BAY STREET-Rare earth plays may not be passing fad

* Demand for rare earths set to more than double by 2015

* Exploration sector has upside potential in 2011

* Shares could spike when China releases 2011 quotas

* First non-Chinese production expected in late 2011

By Julie Gordon

TORONTO, Dec 17 (BestGrowthStock) – Once an obscure corner of the
mining industry, rare earth exploration burst on to the front
pages this year, sending shares of a group of junior Canadian
miners soaring.

The remarkable rally was triggered by a diplomatic dispute
that led China to halt exports of the 17 rare earth oxides,
many of which are crucial to making iPods, electric cars and
other high-tech equipment.

Since China controls about 97 percent of the world’s supply
of these oxides, which are the processed forms of rare earth
elements, shares of Canadian-listed explorers soared, with some
stocks jumping as much as 250 percent between September and
October.

But with Beijing having resumed shipments, and shares of
companies such as Rare Element Resources (RES.V: ), Tasman Metals
(TSM.V: ) and Avalon Rare Metals (AVL.TO: ) having already risen as
much as 450 percent in the last 12 months, the question that
arises is whether there still an upside for investors.

“If the flow of capital in 2011 is anywhere close to what
we had this year,” said Van Eck metals analyst Charl Malan.
“You can get substantial upside again.”

There are three factors likely to keep that capital
flowing: China’s 2011 export quotas, rapid growth in demand,
and the timing of the arrival on the market of output from
mines being developed by Molycorp (MCP.N: ) and Lynas (LYC.AX: ),
the first non-Chinese producers.

With China set to issue 2011 quotas sometime before the
Lunar New Year in February, there is a potential for a spike in
rare earth equities in the coming month, analysts said.

Regardless of the quotas, however, there will still be an
underlying supply and demand imbalance as the first non-Chinese
producers are still in the development stage.

“It wouldn’t matter if the Chinese had no quota – it would
still be difficult to find some of the materials,” said Byron
Capital Market analyst Jon Hykawy. “And that’s just going to
become more obvious in 2011.”

Demand for rare earths is set to more than double in less
than five years, from 120,000 to 250,000 tonnes by 2015.

Driving this demand are companies like General Electric
(GE.N: ), which uses rare earths in wind turbines, Toyota
(7203.T: ) and Nissan (7201.T: ) for their hybrid and electric
cars, and Research In Motion (RIM.TO: ) and Apple (AAPL.O: ) for
their increasing array of smartphones and tablets.

Particularly in demand are oxides like dysprosium, terbium
and neodymium, which are used in permanent magnets.

This is a market gap that mines like Molycorp’s Mountain
Pass in California and Lynas’s Mount Weld in Australia will try
to fill. But even if they make it to market in the next 12 to
18 months, Molycorp and Lynas’s deposits are skewed to “light
rare earths” such as cerium and lanthanum, meaning major holes
in the supply chain will still remain.

“We still need more dysprosium likely than we’ll be able to
produce, we still need more terbium than we’ll be able to
produce, and we still need more europium,” Hykawy said.

These so-called “heavy rare earths” are where Canada’s
explorers have the advantage. Great Western Minerals (GWG.V: ),
Avalon and Stans Energy (RUU.V: ) are all clamoring to bring
their heavy projects to market, with production projected for
2013 and beyond.

But while the demand is there, analysts say that staffing
and technology will likely hold up some projects indefinitely.

ROCKY ROAD TO PRODUCTION

“I think you’re going to see massive delays for these
guys,” said Dahlman Rose analyst Anthony Young. “They’re in
competition with the biggest companies in the world for talent
and for construction expertise.”

Mining, milling and processing rare earths is a very
complex and labor intensive business, which often involves
acids and extreme heat.

“Outside the Mountain Pass mine and some assets in China,
there aren’t that many people who have been involved in the
rare element space,” Young said. Staffing “could be a real
bottleneck for some of these development stage companies.”

It’s an issue that is already causing worry for Robert
MacKay, chief executive of Stans Energy.

His company is looking to bring the past-producing Kutessay
II mine in Kyrgyzstan back online, and has struggled to find
qualified staff.

“It’s an art and a science. It’s not just turning a switch
and thinking that rare earths are going to come out the back
end of the plant,” MacKay said.

Although analysts warn investors to be careful about where
they put their money, for those willing to invest in a highly
speculative sector that may see only minimal production in
2011, the payouts from rare earths could prove impressive

“I still think it’s very early days in the rare earth
element space,” Young said. “I think there still is a lot of
opportunity.”
(Reporting by Julie Gordon; Editing by Frank McGurty and Peter
Galloway)

BAY STREET-Rare earth plays may not be passing fad