The US and EU Are Desperately Seeking Heavy Rare Earths: Jeb Handwerger

Source: Sally Lowder of The Critical Metals Report  (7/3/12)

http://www.theaureport.com/pub/na/13793  

Despite market malaise, the outlook for rare earth element demand is growing more and more compelling. China still controls a majority of the supply, but has been cautioning the world that even its reserves can't last forever. North America desperately needs to establish its own sources, but which juniors will be able to fill that need? Jeb Handwerger, editor and publisher of Gold Stock Trades, predicts which companies may win the race to production in this exclusive interview with The Critical Metals Report.

The Critical Metals Report: Jeb, you successfully forecasted the mining mini-boom from 2009 to early 2011. Now we find ourselves in a protracted down period in the junior mining space, which is even affecting the seniors and producing companies. What market forces are at work here?

Jeb Handwerger: There was a lot of speculative interest in rare earth elements (REEs) in 2011. The REE story was just hitting the mainstream. Then we got hit with the nuclear disaster at Fukushima, the expiration of QE2 in spring 2011, the Euro problems and fear of global contagion of the debt crisis.

REE prices have started to come down and now REE equity valuations have reached rock bottom. This has been accelerated by the overall macroeconomic downturn. Investors are panicking and trying to preserve capital by searching for safe havens. They've exited the resource sector and turned to cash and treasuries. There are record-low yields. Investors are buying treasuries for negative returns. The dollar is extremely overbought and the rally into the dollar is beginning to resemble a herd-like move which may hurt many investors. Despite all the macroeconomic doom and gloom, the fundamentals in the critical heavy rare earths forecasts a supply shortfall in the short term.

TCMR: China restricted its exports of REEs, which caused the share prices of North American-listed equities to increase in 2010 and 2011. How are China's policies affecting REE markets today?

JH: The U.S. Geological Survey (USGS) came out with an estimate of global rare earth oxide (REO) reserves in 2011. It had China around 55 million tons (Mt), about 48.3% of global reserves. China came out with a report recently that indicates it will run out of critical heavy rare earth elements (HREEs) and that the country's reserves are being depleted rapidly due to an exponential rise in demand.

TCMR: But do we believe it?

JH: China is saying to the world that it needs the juniors-and that is the truth. There won't be access forever to an abundant supply of cheap HREEs. China is saying, "We'll help you. We'll help you get the juniors. We'll give you technology and expertise."

That's really what it is going to come down to. Twenty years ago, these metals were not as scarce. Outside of China, there is little or no domestic REE supply being produced today, and it appears we are still years away from producing HREEs.

TCMR: The share prices of North American-listed REE stocks have gone down so much. How should investors play the potential supply problems in and outside of China?

JH: The sector is really beaten down and forgotten, along with the entire resource market. Investors are losing hope that any of these companies are going to be developed in this sort of economic environment. The rare earth sector will break out of the downtrend soon.

There are very attractive HREE assets, some of which have recently published impressive economic studies and preliminary economic assessments (PEAs). Recently, Lynas Corp. (LYC:ASX) announced positive news from the Malaysian parliament, which recommended that a temporary operating license be granted for its advanced materials plant.

The last time Lynas made an announcement like this, it was a positive development throughout the sector. If Lynas begins producing REEs profitably, it will be a real boost to confidence in the sector.

TCMR: Is the market paying attention to Lynas in Malaysia and to the Molycorp-Neo Materials deal?

JH: Lynas went from about $0.90 to $1.10 and has pulled back since the Malaysian Parliament gave an affirmative recommendation on its LAMP Project. It's really just beginning to hit the radar that Lynas and Molycorp may soon be producing a lot of LREEs. A lot of investors don't realize that there have been some major developments in the rare earth sector. It may boost confidence in the sector once investors see that companies are producing LREEs profitably outside of China.

Molycorp Inc. (MCP:NYSE) recently acquired the REE processor Neo Material Technologies (NEM:TSX). Molycorp has mentioned that China's increasing demand for REE materials is predicted to drive production in other countries. One of the benefits of the Molycorp and Neo Material deal is that they will be able to sell to the Chinese market. The world is still completely relying on China, especially for critical HREEs.

The Molycorp and Lynas deals don't answer the HREE problem. The HREEs are a piece of the puzzle that's still missing, and many investors are overlooking HREE assets, such as Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE), Quest Rare Minerals Ltd. (QRM:TSX; QRM:NYSE.A), Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX), Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX), Pele Mountain Resources Inc. (GEM:TSX.V) and Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX).