Molycorp, Lynas May Add to Gains as China Restricts Supply of Rare Earths

China’s clampdown on exports of rare earths essential for the electronics and new-energy industries may create a windfall for a handful of Western companies seeking to benefit from surging global demand.

Molycorp Inc., owner of the world’s largest non-Chinese deposit of rare-earth metals, and Lynas Corp. both plan to open mines in the next two years to meet the demand, forecast by the Chinese Rare Earths Industry Association to gain by almost two- thirds by 2015. Their shares have more than doubled this half, tracking gains in prices for rare earths that are used in the manufacture of disk drives, wind turbines and smart bombs.

“There’re only two genuine new companies coming on-stream that can offer a meaningful level of production and that’s Molycorp in the States and Lynas in Australia,” Hunter Hillcoat, an analyst at Investec Bank Australia Ltd., said by phone from Sydney. The risk is “you have to assume they can bring on production seamlessly and that the price is still at the same level by the time they’re in production,” he said.

China, producer of more than 90 percent of the world’s rare earths, reduced its second-half export quota for the minerals by 72 percent in July and is now further restricting exports in the $1.2 billion market, according to industry participants. Prices for some of the minerals jumped as much as sevenfold in the past six months, prompting companies including Glencore International AG, the biggest commodities trader, to seek to restart and open mines.

Mothballed Mine

Molycorp plans to restart a mothballed California mine in the second half of 2011 and produce about 20,000 metric tons of rare earth oxides by the end of 2012. The Mountain Pass mine met almost all the world’s rare-earth metals demand before closing eight years ago. The company may double its planned capacity to 40,000 metric tons, it said Oct. 19. The Greenwood Village, Colorado-based company has surged 144 percent since raising $394 million in a July initial public offering.

Sydney-based Lynas plans to start production from its A$550 million ($541 million) Mt. Weld project in the third quarter next year with initial output of 11,000 metric tons a year, which will double to 22,000 tons by the end of 2012, it said Sept. 28. Its share have soared 210 percent this year.

“Lynas is in a good position because it signed a number of” sales agreements, Andrew Sullivan, an analyst at BBY Ltd., said from Sydney. “It definitely has first-mover advantage for Western or non-Chinese rare earths users that are looking to diversify. The same could be said about Molycorp. It’s got agreements in place for quite a bit of its production.”

Australian Block

Australia in September last year blocked China Non-Ferrous Metal Mining (Group) Co. from buying a majority stake in Lynas. It blocked a A$2.6 billion bid by state-owned China Minmetals Corp. for OZ Minerals Ltd. in March 2009 on national-security concerns.

Rare earths are 17 chemically similar elements, including neodymium and dysprosium. The oxides are used in the production of equipment for General Dynamics Corp.’s M1A2 Abrams tank and Aegis SPY-1 radar made by Lockheed Martin Corp.

Global demand for rare earths will rise to about 225,000 tons by 2015, compared with 125,000 tons this year, Molycorp Chief Executive Officer Mark A. Smith said this week in an interview, citing research from Roskill, a U.K.-based metals and minerals research company. By 2015, China will produce 175,000 tons of the minerals, leaving a gap of about 50,000 tons a year to be filled mainly by Molycorp and Lynas, he said.

Prices have climbed sevenfold in the last six months for cerium oxide, which is used for polishing semiconductors, and other elements have more than doubled, according to Metal-Pages Ltd. in London, which tracks rare-earth prices.

‘Small Market’

“It is still a relatively small market compared to other commodity markets, but the growth in it is a lot stronger,” said Mark Pervan, head of commodity research at Australia & New Zealand Banking Group Ltd. “I suspect there will be a price pressure on that market to see a supply response.”

Contributing to the rise in prices is an expectation of further restrictions. China will probably tighten export controls next year, Shigeo Nakamura, president of Advanced Material Japan Corp., said at a conference in China yesterday. China said the quota reduction was needed in order to shut polluting mines and still be able to meet domestic demand.

“The big impact is what’s going to happen in the medium term, over the two to four years” in terms of supply, said Dudley Kingsnorth, owner and chief executive officer of Perth- based advisory company Industrial Minerals Co. of Australia. “I can’t see any major project being in production before 2015, 2016, apart from Lynas’ Mt. Weld and Molycorp’s Mountain Pass. There will be opportunities for other companies in the latter half of this decade.”

Arafura, Alkane

Arafura Resources Ltd. and Alkane Resources Ltd. are two other Australian companies that may attract investors, said BBY’s Sullivan. Arafura said this month it’s in talks to raise funds for its rare earth project. The Perth-based company, in which East China Exploration and Development Bureau has the largest stake with 22.2 percent, is planning to produce 22,000 tons a year of rare earth oxides from 2013.

“If you have higher risk appetite, Arafura is more attractive,” BBY’s Sullivan said. Its project is less advanced than those of Molycorp and Lynas, he said.

To contact the Bloomberg News staff on this story: Jason Scott in Perth at Jscott14@bloomberg.net Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net.

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