business

Rare Earths Rival Lure of Navigator’s Gold, Fuel Share ‘Bubble’

Bankers visiting Navigator Resources Ltd.’s gold mine in Western Australia two weeks ago soon turned their focus to a different set of metals about 1,000 kilometers (620 miles) to the north: rare earths.

Twelve days after their Oct. 11 tour, Navigator said it planned to sell half its rare earth assets for at least A$10 million ($9.9 million) to create a separately listed company. The speed of the deal comes amid surging interest in the minerals used in disk drives, wind turbines and guided missiles because of looming shortages caused by China’s cuts to exports that account for more than 97 percent of world supply.

Shares of Lynas Corp. and Molycorp Inc., the biggest non-Chinese rare earth companies by market value, have more than doubled since July, when China said it would cut shipments by 72 percent in the second half. Now, smaller rivals such as Navigator, Korab Resources Ltd. and Greenland Minerals & Energy Ltd. are burnishing their rare earth assets.

“It does smack essentially of the vogue investment,” said Ric Ronge, who helps manage the equivalent of $1.1 billion at Pengana Capital Ltd. in Melbourne. “It’s been used almost as an instrument to come and mine the market.”

Lynas, which is based in Sydney, estimates the global rare earth market this year at $7.8 billion, or about a week’s sales at Wal-Mart Stores Inc. Still, China’s cutbacks have raised political tension because of the strategic importance of the metals used in Toyota Motor Corp.’s Prius hybrid cars, Research in Motion Ltd. BlackBerrys, alternative energy generation and weapons.

Ensuring supplies of rare earths is “crucial,” German Economy Minister Rainer Bruederle said yesterday. The Pentagon is due to report on its plans for securing resources to Congress this month. China says its curbs are needed to shut inefficient mines that waste resources and damage the environment.

Lanthanum Oxide

The price of lanthanum oxide, used in hybrid batteries, has risen more than sixfold since second quarter to $50 a kilogram, according to Lynas’s website. Vehicles such as the Prius contain about 10 kilograms of rare earths, while a typical 3-megawatt wind turbine requires 1 ton of neodymium iron boron magnets, according to Albert Cheung, an analyst at Bloomberg New Energy Finance in London.

World demand for rare earths will increase to about 225,000 tons by 2015 from 125,000 tons this year, Molycorp Chief Executive Officer Mark A. Smith said last week in an interview. By 2015, China will produce 175,000 tons, with the gap to be filled mainly by Molycorp and Lynas, he said.

Hurdles

“It’s only going to take probably four to six significant rare earths-producing mines to fulfill global demand for the next five to 10 years,” said John Mair, general manager of business development at Perth-based Greenland Minerals, whose project in the country may start in 2015. “There is a bit of a rare earth bubble that is starting to emerge.”

Rare earth companies have to overcome regulatory and technical hurdles to develop assets, which can take years, said Trent Allan, an analyst at Resource Capital Research in Sydney.

The key to funding projects is “demonstrating that their process is effective in extracting the rare earth,” said Trent, who covers Greenland Minerals. “That’s the stage that all of these deposits need to get to. So far, so good with Greenland.”

The company’s shares jumped 58 percent last week on the Australian stock exchange. The average stock-price gain over the past month of 31 companies tracked by Bloomberg globally that claim a rare earth element in their business is 34 percent, even though only two have reported positive free cash flow.

Hype

“Everyone is looking for the 3-cent stock that suddenly could shoot to 10 cents, really on the back of hype,” said Cameron Peacock, a market analyst at IG Markets in Melbourne. “These things will crash as quickly as they’ve risen.”

The prospect of shortages and rising prices hasn’t been enough to lure the manager of the world’s biggest mining fund.

Rare earths are “not like producing a bar of gold,” said Evy Hambro, who oversees $14.2 billion at BlackRock Inc.’s World Mining Fund. “You’re producing a basket of commodities of whose prices you’re never really certain. They have lots of different applications and those applications change the whole time.”

Molycorp, which is based in Greenwood Village, Colorado, plans to begin production in the second half of 2011 with a target of about 20,000 metric tons by the end of 2012. The company may double capacity at its California mine, Smith said last week. The project once met almost all the world’s rare-earth demand before closing eight years ago, undercut by low- cost Chinese metals.

Molycorp stock has surged 144 percent since it raised $394 million in a July initial public offering.

‘Exciting Discovery’

Lynas plans production of 22,000 tons by the end of 2012 from its Mt. Weld project, it said Sept. 28. The shares jumped 183 percent this year.

Perth-based Korab Resources Ltd.’s stock has more than doubled to 42 Australian cents since announcing an “exciting discovery” of rare earths on Oct. 15.

“We’re still trading at a huge discount to where we should be,” said Executive Chairman Andrey Karpinski. “Shares should be trading somewhere north of 60 cents based on overall assets,” including other minerals such as magnesium, he said.

Navigator rose 39 percent in the two weeks before the Oct. 22 announcement that it hired BGF Equity to structure its deal. The stock has fallen 14 percent since.

“Navigator’s recognition in the market for having a rare earths project is very recent,” said David Hatch, managing director of the gold-focused developer. The project “has been in the company since it listed in September 2003. It’s not something that fell out of the sky.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE