London, 21 April 2011

The forecast shortfall in rare earths supply has sparked a race to reap the rewards – but it is a high risk race with only a few destined to succeed. China accounts for 97% of global rare earths production and is curtailing exports. This, combined with increasing demand, means a supply shortfall is expected for the next 3-5 years.

Michel Nestour, a director in Ernst & Young’s mining and metals team, says the market is crowded with a large number of projects aiming to fill the estimated supply gap. A new paper from Ernst & Young, Technology minerals: The rare earths race is on!, has examined 19 advanced rare earth projects from 8 countries, and shows that speed to market, financing strategy and choice of minerals will be critical to their success.

Staying ahead of the game

While mining is inherently risky, the rare earths sector is particularly complex and capital-intensive, with uncertain demand projections, complex metallurgy and ore grade considerations, and infrastructure challenges.

“The number of players has mushroomed quite significantly due to the recent spike in prices and many are now jostling to get projects through feasibility and into production,” says Nestour. Those that get into production first are more likely to capture the current price premiums, with the market likely to be very sensitive to future increases in supply.

For example, early movers Molycorp and Lynas are expected to potentially produce well over 20% of 2013E world supply.

Nestour says that whilst Molycorp and Lynas have stolen the lead in the light rare earths sector, there is still time to develop a number of vertically integrated players in the heavy rare earth space and first mover advantage will also be significant. “It is a race to the finish line to develop the next producing asset,” he says.

Strategic partnerships provide a competitive advantage

Nestour says fast-tracking options include miners partnering with existing downstream rare earths processors, which are limited in numbers, and end users will likely partner with those processors to expand processing capacity and provide secure off-take. “The risk profile of these projects also means that financing is challenging – there is going to be a lot of competition for a limited investor pool. Of course, high risk also means significant potential rewards for those that are successful.”

Nestour says management needs to consider a planned and well-thought-out approach to how the project can be funded for subsequent stages and consider whether a full exit strategy might be preferable now to avoid being left behind.

Ends –-

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Attachments:

Tech_Minerals_Rare_Earth_Paper_FINAL.pdf

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