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-- Posted Sunday, 28 November 2010 | | Source: GoldSeek.com
Byron Capital Markets Analyst Jon Hykawy sees the rare earth elements (REE) sector for what it is—something much different from mining copper or gold. He believes the keys to making money in rare earths involve metallurgy, deposit location, marketing and downstream integration. In this Gold Report exclusive, Jon makes his case for rare earth elements.
"Rare earth-equipped motors are the lightest, most efficient motors possible for powering these hybrid and electric cars in the future and that doesn't seem to be something that's going to change," says Jon Hykawy, who was part of a panel at the recent Forbes and Manhattan Resource Summit in West Palm Beach, Fla.
Joining Jon on the panel were REE specialist Dr. Tony Mariano and Ted Miller. Hykawy stressed that the weight-saving and heat-dissipating qualities of REEs are critical to building battery magnets and the light engines that travel the maximum distance on a single charge.
A significant psychological barrier to prospective hybrid and electric car buyers in North America, Hykawy argued, is the idea that electric cars won't let folks pack up the car and drive half way across America, even if few consumers would ever actually attempt that. But Hykawy believes the real growth in hybrid and electric car sales will come from Asia, especially China.
"In China, you're competing against people who are taking their bicycles or walking to work," Hykawy explained. "For them, a huge selling point is having a small box around them in a light vehicle that can carry them to work on a single charge. That way, they're not putting three-quarters of their monthly income into diesel fuel."
Lots of Metals
"A lot of what you see in the mainstream media lumps rare earths into one category. That's an error. Don't fall into the trap of looking at REEs as one material. This is not copper. This is not gold. As Tony said, depending on who is counting and what's included, there are between 14 and 16 elements that get included in this group of rare earths and only a few of them are required in magnets," Jon said. In his view, those elements are neodymium, samarium, praseodymium, dysprosium and terbium.
Dysprosium and terbium are alloyed into rare earths magnets to make them capable of operating at elevated temperatures. At current alloying levels, dysprosium and terbium make up about 5% of the metal used in these car battery magnets.
"Unfortunately, most of the rare earths deposits out there don't contain those levels of dysprosium and terbium. We think they are going to be in tight supply and probably significant undersupply," he predicted.
Jon says that mineralogy and radioactive content are two of the biggest factors in determining an economic deposit. "Mineralogy because if you can't get the material out economically, you don't have a mine," he said, adding, "With all due respect to the geologists in the room, they may find some rock and they may even fall in love with their rock but that doesn't make it a business."
Many rare earths deposits contain radioactive elements like thorium and uranium, potentially costly byproducts.
"If you have no solution for storing (radioactive elements), then you have an expensive problem," he stated. "If you have a solution for storing them, then you may have something that's far better than a byproduct. You may have a business that you can use to take other people's problems and solve them for them."
The China Factor
"Not only do you have to produce the right stuff. You have to worry that other people could destroy your economics," Jon warned, "and that includes the Chinese acting into the market because they will. You can almost count on it."
By some estimates, China controls about 97% of the global production of rare earths. After reducing its REE exports earlier in 2010, last summer the country said it would further reduce rare earth exports by 30%. Under the threat of a visit by U.S. Secretary of State Hillary Clinton, China relented and said the quotas would remain at current levels in terms of tonnage.
But China's quota system has resulted in supply gaps. Lumping all the rare earths into one giant quota has meant that the most expensive REEs are being exported first. It only makes economic sense. Would you rather export lanthanum at $10 a kilogram (kg.) or heavy rare earth elements (HREEs) used in high-tech magnets at $1,500 a kg.?
The economics of China's current export quota system, for example, has left the country with too much lanthanum and the rest of the world with too little.
"China will probably fix that by establishing segregated quotas. It will put in a quota system with a cap for lanthanum and cerium. It may have a separate quota for the medium heavy rare earths used in magnets. And then maybe a separate quota for the very heavy rare earths," Jon explained, adding "There is a concerted effort going on in China to really grab this industry by the neck and use it as a means of control. And that goes back to the segregated quota system because, although (China) promised the United States and Europe the tonnage wouldn't change, it didn't say the composition of that tonnage wouldn't. So, by introducing a segregated quota system, you could conceivably shift almost all the shipment allowance to lanthanum and cerium, which are of no use in building these electric vehicles. Furthermore, you would actually decrease quite markedly the amount of magnet material and the amount of HREEs that leave the nation." China's ultimate goal, Jon said, is to move technology and jobs in a growing industry into China.
Market for Vanadium
"Vanadium, we believe, is the best cathode material that can be used in these automobiles. And we're starting to see that conjecture being borne out by the battery industry, which is looking at lithium/vanadium/phosphate cathodes as one of the more important drivers for a higher-power, higher specific-energy battery and, potentially, a much less expensive battery for the automotive industry down the line," Hykawy said.
Lithium/vanadium/phosphate cathodes are cheaper than lithium/cobalt/oxide cathodes, which are commonly used in laptop batteries. Lithium/vanadium/phosphate cathodes are cheaper because vanadium costs less than cobalt; and these cathodes have a higher "specific energy," so they can store more power than similar chemistries.
Jon compared lithium/vanadium/phosphate batteries with the lithium/manganese-oxide batteries used in General Motors' Chevrolet Volt and Nissan's Leaf. The charge-discharge rate for the latter is 10C, whereas lithium/vanadium/phosphate batteries have a charge-discharge rate of nearly 50C. That means you can charge the battery faster, which makes them very attractive for use in electric cars and laptops.
"We view (lithium/vanadium/phosphate batteries) as having a very, very attractive chemistry and probably the next generation of automotive batteries. That would be a significant demand driver for vanadium moving forward," Jon predicted. He noted that Subaru and China's BYD Auto are currently working on lithium/vanadium/phosphate batteries for various uses.
Share Prices on Rare Earths Companies
"We are definitively in a bubble as far as the rare earths stocks are concerned, Jon asserted, "and I say that because they are all moving up at this point. They are moving up whether or not there is a good resource and a good deposit behind them. "If you go look at the research on our website, we have sells on a number of rare earths companies."
But he still sees some value in the sector.
"Unlike mining other metals," Jon noted, "there is great value in being vertically integrated. The oxides produced from solvent-extraction plants can be sold at a good profit. The real money lies in taking those oxides and making them into metals, and then making those metals into things like magnet alloys and magnets. We like to see these companies moving downstream as far as is practical," Hykawy explained.
The rare earths business is as much about marketing as it is about mining. "These are industrial materials. You really need to produce the products at a quantity and at a cost that the customer demands. And that's marketing," he said.
"We are maintaining all of our recommendations at this point because, frankly, there is a freight train behind this and I don't think the freight train is done yet. Rare earth prices will likely continue to move up and the stocks are likely to continue to move up, too."
Jon Hykawy is currently with the Research team at Byron Capital Markets, with a specialized focus in the lithium and clean technology/alternative energy industries. Jon holds both a PhD in physics and an MBA from Queen's University and has been working in capital markets as a cleantech/alternative energy analyst for the last four years. He began his career in the investment industry in 2000, originally working as a technology analyst. His current area of focus is the lithium sector, ranging from availability and production to lithium battery technology. He has extensive experience in the solar, wind and battery industries, conducting significant research in the areas of rechargeable batteries, ranging from rechargeable alkaline to lithium-ion to flow batteries. Jon is also fluent in Spanish and Ukrainian.
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-- Posted Sunday, 28 November 2010 | Digg This Article | Source: GoldSeek.com
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