Pentagon Challenges Chinese Monopoly on Rare Earths

The Pentagon and Toyota Motor Corp. are trying to crack China’s global monopoly on mining the most valuable rare earths used in unmanned military drones and electric-car motors.

The U.S. Department of Defense and Asia’s biggest carmaker are working with Canada’s Ucore Rare Metals Inc. (UCU) and Matamec Explorations Inc. (MAT), which are developing North American mines that would boost supplies of so-called heavy rare earths. Those are the less-abundant members of a group of 17 chemically similar elements critical to make a host of products from wind turbines to high-performance magnets for cars and weapons.

Foreign buyers are being driven to find alternative producers after China slashed exports in 2010, partly to conserve material for its own industries. The Asian nation today supplies about 95 percent of global demand, triple its market share of 1990, presenting a risk for foreign makers of the next generation of wind turbines and environmentally friendly lighting technology.

“People won’t make a decision on manufacturing something if they don’t know their supply is reliable,” said Jack Lifton, a senior fellow at the Institute for the Analysis of Global Security, which studies the links between energy and security. “If you had a reliable American supply of heavy rare earths, General Electric might decide to make magnets in the U.S.”

‘Incredibly Complex’

Of more than 400 proposed rare-earth mines around the world that are tracked by Technology Metals Research LLC, only five or six have enough heavy rare earths and are sufficiently advanced in their development to have a shot at making it into production, said Gareth Hatch, a co-founder of the Carpentersville, Illinois-based firm.

“The race is which deposit will be first at the finish line,” said Andre Gauthier, chief executive officer of Montreal-based Matamec.

There are risks in early-stage mining projects like those planned by Matamec and Ucore. Development requires raising hundreds of millions of dollars of funding. Mining rare earths is “incredibly complex,” said Chris Berry, founder of New York-based researcher House Mountain Partners LLC.

“The major risk is the understanding of the metallurgy and successfully separating each of the rare-earth elements,” he said.

Price Volatility

Rare-earth prices and stocks have been volatile over the past two years. The commodities have slumped since mid-2011, having surged as much 10-fold following Chinese export curbs. Molycorp Inc. (MCP), which plans to produce rare earths in California, quintupled in less than a year after a July 2010 initial public offering. The Greenwood Village, Colorado-based company now trades below its IPO price. Australian producer Lynas Corp. tripled in 2010 and since then has dropped 65 percent.

That hasn’t stopped exploration companies outside of China touting their potential for producing heavy rare earths such as dysprosium and terbium, all of which are harder to find and therefore pricier than so-called light rare earths.

Toyota Tsusho, Toyota’s trading unit, has a 49 percent stake in a joint venture with Matamec and is funding the feasibility study at the Kipawa project in Quebec. Toyota will harvest dysprosium from the mine, while other deposits on the same property also could be developed, Gauthier said.

Kipawa’s initial heavy rare-earth output will be about 2,000 metric tons and may rise with further exploration on the property. Matamec is operating a pilot plant at the site. Estimated capital expenditure will be about $315 million, according to Edward Otto, an analyst at Toronto-based Cormark Securities Inc.

Alaska Mine

“We think there are places for two to four heavy rare- earth deposits in the world outside China,” Gauthier said in a telephone interview on Oct. 26. “The first can reach better agreements with end-users.”

Ucore’s Bokan Mountain deposit in Alaska may produce about 3,000 tons a year of rare earths by 2016, including enough dysprosium to meet domestic needs, CEO Jim McKenzie said.

The project will likely get the permits it needs as Alaska is a mine-friendly state and the project has the backing of Senator Lisa Murkowski and Governor Sean Parnell, said House Mountain’s Berry, who has previously consulted for Ucore. The mine will cost about $150 million to build, according to Jon Hykawy, an analyst for Toronto-based Byron Capital Markets Ltd.

Mark MacDonald, vice president of business development at Ucore, said in an e-mail yesterday that the company is optimistic Alaska will help underwrite its capital costs.

Pentagon Accords

The U.S. Department of Defense may already be forming a nascent non-Chinese supply chain for high-performance magnets used in weapons systems that require heavy rare earths, said Jeff Green, president of Washington-based lobbying firm J.A. Green & Co.

Ucore said in October that the department initiated an exploratory partnership. Also last month, Canadian magnet maker Great Western Minerals Group said it was chosen by the department to study the supply of yttrium oxide, which is used in jet engines, while closely held U.S. magnet maker Thomas & Skinner Inc. said the Pentagon will invest in a study of neodymium-iron-boron magnets.

Green lobbied the Pentagon on behalf of the three companies. Hitachi Ltd. (6501)’s patents for the magnets expire in 2014, he said in an interview.

“The floodgates should open then,” Green said.

Auto Demand

China consumes two-thirds of global rare earths supply, while the U.S. consumes about 10 percent, data from Technology Metals Research shows. Demand for dysprosium, yttrium and terbium will exceed supply, according to the firm. Heavy rare- earth production has remained almost unchanged over the past five years at around 1,700 tons a year, Lifton said.

“There will never be enough heavy rare earths, and the prices are going to be strong,” Lifton said. “That’s where we’re stuck.”

The Matamec and Ucore mines may lead non-Chinese projects in expanding production of heavy rare earths by 60 percent by the end of the decade, according to Byron’s Hykawy.

The growth will be needed to satisfy expanding demand from cars and consumer electronics in emerging markets, according to Lifton. Ucore’s McKenzie says the biggest demand for heavy rare earths will come from the automotive and aerospace industries.

China hasn’t identified new rare-earth resources and could exhaust its own in five to 30 years, while non-Chinese rare-earth supply is projected to increase fivefold to 31 percent in 2016, Lifton said.

“China’s demand is going to be rapacious, and if the U.S. has these materials, China could be a net importer,” McKenzie said. “The U.S. can turn the tables now.”

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