Tasman’s Norra Karr on top of Europe’s wish list

VANCOUVER — The global rare earth element supply crisis in 2010 served as a “wake-up call” to businesses and governments, and future supply “poses supply security concerns,” according to a recent study commissioned by the European Parliament. 

Written by the European Rare Earths Competency Network (ERECON), the report states that by 2017, demand for the group of 17 elements could rise by more than 20%, and double between now and 2020.

The growth would partly be driven by the increased demand for the green technologies that require their unique properties, such as hybrid cars and wind turbines. 

But China’s monopoly on producing these elements raises manufacturers concerns over reliable and sustainable access to them. According to the report, such vulnerability “threatens to undermine European innovation and competitiveness, and may slow the diffusion of priority technologies.”

Rare earths made industry headlines in September 2010 when China reduced its export quota by nearly 40%, increased duties to 15–25%, and embargoed shipments to Japan.

The changes bottlenecked global supply and set off a speculative price rally for the commodities, driving prices between four and nine times the previous value in less than a year. 

End users and manufacturers stockpiled supplies, making it difficult to procure the elements, while others were forced to fly them from one plant to another to avoid production outages.

The price hike also prompted Molycorp (NYSE: MCP) to reopen its Mountain Pass rare earth mine in California, while Lynas (ASX: LYC) kick-started operations at its Mount Weld mine in Australia. 

But the bubble burst in the second half of 2011, as greater resource efficiency, substitution efforts and more recycling of processing wastes contributed to a drop in demand. 

“If the manufacturers have concerns about the supply, then they’ll look at other ways of doing things,” Mark Saxon, president and CEO of Tasman Metals (TSXV: TSM; NYSE-MKT: TAS) — a rare earth-focused junior explorer — told The Northern Miner during a telephone interview. 

Of the 124,000 tonnes of rare earth oxides consumed in 2014, most of them were used in magnets, polishing and batteries.

But engineers have found alternative materials to reduce or substitute rare earths in manufacturing. For example, Saxon says engines and batteries for electric vehicles now come in several versions: some contain large quantities of rare earths, while others contain none or only negligible amounts. 

He says these substitutions make demand forecasts for rare earths liable to unusually large margins of error. 

“Until they understand the supply chain better, they’re not happy to introduce as many rare earth magnets into their vehicles,” he says. “If they know that supply will be around forever, manufacturers can go back to engineering with more rare earths, and create a much bigger industry.”

Saxon adds that diversifying the supply would increase confidence. According to the ERECON report, Molycorp and Lynas — at a target capacity of producing a total of 40,000 tonnes of rare earth oxide annually — will “likely meet non-Chinese demand for light rare earths in coming years.” 

But this means the world will depend on China to produce the “heavy” rare earths — the elements that enable production of hot-ticket items such as electric vehicles, turbines and computers. 

Because of the new mines, China’s share in global output fell from 95% in 2010 to 80% in 2015, but it still controls 100% of heavy rare earth production. 

As stated in the report, over 30% of the world’s known rare earth deposits are in China, with most of the production from low-grade, clay-hosted deposits in the south. 

Saxon says that 40% of all the heavy, high-value rare earths produced in China are traded on the black market. The rest of the $4 billion industry, he says, is in “government hands,” as the country has spent the past decade centralizing operations into six private, state-owned enterprises. 

Saxon explains that it’s difficult for western producers to match the cost of production in China, since illegal mining offers rare earths at a significant discount because of low-labour costs and environmental negligence.

“Really, it’s Western companies wanting to pay as little as possible, including the consumers,” he says. “They don’t like the uncertainty of supply, and they aren’t happy to pay more than the Chinese customer.”

But it’s the unspoken cost that can raise the most attention. The ERECON report suggests that given the frequent use of rare earths in green products, the sources that are not considered environmentally sound “are likely to come under growing public scrutiny.”

“It’s a tiny industry, yet the environmental impact is way, way beyond what it needs to be,” Saxon says, adding that Chinese mines operate “behind closed doors,” and “the Western world doesn’t know if reserves will last two or 200 years.”

China allegedly tried to stamp out illegal mining and improve its environmental record when it introduced its new legislation in 2010, which caused a frenzy in the industry. 

But the U.S., European Union and Japan approached the World Trade Organization (WTO) and argued that the restrictions were intended to give Chinese industries protected access to goods, lending to an unfair advantage. 

On most counts, the WTO agreed, and requested in March of last year that China revoke the changes violating the trade agreements. 

China implemented the changes, and as of May there has been no ceiling on the amount of rare earths that can be sold abroad, but companies will need a licence to export them.  

ERECON says that rare earth prices — although still higher than before the crisis — have dropped by over 80%, compared to their mid-2011 peaks. 

And as a result, questions remain about the commercial sustainability of rare earth suppliers outside of China. Molycorp filed for bankruptcy protection in June to restructure its US$1.7-billion debt load, and Lynas is trading at all-time lows. 

“People are concerned about the profitability of rare earths because of the bubble we went through,” Saxon says, adding that it is hard to gain traction with investors.

Despite the market sentiment, ERECON recommends that policy-makers in the European Union consider new mines for building a diversified and sustainable supply chain. 

The report says Tasman’s Norra Karr deposit, 300 km southwest of Stockholm, Sweden, has the potential to secure European supply for “decades to come.” 

Norra Karr has the highest percentage of heavy rare earth oxide of all major Western projects, and has already been granted a 25-year mining lease.

Tasman hopes to enter production in 2017 and produce an average of 5,119 tonnes of total rare earth oxide annually, at operating costs of US$39.7 per kilogram of rare earth oxide.

But right now, Saxon says that contract prices are “too low for the mine to enter production,” and instead, the company wants to include other by-products to leverage the project’s economics against market fluctuations.  < /p>

“If we add by-products, then I think we’ll be incredibly robust in terms of withstanding any cycle,” he says. Saxon has scheduled the full feasibility study to begin in November 2015, subject to financing. 

Tasman has traded within a 52-week window of 40¢ to $1.33, and closed at 62¢ at press time. The company has 66.14 million shares outstanding for a $39.7-million market capitalization.