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The rare earths story embraces potentially big windfalls laced with plenty of risk.

Listed Australian rare earths companies aren’t for conservative investors, as explorers without earnings dominate the landscape. Nevertheless, that doesn’t stop share prices rising as the market looks forward, factoring in what tomorrow can potentially bring in an industry dominated by China.

The share price of Lynas Corporation, which is among the best known Australian rare earths companies, has jumped from 37.5 cents in early May last year to a 12-month high of $2.35 on January 4, 2011. During trading on February 16, 2011, Lynas was priced at $1.92 a share. Greenland Minerals and Energy reached a 12-month high of $1.37 on January 4, 2011 after rising from a low of 31cents on July 21, 2010.  (See table below for more comparisons).  Rare earths enable digital technology, such as flat panel televisions, hard disc drives, DVDs, iPods and hybrid cars, so company and industry outlooks will be ruled by demand and supply. Against this backdrop is China, which produces upwards of 90 per cent of rare earths and has dramatically cut exports.

It’s in this global environment that Novus Capital executive director of equities Steven Hing and Shaw Stockbroking senior resources analyst Vince Pisani offer their views on Australian companies operating in the rare earths space. Their choices, revolving around potential capital growth, aren’t recommendations to buy, but can be considered by those believing in the rare earths story and who are comfortable with risk. Mount Weld in Western Australia is touted as the richest rare earths deposit in the world, and it’s where Lynas Corporation is about to complete its concentration plant. The Lynas Advanced Materials Plant in Malaysia is under construction and the company expects to be a rare earths producer later this year. What Hing likes about Lynas is it’s a near term producer, giving it a competitive edge over start-up explorers. Last year, the company increased the total combined resource at Mount Weld to 1.416 million tonnes of rare earths oxide. “The ability to process the ore and ship the oxides is the key and Lynas is moving closer,” Hing says. “Australia is fortunate to have several companies that have rare earth deposits and Lynas is my preferred exposure.”

The outlook for Greenland Minerals and Energy is brighter after receiving approval from the Greenland Government to evaluate its Kvanefjeld multi-element project. Its project at the southern tip of Greenland contains big, unstgeloped deposits of rare earths elements. It’s the first company in Greenland to receive a permit for evaluating a project that includes uranium, enabling the firm to commit to feasibility studies. Hing says the Greenland Government’s decision unearths immense potential, but warns it’s still early days before the company becomes a producer. He says it needs to prove up its resource and build a processing plant. “If it can do that, the story becomes much more interesting,” he says. Pisani says: “Kvanefjeld is regarded as one of the largest unstgeloped rare earths deposits in the world with over 450 million tonnes of ore. To achieve a significant re-rating, Greenland Minerals and Energy must simplify the corporate structure by purchasing the remaining 39 per cent not already owned. Recent approvals by the Greenland Government to reassess its anti-uranium mining stance could significantly re-rate the stock to our price target of $2.50.”

To show how hot rare earths prices are, Pisani compares several elements in 2006 to the end of 2010. The US spot price of lanthanum oxide has risen from a $1.80 a kilogram in 2006 to $61 a kilogram in 2010. Cerium oxide has shot up from $1.50 a kilogram in 2006 to $62 a kilogram in 2010. And, neodymium has jumped from $14.80 a kilogram in 2006 to $88.80 a kilogram in 2010.

Hing says the market reacted positively after Peak Resources announced a high-grade rare earths discovery at Ngualla in Tanzania. Hing says some of the mineralisation at Ngualla appears to be similar to Lynas Corporation’s Mount Weld project, which is most encouraging. “The share price skyrocketed 50 per cent as a result,” Hing says. Pisani is also impressed with Ngualla’s ore body, saying there’s clay deposits at 64 metres, indicating high grade (5.5 per cent rare earths oxide). “Peak Resources is working towards a JORC (Joint Ore Reserves Committee) compliant resource in June this year, which is a big start,” Pisani says. He says Peak, as an explorer, may have a commercially viable deposit, which it could stgelop or sell.

Recently, Arafura Resources announced it would undertake a major drilling program at its Nolans Bore rare earths resource in the Northern Territory. The company expects to produce 20,000 tonnes of rare earth oxides from its Whyalla Rare Earths Complex by 2013. Pisani says the Nolan project is world class and, once in full production, the company will have by-product credits for phosphoric acid, gypsum and uranium totalling $100 million a year. “On our current assumptions, Arafura could generate more than $300 million in net profit after tax by the 2015 financial year,” he says. “Our 12-month price target is $2.15.”

Multi-mineral explorer Alkane Resources has rare earths at the Dubbo Zirconia Project in New South Wales. Pisani values the zirconia project, with rare earths, at $1.15 a share without taking into account the company’s non-producing gold assets, which he believes are worth another 50c a share. Rare earths extraction wasn’t on the company agenda until prices started soaring, but Pisani says, that in time, it will become a major revenue earner for the company. He says not only does Alkane have valuable zircon deposits, but identifiable markets in which to sell when it produces in 2014. Besides quality assets, Pisani rates management highly, saying it’s “very good technically on a number of fronts”.

Hing’s interest in Northern Minerals stems from Lynas Corporation buying a stake in the company last year. Lynas took an interest for a reason, and Hing concludes that its rare earths may be high grade. Pisani says Northern Minerals has high concentrations of heavy rare earths in its deposits, particularly yttrium. It’s a valuable deposit, Pisani says.

 
 COMPANY  CODE  SHARE PRICE CLOSE
 12 – month low  12 – month high  Intraday
 Lynas Corporation  (LYC)  37.5 cents  $2.35  $1.92
 Greenland Minerals and Energy  (GGG)  31 cents  $1.37  $1.23
 Peak Resources  (PEK)  8.7 cents  93 cents  90 cents
 Arafura Resources  (ARU)  38 cents  $1.79  $1.31
 Alkane Resources  (ALK)  23 cents  $1.25  $1.23
 Northern Minerals  (NTU)  5.5 cents  68.5 cents  62 cents

Price current to market close, 16 February 2011