Global Rare Earth Supply Chain Assessment

Transcription

1 Global Rare Earth Supply Chain Assessment The following report was prepared for Tantalus Rare Earths AG by Asian Metal on July 18th, 2012, and revised on January 3rd, 2013 In the past several years, rapid growth in the global consumption of rare earth (RE) materials coupled with restraints on supply has prompted enormous strides in the development of a comprehensive rare earth supply chain outside of China. The approximately 40% reduction to Chinese RE export quotas in 2010, a decrease from roughly 51,145 tons to 30,258 tons, further accelerated development efforts in the rest of world (ROW) RE mining sector and markets saw the rapid emergence of hundreds of prospective mining projects. Molycorp (NYSE MCP), the frontrunner of the ROW RE mining industry, will ramp up production in 2013 and in doing so, will recognize the coveted first to market advantage. Molycorp has touted the importance of production independent of China and has rallied behind its vertically integrated supply chain model. Nevertheless, there is still much territory that must be covered before the ROW RE industry is truly independent of Chinese production. The emergence of Molycorp along with several other smaller ROW mines onto the market in the next few years will more than satisfy global demand for certain light rare earths (LREs). Although Molycorp s Mountain Pass deposit enjoys massive scope and high ore grade, it is primarily classified as light rare earth (LRE) mine. While the mining venture will dramatically contribute to the diversification of LRE supply, its approximately 40,000 tons of annual production capacity, along with a declining real demand from several critical downstream industries, will contribute to an inevitable market surplus of certain LREs. The primary challenge now facing the development of an RE supply chain independent of China lies in the ROW production of heavy rare earths (HREs). Ironically, HREs are significantly scarcer, substantially more critical, and consequently, much more valuable. The current RE industry development trajectory suggests China will continue to dominate HRE production unless immediate action is taken to exploit quickly developable HRE-rich deposits outside of China.

2 Efforts towards ROW supply chain advancement must now be directed towards swiftly securing and developing a substantial HRE deposit. Noteworthy hard rock HRE deposits currently struggling to reach production are not slated to come online until 2015 at the earliest, consequently other options must be explored. At present, virtually all of the global heavy rare earth production is dependent upon Southern China s infamous ionic clay deposits which benefit from several unique advantages including simple metallurgy and a high percentage of heavy rare earth oxides (HREOs) within the total rare earth oxide (TREO) grade. A few potential ionic clay deposits outside of China have been identified, however, the Tantalus Rare Earth AG (TAE DE) deposit in Madagascar stands out as the largest to date and the most advanced in terms of ore testing and mine development. Molycorp is currently positioned at the forefront of the ROW mining sector and is very likely to see production; nevertheless, this veritable RE industry behemoth must first acknowledge the emerging prominent challenges to future development as well as the viable solutions: - The production of certain light rare earth elements, in particular lanthanum and cerium, both of which comprise the overwhelming majority of the Mountain Pass REO grade, will be in surplus by next year. - Molycorp will not be producing significant amounts of some of the more critical and valuable HREs, notably terbium, yttrium, and dysprosium, almost all of which will remain in deficit and dependent upon China for supply. - The Tantalus project comprises a massive HRE rich deposit capable of producing ready to process ionic rare earth concentrate within the upcoming year. Careful analysis of the above mentioned points ultimately leads to the conclusion that a strategic partnership between Molycorp and Tantalus would increase profitability for all parties and simultaneously lead to the realization of a comprehensive rare earth supply chain that is truly independent of Chinese production.

3 A Surplus of Lanthanum and Cerium In the next few years the global supply for light rare earths will see rapid expansion and the overproduction of certain LREs, notably lanthanum and cerium, will have strong implications for all hopeful ROW mining ventures. As is the case with the majority of individual rare earth elements, many of the light rare earths, that is lanthanum (La), cerium (Ce), praseodymium (Pr), and neodymium (Nd), have fundamentally different downstream uses for fundamentally different industries. The varying dynamics of the individual markets for these elements has consequently led to sharply contrasting estimates for future growth and necessary supply capacity. While global consumption of neodymium is largely expected to enjoy substantial expansion, global demand for lanthanum and cerium is predicted to see only marginal annual growth. Although the ROW mines expected to enter production, notably Molycorp, will be able to produce large quantities of the critical rare earth neodymium, they will simultaneously be producing even larger amounts of lanthanum and cerium. As lanthanum and cerium become increasingly available on the global market, the premium on ROW produced material will diminish and mining ventures outside of China will find themselves forced to compete on a price basis with established Chinese rare earth conglomerates. In order to effectively understand the consequences of a lanthanum and cerium surplus for hopeful RE mining ventures, Molycorp included, it is critical to first analyze the core aspects dictating future supply, including both Chinese and ROW production, as well as the defining reasons behind demand growth estimates. Light Rare Earth Production China has dominated the production of light rare earths during the past 20 years and its sheer untapped production capacity along with several production cost advantages suggest it will continue to retain its position as the single largest source for each of the individual light rare earth products. Thus any attempt to understand the primary factors behind a lanthanum and cerium surplus must first begin with an overview of current Chinese LRE production followed by a look into the potential future policy and production scenarios. At present, the vast majority of Chinese LRE production occurs at either Baotou Steel s Bayan Obo mine in Inner Mongolia or one of Sichuan Jiangtong s

4 substantial bastnasite deposits in Sichuan. The majority of these predominantly LRE mines are operating at only a fraction of total production capacity, with the Bayan Obo mine producing only roughly 20% of total estimated production output. All of these projects benefit from years of infrastructure development, proven mining methods, and a network of established ore processing facilities. Additionally, by-product economics enable the Bayan Obo mine, currently ranked as one of the world s largest known rare earth deposits, to produce material at a fraction of the cost of ROW competitors. Since Bayan Obo is first and foremost an iron ore mine and the bulk of its rare earth production comes from the processing of iron ore tailings, the actual rare earth mining costs are marginalized within the iron ore production costs. During the past two decades, the pivotal factor dictating the global supply of LREs has been Chinese policy. To date, China has primarily relied upon production and export quotas to effectively regulate its rare earth industry. Despite the establishment of these rare earth quotas, unsanctioned production and exportation have historically plagued the Chinese rare earth industry and, along with feeding the black market, have contributed to severe mounting environmental concerns. While the 2011 total rare earth production quota was set at 93,800t, illicit production is estimated to have accounted for an additional 24,000-30,000t of production. In an effort to cut back on illegal mining activity, China has promoted industry consolidation by allocating production quotas to a smaller amount of companies and encouraging mergers between regional companies. Additionally, in Q China implemented a new invoice system requiring all rare earth transactions to provide detailed background information on the origins of the rare earth material. While efforts towards consolidation and increased industry regulation will have a substantial impact on the heavy rare earth sector (a topic which will be discussed later in this report), the actual impact on the Chinese LRE sector will be substantially less significant. The large nature of China s bastnasite deposits and the higher start-up costs provide substantial barriers to entry which have naturally encouraged industry consolidation while simultaneously preventing the proliferation of unregulated mining operations.

5 Table 1: Chinese LREO Production by Element (t/a) LREO 2010e 2011e 2012p 2013p 2014p Lanthanum 31,000 31,000 29,500 28,500 28,500 Cerium 42,000 42,000 40,000 39,000 39,000 Praseodymium 6,000 6,000 5,700 5,500 5,500 Neodymium 20,000 20,000 19,000 18,500 18,500 Total LREOs 98,000 98,000 94,200 91,500 91,500 Source: Based on Asian Metal estimates (e) and projections (p) Chinese policy concerning its rare earth export quota system has been the primary determinant for global rare earth supply during the past two decades. The roughly 40% cut to the 2010 export quotas sharply constricted the amount of light rare earth material available on the global market, contributed to massive price climbs, and created a huge disparity between domestic Chinese prices and FOB China prices. Nevertheless, as the criticality of lanthanum and cerium gradually diminishes, primarily a result of ramped up ROW production, but also due to declining demand from certain critical downstream industries, it is highly likely China will ease up LRE export regulations. In fact, the delineation between light and heavy rare earths in the most recent export quota suggests China is already in the process of relaxing the currently tight export regulations for light rare earths. In the next few years, it is possible China could remove light rare earths from its current rare earth export quota system and thus force any ROW producers to compete on the substantially lower Chinese domestic price basis. While the supply of LREs has been dominated by Chinese production during the past two decades, the rapid expansion of ROW production during the next few years suggests supply sources will become increasingly diverse. Molycorp, one of the largest ROW candidates, is scheduled to come online before the end of the year and will massively expand ROW LRE production capacity. Total production capacity is expected to reach approximately 40,000 tons per annum 1 by the latter half of While only one other mine, the Great Western Mineral Group Ltd. (GWG TSXV) Steenkampskraal deposit in South Africa, is expected to come online before 2014, several other projects, notably the Frontier Rare Earths Ltd. (FRO TSX) Zankopsdrift project, the Alkane Resources Ltd. (ALK ASX) Dubbo Zirconia Project, and the Arafura Resources (ASX ARU) Nolans 1 This figure only includes MolyCorp s production capacity at its Mountain Pass facility. Additional production capacity is available via its separation facilities in both Estonia and China

6 Bore project, all of which will be producing large quantities of both lanthanum and cerium, will reach production within the next four years. Table 2 illustrates the combined expected annual ROW production capacity to be reached in 2016 by light rare earth element. Table 2: Projected 2016 ROW Mine LREO Output Capacity (t/a) ROW Mines Year Total REO Lanthanum Cerium Praseodymium Neodymium Steenkampskraal H ,000 1,050 2, Zandkopsdrift H ,000 5,000 8, ,000 Mountain Pass ,000 13,000 19,500 1,700 4,800 Mount Weld ,000 10,450 5,200 1, Dubbo , , Nolans Bore H ,000 3,800 9,700 1,150 4,116 Total ROW ,600 34,200 47,100 5,230 17,354 Source: Asian Metal Projections, Company Reports Demand Prospects for Lanthanum and Cerium Although supply for all of the light rare earth elements will see universal increases in the next two years, future demand estimates vary substantially by the individual elements. A rapidly expanding permanent magnet market, a topic which will be discussed in greater depth in the next section, will contribute to strong sustained annual growth for both neodymium, and to a lesser extent, praseodymium. On the other hand, total global consumption of lanthanum and cerium is expected to see limited growth, with sharp declines in demand from specific sectors. Since the goal of this section is too examine sectors within the RE industry likely to face surplus, it is most beneficial to examine future demand estimates for lanthanum and cerium. The 2010 Chinese reduction in rare earth export quotas prompted a massive spike in price levels and raised concerns about the security of supply. From July 2010 to July 2011, prices for both lanthanum oxide and cerium oxide increased by a multiple in excess of 20. In response to the drastic price increases and the escalating fears concerning the security of supply, several critical downstream industries began searching for viable substitutes and for ways to reduce their 2 Mountain Pass will not hit full production capacity (40,000t/a) until H H will see the completion of Project Phoenix Phase I and a production capacity of 20,000t/a.

7 dependence on these materials. In the past year the FCC catalyst industry, the single largest source of downstream demand for both lanthanum and cerium, effectively altered the composition for certain catalysts to require substantially diminished amounts of the materials with minimal reductions in catalyst efficiency. Although La and Ce prices have deflated from July 2011 highs, they are still significantly above early 2010 levels. While demand for FCC catalysts is likely to see sustained growth in the upcoming years, should the petroleum refining industry choose to continue using low REO content FCC catalysts, as many end users within the industry have indicated, it would have a severe negative impact on La and Ce demand growth estimates. La-Ni-H batteries, another critical source of downstream demand for lanthanum, are also expected to see diminished usage during the next two years as certain applications, particularly hybrid vehicles, switch to the more efficient lithium ion batteries. Likewise, although demand from high end optical applications is somewhat inelastic, end users in the glass industry are working to substantially decrease dependency on La through substitution and the optimization of manufacturing process efficiency. The ceramics and metallurgy sectors, two additional major sources of La demand, have also been diligently working to reduce consumption levels. Aside from the FCC catalyst industry, major sources of demand for cerium include catalytic converters (used in vehicles to reduce exhaust emissions), polishing powders, metallurgy, and the glass and ceramics industry. While options for substitution within the catalytic converter and polishing powder industries, two industries likely to benefit from strong sustained annual growth, are extremely limited, the glass industry, which uses cerium as a decolorant, has effectively altered production formulas to minimize usage of cerium oxide. The ceramics and metallurgy sectors have similarly managed to sharply reduce total cerium consumption levels. Expanding production and declining demand are both expected to contribute to sharp price declines for lanthanum and cerium in the next two years. Table 3: FOB China Price Projections 99%min oxide Current price 03/01/ forecast Percentage change Unless noted (per kg) (per kg) La $10.50 $ % Ce $10.50 $ %

8 Global production of lanthanum and cerium will inevitably hit surplus during the next two years. Many ROW RE mines are now facing a scenario in which the market for the majority of their rare earth production, that is lanthanum and cerium, will recognize huge increases in global production capacity while simultaneously struggling with decelerating consumption growth rates. Chinese efforts to consolidate rare earth production and increase industry regulation will have a limited effect on LRE production, and although output may decrease by roughly 5-10% in the next two years, China will still retain its position as the largest producer of light rare earths. Furthermore, the removal of La and Ce from the current Chinese rare earth export quota system, the initial stimulus for the massive price increases witnessed during the past two years and the primary factor supporting current price levels, will undoubtedly lead to additional noteworthy price declines. Moreover, it would force ROW companies to compete on a more direct price basis with seasoned Chinese RE conglomerates, many of which enjoy sharply reduced production costs and are only operating at a fraction of total capacity. A fact that ROW rare earth producers, especially those focusing on primarily LRE deposits, must now face is that global production capacity for both lanthanum and cerium is currently more than adequate. For many end users, recent constrictions on Chinese supply have emphasized the importance of diversifying supply sources; however, the fact remains that China alone currently has both the necessary reserves and the production capacity to single handedly satisfy global demand for the next several years. All ROW mining projects must come to terms with the simple fact that the potential profit derived from the production of both lanthanum and cerium for virtually all projects will steadily diminish, if not altogether dissipate, within the next two years. A Shortage of Mid-Heavy Rare Earths Although production of lanthanum and cerium is rapidly progressing towards surplus, global production of many of the mid-heavy rare earths is expected to remain in deficit during the next several years. China has historically dominated the production of these materials and substantial obstacles facing many of the ROW hard rock and sand HRE deposits suggest China will continue to control the supply of HREs during the next 4-5 years. Nevertheless, Southern China s ionic clay

9 deposits, the primary economic advantage which enabled China to corner the production of heavy rare earths, are steadily depleting and in the upcoming years, China will take further measures to restrict the exploitation of these critical natural resources. While many of the mid-heavy rare earths are necessary inputs to important downstream applications, the rare earths europium (Eu), terbium (Tb), dysprosium (Dy), and yttrium (Y) stand out as the most critical due to the massive size and huge potential for rapid expansion within their downstream industries. Eu, Tb, Dy, and Y are necessary inputs to rapidly growing sectors within the global economy and efforts to substantially decrease or eliminate their usage, particularly in the phosphor powder and permanent magnet industries, will require a fundamental restructuring of the final application. The global push towards energy efficiency will be a major driver for HRE demand during the next four years as government initiatives and policy mandate nationwide transitions towards high efficiency and clean technologies, many of which are reliant upon heavy rare earth components. Efforts towards the development of a rare earth supply chain independent of Chinese production must now focus on securing and rapidly developing a source of these critical rare earths. Mid-Heavy Rare Earth Production Since current supply forecasts predict China will continue to control the supply of heavy rare earths during the next few years, it is critical to first understand the nature of Chinese HRE production as well as some of the industry trends that are likely to lead to further supply restrictions. At present, virtually all of global heavy rare earth production is concentrated around China s ionic clay deposits. Largely scattered throughout some of the more remote areas of Southern China s Yangtze River basin, the individual ionic clay deposits are significantly smaller than many of China s massive bastnasite mines. As discussed earlier in the report, the ionic clays not only benefit from a very high proportion of HREOs in their total rare earth oxide (TREO) grade, but also profit from simple and inexpensive processing techniques. A relatively basic leaching method can be used to extract the rare earth concentrate and relatively small operations can still run efficiently. Over the years, the low barriers to entry and dispersed/remote nature of the ionic clay deposits have led to substantial amounts of illicit mining activity, significant environmental damage, and rapid resource depletion.

10 At present, roughly 30-40% of annual Chinese HRE output is estimated to come from unsanctioned mining activity. Smuggling has also plagued the Chinese HRE industry and illegally exported material is estimated to account for as much as 50%, of internationally traded rare earth products. While China is certainly dedicated to preventing both black market operations and environmental degradation, the recent explosion in global demand for HREs and the rising criticality of these materials have also served as an important catalyst for efforts towards the protection of these natural resources. Consequently, the primary thrust of recent Chinese efforts towards rare earth industry consolidation and increased regulation is clearly aimed at cutting back on the exploitation of China s invaluable ionic clay deposits. The gradual emergence of dominant HRE producers in China (Ganzhou Southern Rare Earth Mining and Metallurgy Co., Ltd 赣州矿业 ), despite complications largely due to the disposition and geographical distribution of the ionic clay deposits, lays testament to the success of Chinese efforts towards industry consolidation. While the actual effectiveness of the new invoice system has yet to be proven, in theory, it should restrict many of the previous channels for illegal material and consequently discourage illicit production. China has also increased border patrols to prevent smuggling and placed renewed emphasis on the persecution of illegal production. In an effort to further conserve critical natural resources, China is initiating a rare earth stockpile presumably targeted at Eu, Tb, Dy, and Y, a policy measure which has the potential to dramatically constrict the amount of available mid-heavy rare earths. Although the actual Chinese rare earth production quotas are estimated to hold steady during the upcoming months, a sharp crack down on illegal mining activity along with the creation of an HRE stockpile will ultimately lead to substantial decreases in both the total Chinese output as well as the market availability for the critical mid-heavy rare earths. Table 4: Estimated and Projected Chinese Production through 2016 by Selected Rare Earths (t/a) HREO 2011e 2012p 2013p 2014p 2015p 2016p Europium Terbium Dysprosium 1,600 1,500 1,250 1,100 1,100 1,100 Yttrium 9,000 8,250 7,000 6,500 6,500 6,500 Sources: Based on Asian Metal estimates (e) and projections (p)

11 While total Chinese HRE output will decrease in the upcoming years, relatively limited additional ROW HRE production capacity will further compound future supply issues. As discussed earlier in the report, Mountain Pass and Mt. Weld are primarily light rare earth deposits. With only trace amounts of heavy rare earth elements in Mountain Pass ore grades, Molycorp currently does not plan to produce any substantial quantities of critical heavy rare earths at its Mountain Pass facilities. With the exception of europium, Mt. Weld ore grades are also largely devoid of significant amounts of critical heavy rare earths and Lynas anticipates only limited heavy rare earth production. Although the Steenkampskraal ore grade is proportionally richer in HREOs, the small scope of the actual deposit limits supply capacity and does little to alleviate the global HRE shortage. In the upcoming four years, all of the other projects expected to come online are similarly forecasted to offer relatively little to global supply in terms of HREO production. As illustrated in Table 5, the ROW HRE supply situation depicts little to no improvement by 2014, with only marginal increases in ROW production capacity by Table 5: Projected 2016 ROW Mine Output Capacity for Critical Heavy Rare Earths (t/a) ROW Mines Year Total REO Europium Terbium Dysprosium Yttrium Steenkampskraal H , Zandkopsdrift H , Mountain Pass H , Mount Weld Q , Dubbo , Nolans Bore H , Total ROW , ,217 Source: Asian Metal Projections, Company Reports Limited prospects for increased ROW critical heavy rare earth production coupled with decreasing Chinese production suggest global markets will see little growth in total output during the next four years, with many critical heavy rare earths facing decreases in total output in the short run. While specific supply figures for several of the other mid-heavy rare earths (Sm, Gd, Ho, Er, Tm, Yb, Lu, and Sc) are not detailed in this report, similar supply reductions in terms of total Chinese output as well as limited additional ROW production capacity are expected across the board.

12 Table 6: Projected Global Supply for Selected Heavy Rare Earths (t/a) REOs Europium Terbium Dysprosium 1,514 1,322 1,221 1,398 1,463 Yttrium 8,292 7,292 7,052 8,317 8,717 Source: Asian Metal Projections Demand Prospects for Europium, Terbium, Dysprosium, and Yttrium While the supply for the majority of heavy rare earths is projected to remain severely constricted during the next four years, the demand for mid-heavy rare earths, particularly europium, terbium, dysprosium, and yttrium, is expected to see rapid growth. All four of these rare earth materials are critical inputs to important applications and technologies within the Green technology sector and will consequently benefit from the ongoing environmental friendly shift in consumer purchasing behavior. Additionally, as global initiatives actively work to push forward legislation mandating energy efficient solutions, government policy will push consumers towards, and in certain cases even require, the use of many applications dependent upon these rare earth materials. The modern preference towards the miniaturization of electronics (i.e. smaller cellular phones and more compact computers) will also contribute to strong growth figures for demand during the upcoming years. The vast majority of downstream demand for europium, terbium, and yttrium comes from the rapidly growing rare earth phosphor industry. Roughly 85% of phosphor powder consumption can be attributed to the fluorescent lighting industry; however, LCD display panels (used by computer monitors, flat screen TVs, cell phones, GPS navigation systems, etc.) and, to a lesser extent, LED lighting are also heavily dependent upon rare earths. At present, there are no available substitutes for yttrium, europium, and terbium in the production of the trichromatic rare earth phosphors used by the fluorescent lighting industry, and strong projected growth in demand is highly likely to place substantial strains upon the already constricted supply chain. During the past several years, global green energy initiatives have prompted a massive shift away

13 from mainstream incandescent lighting in favor of much more energy efficient fluorescent lighting alternatives. In January 2012, the United States began phasing out incandescent light bulbs in favor of higher efficiency lighting alternatives. Similar initiatives and legislation within the EU, China, India, Russia, and several other countries are expected to drive consumption levels for Eu, Tb and Y upwards during the next four years. In response, many major lighting manufacturers have begun scaling back production of incandescent bulbs while simultaneously increasing fluorescent lighting production capacity. Global demand for fluorescent lighting alternatives is estimated to increase by roughly 12-15% during the next three years, with a global consumption of over 3.8 billion CFL units by Dysprosium, neodymium, and to a lesser extent praseodymium, are used together as an alloy to produce neodymium-ferroboron (NdFeB) permanent magnets, which have benefited from substantial growth in diverse industries over the last several years. Vastly increased strength enables substantial reductions in magnet size (a traditional ferrite magnet is typically ten times the size and mass of a similar permanent magnet), and these particular qualities enabled the permanent magnet industry to enjoy growth averaging above 30% in the three years prior to the rapid price escalation of The industries where the conversion to NdFeB magnets have been the highest and the most successful include the automobile and high-efficiency motor industries, particularly in the case of the emerging electric vehicle (EV) and hybrid electric vehicle (HEV) sectors, consumer electronics, audio systems, and modern generation wind turbines. For many industries, a transition away from NdFeB magnets would represent a huge technological step backwards. Available substitutes simply cannot compete in terms of strength or size and would compromise much of the accomplishments and progress made towards product miniaturization and increased efficiency levels. Demand for NdFeB magnets is expected to average 15-20% per annum through the next several years. Specific areas of rapid growth include the electric vehicle and hybrid electric vehicle market, as well as wind energy, both of which will see explosive growth in the developing BRICS countries. While increasing ROW production of both neodymium and praseodymium will help to alleviate pressure from global demand, the rapidly expanding HEV, and wind turbine sectors, as well as the continued consumer preference towards smaller more compact

14 electronics, should put exhaustive pressure on the current and projected supply of dysprosium. Table 7: FOB China Price Projections 99%min oxide Current price 03/01/ forecast Percentage change Unless noted (per kg) Pr $73.50 $ % Nd $75.50 $ % Eu $1, $2, % Tb (99.9%min) $1, $2, % Dy $ $1, % Y (99.999%min) $33.00 $ % Although praseodymium, which will see sharp declines in demand from the glass and ceramic pigments sector, is anticipated to see marginal decreases in price, strong growth in the phosphor powder and permanent magnet industries is expected to translate into substantial price gains during the next two years. While the ROW supply chain has managed to effectively address issues concerning the production of light rare earth materials, additional production capacity for many of the mid-heavy rare earths remains insufficient. China clearly understands the critical nature of HREs and has adopted measures to protect its natural resources. Increased efforts towards industry consolidation and regulation, along with the formation of a critical heavy rare earth stockpile, will translate into significantly reduced total annual Chinese heavy rare earth output. At the same time, the global push towards clean technology suggests demand for many of the critical heavy rare earths, driven by both consumer preference and national policy, will see rapid expansion. Under current supply projections, all of the critical mid-heavy rare earths are expected to remain in deficit during the next four years. These materials are all essential inputs to increasingly important sectors of the global economy, and any efforts to develop a ROW supply chain independent of Chinese production must consequently address these shortcomings or be doomed to failure. A Viable Solution The current progression of the ROW RE sector exhibits two dominant trends; both lanthanum and cerium production will enter surplus and critical heavy rare earths will remain in deficit. Current

15 efforts must not be focused on increasing the production capacity of either lanthanum or cerium, but instead, must be diverted towards the production of HREs. Ultimately, the notion of a comprehensive ROW rare earth supply chain will remain a myth until a substantial ROW source of HREs can be brought to market. As Chinese production has aptly demonstrated during the past twenty years, ionic clay deposits exhibit a clear advantage in terms of heavy rare earth production. Simple extraction methods significantly reduce both the start-up costs and the timeline required to bring an ionic clay deposit to production. The Tantalus Rare Earth AG project in Madagascar comprises one of the world s largest ionic clay deposits and is currently forecasted to reach ionic rare earth concentrate production in At the same time, Molycorp, the first to market ROW project with the necessary facilities to process large amounts of rare earth concentrate, will have excess production capacity as global lanthanum and cerium markets hit surplus. A brief analysis of the unique advantages of the Tantalus project along with the potential benefits of shifting towards heavy rare earth production leads to the ultimate conclusion that a strategic partnership between Tantalus and Molycorp would represent a huge step towards the development of a comprehensive ROW rare earth supply chain. The Tantalus Rare Earth project appears to be the most direct and expedient solution to the current ROW HRE production dilemma. Both favorable ore composition and simple mining and processing techniques suggest the Tantalus deposit has the potential to be the first major heavy rare earth project in production. Primarily composed of rare earth bearing lateritic clays, Tantalus ore shares remarkable similarities with many of the Chinese ionic clays. Testing to date indicates HREOs compose roughly 20% of TREOs. Additionally, Tantalus ore is largely devoid of thorium, uranium, and other dangerous radioactive by-products. The presence of these radioactive materials complicates processing efforts, requires the development of expensive disposal and storage facilities, and, as demonstrated by the lengthy delays to the opening of the Lynas Advanced Material Plant (LAMP) in Malaysia, vastly impedes efforts to get approval necessary for mining and processing licenses. Concerns about the deposit s low TREO grade, which is in fact commonplace for all ionic clays, are misplaced due to the ore s simple metallurgy and vastly reduced processing costs. Current mining plans envision the use of a slurry mining technique combined with a vessel leaching method. Using high powered hoses, Tantalus ore will be transformed into a slurry, which will then be pumped

16 into a vessel where it will be treated with a simple leaching reagent to produce an ionic rare earth concentrate. Unlike many of the hard rock or sand rare earth deposits that require expensive facilities necessary to crush, grind, and handle the complex processing techniques to produce their respective rare earth concentrates, the Tantalus project will require limited initial infrastructure expenditures and will consequently benefit from substantially reduced production costs and a shorter mine development timeline. Certain characteristic provide the Tantalus Project with several crucial advantages over its Southern Chinese ionic clay counterparts. Unlike many of the Chinese ionic clay deposits, which are forced to cope with the poor infrastructure of remote areas in Southern China and are limited in size, the Tantalus project is ideally located and benefits from a large resource estimate. The deposit is situated near a major highway, airport, and international seaport, and consequently faces only marginal transportation infrastructure costs to reach production. While drilling samples to date put the inferred resource estimate at roughly 130Mt of rare earth lateritic bearing clays with nearly 104kt of REOs, Tantalus is confident additional drill samples will push the inferred resource estimate up to 350kt REO before the end of the year. Although not yet verified, the Tantalus deposit is expected to contain as much as 1.5Mt REO. The substantial size of the deposit along with developed transportation infrastructure will enable the rapid upscale of production capacity. In 2013, production capacity is forecasted to hit 5,000t/a, however, an additional 10,000t capacity is expected in the following year. At 15,000t/a, the Tantalus Project would bring an additional 3,000 tons of HREO production to the market by Table 8 illustrates anticipated Tantalus production capacity by critical heavy rare earth element. Table 8: Tantalus Production Capacity Projections (t/a) Year Total REO Europium Terbium Dysprosium Yttrium H , , ,779 Source: Company Reports While Tantalus will be able to provide large amounts of ionic rare earth concentrate, Molycorp has the facilities with both the technology and capacity to process it. As outlined earlier in this report, Molycorp s collective separation facilities can process over 40,000 tons of rare earth concentrate per

17 annum. At present, the majority of facilities will primarily be producing lanthanum and cerium little-to-no production of europium, terbium, dysprosium, and yttrium. In the next few years, Molycorp will face stiff competition in global lanthanum and cerium markets as several other ROW projects come online and China gradually relaxes light rare earth export constrictions. By far the greater threat, direct competition against the massive Chinese rare earth conglomerates would be an almost insurmountable challenge. On the contrary, production for many of the critical heavy rare earths is likely to see contractions due to limited additional ROW production and Chinese efforts to conserve valuable natural resources. While a shift towards heavy rare earth production would provide Molycorp with an enormous production advantage in the ROW RE sector, it would also enable the company to approach China as a potential client instead of competitor. A strategic partnership with Tantalus, in which the Tantalus ionic rare earth concentrate is supplied to Molycorp for processing, would signify the completion of the comprehensive ROW rare earth supply chain and provide the supply security necessary to stimulate further demand growth. As discussed in previous sections of this report, demand for many of the critical mid-heavy rare earths will rapidly outpace available supply during the next few years. Bleak prospects for additional production capacity and ongoing concerns about the security of Chinese supply have encouraged major end users and even countries to fund R&D programs aimed at decreasing the dependency on and/or developing viable substitutes for Eu, Tb, Dy, and Y. All four of these RE materials are critical to their respective applications and efforts to develop alternatives will require large amounts of time and resources; however, in the next few years substantial demand destruction is a definite possibility if a ROW HRE source is not quickly brought to production. Cooperation between Molycorp with Tantalus, effectively the creation of a vertically integrated ROW HRE supply chain, would provide supply security for the heavy rare earths and drastically reduce the urgency of the above-mentioned R&D. Capital would consequently be shifted from R&D efforts aimed at decreasing rare earth dependency back towards efforts to improve upon the already superior rare earth-reliant technologies and ultimately further accelerate demand. A strategic partnership would similarly increase the profitability of the Molycorp REO baskets. Table 8 illustrates a list of current REO basket prices for selected ROW mines along with projected basket

18 prices for Although the present basket prices are inclusive of the current relevant FOB China REO prices, changes in basket prices are only reflective of the projected price levels for La, Ce, Nd, Pr, Eu, Tb, Dy, and Y. Due to the scope of this report, the more limited prospects for price growth, and the thinly traded nature of the products, future price developments for many of the other rare earths (Sm, Gd, Ho, Er, Tm, Yb, and Lu) are not included in the forecasts. The current Tantalus REO basket price is not only much higher than that of Molycorp, but is also forecasted to see significantly larger price gains. Table 9: ROW Mine Basket Value Estimations and Projections ($/kg) ROW Mines 03/01/ % Change Tantalus % Molycorp % Prices derived from Asian Metal Mineral resource data derived from company reports and TMR Advanced Rare Earth Project Index; Aside from substantially increasing the profit projections for the Molycorp REO basket, a strategic partnership with Tantalus would enable both companies to resolve ongoing issues with its respective model. While Molycorp has made huge progress in terms of the development of its mine to magnets vertically integrated supply chain, it is still entirely dependent upon Chinese production for dysprosium, a critical input for any high value permanent magnet. A partnership with Tantalus would provide Molycorp with a secure supply of dysprosium and enable it to redirect resources towards the development of a stronger, smaller and more efficient magnet. Molycorp has rallied to the cry of a vertically integrated supply chain and a strategic partnership with Tantalus would enable them to reach that goal. Conclusion While the emergence of Molycorp onto the market signifies a tremendous step towards self sufficient ROW rare earth production, several prominent issues must be addressed before a comprehensive rare earth supply chain independent of Chinese production can be recognized. In the next few years, imminent lanthanum and cerium excess production capacity along with an ongoing heavy rare earth supply shortage will play a prominent role in determining future development trends for the ROW rare earth sector. While demand will see marginal growth, global

19 production capacity for lanthanum and cerium will see huge gains as Molycorp, followed by several other ROW producers, ramps up production. Current industry trends suggest China will gradually relax rare earth export quota restrictions, forcing future ROW producers to compete on a direct price basis with massive and experienced Chinese producers. On the other hand, limited prospects for ROW mid-heavy rare earth production along with explosive growth in HRE demand will place enormous strains on global HRE supply. Chinese efforts to protect its ionic clay resources primarily through industry consolidation and increased regulation will further constrict supply and exacerbate the global mid-heavy rare earth deficit issue. While there is no single solution to the global HRE supply shortage, a strategic partnership between Molycorp, the frontrunner ROW producer with the largest production capacity, with Tantalus Rare Earths, the largest and most promising ROW ionic clay deposit to date, appears to be the quickest and most effective plan to realize substantial ROW HRE production. While simple mining and processing methods along with limited start-up costs will enable the Tantalus project to quickly reach rare earth concentrate production, the magnitude and favorable ore composition of the deposit suggests a partnership with Molycorp would enable substantial ROW HRE production before the end of A shift from light to heavy rare earth production would enable Molycorp to supply both more valuable and more critical products. Aside from the potential profit increases, processing Tantalus rare earth concentrate would provide Molycorp with a secure supply of dysprosium, a critical material in permanent magnets. In the next few years, cooperation amongst ROW producers must become an increasingly common theme in order to expedite development efforts and increase industry efficiency. A strategic partnership between Molycorp with Tantalus is not only beneficial for all participating parties, but more importantly, would signify a huge step towards the formation of a comprehensive ROW rare earth supply chain.

20 Appendix 1: Current AM Rare Earth Prices FOB China Prices for Selected REs 99%min oxide Unless noted Current price 03/01/12 (per kg) Ce $10.50 Dy $ Er $70.00 Eu $1, Gd $85.00 Ho* (99.5%min) $77.00 La $10.50 Nd $75.50 Pr $73.50 Sc* (99.5%min) $4, Sm $24.50 Tb (99.9%min) $1, Y (99.999%min) $33.00 *Chinese domestic market price; USD1.00=6.37RMB All statements in this analysis, other than statements of historical facts, that address future market developments, government actions and events, are forward-looking statements. Asian Metal believes that outcomes in such forward-looking statements are based on fair expectations and assumptions but are not a guarantee of future performance. Actual results may differ from forward looking statements due to shifts in government policy, the development of new rare earth technologies or substitutes, or other changes in economic conditions. This report, prepared by Asian Metal analysts, is strictly an assessment of the rare earth market and is not intended to be used as investment advice. Asian Metal will not be held liable for any loss as a result of investments in the rare earth industry, including, but not limited to, commodities and publically traded shares. Parties interested in investing in the rare earth industry should seek the advice of an experienced professional. The reader of this document assumes all responsibility of this market material and information. Statistics used in this analysis, including current usage and pricing data, come from Asian Metal. Asian Metal, founded in 2000, is a global information company with leading positions and recognized brands in the metal and steel research and consulting industry. The Asian Metal team consists of professional metal experts within the industry and serves over 100,000 companies from close to 200 countries worldwide. Asian Metal's mission is to help companies in the metal and steel industry make informed business decisions by providing accurate concluded prices, up to date news and comprehensive analysis. Asian Metal's price assessments for metals are taken as benchmark prices for contracts signed by major players of the industry in the world market.