REFILE-Neo Material CEO sees price bubble for rare earths

Wed Sep 15, 2010 3:35pm GMT
 

(Fixes name in headline to Neo Material, not Materials)

* Sees China relaxing export quotas, re-flooding market

* Says critical shortage in heavy rare earths, not lights

(In U.S. dollars unless noted)

By Julie Gordon

TORONTO, Sept 14 (Reuters) - A price bubble has developed in the market for "rare earth" metals used to build components for the iPhone, electric cars and a range of other products, raising the prospect of a steep decline, the head of Canada's oldest rare earth operation said.

Such scenario could derail the economics of developing new mining projects designed to ease the current supply crunch, said Constantine Karayannopoulos, chief executive of Neo Material Technologies NEM.TO.

"At the end of the day, rare earths are not that rare," he said in an interview. "Bubble economics aside, there just isn't enough value in the ground to justify digging the stuff up and processing it."

China, which produces over 90 percent of the world's supply, is chopping exports by almost half this year, creating a big gap in the supply needed to meet a surge in demand as green technology goes mainstream.

Rare earths like neodymium and dysprosium are used to build the batteries and motors for electric vehicles. Neodymium is also used in wind turbines.

Other rare earths are essential for the vibration motor in smartphones, for display panels, and in the catalyst industry, among other uses.

The current supply would easily meet the demand for most rare earths if not for the Chinese quotas. Even so, companies outside China are eager to secure new resources.

"It's very, very dangerous for people to be committing hundreds of millions of dollars to projects that will take another five years or more to see the light of day," said Karayannopoulos.

"With today's prices, a lot of stuff makes sense ... but I also think prices at this level are unsustainable."

Neo, which makes rare earth alloys and magnets, has bought concentrate from China since 1993.

Karayannopoulos believes China has overreacted to reports of pending shortages and will soon ease export quotas, flooding the market again with cheap rare earth concentrates.

"There's a glut of this stuff in China," he said. "Because they don't consume enough, they have to export it."

Karayannopoulos is also quick to point out that the money is in rare earth alloys and magnets, not in rare earth ore or concentrate.

This poses another challenge for junior miners and explorers, because producing the alloys and magnets is labor intensive and expensive.

"These are not minerals that you are selling," he said. "You're selling highly, and very precisely, engineered materials that are customized for each customer."

HEAVY CRUNCH

To be sure, not all rare earths are in such high supply. The group consists of two types: heavy and light. The heavies -- used in electric vehicles, display panels and lasers -- are in much smaller supply, and therefore, far more valuable.

"If there is a crunch," said Karayannopoulos. "It will come in the heavies."

China currently produces most of the world's heavy rare earths from its ion absorption clays, but that resource is running out.

That has prompted Neo to look to Brazil for new sources of heavy rare earths.

Last year, the company signed a deal with Minsur's (MINi.LM: Quote) Mineracao Taboca subsidiary to process rare earths from the tailings of its Pitinga tin mine in the Amazon.

Karayannopoulos said Neo's tests indicate that the mine is producing very high concentrates of terbium and dysprosium, two of the key heavy rare earths.

Pitinga "could potentially completely upset the heavy rare earth supply and demand situation in the world," he said. "That's the prize as far as I'm concerned, that's the Holy Grail."

The Pitinga project will cost about $100 million to develop, including building a new processing facility.

Neo Material Technologies was down 1.14 percent at C$4.32 on the Toronto Stock Exchange in morning trade on Wednesday.

($1.00=$1.03 Canadian)

(Editing by Frank McGurty)

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