperature,Neo magnets require substitution of dysprosium for some of the neodymium resulting in reduced magnetic output

Ferrite Neo Alnico SmCo


0

Both Alnico and SmCo perform well over a wide temperature range. Both materials are temperature stable.

-275 -200 -125

-50

25

100

175

250

325

400

475

550

Temperature, C
Source: Arnold Magnetic Technologies, J.P. Morgan

53

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Rare earth magnets While rare earth elements are ferromagnetic, their Curie temperatures1 are below room temperature, so in pure form their magnetism only appears at low temperatures. However, they form compounds with transition metals such as iron, nickel, and cobalt, and some of these have Curie temperatures well above room temperature. The advantage of the rare earth compounds over other magnets is that their crystalline structures have very high magnetic anisotropy. This means that a crystal of the material is easy to magnetize in one particular direction, but resists being magnetized in any other direction. There are four general compositions of commercially available rare earth magnets: SmCo5: Sintered magnets are manufactured by powder metallurgy. This material was developed and commercialized between 1966 and 1969. It is anisotropic and benefits from orienting during processing. Energy products of grades today range from 18 to 25 MGOe. The 25 MGOe grade is achieved by substituting almost half of the samarium with praseodymium. The praseodymium addition raises the strength of the magnet but also increases corrodibility. Temperature stabilized grades of SmCo5, where gadolinium is substituted for part of the samarium, provide almost no change in flux output from -40 to 150 C. Maximum use temperature is generally advertised as 250 C. Sm2Co17: Sintered magnets manufactured by powder metallurgy. A small amount of compression bonded and injection molded Sm2Co17 is found in the marketplace. This material was developed between 1969 and 1974. Energy products range from 24 to 33 MGOe. Temperature stabilized grades, where gadolinium is substituted for part of the samarium, provide almost no change in flux output from -40 to 150 C. Maximum use temperature is generally advertised as 350 C but higher temperature grades have also been made for use to over 500 C. This is achieved by increasing the cobalt content and reducing the iron. Nd2Fe14B (Neo, neodymium iron boron): Neo magnets first appeared in the marketplace in November of 1984. Production expanded rapidly and was concurrent with growth of the personal computer market. In 1990, it was reputed that 75% of all Neo manufactured was used in hard disk drives (bonded spindle drive magnets and sintered voice coil actuator magnets). The majority of Neo is produced via powder metallurgy and the material benefits from orientation during manufacture. Rapidly quenched powder for bonded magnets is isotropic and does not require orientation. Manufacturing improvements and composition enhancements led to higher energy product and reduced corrosion. Maximum use temperature is dependent upon dysprosium content. 11% dysprosium content grades can be used up to 220 C. Praseodymium is often used as a partial substitution for neodymium, generally to reduce costs in its pure form, or as a mixture with neodymium. SmFeN: Manufactured as a powder via ball milling. The fine powder is suitable for bonded magnets but not for sintered product as the interstitial nitrogen will come out of the lattice when heated above ~450 C. It does have excellent temperature stability. It is an anisotropic powder, so benefits from aligning during the bonding process and produces higher energy product than anisotropic neo powder for bonded magnets. However, the materials and process are costly and it is considered a niche product. Source: Arnold Magnetic Technologies
1

Curie temperature: the temperature above which a ferromagnetic substance loses its ferromagnetism and becomes paramagnetic.
54

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Importance of dysprosium in high temperature applications For higher temperature applications, neodymium is partially substituted by dysprosium of 5% or more by weight. In some grades terbium is also utilized to increase the coercivity (resistance to demagnetization - Hcj). Increasing coercivity comes at the expense of remanence (the amount of magnetization retained at zero driving field - Br). This need for dysprosium is of particular importance in the emerging applications of the Nd-Fe-B magnets used in hybrid electric vehicles in the transmissions for their motors and generators, which give these vehicles their combustion engine-electric motor dual functionality. Permanent magnets offer higher torques over the required broad speed range when compared to an induction motor. This engine environment requires Nd-Fe-B with higher temperature grades, which must have substantial amounts of dysprosium in order to increase coercivity.
Figure 68: Dysprosium use in Neo magnets
HDD's, CD's DVD's, Sensors Holding Sensors General purpose motors, some wind power generators High performance motors & generators, wind power Super high performance motors & generators, auto traction drives AH 220oC EH 200oC UH 180oC 14

35,000

HCJ and Br as a function of Dysprosium Content


Approximate

15

Magnet grade suffix

30,000

HCJ, Oe

20,000

HCJ
H 120oC

SH 150oC

Br
12

15,000 80oC 10,000 0

M 100oC

11

10 2 4

Dysprosium, %

10

12

Temperature is manufacturer's maximum recommended use temperature

Source: Arnold Magnetic, J.P. Morgan

A very rough estimate of relative abundance of the magnet rare earths as a fraction of production from operating mines is: 15% of all rare earths produced are Neodymium, 5% Praseodymium; 3% Samarium, and 1% Dysprosium. The total rare earth content of a neo magnet is about 32 weight percent. Therefore, the grand average weight percent dysprosium in a neo magnet can be about 1-2% and be in balance with existing supplies.
55

Br, kG

25,000

13

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

As shown Figure 68, most of the applications lie above this 1-2 weight percent point, including wind power and electric vehicles of all types. Even general industrial motors use over 4% dysprosium. However, recognizing this issue, technologies are being developed to reduce the amount of dysprosium used in high temperature permanent magnets. Grain Boundary Diffusion is one such technology developed by Shin-Etsu Chemical (a Japanese rare earth magnet producer), Hitachi, Vacuumschmelze and others. In this technology, the dysprosium is concentrated selectively near the grain boundaries. As a result enhancement of coercivity with suppression of serious reduction in remanence can be achieved and efficient usage of heavy rare earths can be realized.
Figure 69: Grain Boundary Diffusion technology

Source: Shin-Etsu Chemicals

Substitutions for rare earth magnets NdFeB permanent magnets have the strongest magnetic energy density and are the most powerful commercial magnets existing today; therefore, it may prove difficult to find exact substitutes for these magnets in certain applications in the near future. Compared to NdFeB magnets, SmCo are able to withstand higher temperatures (500C as opposed to 200C), and make good alternatives for application temperatures of 150 C and above. Additionally, SmCo magnets are currently less expensive. However, limited availability of Samarium and sensitivity to cobalt price variability prevents more widespread adoption of SmCo magnets.
Table 9: Relative cost of magnets
Material Ceramic (flexible) Ceramic (sintered) Alnico 5-7 Neo (injection molded) Alnico 9 SmCo5 Sm2Co17 NdFeB (N33EH) NdFeB (N40SH)
Source: Arnold Magnetic

BHmax typical, MGOe 1.5 3.5 5 5 10 22 30 33 40

x-China Manufacture Relative Cost Relative Cost (US$/lb) (US$/MGOe) 1 0.65 4 1.15 20 4.00 30 6.00 25 2.50 110 5.00 100 3.35 185 5.60 130 3.25

China Manufacture Relative Cost Relative Cost (US$/lb) (US$/MGOe) 1 0.65 3 0.85 15 3.00 25 5.00 20 2.00 90 4.10 85 2.85 120 3.65 90 2.25

56

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Similarly, AlNiCo and ferrite (ceramic) magnets do not appear to be close substitutes for NdFeB magnets for high remanence applications. Their maximum energy products (the density of magnetic energy) are much less than those of NdFeB magnets. Applications for rare earth magnets As shown in the chart below, the majority of permanent magnets go into automotive applications. Other key uses for permanent magnets are hard-disk drives, wind turbines, and electric vehicles.
Figure 70: Rare earth magnet use by application in 2012
Other 11% Wind Turbines 19%

HDD voice coil motors 21%

Electric Bicycles 5% Electric Vehicles 4%


Source: J.P. Morgan estimates

Auto's excl EV's 40%

Permanent Magnets in electric motors in automobile applications Many types of motors can use permanent magnets. Permanent magnet-excited, brush-type DC motors with the magnet in the external stator are still the most used. Many million units are produced annually, particularly for automotive applications.
Figure 71: Evolution of permanent magnets on DC motors

Source: University of Dayton Ohio

In cars they operate auxiliary devices like windshield wipers, blowers, cooling fans; window, seat, mirror and roof actuators; fuel and windshield washer pumps.
57

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Increasingly, starter motors also use magnets. For economic reasons, the permanent magnet material in most small motors in automobiles is sintered ferrite, although bonded rare earth permanent magnet is gaining share with weight reduction an increasingly important aspect of lowering fuel consumption.
Figure 72: Electric motors in vehicles
Sun roof motor Automatic temperature Cruise control control Speakers Defogger motor Tail gate motor Door lock motor Economy and pollution control Coolant Fan Motor Fuel pump Motor Heat and Air condition motor Starter motor Throttle and crankshaft position sensors Speedometer, gauges and digital clock Liquid level indicators Windshield wiper motor Windshield wiper washer pump Headlight door motor

Anti-skid

Window lift Motor

Ignition Antenna lift Motor

Source: J.P. Morgan

When the smallest possible weight and volume are desired, as in aerospace applications, dense Sm-Co and Nd-Fe-B are also used. Figure 71 on page 57 shows the influence of different magnets on the stator geometry and relative size of functionally comparable motors. Permanent magnets in hard disk drives Hard disk, CD and DVD drives use motors to spin the discs and for positioning the read/write head. In all cases, the spindle drive motors are made using compression bonded ring magnets. The hard disk drives require a very fast positioning mechanism and these have for several decades been made of neo magnets. A flat form coil sits in the opening of the magnet holding fixture. An interaction between the coil and the magnets causes the read/write head to move back and forth across the disc. Average access times are on the order of 9 milliseconds: moving to the approximate target sector, reading actual location, moving to the precise sector, allowing the read/write head vibration to settle and reading the information. The number of turns for the coil is limited by the thin gap in the magnetic structure, so the strongest possible magnets are desired. The drives operate at relatively low temperatures (35 to 45 C) in a high permeance circuit so grades of neo with little-to-no dysprosium are used. Although the quantity of magnet material per drive is low, the number of drives is very high.

58

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Figure 73: Voice Coil Motors in hard-disk drives

Source: University of Technology Sydney, J.P. Morgan

Wind Power In conventional wind turbines, generator blades spin at ~10-12 rpm. An induction generator is not efficient unless turning at greater than 1500 rpm and is typically set at 1800 rpm. Therefore, to increase the speed of the rotor up to 150 times, these turbines require a 3-stage gear box. Due to the large stresses, the main drive shaft and the gearing must be very robust. Even so, the stresses cause flexing of the drive shaft and gear mesh is affected reducing gear life. In direct-drive generators for wind turbine, the rotor is directly connected to the rotor hub and therefore the generators operate at the same speed as the turbines blades. In these applications, permanent magnets are used to reduce the size of the generator.
Figure 74: Direct-drive wind turbine

Source: General Electric

59

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Induction generators, which require gear boxes, require more frequent maintenance than direct drive generators. The advantage of direct drive permanent magnet generators is that they eliminate this high maintenance gear box. This is especially important for offshore wind farms because doing maintenance at sea is a lot more complex and expensive than on the ground. Furthermore, direct drive generators can be overall lighter in weight. The shape changes to being larger in diameter but substantially shorter in length (as shown in the GE nacelle diagram). We estimate current Generation-4 wind turbines use approximately 600kg of neo magnets per MW of power generated. According to Arnold Magnetic, Hybrid (~half speed) drives require 165 to 250 kg of Neo magnets. These hybrid designs are relatively new but could represent a large portion of future wind power generator installations as they offer a good compromise of improved gear box life, less frequent maintenance, somewhat reduced weight (over full induction generators) and lower demand for neo magnets than a full PM generator.
Figure 75: Comparison of size generator size

Source: REACT

Electric vehicles Almost all mass-produced electric vehicles (EVs) and hybrid electric vehicles (HEVs) use rare earth permanent magnets in the motors that propel them during electric drive operation. As one component in a complex system, the motors are also constrained in size and weight to fit within existing design parameters, making substitution difficult. This is particularly true for HEVs which have to fit both a gasoline engine (or generator) and an electric motor in a tight engine compartment. Manufacturers have explored several options to replace rare earth permanent magnet motors in vehicle designs and some have reconsidered using induction motors. However, induction motors are larger (for a given power rating) and less efficient than permanent magnet motors. In the induction motor, all energy input derives from the field in the stator windings. These fields must induce eddy currents in the rotor which then create fields in the rotor which interact with the stator fields. The transfer of energy from the stator to the rotor is inefficient. In a permanent magnet motor, the magnets provide the field that interacts with the stator field.
60

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Figure 76: Main components of a Hybrid Electric Vehicle

Source: US Department of Energy

A second very important issue is that torque output of an induction drive motor drops off rapidly as the speed increases. The torque in permanent magnet motor drops off more slowly than induction motors. The advantage of induction motors is that they does not require magnets and are less sensitive to change in performance as a function of temperature. Notwithstanding these issues, several niche EVs (including the Tesla Roadster and Mini-E), already use induction motors, and Toyota announced in early 2011 that it was also developing an induction motor design that could be used in a range of vehicles with electric drives. According to industry research, one traction motor of an electric vehicle requires approximately 0.85-1.00 kilograms of high performance neo magnets2. With the motors expected to operate at high temperature, one of the key considerations with using neo magnets in electric vehicles is the high dysprosium content (8-10%).

According to a report conducted by Oak Ridge National Laboratory for the U.S. Department of Energy: The 2010 Toyota Prius motor magnets weigh 48 grams in comparison with 77 grams for the 2004 Prius. With only one magnet along the axial length of the motor rotor, 16 magnets contribute to a total of 0.768 kg. The LS 600h, Camry, and 2004 Prius have total magnet masses of 1.349 kg, 0.928 kg, and 1.232 kg.
61

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Metal Alloys (25% of demand)


As shown in the chart below, demand for rare earths into metal alloys was approximately 31kt in 2012, representing 25% of overall demand. Since 2003, demand has grown at a compound rate of 4% per annum. Rare earths are used in metal alloys catalysts in two broad markets: Nickel Metal Hydride Batteries: Nickel Metal Hydride batteries which contain lanthanum in the anode are predominately used in electric vehicles. Other: Rare earths are used in alloy with other metals to improve certain physical properties in a range of applications.
Figure 77: Total rare earth demand in Metal Alloys and percentage of overall demand [kt]
25 21% 20 19% 15 18% 10 18% 18% 20% 23% 21% 23% 25%

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports, J.P. Morgan Estimates

Nickel Metal Hydride Batteries NiMH batteries are related to sealed nickel-cadmium batteries and only differ from them in that instead of cadmium, hydrogen is used as the active element at a hydrogen-absorbing negative electrode (anode). This electrode is made from a metal hydride usually alloys of Lanthanum and rare earths that serve as a solid source of reduced hydrogen that can be oxidized to form protons. The electrolyte is alkaline potassium hydroxide. Like Nickel-Cadmium (NiCd) batteries, NiMH batteries are susceptible to memory effect 3 although to a lesser extent. They are more expensive than lead-acid and NiCd batteries, but they are considered better for the environment. NiMH batteries are used in a multitude of applications, including portable consumer electronics and portable power tools; however hybrid vehicles are the main growth application. Batteries are a key component in vehicle applications: hybrid electric vehicles (HEVs), plug-in hybrid electric vehicles (PHEVs) and all-electric vehicles (AEVs) all require batteries to store energy for vehicle propulsion. Current-generation HEVs primarily use nickel metal hydride (NiMH) batteries while lithium-ion (Li-ion)

It is commonly believed that when rechargeable batteries are not fully discharged between charge cycles that they remember the shortened cycle and are thus reduced in capacity
62

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

batteries are generally used for PHEVs and AEVs to meet requirements for greater storage capacity and higher power ratings.
Figure 78: Hybrid car drive engine with electric motor and generator

Source: Toyota

However, HEV manufacturers are expected to transition to Li-ion batteries as the technology becomes cheaper and more mature. For example, Hyundai has already incorporated lithium polymer batteries into its Hyundai Sonata Hybrid. The most common NiMH chemistries use a cathode material designated as AB5. A is typically rare earth mischmetal containing lanthanum, cerium, neodymium and praseodymium; while B is a combination of nickel, cobalt, manganese and/or aluminum. A recent development in NiMH batteries is a move from mischmetal to lanthanum rich rare earths. We estimate new NiMH batteries will use up to 75% lanthanum versus 25% in a standard mischmetal previously. Other metallurgy applications for rare earths Rare earths are added to aluminum, iron, steel, and other host metals in small quantities to improve selected physical properties of the resulting alloys. The rare earths are added as ferroalloys, master alloys, mischmetal (a mix of mostly cerium and lanthanum oxides), or metals. These metallurgy applications include lighter flints historically, as well as more recently galfan in submarine sonar systems, magnetic refrigeration and high-impact steel.

63

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Catalysts (20% of demand)


20% of rare earths went into catalyst applications in 2012. As shown below, this segment has seen little growth over the last decade. Rare earths are used as catalysts in two broad markets: Fluid cracking catalysts (FCCs): FCCs are materials used in the petroleum refining industry to convert heavy crude oil into gasoline and other valuable products. Automotive catalytic converters: Modern vehicles use catalytic converters to reduce the emission of pollutants that result from internal combustion engines.
Figure 79: Total rare earth demand in catalysts and percentage of overall demand [kt]
30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports, J.P. Morgan Estimates

24% 25% 25% 24%

22%

21%

23%

24% 20%

19%

Fluid cracking catalysts (FCCs) Lanthanum and cerium are used in catalysts and additives for fluid cracking catalysts (FCC), a key process in gasoline production. These rare earths increase gasoline yield and reduce air emissions from the oil refining process. In a refinery, crude oil is distilled into different streams. Lighter molecular weight streams include gasoline, kerosene and diesel. Heavier molecular weight streams are processed further, and can be broken down into lighter products by several conversion processes. The FCC process breaks apart or cracks heavy input streams into primarily gasoline and diesel fuel, but also light hydrocarbon gases, heavy oil and coke. The heavy crude oil material entering the FCC unit, sometimes called heavy gas oil or vacuum gas oil, is heated to about 1,000F, at which it becomes a gas and flows up a specially designed pipe (called a riser) along with a catalyst that helps to break apart the heavy molecules. The term fluid refers to the fact that the hot gas flowing up the pipe suspends the catalyst, which looks like powder floating in the upward flowing gas. FCCs are manufactured to have structural shapes and compositions to increase the speed of the cracking process and to produce a mix of products that are most valuablein this case, light olefins (propylene and butylenes), gasoline and diesel. One of the materials used in FCC catalysts is lanthanum oxide. The addition of rare earth oxides helps the FCC catalysts to produce desired products and to remain effective longer. Reducing the amount of rare earths in catalysts reduces the amount of gasoline and distillate produced in the FCC units.
64

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Figure 80: Diagram of fluid cracking process

Reactor effluent REACTOR SEPARATION VESSEL

Flue gas to particulates

Gas (C 4 & lighter) Catalyst Stripper FRACTINATOR Steam Gasoline Light gas oil Heavy gas oil

CATALYST REGENERATOR

Combustion Air

AIR HEATER RAW OIL CHARGE


Source: EIA, J.P. Morgan

According to the U.S. Department of Energy, the use of rare earths in FCC catalysts increased from an average of 1.2% (by weight) in 1994 to about 2.9% in 2010. Higher rare earth content results in higher gasoline yield, but it also lowers octane content in the FCC gasoline. In recent years, octane loss has been less of a concern because the need for higher-octane FCC gasoline fell with increased blending of high-octane ethanol into gasoline. Rare earths, mainly cerium, are also used in some FCC additives to reduce sulfur oxide (SOx) emissions. These additives contain between 4% and 15% cerium oxide by weight. However, because the majority of FCC units do not use SOx reduction additives, this rare earth application is less significant than rare earth use in FCC catalysts. In addition, with increasing cerium prices, some catalyst manufacturers literature indicates that low rare earth content SOx additives will be available soon. While the unprecedented increases in rare earth costs during in 2011 year have likely added less than a penny to the price of gasoline, restricted supply visibility provided incentives for catalyst manufacturers to reduce rare earth content. We understand an end to the perceived supply crisis has led to a reversal of reduced rare earth content in FCCs.

Riser

SLURRY SETTLER

65

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Automotive catalytic converters Catalytic converters are anti-pollution devices located in the exhaust system of all modern motor vehicles. Its purpose is to convert harmful environmental exhaust gasses (pollutants) produced in the engine's combustion cycle into harmless substances like carbon dioxide, nitrogen and water vapour.
Figure 81: Automotive exhaust system
T409 Stainless Steel Catalytic Converter Body Intumescent Mat Insulation Packaging Tail Pipe Emission H2O Water CO2 Carbon Dioxide N2 Nitrogen

Heat Shield Position for Oxygen Sensor Plug

Catalyst Substrate Catalytic Active Material

Exhaust Gas Raw Emission HC Hydrogen CO Carbon Monoxide NOX Nitrogen Oxide
Source: Master Muffler

Catalytic Active Material Alumina OxideCerum Oxide CeO2 Rare earth Stabilisers Pt/Pd/Rh (Platinum/Paladium/Rhodium)

Major Reaction CO + 1/2 O2 = CO2 H4C2+3 O2= 2 CO2 + 2H2O CO + NOX= CO2 + N2

The main pollutants include carbon monoxide, hydrocarbons and nitrogen oxides, which are harmful to both human health and the environment. Catalytic converters contains ceramic or stainless steel metallic matrices (substrate) covered by a coating containing catalysts, Platinum, Palladium and Rhodium. Under elevated temperature these catalysts cause reactions that oxidise and reduce the pollutants. Automotive catalytic converters use cerium to facilitate the oxidation of carbon monoxide, helping to significantly reduce vehicle emissions. While the amount of cerium required per vehicle is very small, catalytic converters are increasingly being used in passenger and commercial vehicles.

66

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Glass (17% of demand)


Rare earths are used in glass as additives or as polishing powders. Total demand for rare earths in glass was 15kt in 2012 or 17% of total demand. We estimate the use of rare earths in glass has decreased 2% per annum in the last ten years.
Figure 82: Total rare earth demand in glass and percentage of overall demand [kt]
25 21% 19%

20 26% 15 24%

23%

22%

19% 18% 17% 17%

10

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports, J.P. Morgan Estimates

Polishing powders Glass polishing agents rely on rare earth oxides, often cerium and cerium oxides. Developed as polishing agents just before World War II, for such items as periscopes and range finders, these compounds are used to remove scratches from eye glasses.
Figure 83: Total rare earth demand in polishing powders and percentage of overall demand [kt]
16 14 12 10 8 6 4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports, J.P. Morgan Estimates

14% 15% 16% 15% 14%

14%

14% 13% 11% 12%

Polishing powder is sprayed on spinning glass where chemical dissolving and mechanical abrading agents work together to provide superior polished glass surfaces. Rare earth glass polishing powders at end-of-life contain 66-95% REOs in the following percentages: cerium oxide: 50- 99%; lanthanum oxide: 0-35%; neodymium oxide: 0-15%; and praseodymium oxide: 0-5%.
67

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Figure 84: Precision planetary polishing at JENOPTIKs Optical Fabrication Lab in Germany

Source: Jenoptik

Glass additives Rare earth oxides are added to glass to perform such functions as absorbing ultraviolet light, altering the refractive index, and colorizing or decolorizing. Yttrium is used with garnet to form yttrium-aluminum-garnet (YAG) lasers. Neodymium and other rare earths are used as dopants to alter the properties of the YAG lasers. In addition, rare earth elements are used to add antireflective properties to camera lenses. Lanthanum oxide is used to manufacture telephoto lenses.
Figure 85: Total rare earth demand in additives and percentage of overall demand [kt]
8 7 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports, J.P. Morgan Estimates

10%

9%

8%

7%

7% 6% 5% 5% 5% 6%

68

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Phosphors (8% of demand)


Phosphor materials emit light after being exposed to electrons or UV radiation. Liquid crystal displays (LCDs) and plasma screen displays, light-emitting diodes (LED's) and compact fluorescent lamps (CFL's) all utilize such materials. Demand for rare earths into phosphors has grown at an average compound rate of 2% per annum since 2003. In 2012, demand for rare earths into phosphors was 7kt representing 8% of overall demand.
Figure 86: Total rare earth demand in phosphors and percentage of overall demand [kt]
10 9 8 7 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports, J.P. Morgan Estimates

8% 8% 7% 8% 8% 7% 8% 8% 7% 8%

Lighting technologies can be broadly grouped into four categories: traditional incandescent, fluorescent, light emitting diodes (LEDs) and organic light emitting diodes (OLEDs). Many of these lighting technologies incorporate key materials, including rare earths. Older fluorescent lighting designs did not contain any rare earths. However, the current generation of more efficient, spectrally complete and visually pleasing lamps uses phosphors containing different concentrations of lanthanum, cerium, europium, terbium and yttrium to achieve various lighting effects. The exact composition of phosphors, including rare earths variety and weight percentages, differs by manufacturer and is considered proprietary information. Emerging lighting technologies have lower rare earth content than fluorescent lamps. White LED designs eliminate the need for lanthanum and terbium phosphors, but may still use cerium and europium phosphors to convert blue LEDs to useful white light. Gallium and indium are used in the formation of the LED compound semiconductor material. Some manufacturers add neodymium as a glass component to shift the color of certain products to more closely resemble natural light. However, in 2010 this use represented a very small percentage of overall neodymium use. OLEDs can be free of all lanthanides, but bulb manufacturers may still use other key materials such as indium.
69

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Purity is an important consideration for rare earths in phosphors Rare earths used in phosphors must be 99.999% pure, necessitating tight control over the manufacturing process. The presence of impurities of a few parts per million can distort the color characteristics of a given phosphor. In order to achieve these high purities, the purification takes many more separation stages, significantly increasing the cost of the rare earth oxides used to produce the phosphors. Suppliers of phosphors used in lighting products generally produce mass quantities of similar phosphor materials for application in television screens, computer monitors and electronic instrumentation. China currently consumes 80% of worlds lighting phosphor supply to produce components for major lighting manufacturers, although it subsequently exports the majority of these components for sale worldwide. The location of the lamp manufacturing process (which includes the production of glass tubes, coating with phosphors and assembly of bulb components) is driven by the labor and transportation costs of different types of bulbs, as well as by local government manufacturing incentives.

Other (5% of demand)


Approximately 5% of rare earth demand in 2012went into other applications we have not covered.
Figure 87: Total rare earth demand in ceramics and percentage of overall demand [kt]
9 8 7 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company reports, J.P. Morgan Estimates

7% 8% 7% 7% 7%

7%

6% 5%

5%

5%

Rare earths are added to ceramic glazes for color control. Barium titanate powder, which is used in electronic applications, is doped with lanthanides to modify the properties of the titanate. Yttrium is used to make ferrites for high frequencies and to stabilize zirconia in oxygen sensors.

70

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Appendix I: Individual rare earths elements


Table 10: Rare earths elements chemistry and applications

Scandium
Symbol: Sc Atomic number: 21

Scandium is variously included or not included among the rare earth elements. Annual global scandium production is very low, but only small amounts are used by current technologies. Increases in application in metal alloys and for fuel cell production would probably accompany an increase in supply. Scandium is used in the production of certain high performance aluminum and titanium alloys for sports equipment and for the aerospace industry. It is also used in some specialized high intensity and 'true-color' light sources. Yttrium is only present in significant quantities in a few known ore locations. Others contain very little of the element. Expected future demands far exceed current global production. The largest demand for Yttrium is in the production of phosphors such as those necessary to create the red colors on CRT displays (television screens). Other applications are rapidly emerging. The element is also currently used for high powered lasers, energy saving white LED light sources, to increase the strength and durability of aluminum and magnesium alloys, in specialized glass types and optical lenses, in various electronics and gas sensors, in high performance ceramics, in ornamental cubic zirconia (cz), and in cancer fighting drugs. Lanthanum is one of the four most 'abundant' rare earth elements, making up 20 to 40% or more of the REE content of some ore bodies. This is fortunate, considering its varied and unique usefulness. Lanthanum is used in the production of speciallized steel and other metal alloys, fiber optic and optical glass, rechargeable batteries, including those used in consumer electronics and electric and hybrid cars, mischmetal 'sparking' alloys such as are used in lighters, high intensity lighting, such as for movie projection, ion thrusters for some space craft, high sensitivity sensors, emission sources for instruments such as electron microscopes, and in petroleum refining for fuel production. Cerium is one of the most commonly available of the rare earth elements. It is the most abundant of the REEs in the earths crust and makes up a substantial percentage of the REE present in many ore bodies. Cerium is also more easily separated from the ores and from its accompanying elements than are many of the other rare earths, making extraction and refining of this element far more efficient and affordable than comparable processes for several of the other rare earths. Cerium is very heavily used as a polishing agent for optical and other glass products, as well as for metal (including jewelry), and other materials that require precision surfaces. It is also widely employed in the production of catalytic converters to reduce toxic and reactive emissions from vehicle exhaust. Cerium is also used to produce UV blocking glass, to produce optically clear glass, in a variety of aluminum, iron, steel, and magnesium alloys, in mischmetal sparking alloys, in high intensity lighting, and in rechargeable batteries. Cerium demand for the production of energy efficient fluorescent and compact fluorescent light bulbs is expanding rapidly. It has also shown promising future potential in the development of hydrogen fuel cells, a sustainable green energy alternative.

Yttrium
Symbol: Y Atomic number: 39

Lanthanum
Symbol: La Atomic number: 57

Cerium
Symbol: Ce Atomic number: 58

Praseodymium
Symbol: Pr Atomic number: 59

Praseodymium is not one of the more common rare earth elements, but unlike some of the scarcest types, it is found in recoverable quantities (1 to 6% oxide by weight) in nearly all REE ores. The supply versus demand tension for praseodymium is reduced, despite its scarcity, by a currently (comparatively) narrow range of applications. This may change unexpectedly with the broad based and well financed applications research currently underway in China and elsewhere around the globe. Praseodymium is currently primarily used in the production of permanent magnets, in high performance magnesium alloys, as a glass and ceramic colorant, in some batteries and catalytic converters, and in high intensity lighting and mischmetal 'sparking' alloys. Demand for this metal in magnet production has been steadily increasing. It should also be noted that, because alloys of praseodymium exhibit some of the strongest known magnetocaloric effects, emergent magnetocaloric refrigeration and cooling technology has the potential to impact demand for this element profoundly in coming decades.

Neodymium
Symbol: Nd Atomic number: 60

Neodymium is one of the most critically important rare earth elements in terms of both existing technologies and emergent sustainable and energy efficient future technologies. Neodymium is the most important REE in the manufacturing of high strength types of permanent magnets. The most commonly manufactured neodymium magnets, and the most commonly used rare earth permanent magnets overall, are neodymium-iron-boron magnets. The importance of these magnets to modern technology cannot be overstated. They are used in everything from cell phones and disc drives to MRI imaging, satellites, hybrid cars, and wind power generators. When averaged among ore bodies, Neodymium is the third most highly concentrated RE element in REE ores. This means that production is relatively stable, and that the element makes up a significant portion of overall global annual REE production. Scarcity is a function of both supply and demand, however, not just supply. The growth in demand levels, compared to growth in production of the resource, point out a serious need for expanded short and mid-term production. In addition to thousands of ever-increasing uses in the form of magnet alloys, Neodymium is also used in the production of advanced batteries, as a glass colorant, in certain lasers, and in a few other metal alloys.

Promethium
Symbol: Pm Atomic number: 61

Only a little over 1/2 kilogram of promethium is estimated to exist naturally in the entire earth's crust. It is a highly radioactive element with a short half life (its longest lived isotope half-life is only 17.7 years) and few commercial uses. Promethium exists, on earth, only as a temporary intermediate product in the ongoing radioactive decay of other elements. It is not mined in any meaningful sense, and is absent in meaningful quantities in REE ores. Small quantities of this element, manufactured in nuclear reactors, are used in the production of nuclear batteries and for a few other specialized applications. Since it is not mineable from the earth, virtually all of this material is created in a laboratory, mostly from nuclear waste, rather than from nature. Promethium is technically one of the rare earth elements, but it is not a part of the supply-demand chain that informs the current globally significant environmental, technological, and mining issues surrounding these elements.

71

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Samarium
Symbol: Sm Atomic number: 62

Samarium is a significantly mined, but relatively scarce, REE. It is present in concentrations of about 1 to 5%, by mass, in most rare earth ore bodies. Samarium is primarily used, currently, in high strength permanent magnets. Samarium-cobalt magnets are only slightly weaker than neodymium magnets, but have a much higher resistance to degradation with exposure to high temperatures than neodymium-iron-boron magnets. Samarium magnets can withstand temperatures over 700 degrees C (the highest of any currently known magnet variety), while neodymium magnets lose their magnetism at less than 400 degrees C. Applications of, and potential applications for, samarium magnets are extremely diverse. Additional (nonmagnet) applications of samarium include anti-cancer drugs, lasers, including some speciallized lasers used in analytic equipment. Samarium is also used, because of its exceptional ability to absorb neutrons, in the control rods for nuclear power plants. Samarium shows significant potential in the future production of super-conductors that operate at practically achievable temperature ranges. For the moment, supply and demand of samarium are relatively balanced but, as with many of the other rare earth elements, increasing numbers of potential applications await increases in supply of the material. Europium is both rare and expensive. Potential applications far exceed supply. Both new applications and the realisation of the full potentials of currently known applications await cost reductions. Europium is present in most rare earth ores at low levels (below 1% of REE oxide by mass). It is currently used, with yttrium, to produce red phosphors that are key to the manufacture of energy efficient (white) compact fluorescent light bulbs, as well as to the function of most computer and television screens. Many other applications are already known, but available resources are absorbed by current demand. Gadolinium content in REE ores varies substantially, from less than 1% to up to almost 7% (in chinese laterites and others). Gadolinium is used for radiation shielding and to slow rates of reaction in nuclear reactors. It is also used as a contrasting medium in medical MRI imaging, as a phosphor in medical X-Ray imaging, to create temperature tolerant and oxidation resistant alloys of iron and other metals, in compact disks (CDs), in a variety of sensors and analytic instruments, and in green phosphors for television and computer screens. Gadolinium has also shown promise in the development of superconducting materials. Gadolinium, in certain alloys, exhibits a strong magnetocaloric effect. This property of the element may become very important in the future development of energy efficient magnetic refrigeration technologies that benefit the environment by eliminating the use of chemical (HFC) refrigerants. The effect is already employed in specialized refrigeration systems used to reach extremely cold temperatures (<4K) neccesary for certain types of research.

Europium
Symbol: Eu Atomic number: 63

Gadolinium
Symbol: Gd Atomic number: 64

Terbium
Symbol: Tb Atomic number: 65

Terbium is found in small quantities (0 to 1% by mass) in most rare earth element ores. Global demand and expected future demands for terbium far exceed supply. Terbium is used in solid state electronics, in potentially environmentally important fuel cell technologies, in a variety of precision sensors and actuators, and in sonar systems. Its most significant current consumption, however, is in the production of energy efficient fluorescent and compact fluorescent light bulbs, where it serves as a phosphor (light source). It is also used as a yellow or green phosphor in computer monitors and televisions. Some of the uses of terbium derive from its 'magnetostrictive' alloy, Terfenol-D (Terbium, Dysprosium, and Iron), which exhibits a pronounced change in size when exposed to changes in magnetic field. Terbium may also become important in emergent nano-technology applications. The U.S. Department of Energy lists Dysprosium as the most critical element resource, in terms of both importance to clean energy technology and in terms of vulnerability of supply, in both the short-term and mid-term future. Demand for dysprosium for hybrid car production, only one of dozens of critical current applications, is expected to exceed current global production in the short term. The inadequacy of supply is due, in large part, to an inadequate number of active source mines. In short, too much of the worlds production is from a small number of mines in China, and other countries need to bring REE mines into immediate production. Dysprosium is used, with Neodymium, in the production of very strong permanent magnets that are critical to a wide range of emerging high tech instruments (cell phones, computers, ipods, etc) and environmentally sustainable technologies such as hybrid cars and wind power generators. Small percentages of this metal increase both the strength and corrosion resistance of these magnets. Dysprosium is also used in several of the most common types of computer memory and data storage devices and, with Terbium, to produce Terfenol-D, a magnetostrictive (megnetically sizechanging) alloy important in many sensors, actuators, and analytic instruments. Additionally, Dysprosium is used in high intensity light sources, in infrared phosphors, and is employed in nuclear power generation, to control and limit nuclear reactions.

Dysprosium
Symbol: Dy Atomic number: 66

Holmium
Symbol: Ho Atomic number: 67

Holmium is one of the least abundant of the rare earth elements, which is unfortunate, since it has the strongest magnetic moment (attraction) of any element. It is found in mineable quantities in relatively few rare earth element ore bodies. In those cases where it is most abundant, it still makes up, typically, less than 2 percent of the ore by mass. While expanded mining and recapture from waste may increase available quantities of this material, it is likely to remain scarce. Small quantities of Holmium, however, can be used with other elements, to significantly increase the strength of magnets. Many of its other applications, similarly, require little of the material in order to be effective. Holmium finds modest employment in the production of very powerful magnets and in nuclear control rods (due to its ability to absorb large quantities of stray neutrons). Other, more common, elements are probably more appropriate to nuclear applications, due to the scarcity of this element and its other potential applications. Holmium lasers are used as surgical lasers in the medical and dental fields, as well as in fiber optic communications. Holmium is also used in several analytic instruments, as a colorant in glass, and as a dichroic colerant in cubic zirconia for jewelry. The commercial potential of this element has not yet been fully explored, and may expand radically with increased supply.

Erbium
Symbol: Er Atomic number: 68

Erbium is a relatively scarce REE, completely lacking in some rare earth ore bodies, and representing up to 5% of the recoverable metal in others. Erbium is used in the production of amplifying lasers for fiber optic cable communications. Erbium in glass cables reduces signal loss substantially. Lasers made with this element are used widely in medical, dental, and dermatological applications. Stronger lasers, combining erbium and ytterbium, are used in metal cutting and welding. This element is also used as a pink colorant in glass, ceramics, and cubic zirconia. It is a uniquely stable colorant in certain applications. As with many other REEs, erbium absorbs free neutrons effectively, and thus is used in control and limitation of nuclear reactions in nuclear power generation facilities.

72

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Thulium
Symbol: Tm Atomic number: 69

Thulium is an exceedingly scarce metal. It is the rarest of the rare earth elements. Thulium is found only in very small quantities (up to 1/2 of 1% of oxides) in some rare earth ores. Like promethium, thulium is currently so rare that it has little influence on supply/demand dynamics in the world of rare earth element mining, distribution, or in the manufacturing of end-use products. The price of Thulium limits its utility, but, unlike promethium, which will never be mined on this planet in commercially important quantities, thulium availability will change with expanded production. The element can be used in medical (and other) lasers, as well as to make safer medical X-ray equipment. The element also shows potential in the development of superconductive materials. Applications (and thus demand) for Thulium may well expand with greater research and material availability.

Ytterbium
Symbol: Yb Atomic number: 70

Very few rare earth ores contain appreciable concentrations of ytterbium. Notable among these, are locations in Malaysia and Canada, as well as the Chinese REE bearing laterites. Chinese laterites produce, essentially, all Ytterbium used in the world today (about 50 metric tons), though other deposits are richer in this scarce REE, and could potentially produce larger quantities. Supply limitations strongly inhibit many known applications of this element. Rapidly expanding potential applications far exceed even the most robust estimates of future increase in supply. Ytterbium is an astoundingly useful element employed in technologies such as solar electric cells, high performance steel alloys, high-powered lasers, anti-forgery inks, night vision technology, and stress measuring instruments. Its potential market demand for applications as an alloy component, as a fiber optic amplifier, and in solar electric generation, as well as others, may expand substantially with greater availability of the resource.

Lutetium
Symbol: Lu Atomic number: 71

Lutetium is astoundingly scarce, even in the richest REE ores. It ranges from 0% to 1% of recoverable metal in most ores, but most commonly represents 0.1% or less. World production is only around 10 metric tons per year, and the prices of the metal and its oxides are correspondingly high. Lutetium has been used, on a small scale, as a chemical catalyst and in the petroleum refining process. It also has important current medical applications, including use in cancer treatment and as a sensor material in PET scans. If price and availability change, lutetium shows substantial promise in a variety of applications in analytic tools, advanced computer memory, manufacturing, the nuclear industry, in phosphors, and in both medical diagnosis and treatment. Supply limitations and high prices currently constitute substantial limitations on use of this element.

Source: Rare Earths Elements

Table 11: Discovery and history of rare earth elements


Year 1794 1803 1839 1843 1878 1878 1879 1879 1879 1879 1880 1885 1885 1886 1896 1907 1945 Element Yttrium Cerium Lanthanum Erbium Terbium Ytterbium Samarium Scandium Holmium Thulium Gadolinium Praseodymium Neodymium Dysprosium Europium Lutetium Promethium Origin of name Ytterby mine, Sweden After the asteroid Ceres From Greek lathano = concealed Derived from Ytterby mine, Sweden Derived from Ytterby mine, Sweden Derived from Ytterby mine, Sweden After the mineral samarskite After Scandinavia After the Latin for Stockholm Ancient name for Scandinavia In honour of Johan Gadolin, a Finnish chemist From Greek prasios = green, and didymos = twin From Greek neo = new From Greek dys = bad and prositos = approachable After Europe After Lutetia, Latin name for the place where Paris was founded After Prometheus, in Greek mythology, who brought fire to mankind Discovery Johan Gadolin Baron Jons Jakob Carl Gustav Mosander Carl Gustav Mosander Carl Gustav Mosander Jean Charles de Marignac Paul E. Lecoq de Boisbaudran Lars Fredrik Nilson Per Teodor Cleve Per Teodor Cleve Jean de Marignac Carl Auer von Welsbach Baron Carl Auer von Welsbach Paul E. Lecoq de Boisbaudran Eugene Demarcay Georges Urbain, Carl Auer von Welsbach Charles DuBois Coryell Nationality Finnish Swedish Swedish Swedish Swedish French Swedish Swedish Swedish Swedish Swiss Austrian Austrian French French French and Austrian American

Source: Tasman Metals

73

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Appendix II: Rare earth geology


Rare earth elements do not occur as free metals in the earths crust, such that all naturally occurring minerals consist of mixtures of various rare earths and nonmetals. Bastnsite, monazite and xenotime are the three most economically significant minerals of the more than 200 minerals known to contain essential or significant rare earths: Bastnsite and monazite are main sources of light rare earths elements. Monazite is also the principal ore of thorium (containing up to 30% thorium), which together with smaller quantities of uranium imparts radioactive properties. Xenotime and minerals such as allanite are common sources of the heavy rare earths and yttrium. Other commercial sources of rare earths are apatite and loparite (western Russia), rare earth-bearing clays (Longnan clay or southern ionic clay, Jiangxi Province, China), and various minerals such as allanite that are produced as a by-product of uranium mining (Canada). The main commercial source of scandium is as a byproduct from the processing of uranium and tungsten. We provide descriptions of the main rare earth bearing minerals below. Advantages and disadvantages of each are shown in Table 13 on page 76.
Table 12: Composition of Major Rare Earth Minerals
Mineral Bastnasite Monazite Loparite Xenotime Apatite Ionic Clays Formula LnFCO3 (Ln,Y,Th)PO4 (Na,Ca,Ln,Y)(Nb,Ta,Ti)2O6 YPO4 (Ca,Ln)5[(P2Si)O4]3 Weathered Xenotite and Apatite Major Occurrences China, USA China, Australia, Brazil, India, Malaysia, Africa Former Soviet Union China, Australia, Malaysia, Africa Former Soviet Union, Australia, Canada China REO % 70 to 74 35 to 71 32 to 34 52 to 67 0 to 12 n/a ThO2 % 0 to 0.3 0 to 20 n/a UO2 % 0.09 0 to 16 0 to 5 n/a

Source: Greenland Minerals. Ln = Lanthanite

Bastnsite: Bastnsite is a fluorocarbonate mineral with the chemical formula (Ce, La, Y)CO3F, and is the source of most of the worlds rare earth production. Bastnsite contains predominately light rare earths elements, and tends to be specifically high in cerium, lanthanum, yttrium, and neodymium. Related minerals (which are formed from substitution of the fluorine or carbonate anions) include parisite, and various hydroxyl-bastnsites, as well as others. Bastnsite ores have been found in a variety of igneous contexts, ranging from carbonatites, granites, and pegmatites, as well as in hydrothermal and bauxite deposits. Monazite: Monazite is a rare earth phosphate and the second most common source of rare earths. A variable naming system is used depending on the elemental composition of the ore: monazite-Ce, monazite-La, monazite-Nd, and monazite-Pr. These terms reflect the primary rare earth element in the ore, but monazite ores also contain varying quantities of the others. Similar to other
74

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

common rare earth ores, monazite generally contains more light than heavy rare earths, but the ratio of heavy/light is typically greater in monazite than in bastnsite. Due to the high density of the ore, monazite generally collects in placer sands. One of the key negatives, is radioactive byproducts have the ability to substitute for the rare earths in the monazite structure. In high enough concentrations, these byproducts (including uranium and thorium) may become mineable co-products. Not all monazite mineral sources contain significant percentages of thorium, however, and these challenges are dealt with (or taken advantage of) on a case by case basis. Xenotime: After monazite and bastnsite, xenotime is the third most important ore for production of rare earths. Chemically, xenotime, is an yttrium phosphate is similar to monazite. However, the yttrium in xenotime is readily substituted by other heavy rare earths such as: ytterbium, erbium, and gadolinium, followed by lesser quantities of terbium, holmium, thulium, and lutetium, as well as by uranium and thorium. Therefore xenotime ores typically have higher quantities of heavy rare earth elements than monazite ores which are predominately light rare earths. Similar to monazite, uranium and thorium can be present (although not always) in significant quantities in xenotime ores. These byproducts present either a mineable co-product or an impurity. Xenotime and monazite can be found together in the same area. Monazite generally forms at lower temperatures and pressures, while xenotime forms relatively higher temperatures and pressures. Loparite: The mineral loparite (Ce, NA, Sr, Ca)(Ti, Nb, Ta, Fe+3)O3 is the principal ore of the light-group rare-earth elements mined in Russia's Kola Peninsula. Ore is beneficiated to produce a 95% loparite concentrate containing 30% rareearth oxides. Loparite concentrate is refined by either a chlorination process or acid decomposition process to recover rare-earths, titanium, niobium and tantalum. Apatite: Apatite is a group of phosphate minerals, usually referring to hydroxylapatite, fluorapatite and chlorapatite, named for high concentrations of OH, F, Cl or ions, respectively, in the crystal. Apatite is a common host for minor to trace amounts of rare earth elements in igneous rocks. One such deposit is Hoidas Lake in Canada. Ion absorption clays: A particular type of rare earth deposit, the ion-absorption type, is formed by the leaching of rare earth elements from seemingly common igneous rocks and fixing the elements onto clays in soil. These deposits are only known in southern China and Kazakhstan and their formation is poorly understood.

75

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

A summary of the key advantages and disadvantages of each ore type is shown below.
Table 13: Advantages and disadvantages of minerals bearing rare earth oxides
Ore type Bastnsite Total REO% 1-8% Advantages - Normally high REO content - Has been processed economically in the past - Weathered monazite contain particularly high levels of rare earth oxides and thorium and uranium content is lower - Processing method has been developed - Developed processing method - High content of titanium - Well established source of heavy rare earths - Easy to process - Generally low cost - Normally contains high quantities of heavy rare earths Disadvantages - Mainly contains light rare earths

Monazite (primary and placer deposits)

0.5-10% (0.5-2.5%)

- Often occurs along with uranium and thorium minerals - High reagent consumption

Loparite

2-3%

- Significant thorium and uranium content in ores - Mainly contains light rare earths oxides - Low rare earth oxide content - Environmentally damaging mining techniques

Ion absorption clays

<0.5%

Eudialyte

~0.5-1.5%

- Hard rock deposit requiring more processing stages - High reagent consumption - No established process - Deposits of pure xenotime are quite unusual and are often small - Some deposits have significant levels of thorium and uranium - Composition can be variable - Yttrium levels are normally low - Capacity is limited by amount of tailings generated

Xenotime

1-2%

- Yttrium content is normally high - Established process for extraction

Uranium tailings

~5%

- Overall costs are low as material has already been mined

Source: Various sources including Lynas and J.P. Morgan

76

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Appendix III: Mining and processing


The extraction and processing of rare earths into metal follows a four step process: rare earth ore is first mined, then concentrated (usually at the mine site). The rare earth elements are then separated into carbonate or oxide form, which is finally purified into metal for use in various applications.
Figure 88: Four stages of extraction and processing

Source: J.P. Morgan

Mining and concentrating The first two stages of the process are similar to mining operations of other minerals. After ore containing rare earths is removed from the ground, it goes to a process facility where the valuable mineral material in the ore is milled or beneficiated.
Figure 89: Mining and concentration process

Source: Lynas

The mined ore is crushed into gravel, which in turn is ground up into progressively smaller particles. These particles are sifted and sorted by such means as flotation and electromagnetic separation to extract usable material. Flotation: Flotation is a beneficiation method that can be used with bastnsite and Lynas monazite ore. First, the ore is ground into a fine powder and added to liquids in flotation tanks. Chemicals are added to cause impurities to settle out, and air is pumped in to create air bubbles. The finer bastnsite particles stick to the bubbles, which rise to the top and form a froth that is then skimmed off. Following flotation the mixture is thickened and filtered to produce a concentrate. Electromagnetic separation: Both monazite and bastnsite are highly magnetic, meaning the minerals can be separated from non-magnetic impurities in the ore through repeated electromagnetic separation. This technique uses a magnetic separator device that consists of a belt moving on two rollers, one of which contains strong magnets. When powdered ore is dropped onto the belt, magnetic and non-magnetic particles within the ore will fall away differently from the magnetic roller.
77

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Rare earth separation Rare earth concentrate then goes through a process to separate the material into the various oxides. The complex metallurgy of rare earth elements and the fact that no two ores are truly alike means there is no standard process for extracting the minerals and refining them into marketable rare earth compounds. Lynas (as well as Baotou and others) uses an acid leach process. A process flow diagram is shown in Figure 90. The concentrate, which is essentially a phosphate mineral, is mixed with concentrated sulfuric acid and cracked at a high temperature in a rotary kiln to convert the material to a sulphate. Water is then added to the sulphate in the leaching stage and impurities (such as Iron and Thorium) are removed. The solution advances to the neutralisation stage to produce the rare earths rich solution as feed to the solvent extraction.
Figure 90: Mining and concentration process

Source: Lynas

The process of solvent extraction uses chemical agents to break down the components within a substance. Those materials which more soluble or react more readily to a particular acid or base get separated from the rest. The separated materials are then removed, and the process begins all over again with the introduction of more chemicals to leach out more components. The solvent extraction method used to separate rare earths relies on the slightly different solubilities of rare earth compounds between two liquids that do not dissolve in each other (typically oil and water). For example, one process has bastnsite repeatedly treated with hot sulphuric acid to create water-soluble sulphates. More chemicals are added to neutralize acids and remove various elements like thorium. The mineral solution is treated with ammonium to convert the rare earths into insoluble oxides.

78

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Purification into rare earth metals The first stage is to convert any carbonate material into an oxide. In this process, ovens and other devices like induction furnaces and arc furnaces are used to heat up substances to the point where volatile, chemically combined components like carbon dioxide are driven off. The rapid advance of science and technology has led to some rare earth applications that require very high purities of individual rare earths: as much as 99.999%. For these applications, multistage solvent extraction is generally used to refine the oxides. The most common method to convert oxides to rare earth metal is electrodeposition using an electrolytic furnace: The rare earth metals are prepared in high yields in a specially designed electrolytic cell, by electrolyzing a melt comprising (i) a rare earth chloride, (ii) an alkaline earth metal chloride, and (iii) an alkaline earth metal fluoride. This process is energy intensive, and research is being conducted to find other viable alternatives. The process yield for reduction from the oxide to the metal is approximately 80% (though some more primitive processes yield less than 50%). Approximately 13-14% of the rare earth oxide is oxygen. So theoretically, the maximum yield is about 86-87%.

79

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Appendix IV: Timeline of magnet development


Table 14: Permanent magnet development timeline based on Parker
Material Carbon Steel Chrome Steels Cobalt Steel Remalloy Alnico New KS PtCo Cunife Cunico Alnico, field treated Vicalloy Alnico, DG Ferrite, isotropic Ferrite, anisotropic Lodex Alnico 8 Alnico 9 RECo5 RECo5 RE2(Co,Fe,Cu,Zr)17 RE2TM14B First Reported c.1600 c.1870 1916 1931 1931 1934 1936 1937 1938 1938 1940 1948 1952 1954 1955 1956 1956 1966 1970 1972 1984 Reference Gilbert Hadfield Honda et al Seljesater Mishima Honda et al Jellinghaus Neumann et al Dannhl & Neumann Oliver & Shedden Nesbitt & Kelsall McCaig, Bemius, Ebeling Went et al Stuijts eta al Luborsky et al Koch et al Koch et al Strnat et al Benz & Martin Strnat et al Koon, Croat, Sagawa (range of properties) RE2TM14B 2010 (numerous) (range of properties)
Source: Arnold Magnetics

BH(max) 0.2 0.3 0.9 1.1 1.4 2.0 7.5 1.8 1.0 5.5 3.0 6.5 1.0 3.6 3.5 4.5 9.2 16.0 19.0 32.0 26.0 35.0 30.0 52.0

Hci 50 65 230 230 490 790 4,300 590 450 640 450 680 1,800 2,200 940 1,450 1,500 7,000 8,000 25,000 25,000 11,000 35,000 11,000

80

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgans Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail research.disclosure.inquiries@jpmorgan.com. Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.jpmorganmarkets.com. Coverage Universe: Busuttil, Mark: Aquila Resources Ltd (AQA.AX), Atlas Iron Ltd (AGO.AX), Energy Resources of Australia Limited (ERA.AX), Gindalbie Metals Ltd (GBG.AX), Grange Resources (GRR.AX), Iluka Resources (ILU.AX), Lynas Corporation Limited (LYC.AX), Mount Gibson Iron Ltd (MGX.AX), Paladin Energy Ltd (PDN.AX), Whitehaven Coal Limited (WHC.AX) J.P. Morgan Equity Research Ratings Distribution, as of June 28, 2013
J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 44% 56% 42% 76% Neutral (hold) 44% 50% 50% 66% Underweight (sell) 12% 40% 8% 55%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com. Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

81

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales representative. Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the Johannesburg Securities Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited and CHI-X. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MIC (P) 049/04/2013 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Japan: JPMorgan Securities Japan Co., Ltd. is regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE. Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc. Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client" has the meaning given in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in
82

Mark Busuttil (61-2) 9003-8619 mark.busuttil@jpmorgan.com

Australia Equity Research 11 July 2013

accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / ouvidoria.jp.morgan@jpmorgan.com. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised May 4, 2013.

Copyright 2013 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

83