Arafura shares jump on rare earths production milestone
Comment of the Day

September 13 2010

Commentary by Eoin Treacy

Arafura shares jump on rare earths production milestone

This article by Balazs Koranyi for Reuters appeared in today's newsletter and may be of interest to subscribers. Here it is in full
Australia's Arafura Resource (ARU.AX: Quote) said it has successfully produced commercial quality separated rare earths and would be able to utilise the technology at its Nolans Project once production starts in the second half of 2013.

Arafura said the Australian Nuclear Science and Technology Organisation under commission from the company separated middle rare earth oxides and heavy rare earth oxides -- elements used in a wide range of consumer products, from mobile phones to batteries and electric car motors.

Arafura shares surged over 12 percent on the announcement while shares in domestic rival Lynas (LYC.AX: Quote) rose 7.8 percent, both outperforming a 1.2 percent rise by the broader market .

Arafura shares have risen 41 percent this year as world demand for the 17 rare earth metals grows, while supplies are shrinking, threatening with a global supply shortage.

East China Mineral Exploraton & Development Bureau (ECE) is Arafura's biggest shareholder with a 22 percent stake.

Prices of rare earths are rising, while separation and purification is difficult and expensive, making many of the world's rare earth deposits commercially unviable.

China dominates production with 95 percent of global supply of the group of metals and prices jumped in July after reports that China's government plans to fix prices so companies do not engage in "cut-throat competition"

Arafura last week said the average valuation concluded in August for its Nolan project increased 278 percent since December 2009.
Rare earths pricing continued to rise in August and appeared to stabilise in early September," Arafura said last week.

The Nolans resource in the Northern Territory contains 850,000 tonnes rare earth oxides, 3.9 million tonnes of phosphate pentoxide and 13.3 million pounds of uranium oxide.

Eoin Treacy's view The investment case for rare earth metals took a big step forward when the Pentagon released a report detailing how dependent the US economy and military infrastructure was on these metals and how woefully inadequate the USA's production of them has become. The fact is that the manufacturers of just about every advanced piece of technological hardware, from military to green applications, depends on these metals and by extension the munificence of China in producing and exporting them.

With China talking about reducing exports and setting a comparatively high fixed price for these metals some companies are beginning to research how they can replace them in the manufacturing process. This article posted on, kindly submitted by a subscriber carries further details. Here is a section:

Japan is doing its best to put a dampener on relying on the factory across the way, China, by developing and using technologies which do not rely on rare earth metals.

China's got the upper hand on the world with its rare earth metals, which are required for fancy technology we take for granted, and as recently as June this year said it doesn't want to hand them out willy-nilly. Japanese manufacturing giant Hitachi doesn't like the idea of being under the thumb and has developed a kind of motor which uses ferric oxide, a cheaper and easier to find alternative to the likes of dysprosium and neodymium.

Substitution is the enemy of just about every commodity bull market, but we are still a number of years away from viable alternatives for these metals and they will always play a part in hi-tech manufacturing. This is why there has been such a flurry of interest in a comparatively small number of companies offering potential to produce these metals outside of China; primarily in Australia and Canada.

Earlier in the year (Also see Comment of the Day on January 11th) a number of rare earth shares were outperforming in no uncertain terms. Most entered multi-month consolidations and some have surged to impressive heights over the last couple of months. .

Lynas Corp, Rare Element Resources and Alkane Resources have all accelerated higher on consecutive weeks and are becoming increasingly overextended. The first clear downward dynamic is likely to signal a medium-term peak. From a trader's perspective, those fortunate enough to be long a might consider a trailing stop to be appropriate.

Arufura Resources, Great Western Minerals, Hudson Resources, Ucore Rare Metals, Rare Earth Metals, Neo Material Technologies and Matamec Explorations have all rallied impressively of late but are not nearly as overextended as those listed above. They would need to take out their short-term progressions of higher reaction lows to question scope for further upside.

Avalon Resources, Tasman Metals and Quest Rare Minerals encountered resistance last week in the region of prior highs, suggesting at least a short-term pause. Sustained moves to new high ground are now required to reassert the medium-term uptrends.

5N Plus and Greenland Minerals & Energy remain within their long-term bases and will need to move to sustain moves to new recovery highs to indicate demand has returned to medium-term dominance.

Doing one's own due diligence is highly advisable when looking at miners that have yet to produce any metal. There are a number of small cap companies currently parading as rare earth miners that have changed their names from when they were touting leverage to uranium back in 2006. While one can reasonably expect rare earths to be found in the same areas as uranium, one needs to be cautious to marketing operations dressed up as mines. In bullish cycles for relatively illiquid instruments leaders and laggards generally do so for a reason and this is worth bearing in mind when one is tempted to "bottom fish". Tight money control discipline is essential when dealing in such shares.

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