A New Trend in Rare Earth Elements
by Justin Dove, Investment U Research
Thursday, August 25, 2011
China’s manipulation of the rare earth element market has led to yet a new chapter in the industry.
Two of the world’s largest end-users of rare earth elements are fighting back against the Chinese by entering agreements with two of the largest miners outside of China.
Siemens AG (NYSE: SI) recently entered an agreement with Australia’s Lynas Corporation to provide neodymium for magnets. Hitachi Metals, a subsidiary of Hitachi Ltd. (NYSE: HIT), has entered a three-year agreement with Molycorp (NYSE: MCP). Molycorp will provide Hitachi Metals with rare earths, including didymium (a mix of neodymium and praseodymium) metal and alloy, as well as lanthanum oxide.
Australia's Mount Weld Challenges China's Rare Earth Dominance
Lynas Corporation owns the Mount Weld mine in Australia. It’s said to have some of the richest deposits of rare earth elements in the world. It became operational on August 4 and should become fully operational next year. It’ll have three phases of production, and it’s expected to be the biggest challenge to China’s rare earth dominance:
- The mine is expected to produce up to 11,000 metric tons of rare earth oxides in 2012.
- In a second phase of expansion, Lynas is expected to double production to 20,000 metric tons annually by 2013.
- Eventually, Lynas expects to produce 33,000 metric tons annually over a 20-year span.
Per the letter of intent, Lynas and Siemens will co-venture a production company that produces the magnets Siemens needs. Siemens will take a 55-percent ownership, with Lynas covering the remaining 45 percent.
Neodymium prices have increased by a factor of 10 over the past year. This deal should be a win-win for both companies. Siemens benefits by getting a cheaper and safer stream of resources. Lynas has locked in a giant customer for years to come.
Mountain Pass: Molycorp's Rare Earth Mine
Molycorp is currently the largest producer of rare earth oxides outside of China. It’s also the only one based in the western hemisphere. Mountain Pass, the flagship mine for Molycorp's rare earths, is also expected to reach full production in its first phase in 2012.
Late last year, Molycorp entered a letter of intent with Hitachi Metals to create a similar joint venture producing magnets used in missile guidance systems, hybrid cars and electrical windmill turbines. This benefits Molycorp because Hitachi holds key patents in many of those applications. Unfortunately, the deal fell through earlier this month. However, Molycorp will still supply Hitachi with REEs for at least three years.
"Hitachi Metals has a long-standing reputation as a global leader in the development and manufacture of advanced technology products that require rare earth materials,” Molycorp CEO Mark A. Smith said. “We look forward to playing a very prominent role in their production supply chain.”
Everybody Wins, Except China
This trend will likely expand into many relationships between various end-users and the increasing amount of rare earth element producers outside of China.
In fact, Avalon Rare Metals (AMEX: AVL), which is still in preliminary stages of production, already has some interested end-users lined up. According to the report, three unnamed Asian companies entered non-binding memorandums of understanding with Avalon. In short, these companies will provide information and capital to Avalon in return for first dibs on production contracts.
The fact that end-user companies are getting to the point that they need to secure these contracts speaks to the desperation China’s causing. These end-users should benefit from better access and cheaper materials.
For instance, Siemens’ stock has fallen almost 30 percent from its 52-week high. It’s arguable how much rising rare earth element prices affected the stock, but its relationship with Lynas could be a reason to be more bullish.
It should also provide great security for the mining companies going forward. It’ll be good to have large investors with a big stake in their success. Keep an eye on these relationships, as more are sure to develop.