(This story was originally published on 28th June 2011. It has now been re-published to make it available to non-paying members at FNArena and to readers elsewhere).

- Rare earth metals prices have soared - Usage is very 21st century - There is a window of global supply constraint - Not all claimants will reach production

By Greg Peel

The funny thing about rare earth metals is that they're not actually rare at all. The same assumption is often erroneously made about uranium. The truth is you can't dig a fence post without encountering at least some amount of uranium. Cerium (atomic symbol Ce; atomic number 58), for example, is one of the "rare earth metals" yet it has an equivalent abundance to copper (Cu; 29) and we know there's plenty of that about. Yet while this month copper has been trading around US$4/lb, cerium oxide will cost you US$149/lb. And if you want the heavier dysprosium (Dy; 66) oxide, that will set you back US$1,485/lb.

In 2004, copper and cerium were both around US$1.50/lb, so between now and then, the price of copper, which is used in all electrical wiring, has risen 166% but the price if cerium, which is merely used to polish glass, has risen 9,833%.

The trick is that while rare earth metals are abundant across the globe, they are, like uranium, not often found in large, commercially recoverable concentrations. The other trick is that while copper's price rise can be attributed basically to the Chinese buying their first house-car-fridge-etc, cerium's price rise can be attributed to the arrival of computer monitors, LCD televisions, iPhones, and anything else with a screen that needs to be abrasively and chemically polished to a fine tolerance. The Chinese have been buying those for the first time too, as has everyone else on the planet.

Now, here's a trip down the schoolroom memory lane:

Note the series of elements in the sky blue boxes at the bottom. The Lanthanide (or "rare earth") Series (58-71) actually squeezes in after the first "rare earth" Lanthanum (La; 57) while the Actinide Series (90-103) includes uranium (U; 92) and Plutonium (Pu; 94) and squeezes in after actinium (Ac; 89).

The lanthanide series contains your "light" and "heavy" rare earths but further elements are also popularly labelled as "rare", including yttrium (Y; 39), zirconium (Zr; 40), niobium (Nb; 41), hafnium (Hf; 72) and tantalum (Ta; 74) among the "transition metals", and even gallium (Ga; 31) among the so-called "poor metals" series which includes aluminium (Al; 13), tin (Sn; 50) and lead (Pb; 82). It largely comes down now, I believe, to a matter of what is considered a "rare" element by scientific categorisation and what is otherwise included as "rare" on the basis of being rare in remote concentration or even simply being an element one is unfamiliar with and may need a Periodic Table to find.

We know, for example, that the once struggling Iluka Resources ((ILU)) is now seeing its time in the sun due to the scarcity of commercial mineral sands projects across the globe ? those which produce zircon and also titanium (Ti; 22) oxide. Titanium is not really a "rare earth" but is now being lumped in with the "rares" if for no other reason than its recent, extraordinary jump in price.

Titanium oxide's primary use is to provide the "white" in "whitegood", so one can see why, given rapidly rising emerging market demand, its price has been on the move. Colour is indeed a very important factor in overall rare earth demand because from among the rare earths we source the colours red, green and blue as used in cathode ray tubes and LCD displays and so forth. Your iPhone screen, for example not only requires rare metals, it relies on them. There is simply no substitute.

Indeed, amongst all the various uses for rare earth elements (REEs) and other elements included under a "rare" banner a common theme is one of "twenty-first century". REEs are used to significantly increase the strength-to-weight ratio of metal alloys and to make super magnets which significantly increase the efficiency of electric motors. Right there you have wind turbines and electric cars. Indeed, it has been said that the world's shift to "green" solutions will not be possible at all without REEs.

REEs can improve the efficiency of converting crude oil into petrol, the efficiency of electricity conductivity, the efficiency of light bulbs, and the efficiency of pollution control catalysts. REEs are used in fibre optic cable, in lasers, in rechargeable batteries and in the components of nuclear reactors. REEs are used to increase the high temperature performance of metal alloys.

Here are some facts to consider:

Four kilograms of niobium used in the manufacture of a mid-sized vehicle would save one hundred kilograms of steel and translates into fuel savings of half a litre per one hundred kilometres.

Neodymium (Nd; 60) magnets are the strongest known permanent magnets. A neodymium magnet of only a few grams can lift one thousand times its own weight.

Dysprosium is among the highest priority and most critical metals now consumed world-wide in military, high technology and clean energy applications. The US Department of Energy has named dysprosium as the single most critically threatened strategic metal to the United States.

So clearly the world has a problem. The demand for these elements has skyrocketed in a short space of time, catching out global supply. We recall that in the nineties, the global resources industry was in a slump, prices were low and little investment was being made in exploration, production and infrastructure. When China began hitting its straps in the early noughties, the price of base metals and iron ore shot up significantly given demand outstripped supply. Demand growth has held firm but after the development lag time, supply has much increased and will continue to increase. Just look at the iron ore expansion plans of Australia's majors, for example.

Hot on the heels of base minerals was uranium, as China declared to the world it would begin a massive program of reactor building. The uranium price skyrocketed on lagging supply and speculation, before enduring a bubble-and-bust. Along the technology chain, metals such as cobalt and molybdenum began their run and then came lithium for batteries. Even silver has seen a surge not because of its precious metal status, but because of increasing industrial demand.

Now it's the turn of mineral sands and REEs. Deemed unsubstitutable, the prices or these elements have had no where to go but up as demand growth has far outstripped supply growth.

China is clearly ruing the fact that despite having an abundance of certain raw materials (it is a major coal producer for example), it does not have enough quality iron ore, base metals or mineral sands to provide self-sufficiency. China does, however, boast abundant resources of REEs. Estimates put China's global proportion of known REE reserves at 36%, with the Commonwealth of Independent States (part of the former Soviet Union) at 19%, the US at 13%, Australia at 5%, India at 3% and "other" at 24%.

The important point is, however, that while REEs have been mined for decades, no one had given them much thought up until recently. The simple reality is that while straightforward to mine, separation and processing of REEs into their constituent concentrates is a highly complex and highly costly business. Too costly for the private sector late last century, but not too costly for the public sector of a communist dictatorship. Had the world been able to foresee the twenty-first century uses for REEs then perhaps the story might have been different. But the reality is that at this point, China provides the world's only significant processed supply.

This means that right now, China provides 95% of the world's REEs. Next closest is India with 2%. Production in Australia, and in the US, is currently 0%.

So when it comes to REEs, the tables are turned. China must enter often bitter iron ore price negotiations each quarter, for example, so with REEs it can dish up some of the West's medicine back again. With prices the way they are, you'd think China would be exporting as much as it can. But no ? REEs are subject to government export limits and many mines have been closed down on environmental grounds. China is cornering the REE market.

The most substantial victim of Chinese REE policy is Japan. With no natural resources of its own to speak of, the Japanese economy has been built on the export of manufactured goods. Japan has long been the leader in the manufacture of electronic goods, such as televisions. Thus Japan has a high demand for REEs, and for decades has imported the raw material from China and "value-added" by producing export goods. Therein lies the profit. But now, China has also become a manufacturer and exporter of everything, including electronic goods. So China no longer wants to sell raw materials to competitor Japan and thus hand over the value-add profit. China wants to take REEs much further up the processing chain before selling to Japan at a much higher price, leaving a far less available margin than Japan has always enjoyed. And Japan is not happy.

The result is, as one might expect, a global race to produce and explore for more REEs, which as noted are not actually all that rare. Not only are prices now sufficiently high to justify the cost of REE production, they are high enough to ensure riches to whoever can successfully exploit their resources. Independent industry consultant Technology Metals Research notes that there are about 150 projects around the world now claiming to have REE production potential.

The parallels here with the uranium industry in 2006-07 are substantial. Uranium is abundant in small grades, so when the price was skyrocketing at this time potential uranium production companies were coming out of the woodwork. Some could boast little more than a patch of dirt with some half reasonable test results, but it didn't stop self-proclaimed uranium juniors in Australia and across the globe from seeing share price jumps of hundreds, and even thousands, of percent. It all ended in tears of course, when the uranium price collapsed, but experts knew at the time that the bulk of those juniors would never reach production at any price.

For investors interested in the potential riches of REEs, the uranium experience provides a cautious tale. Similarly, skyrocketing mineral sands prices have investors nervous. Such bubbles inevitably end in busts, and the share prices of junior hopefuls turn to dust.

Technology Metals Research believes that of the 150 listed companies across the globe claiming REE potential today, five will survive to production. In two to three years the global ex-China supply of REEs will jump significantly such that China will lose its position of dominance and control. There will clearly be ongoing growth on the demand side, but TMR suggests that in three years time there may not even be a global shortage. In the meantime, the cost of REE production will simply outweigh the revenues for junior miners starting from scratch.

The five that survive will include, according to TMR, Molycorp in the US and Lynas Corp ((LYC)) in Australia. The reason is that these two companies boast commercially viable quantities of the key REE ? dysprosium. The "heavy" REEs are far more valuable than the "light" REEs, and dysprosium, which is used to make powerful permanent magnets, is the jewel in the crown.

Lynas Corp's Mt Weld project in Western Australia is the first of what RBS Australia analysts believe will be a "lumpy" global response to soaring REE prices. Lynas is targeting first concentrate production next quarter and first saleable product out of its Malaysian processing plant by year-end. By early 2013 Lynas expects to be producing 22ktpa and that would represent 20% of 2010 level supply. RBS is nevertheless a lot more cautious given the technically challenging process, and is assuming first saleable product by the second quarter of 2012 and 22ktpa by the fourth quarter 2013.

RBS initiated coverage of Lynas last week with a Buy rating and a 12-month target price of $2.45 (current trading price $1.98). If Lynas can meet its own production, cost and capex targets however, the broker sees a value of $3.43. RBS is now the fourth broker in the FNArena database covering Lynas and joins Deutsche Bank and JP Morgan on Buy with similar 12-month target prices. Citi (Sell) initiated coverage in January but has not reported since.

Lynas is one of only four companies in Australia sitting on REE reserves which satisfy Joint Ore Resource Committee (JORC) qualification. The other three are Alkane Resources ((ALK)), Arafura Resources ((ARU)) and new kid on the block, Hastings Rare Metals ((HAS)).

Development is underway at Hastings' project near Halls Creek in northern WA, east of Derby, and exploration is ongoing. Assays completed in May confirmed the presence of high grade rare metals and heavy rare earths, including zirconium, niobium, tantalum, yttrium, hafnium, gallium, erbium, ytterbium and, importantly, dysprosium. Drilling commenced early this month.

The current resource is 22mt and an interim revised resource estimation is expected in July, followed by a final estimation in September. Also this month, Hastings announced the acquisition of a 60% stake in the Yangibana rare earth project in the Gascoyne region of WA, near the coast between Carnarvon and Dampier. Yangibana is a greenfield site with seven kilometres of under-explored strike length. Chip samples have returned high grades of REEs, including an extremely high proportion of neodymium (Nd; 60) which, like dysprosium, is expected to be in critical shortage in the near term.

Hastings has funded the Yangibana acquisition from cash and is also funding exploration activities at the original development from cash, of which it now has $3.4m on the balance sheet. Make no mistake however ? there is a long row yet to hoe. Processing will be another matter altogether, and it took Lynas ten years to get to its current point. What can't be denied nevertheless is that the Lynas share price has rallied 300% in a year. A similar run has been experienced by Iluka.

As noted, Hastings is one of only four REE stocks listed on the ASX with a JORC-qualified resource. Other listed REE companies include Greenland Minerals & Energy ((GGG)), Northern Minerals ((NYU)), Peak Resources ((PEK)) and Kimberley Rare Earths ((KRE)), but while these companies have provided positive test results, they are yet to meet JORC compliance.

With Hastings Rare Metals currently trading at 28c, readers might find the following capitalsation table enticing:

Hastings will not be in a position to exploit the 2-3 year window of Chinese dominance which should see REE prices ex-China continue to come under upward, supply constraint pressure. But given demand for REEs, via demand for all the various twenty-first century applications of REEs, is unlikely to let up over a longer time frame, analysts see REE prices more likely to peak and plateau rather than peak and plummet.

The REE market thus continues to provide investment opportunity as long as investors choose intelligently among the claimants.