February 2011

Chinese rare earth quota boosts Canadian juniors' stock

Canada holds majority of rare earth projects

By Virginia Heffernan


Chris Pedersen, senior geologist, Avalon Rare Metals, examines the rare earth content of the core samples at the company's Thor Lake site | Photo courtesy of Avalon Rare Metals Inc.

The stock market frenzy that followed the latest cut in China’s rare earth elements (REE) quotas underscored a growing investor awareness of the tiny sector. China produces about 95 per cent of REEs used in high-tech and clean energy applications, so the announcement that export quotas would be cut 11 per cent to 13,105 tonnes for the first half of 2011, after a 40 per cent cut for the whole of last year, reminded the market that supply of the metals is vulnerable and alternative sources are necessary.

The Chinese government is also reported to be cracking down on pollution at some of their mines and suggesting that some could be forced to close. In January, the Chinese land and resource ministry nationalized 11 REE mines in the eastern province of Jiangxi.

“There has been enough publicity that people now appreciate how important rare earths are to so many new technologies, how scarce they are, and how significant reductions in supply could be,” said Donald Bubar, CEO and president of Avalon Rare Metals.

Shares of Avalon, which is advancing the 100 per cent-owned Nechalacho deposit in the Northwest Territories, jumped about 40 per cent on the TSX when the H1 2011 quota was announced. China routinely declares its rare earth quotas every six months but the sector has gained a higher profile since the last statement at mid-year 2010 because of Molycorp Mineral’s initial public offering (IPO) and listing on the NYSE in July. Colorado-based Molycorp has one the largest and richest rare earth deposits in the world at its operation in Mountain Pass, California, and its stock has quadrupled since the IPO.

“Molycorp’s IPO brought new awareness of the rare earths sector as a whole,” said Gareth Hatch, founding principal of Technology Metals Research, who points out that two Canadian juniors, Avalon and Rare Element Resources, have also recently listed on the small-cap index NYSE Amex. “The are more institutional investors looking at this space and as Canadian companies gain exposure on the American exchanges, it puts a bigger spotlight on the junior rare earth community as a whole.”

“The expanded market awareness is good news for junior mining companies exploring for and developing rare earth deposits,” said Bubar. “The market will remain excited because there will be more news about shortages and updates on Chinese export policy. That will keep the spotlight on the space. It’s going to be an active year.”

While deposits such as Mountain Pass and the Mount Weld project in Australia are likely to satisfy much of world demand for light rare earths once they reach full production, deposits enriched in the more valuable heavy rare earths — with the exception of the Great Western Minerals Steenkampskraal development project in South Africa — tend to be concentrated in Canada, for example, Avalon’s Nechalacho, Quest Rare Minerals’ Strange Lake project in Labrador and Matamec Explorations’ Kipawa project in Quebec.

Hatch tracks an inventory of about 275 rare earth projects worldwide and says about 60 per cent of them are in Canada. “Canada is definitely the unsung hero of trying to solve this problem longer term and weaning off dependence on China,” said Hatch.

Chinese rare earths quotas have been on the decline for the past five years as the country tries to hold onto enough supply to fuel their own industrial needs. Bubar expects future quotas could be affected by political motivations after China temporarily blocked exports of rare earths to Japan last fall in retaliation for the Japanese arrest of a Chinese boat captain in disputed waters.

“China has now shown that they are not shy about using their control of the rare earths market as a political weapon,” explained Bubar. “This has increased Japan’s interest in seeing new sources of supply come into the market.”

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