Rare Earth Prices In 2015:

Investor Takeaways
Dec. 29, 2015 10:12 AM ET 
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 Includes: AVLNF, GOLDF, MCPIQ, MLLOF, NOURF, REE, TAS, TMRC

Ben Kramer-Miller
Gold & precious metals, macro, research analyst, Deep Value
(3,657 followers)

Summary

Rare Earth prices slumped with the broader commodity market, making
every proposed REE mine uneconomical without a by-product or
technology solution.

Several REEs have seen element-specific developments that have hurt

their markets (e.g. cerium, lanthanum, europium, terbium, dysprosium,
yttrium).

Western prices have converged towards Chinese domestic prices as the

export tariff expired.

Some REEs are overproduced so that others can be sufficiently produced,

meaning there is some oversupply (exacerbated by the aforementioned
element-specific developments).

Investors should focus on companies that can smoother over this volatility
with by-products, or companies which have found other by-product
solutions.

REE prices fell substantially this year, and there are several reasons for
this. First we cite the ongoing decline in commodity prices in general. A
global deceleration in the economy has resulted in less demand for REEs
than projected. We cite this 2011 5-year supply/demand projection from
Dudley Kingsnorth.
Demand is closer to 130 ktpa. Note, however, that Kingsnorth's projected
supply growth has underwhelmed: Molycorp (OTCPK:MCPIQ) is no longer
producing, Lynas' ramp-up has been slower than anticipated, and no
other projects have made it into production. Nevertheless there is
oversupply in the market, although this situation is somewhat nuanced,
as we will see.

Second, the underperformance of demand vs. expectations has been

exacerbated by the REE scare in 2010-11, which has spawned efforts all
over the world to reduce REE-consumption by finding substitutes.

Perhaps the biggest breakthrough on this front has been the reduction in
phosphor consumption in lights (e.g. in fluorescent lights). As LED lights
replace fluorescent lights demand for phosphors and the REEs that
comprise them has seen a secular decline. Lanthanum, europium, terbium
and yttrium have been casualties of the secular bear market in
phosphors. This is in spite of the projections for soaring phosphor demand
just a few years back. MIT adopted the following Roskill data and has
provided us with the following chart of projected phosphor demand.
adopted the following Roskill data and has provided us with the following
chart of projected phosphor demand.

This chart is a pipe dream in today's world, although it was universally

accepted as inevitable 4 years ago. In the cases of europium and yttrium
the phosphor market was the primary source of demand; it follows that
these two materials--once deemed to be among the most critical REEs to
industry while posing substantial supply risk (e.g. by Lifton in 2012)--are
oversupplied. Europium demand has virtually dried up as an
overwhelming majority of demand came from phosphors. Yttrium has
other uses in ceramics, alloys, and laser crystals, but the bulk of demand
came from phosphors, meaning that we've seen a sharp shift in yttrium
supply/demand. Lanthanum has several other uses such as in fluid
cracking catalysts and in nickel metal hydride batteries, and terbium is
used in small amounts in neodymium-iron-boron permanent magnets to
increase their coercivity. Praseodymium, which is found in phosphors as
well, can be used in NiMH batteries, Nd-Fe-B magnets as a substitute for
neodymium ("dydidium" is used so as to reduce separation costs).
Growing demand for praseodymium in magnets has likely offset the
demand lost in the phosphor market. In fact of all the REEs
praseodymium's fundamentals have outperformed in the past few years.

The other primary substitution we've seen has been in magnets:

manufacturers are worried about China's monopoly on dysprosium and
terbium production, and they also want to reduce magnet costs. This has
pushed them towards finding substitutes for them in Nd-Fe-B magnets.
There is a lot of literature and discussion regarding the effectiveness and
feasibility of such a substitution, since dysprosium and terbium add
essential attributes to permanent magnets. From what we've been able to
gather the substitution is more effective in some cases vs. others. We
note that one REE-magnet producer -- JL Mag -- is very confident in its
ability to reduce dysprosium consumption in its permanent magnets. It
believes that this will have a dramatic impact on dysprosium demand
going to forward.

Considering that the primary use for dysprosium is in permanent magnets

this is certainly feasible. We could easily see a convergence of dysprosium
and neodymium/praseodymium prices, and this is already taking place.

Finally there has been a shift in the battery market towards lithium-ion
batteries, which many analysts expect will be the preferred choice for the
highly prospective EV, HEV, and stationary battery markets. NiMH
batteries are heavier relative to the amount of energy they can store,
although they are less expensive. Note that Toyota (TM) is offering its
2016 Prius with either battery choice: the Li-B choice is more expensive
and gets slightly better mileage.

Third, we cite the convergence of FOB prices towards Chinese domestic

prices. Previously, REE exports had been taxed coming out of China,
meaning that any Western producer looking to get into the REE space
could operate less efficiently than the Chinese and still be profitable: the
Chinese producer had to charge a higher price to pay the tariff, while the
Western producer could pocket that difference. With this policy's reversal
the competitive landscape has evened out, and Western producers have
to compete with Chinese internal prices. These prices have continued to
fall for the reasons discussed above, as well as the following.

Fourth, and finally, REEs are not produced in the proportions in which
they are consumed. Since they all occur together in economic deposits, it
follows that some must be overproduced in order for all to be sufficiently
produced. Cerium and lanthanum, for instance, have been overproduced
so that sufficient quantities of neodymium and praseodymium would be
produced. In today's market it costs more to process these materials than
they're worth on the market. The situation is such that several companies
have incorporated an early-cerium removal step into their
hydrometallurgical RE-extraction flowsheets [cerium removal is less
expensive than lanthanum removal because Ce (III) is readily oxidized to
Ce (IV) which can easily be precipitated out of a PLS]. Note that we can't
cite any ongoing operation that incorporates cerium removal, meaning its
appeal is largely based on conjecture at this point in time.

Yttrium, not surprisingly, is also overproduced as miners try to produce

sufficient quantities of dysprosium and terbium. Despite falling demand
for dysprosium in magnets on a proportionate basis, and despite falling
demand for terbium in phosphors, the fall in demand for yttrium has been
sufficient enough for this situation to emerge. One company -- Northern
Minerals (OTC:NOURF) -- has proposed an yttrium-removal step for its
hydrometallurgical flowsheet, although we aren't sure of the company's
chosen method, its history, or its efficacy.