Dutch tulip mania ? tulpengekte ? is considered to be the first recorded speculative bubble in the global economy.
The tulip was introduced to the Netherlands in 1593 by Flemish botanist Charles de l??cluse, who apparently received it from a Turkish ambassador.
As the popularity of the flower grew, so did prices and, along with this, interest in investing in it. This increased profits, luring a growing number of investors to throw yet more money at this seventeenth century luxury item.
In 1623, the price of a popular tulip variety was around 1 000 florins ? consider that the average yearly wage of a skilled artisan at that time was 150 florins.
At its peak, tulip prices for certain bulbs soared to 6 000 florins ? and, yes, that would be for a single tulip bulb ? well beyond its real intrinsic value.
Then, all of a sudden, in February 1636, investors started losing faith in the market. Prices were no longer considered realistic and stopped climbing. Investors panicked and began to sell in unison, leading to a massive drop in prices.
In recent years, many commentators have contested the widespread impact of the tulip mania, but the sharp increase and drop in the value of the flower during the 1600s remain fact.
Today ?tulip mania? is often used as a generalised term to refer to an economic bubble.
Many bubbles ? real or perceived ? have followed since the heyday of tulips, with questions being raised about whether the current rare earths market does not qualify for this tag.
The 15 rare-earth elements are used in renewable-energy devices, such as electric vehicles and wind turbines, as well as con-sumer and industrial electronics, such as the iPad and television screens.
China effectively controls this market as it produces around 97% of all rare earths in the world. It does not mean other countries do not have rare-earth deposits but just that they have not bothered to develop these resources as China has always been a cheap source of supply.
However, the Asian tiger has been trimming export quotas ? a move which has alarmed rare earths users, leaving them scrambling to secure supply.
These supply fears, as well as increased demand, have seen rare earths prices and shares in many exploration companies soar since the middle of 2010 ? and not by single digits.
However, can this situation last, or is it nothing but tulip mania for the twenty-first century?
Dramatic Price Increases
When talking rare earths prices there are two markets to consider ? the domestic Chinese space, and the foreign, or FOB China market, explains Toronto-based Byron Capital Markets researcher Dr Jon Hykawy.
Hykawy holds a PhD in physics and an MBA from Queen?s University.
Within China, prices have been trending up since the beginning of the year, Hykawy tells Mining Weekly.
Cerium oxide prices have risen from around 32 000 RMB/t to the current levels of 187 000 RMB/t, although prices have remained flat since early June. (RMB, or Renminbi, refers to China?s currency).
Lanthanum oxide prices have danced to the same tune, increasing from 30 000 RMB/t to current levels of 163 000 RMB/t.
Magnet materials, such as neodymium oxide, have risen from 264 000 RMB/t at the beginning of the year to current levels of 1.5-million RMB/t, but have been flat since June 15.
The more valuable heavy rare earths, such as dysprosium oxide, have increased in price from 1.43-million RMB/t to 13.78-million RMB/t, but have been flat since June 28.
Outside China, cerium oxide prices have jumped from about $60 000/t to $150 550/t, but have held steady since May 23.
Lanthanum oxide prices have moved from $60 050/t to $140 050/t, and have been flat since May 23.
Neodymium oxide, for rare earths magnets, has shot up from $89 750/t to $339 750/t, and has still been ticking up as recently as July 14.
Dysprosium oxide prices have run from $291 000/t at the beginning of the year to the current $2.27-million a ton, and are still climbing.
Hykawy says the major factors driving the market are the consolidation of the rare earths industry, as well as the establishment of rare earths exchanges as the only official rare earths sellers in China.
Establishing these exchanges will result in greater Chinese control of the market and stabilisation of, if not outright decreases in, Chinese domestic rare earths prices, he notes.
However, the same will not be true for rare earths prices in the rest of the world.
?That more effective control, coupled with demand increases outside China and increasingly stringent export quotas, will result in continued increases in FOB China pricing for rare earths,? forecasts Hykawy.
Chinese export quotas have this year been cut by about 2%, compared with last year.
Correction and Speculation
The steep increase in rare earths prices is not a bubble, but rather a correction, believes Technology Metals Research founding principal and rare earths specialist Jack Lifton.
?The two-tier pricing system has exposed the fact that China?s supposed low labour and emerging nation cost advantages are at best narrowing and, at worst, may never have existed in the rare earths space,? he explains.
?It is looking more and more ? as China enters a period of switching from an export-led economy to one of domestic consumption ? [as if] the country has been subsidising the rare earths mining and refining industry for a very long time. It looks like prices are normalising ? or, as the stock market theorists like to say, correcting.?
Lifton adds, however, that speculation is indeed currently the most important rare earths price motivator in what he calls the ?casino of capitalism?, but he believes this will subside as new sources of rare earths outside China come into production, and more investors begin to understand the true dynamics of the rare earths market?s fundamentals.
?In the end, prices of the critical rare earths will remain substantially higher than they were in the past,? believes Lifton. ?The critical rare earths are neodymium, europium, dysprosium, terbium and the related metal, yttrium.?
However, the bad news is that he also believes the most common rare earth, cerium, and the second-most produced rare earth, lanthanum, may already be in oversupply and that their prices will, ultimately, correct most sharply.
No Tulip Mania
There will be no imminent collapse of the broader rare earths market, notes Hykawy.
?This isn?t the Tulip Mania of 1637 ? this is a real need for material that is in short supply.
?The biggest problem with the market is that foreign demand for raw rare-earth oxides is probably 30% to 50% greater than what can be satisfied with strict adherence to Chinese export quotas.?
Saying that export quotas have this year been cut by about 2% compared with last year also does not reflect what is really happening, notes Hykawy.
?Depending on who you listen to, the inclusion of some new classes of materials in the 2011 quota ? such as alloys of iron and rare earths containing more than 10% rare earths ? means that real exports will fall between 5% and 8%. That is not welcome news, no matter what side of the industry you are on.
?There is no rare earths pricing bubble outside China,? emphasises Hykawy.
?The prices we see reflect the need of buyers to pay up for the material, as they have not had sufficient time or the inclination to find substitutes for rare earths, as of yet.?
However, Hykawy agrees with Lifton that not all rare earths are safe from a market fallout.
?If prices remain high, some rare earths may see their demand collapse over time. I have been at some conferences where speakers suggested that Japanese demand for cerium oxide, as an example, might collapse by up to 70% this year.
?Cerium oxide has been used in certain industries not because it was irreplaceable or very desirable, but because it was cheap. With very high prices becoming the norm outside China, as compared to historical levels, demand destruction is occurring.? Hykawy says there is also probably an overabundance of lanthanum and cerium in China.
?The light rare earths will likely come into global oversupply by 2013, once Molycorp, Lynas and Great Western Minerals Group are all in production.?
However, he adds, the global supply of magnet materials, such as praseodymium and neodymium, is likely to be tight, despite new projects coming on stream.
Certain heavy rare earths, such as dysprosium, are also likely be in short supply, even through 2020.
China Situation Unlikely to Ease
Hykawy expects no easing in Chinese export quotas going forward.
?The Commerce Ministry in China will continue to work to establish a competitive advantage for China through the use of the rare earths industry. They will work to build a sustainable industry within China, and, if that means continuing decreases of material available for export, then so be it.?
Lifton expects the Chinese domestic market for rare earths to continue growing in the near term, with Chinese production to grow only at a marginal rate.
Hykawy believes China will likely become a net importer of the heavy and more scarce rare earths by 2014 or 2015.
Bubble in the Mining Industry
?If there is a bubble in the rare earths market, it is one composed of a rapidly expanding number of junior mining companies all trying to raise money in the market, supposedly for the development of their properties,? says Lifton.
?This must collapse as the law of supply and demand operates in a Darwinian fashion.
?Only those deposits that can be brought into production so as to profitably compete in the world market will survive.?
Lifton says it appears more and more as if rare earths miners will need to be vertically integrated, or be part of a vertically integrated supply chain to be economically sustainable.
Hykawy adds that anyone who ?claimed to have rare earths last year was headed for glory and success?. However, this year, insti- tutional investors seem to recognise that there is no point in anyone building a mine if it cannot start production quickly, or if it does not have a customer.
Lifton predicts a?rebalancing?of the rare earths mining market, or ?correction,? to take place among the myriad of junior miners and explorers between 2013 and 2015.
Frontier Mining To Be SA?s Second Rare Earths Mine
South Africa currently has two rare earths mines which are at fairly advanced stages of development. Both have offtake agreements in place, which bodes well for the establishment of a new type of mining industry in the country.
Globally, the companies that are the furthest down the permitting curve and the closest to being fully funded ? and, therefore, the closest to being the first producers outside China ? are the US?s Molycorp Minerals, Australia?s Lynas Corporation and Canadian firm Great Western Minerals Group?s (GWMG?s) South African asset, the Steenkampskraal mine.
All three are likely to come to market between the end of the year and 2013.
What places GWMG in a strong position is that the company is also going downstream, producing magnet alloy as a final product, which Hykawy believes puts it in a good position to grow its share price.
The company has already signed a cooper- ation agreement with Aichi Steel, which is part of the Toyota group.
Slotting in below GWMG and the like is the next tier of producers ready to churn out rare earths. This group includes Canadian-listed Frontier Rare Earths.
Frontier Rare Earths, developing the Zandkopsdrift rare earths project in South Africa?s Namaqualand, in July unveiled an agreement with Korea Resources Corp (Kores) that would see the South Korean parastatal take up to 20% ownership of the Zandkopsdrift project, and a 10% stake in the firm. The heads of agreement the two companies signed also envisages Kores buying up to 40% of Zandkopsdrift?s output, and arranging debt financing for the project. Lifton notes that the deal may solve South Korea?s rare earths supply problem.
?Korea has an industrial policy which calls for self-sufficiency in critical industrial raw materials as soon as possible.
?Kores will invest in Frontier?s development plan to ultimately bring to the market 20 000 t/y of rare earths. Kores?s investment is small potatoes when viewed from that perspective.?
Hykawy notes that Byron Capital Markets has covered Frontier with a speculative buy recommendation, establishing a $4.80 a share target price, up from the less than $2 it is currently hovering at.
?We have set this target price because of the quality of Zandkopsdrift as a deposit and its location in a low labour cost jurisdiction in Africa.
?Obviously, there continues to be a question regarding the costs of processing the ore from Zandkopsdrift, but that can be determined over time,? he says.
?Kores officials obviously feel that the risks are sufficiently contained to make Frontier a priority partner for them, and we feel both parties can benefit from their partnership.?
More Than Korean Interest
Apart from Kores, Frontier Rare Earths CEO James Kenny tells Mining Weekly that there is also interest in the company from ?a number of credible parties in Europe and Asia?.
As for a possible oversupply looming, just as Zandkopsdrift works to come on line, Kenny believes the reality is that there is growing demand for rare earths ? both for existing and new uses.
?Why should developing a rare earths mine be different to developing a gold mine or an oil deposit? Nobody says there is already enough gold in the world when someone plans to open a gold mine.?
However, Kenny admits that he can also foresee an oversupply of lanthanum and cerium, similar to the position taken by Lifton and Hykawy.
?Zandkopsdrift is a balanced deposit and will produce all 15 rare-earth elements, though, so one needs to consider the totality of what will be produced when weighing the mining operation.?
As for steadily rising prices, Kenny says the speed of escalation has indeed been dramatic. However, he adds that the rare earths market is unlike any other commodity market in that one country controls 97% of production, and the fact that there are no spot or future markets.
Kenny believes rare earths are only now coming off the artificially low base they have been inhabiting ?for very, very long ? plus, demand has gone up?.
?Heavy rare earths pricing is not distorted,? he emphasises. ?They are in very short supply.?
Despite all these arguments, Frontier?s share price has dipped from the (Can)$3.29 a share to the current level of around $2.
?A lot of companies had a strong run, but then we saw a big sell-off in the markets in November,? says Kenny.
Mining Rights Outstanding, Nationalisation Talk Causing Jitters
Frontier Rare Earths currently has prospecting rights at Zandkopsdrift, and will apply for mining rights ?possibly on completion of the prefeasibility study?, says Kenny.
The project is already fully empowered, with 26% black shareholding.
?It will be a straightforward, shallow, openpit mining operation, with low tonnage and low cost,? adds Kenny.
He says it is still unknown how much it will cost to develop the Namaqualand mine.
A recent bugbear has been talk of mine nationalisation by trade union grouping Cosatu and the ruling party?s youth league.
Kenny says such talk has been ?pretty unhelpful in many ways ? in fact, it is not helpful under any heading?.
?We are living in a global economy. Our South African project competes with other projects in the US and Asia, and in none of these jurisdictions do we need to price in a risk factor such as this.?
Kenny says South Africa has done well in attracting foreign direct investment in recent years, dispelling notions about Africa not being a feasible and attractive investment destination.
Now, however, talk from a body which was not even in an elected position of power could hurt this image.
?While, obviously, the matter can be debated and all interest groups consulted, nowhere, to my knowledge, has nationalisation proved economically successful,? emphasises Kenny.
?Continued dialogue on this is causing uncertainty, so, yes, it has made certain investors nervous.?
LYC Price at posting:
$1.75 Sentiment: Buy Disclosure: Held
(20min delay)