Investors rush into rare earth element mining

Investors are scrambling to cash in on a new mining boom, one that might end up creating a new industry in Canada.

The rush is on to find deposits of rare earth elements (REEs), critical components of materials used in the defence, electronics and other keyindustries.

REEs comprise 16chemical elementsuniquely able to retain their physical properties at high temperatures.China is by far the world's dominant producer but has served notice it plans to conserve supplies for its own use.

"There are absolutely no substitutes for the rare metals that are used in (the missile) guidance systems and hybrid batteries that are used in defence applications," Quest Uranium Corporation CEO Peter Cashin told CBC News.

REEs are used for everything from nickel metal hydride batteries in hybrid cars to fibre-optic telecom cables, military hardware, solar panels, wind turbines, compact fluorescent lighting, mobile phones, computers, the manufacturing of super conductors and high energy magnets and petroleum refining.

Demand to soar

Demand in the West for REEs is set to explode, not only because of China's move but alsoas demand grows for these products. The Industrial Minerals Company of Australia has predicted global demand will grow from about 112,000 tonnes in 2008 to approximately 180,000 tonnes by 2015, a 60 per cent increase.

"I think [the demand growth prospects are] very promising," said Glen Jones, Intierra.com's executive director responsible for the Western Hemisphere.

Intierra monitors global exploration and mining on a daily basis and offers online subscriptions to its detailed data bases to clients like Barrick, Newmont, Anglo American, Rio Tinto, Cameco and Standard Bank.

Currently, China controls between 95 and97 per cent of world REEs production.But its announcement in September, Jones said, "caused a bit of panic" for customers outside China, who now question where the supply will come from.

That's one reason why Toronto-based Quest Uranium's share price has soaredrecently to almost $3 from five cents when it first listed on the TSX Venture Exchange in January 2008. Quest is exploring two deposits in northeast Quebec near the border with Labrador. The site is125 kilometers west of the Voiseys Bay nickel-copper-cobalt deposit currently being mined by Vale.

REEs aren't actually that rare and, in fact, areas common as nickel or tin. The name refers to the fact theyaren't often concentrated in deposits that are profitable to develop.

Canada is three decades behind China in developing the rare earth industry, Jones said, because 30 years ago, China saw the potential and dramatically increased production.

"This caused a steep decline in commodity price and effectively killed off any competition," he explained. "So that's why they've had this monopoly. It hasn't been economical for anybody else to explore."

That has createdan exploration rush that could becomean opportunity for Canadian mining companies.

"Canada's definitely going to benefit," predicted Jones.

"Canada has really been blessed with great geology," he said.Canada has 109 or 56 per cent of the potential deposits outside of China. Quebec, with 41 exploration projects, and Ontario, with 28, have the best potential, but there arepossible targets in other provinces and territories, too.

There's no production in Canada yet, butthree exploration projectshave been able toidentify reserves at Nechalacho Lake in N.W.T., Strange Lake in Quebec, and Hoidas Lake in Saskatchewan. Alberta and P.E.I. are the only provinces where companies are not yet active.

Investor interest growing

"There's a huge amount of investor interest given the opportunity to invest in the early stages when the rewards can be substantial," said Jones.

Quest has two projects at Strange Lake.Initial results from its exploration hold promise, but there are still challenges.Among them is negotiating a partnershipwith a larger company witha facilitytoprocess the ore into concentrate.Cashin said Quest has "just started" trying tofind apotential partner.

Jones has watched investor interest in REEs grow.To address that, he used Intierra's databasein advance ofa speech he was to give at a mining investment conference in Vancouver in January to come up with a list of 72 Canadiancompanies listed on the Toronto Stock Exchange and TSX Venture market with potential REE properties. (See sidebar.)

Jones said his aim was to compile a list for investors, but he's not recommending any of them. He emphasized investors mustdo their own due diligence.

Small resource companies are high risk.Their projects might turn out not to be profitable, and in times of market turmoil, investors might find they can't sell their shares at any price. Also, because they are small, theymay be less able to weatherdownturns in theirindustry or the wider economy.

Jones put together the list because "without a database like ours, it wouldtake weeks or months" for small investors to put their own together.

When researching companies, Jones suggests investors ask themselves whether firms have:

• Enough cash to carry out their exploration and development programs.
• Management with the necessary skills and experience with rare earth elements.
• A coherent plan to develop reserves should theyfind them.

Despite all the risks, Cashin, who has been in the resources business for more than 30 years,says "it's very exciting" to be in on the first stages of what is essentially a new industry.

"I've never seen this kind of development in the resource area before," he said.