CIBC Report: A Rare Earth Element Industry Overview

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Initiating Coverage

March 06, 2011 Metals & Minerals

Once Ignored On The Periodic Table, Don't Ignore Them Now A Rare Earth Element Industry Overview

� As China squeezes global supply and uses for rare earths continue to grow,

the world needs new rare earth deposits. Those deposits with favorable

grade weightings and extensive work already completed are more likely to

be developed in the next 10 years than earlier-stage plays.

� While the market for rare earths is expected to grow at 9%-15% per year

to 2015, we do not foresee every deposit going into production. As of March

6, we initiate coverage of Avalon Rare Metals (SO), Frontier Rare Earths

(SO-Spec.), and Molycorp (SO) as the preferred ways to play the space.

All figures in Canadian dollars, unless otherwise stated. 11-106854 © 2011

CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

See "Important Disclosures" section at the end of this report for important

required disclosures, including potential conflicts of interest.

See "Price Target Calculation" and "Key Risks to Price Target" sections at the

end of this report, or at the end of each section hereof, where applicable.

Sector Weighting: Market Weight

Matthew Gibson 1 (416) 956-6729 [email protected]

Ian Parkinson 1 (416) 956-6169 [email protected]

Once Ignored On The Periodic Table, Don't Ignore Them Now - March 06, 2011

2

Table of Contents

Why Rare Earths? ...................................................................................... 3 How To Play Rare Earths.......................................................................... 4 The China Factor .................................................................................... 5

Bayan Obo ....................................................................................... 6 The Basics ................................................................................................ 8 Project Locations .................................................................................. 10 Processing ........................................................................................... 11

Supply And Demand ................................................................................ 14 CIBC’s Rare Earth Forecast .................................................................... 15 Demand .............................................................................................. 16 Permanent Magnets ........................................................................... 17 Wind Energy................................................................................... 18 Hybrid Electric Vehicles .................................................................... 20

Phosphors ......................................................................................... 20 Rechargeable Batteries ....................................................................... 23

Supply................................................................................................. 24 Rare Earth Pricing.................................................................................... 28 Bubbles ............................................................................................... 30 Price Target Calculations And Key Risks To Price Targets ........................... 32

Table of Exhibits

Exhibit 1. CIBC’s Rare Earth Coverage ..................................................... 3 Exhibit 2. The Rare Earths Value Chain .................................................... 4 Exhibit 3. Bullish Rare Earth Elements...................................................... 4 Exhibit 4. REO Eq Grade And Leverage To Bullish Elements ........................ 5 Exhibit 5. China’s Rare Earth Export Quotas ............................................. 6 Exhibit 6. Bayan Obo Mine Site ............................................................... 7 Exhibit 7. Rare Earth Elements................................................................ 8 Exhibit 8. Rare Earth Oxide Usage By Industry (2010E) ............................. 9 Exhibit 9. Rare Earth Uses And Demand Drivers ........................................ 9 Exhibit 10. Select Global Earth Deposits................................................... 10 Exhibit 11. Generalized Bastnasite Beneficiation Flow Diagram ................... 11 Exhibit 12. Generalized Flow Diagram For Extraction Of Monazite

And Xenotime From Ti-Zr-REE Mineral Sand ......................... 12 Exhibit 13. Mountain Pass Previous Separation Process Using SX ................ 13 Exhibit 14. Supply And Demand Projections ............................................. 14 Exhibit 15. Supply And Demand Balances – Select Rare Earth Elements....... 15 Exhibit 16. CIBC Rare Earth Forecast....................................................... 16 Exhibit 17. Long-term Rare Earth Forecast ............................................... 16 Exhibit 18. End-use By Metal .................................................................. 17 Exhibit 19. Differences In Electric Generators ........................................... 17 Exhibit 20. Direct-drive Wind Turbine ...................................................... 19 Exhibit 21. Global Installed Wind Capacity 2002–2030E (Moderate Case)..... 20 Exhibit 22. Uses For Permanent Magnets In Hybrid Cars ............................ 20 Exhibit 23. Personal Technology Demand Outlook ..................................... 21 Exhibit 24. A Plasma Television Pixel ....................................................... 21 Exhibit 25. The Range Of CFL Lightbulbs .................................................. 22 Exhibit 26. Electric Vehicle Sales 2007-2020E........................................... 23 Exhibit 27. NiMH Car Battery For A Toyota Prius ....................................... 23 Exhibit 28. Select Investable Deposits In Development Outside China ......... 25 Exhibit 29. Development Stages Of Select Rare Earth Projects.................... 26 Exhibit 30. Race To Full Production – Rare Earth Developers....................... 27 Exhibit 31. Rare Earth Spot Prices ........................................................... 28 Exhibit 32. Select Rare Earth Historical Prices FOB China ........................... 29 Exhibit 33. Bubbles In Recent History ...................................................... 30 Exhibit 34. Significant Historical Bubbles.................................................. 31


3

Why Rare Earths? The rare earth (RE) story is one of robust demand growth coupled with an

uncertain supply-side response, creating a deficit market in many elements and

the foundation for significant increases in prices. Rare earth demand is driven, in

large part, by two of the fastest-growing sectors on the planet, energy and high

technology. In the energy square, neodymium, praseodymium, and dysprosium

are used in the manufacturing of rechargeable batteries, hybrid/electric cars,

and wind turbines. Cerium and lanthanum are used in fluid cracking catalysts

and catalytic converters. In the high tech sector, elements like europium and

yttrium are used in flat panel displays, lasers, radar, and weapon guidance

systems. Neodymium, praseodymium, yttrium, europium and terbium have

substitutes but they are not as effective and other elements have none at all in

specific applications. Unlike base metals, new applications are also being

constantly developed for rare earths given their unique attributes.

China produces 97% of the world’s rare earth elements and has begun

restricting exports, reducing permits from 66,000 tonnes in 2004 to

30,000 tonnes in 2010. Additional measures, such as shutting down

environmentally dangerous production and instituting heavy levies (15%–25%)

on exports, have left the rest of the world in the lurch. As a result, prices outside

of China have risen 706% on average since January 2009 and several projects

are being progressed through to production. In our opinion, Molycorp (MCP–SO),

Avalon Rare Metals (AVL–SO), and Frontier Rare Earths (FRO–SO-Speculative)

are excellent vehicles through which investors can participate in the rare earth

industry, as they have a broad range of projects from near-term production to

early-stage development.

Exhibit 1. CIBC’s Rare Earth Coverage

Company Ticker Rating Price (Mar 3) NAV P/NAV

Molycorp MCP SO US$49.83 US$78.88 0.6x

Avalon AVL SO C$7.31 C$9.50 0.8x

Frontier FRO SO-S C$3.11 C$7.30 0.4x Source: Bloomberg and CIBC World Markets Inc.

We believe that the tight market has created opportunities for new producers to

enter the market, although not every company that flaunts a rare earth resource

will necessarily go into production. It takes an average of 10 years for a typical

deposit to move from discovery to production and in that time we believe the

market opportunity will have passed. It is important for investors to pick

companies with the first-mover advantage, large resources, technically

competent management teams, and favorable weightings to what we term the

“bullish” metals – those elements tied to what we foresee as the tightest

markets within the rare earth complex going forward.

Elements used as phosphors – yttrium, terbium, and europium – are our natural

favorites, followed by those used in permanent magnets – neodymium,

praseodymium, and dysprosium. These elements lie in what has been termed

the light and heavy rare earths. The distinction stems from the relative atomic

weights of each element and the fact that some heavier rare earths sell for

substantially higher prices than light rare earths. While every deposit has a

naturally occurring grade weighting to the 17 rare elements, giving them

strategic value in the market place, there are additional ways in which to

increase this leverage.


4

As seen in Exhibit 2, Molycorp will increase its leverage to neodymium and

praseodymium by focusing on the downstream production of alloy and magnets.

In doing so, the company will capture more of the value-added margin related to

the rare earth elements in its deposit, rendering these metals a higher portion of

its operating profits.

Exhibit 2. The Rare Earths Value Chain

Exploration and Development Mining and Production of Rare

Earth Concentrate (97% China)

Separation into Individual Rare

Earth Oxides (97% China)

Upgrading Oxides to Rare Earth

Metals (100% China)

Converting Metals into Alloy Powders

(80% China, 20% Japan)

Component Manufacturing (80%

China, 17% Japan, 3% Europe)

RE Concentrate

Price: US$38.00/kg

Nd Oxide FOB China

Price: US$150/kg

MCP Margin: US$145/kg

Nd Metal FOB China

US$203/kg

MCP Margin: 192/kg

Nd Magnet Powder

~US$444/kg

MCP Margin: 348/kg

Permanent Magnets

Price: ~US$696/kg

Margin: Depends on Size/Shape

Molycorp Currently Molycorp's Goal

Lynas Currently

Frontier Currently

Avalon Currently

Neo Material Technology Currently

Lynas' Goal

Frontier's Goal

Avalon Currently

Source: Company reports.

How To Play Rare Earths We believe that exposure to bullish elements within the rare earth complex will

be the best way to achieve above-average returns in the space. The elements

listed in Exhibit 3 not only offer exposure to the fastest-growing markets but the

limited supply coming online in the next 10 years, due to the forecasted grade

weightings of projects moving into production, gives them significant strategic

value.

Exhibit 3. Bullish Rare Earth Elements

Light Rare Earths Applications Industry CAGR 2010E–2015E

Yttrium Red phosphor, fluorescent lamps, ceramics, metal alloy agent 30.00%

Praseodymium Magnets, battery alloy, lasers 16.00%

Neodymium Permanent magnets, auto catalyst, petroleum refining, lasers 16.00%

Heavy Rare Earths Applications Industry CAGR 2010E–2015E

Terbium Phosphors, permanent magnets 30.00%

Dysprosium Permanent magnets, hybrid engines 16.00%

Source: IMCOA and CIBC World Markets Inc.

Besides the development potential of a deposit, one must also consider how

much exposure a company will offer investors to the elements outlined in

Exhibit 3. Molycorp will generate a significant amount of leverage to the

neodymium and praseodymium markets given its focus on the downstream

production of NdFeB alloy powders and permanent magnets. Avalon’s

Nechalacho deposit represents the best way to play heavy rare earths currently,

we believe, as its deposit is 25% weighted to elements like terbium, dysprosium

and yttrium, and is further along the development timeline than most. Frontier

will have more leverage to the battery metals and, as its flowsheet is derisked, it

should offer patient investors substantial returns as it re-rates to a valuation

more in line with its peers.


5

Other considerations in an investment analysis are the capability of management

teams to develop the assets, the potential flowsheet of a project, the extent to

which a region is mining-friendly, a project’s proximity to infrastructure, and a

company’s ability to access financial markets to support its development plan.

We believe that Molycorp, Avalon and Frontier all fit this bill, albeit with different

risk profiles.

Exhibit 4. REO Eq Grade And Leverage To Bullish Elements

Steenkampskraal (Great

Western)

Nechalacho (Avalon)

Kvanefjeld (Greenland

Minerals)

Zandkopsdrift (Frontier)

Mount Weld (Lynas)

Mountain Pass (Molycorp)

Dubbo (Alkane)

Nolans Project (Arafura)

Bear Lodge (Rare Element)

Norra Karr (Tasman)

Strange Lake (Quest)

Hoidas Lake (Great

Western)

0.0%

5.0%

10.0%

15.0%

20.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

Grade Weighting in Bullish Elements

Gra

de (%

RE

O)

Bubbles represent the size of the deposit.


The China Factor The Chinese government has reduced the export of rare earths for the first half

of 2011 by 35% compared to H1/2010. The quota has been set at

14,446 tonnes to be split among 31 different companies and further cuts may

transpire in the near term. The Chinese Commerce Ministry has formally stated

that this policy is in response to what it sees as a dwindling natural resource,

one that China will require for its own future.

In addition, the government has begun cracking down on illegal mining,

consolidating the industry into fewer, larger, and more technically advanced

companies, and introducing environmental regulations that will dampen

increases in Chinese production going forward. Wang Guoqhen, a former VP of

China Nonferrous Metals, has estimated that these reforms will double

production costs inside China.


6

A recent study undertaken by the Chinese Society of Rare Earths estimates that

Chinese production will decline from 120,000 tpa in 2010 to ~100,000 tpa in

2015. Combined with a 15% per year demand growth, this study estimates that

western suppliers will have to address a gap of 80,000 tpa as China likely moves

from a net importer to a net exporter.

Exhibit 5. China’s Rare Earth Export Quotas

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2004 2005 2006 2007 2008 2009 2010

Rar

e E

arth

Oxi

des

(ton

nes)

Chinese Ex port Quotas JV Quota

Source: Chinese Ministry of Commerce.

The good news is that there are multiple deposits outside of China that remain

undeveloped; in fact, rare earths are not that rare. Some rare earth elements

are as common in the earth’s crust as copper. However, high-grade deposits

close to infrastructure and in mining-friendly jurisdictions are a little harder to

come by. At best, it will take years for these new deposits, even the furthest

along, to move into production. We do not believe that China will cut off all rare

earth supply, but even undertaking the measures it has will keep the market

outside of China extremely tight, thus supporting high prices. We believe that

China’s policy is partially politically motivated as it attempts to encourage

hardware manufacturers that use these elements to establish facilities in

mainland China – in order that the country can capture more of the value-add

activities related to the industry and absorb more technical knowledge. At the

same time, we believe that the country will encounter extensive demand as the

Chinese consumer becomes more tech savvy and as the development of green

energy remains a staple in policy platforms, limiting the possibility of Chinese

production upsetting the market.

Bayan Obo

Bayan Obo is a giant polymetallic REE-Fe-Nb hydrothermal deposit located in

Inner Mongolia, China. In 2010 it was expected to produce 55,000 tonnes of

rare earth oxide (REO), representing 46% of Chinese production and 42% of

global supply. It is by far the largest rare earth deposit in the world, containing

some 56.3MM tonnes of REO, according to U.S. Geological Survey (USGS)

estimates, although there are a number of other wide-ranging estimates for the

deposit’s size. The deposit is weighted mostly to light rare earths, containing

roughly 73% cerium and lanthanum and only 2.2% heavy rare earths.


7

Exhibit 6. Bayan Obo Mine Site

Source: Google Earth.

The deposit was discovered in 1927 by interests controlled by the former USSR.

It began production in 1957 and, although it has been mined from

approximately 20 different sites, the bulk of production has come from two large

deposits, the Main and East ore bodies (seen clearly in Exhibit 6). Mining occurs

at approximately 15,000 tpd using electric shovels and rail haulage. Due to a

lack of water onsite, ore is transported to Batou via rail for processing. During

the high REO price environment of the late 1970s and early 1980s, selective

mining was not practiced. According to a study conducted by the USGS in 1990,

REO production comes strictly from bastnasite ore found in certain zones of the

deposit, though their processing techniques follow a typical monazite flowsheet.

There is limited detail available on the mine plan and the production potential of

Bayan Obo. Some industry experts believe that the mine may be moving away

from REO-rich regions, resulting in a forecast decline in production from the

mine over the next five years.


8

The Basics The rare earths are a moderately abundant collection of 17 elements, 15 of

which are known as lanthanides plus scandium and yttrium. The elements were

first isolated in the 18th and 19th centuries, and were named rare earths due to

the difficulties scientists had in refining them into pure metal. Due to the

elements’ chemical similarities, efficient separation processes were not

developed until the 20th century. Rare elements are actually not that rare. In

fact some elements, such as cerium, the most abundant rare earth, are more

common in the earth’s crust than copper or lead. Most rare elements have a

commercial market, though some of the heavier rare earths essentially only

trade by special order.

Each element’s unique properties have led to new applications being developed

consistently over the last 50 years, and research into new uses continues. In

certain applications substitutes do exist, but these rarely work as effectively.

Given the small overall cost represented by these elements in end-products and

the lack of effective substitutes, we foresee continued strong demand for these

metals.

Exhibit 7. Rare Earth Elements

Light Rare Earths Symbol Atomic Weight

Upper Crust Abundance (ppm) Applications

2010E Demand

(Mt)

Yttrium Y 88.9 22.0 Red phosphor, fluorescent lamps, ceramics, metal alloy agent 6,706

Lanthanum La 138.9 30.0 Hybrid engines, metal alloys, fluid cracking (heavy oil), flint, hydrogen storage 41,605

Cerium Ce 140.1 64.0 Polishing powder, auto catalyst, petroleum refining, metal alloys 43,181

Praseodymium Pr 140.9 7.1 Magnets, battery alloy, lasers 10,602

Neodymium Ne 144.2 26.0 Permanent magnets, auto catalyst, petroleum refining, lasers 29,440

Promethium Pm 145.0 na Nuclear battery (does not occur in nature) na

Samarium Sm 150.3 4.5 Magnets 728

Europium Eu 151.9 0.9 Red color for television and computer screens 387

Gadolinium Gd 157.2 3.8 Magnets 899

Heavy Rare Earths Symbol Atomic Weight Applications

Terbium Tb 158.9 0.6 Phosphors, permanent magnets 433

Dysprosium Dy 162.5 3.5 Permanent magnets, hybrid engines 1,750

Holmium Hm 164.9 0.8 Glass coloring, lasers

Erbium Er 167.3 2.3 Phosphors

Thulium Tm 168.9 0.3 Medical x-ray units

Ytterbium Tb 173.1 2.2 Lasers, steel alloys

Lutetium Lu 175.0 0.3 Catalysts in petroleum refining

312

Total Demand 136,043

Source: Society Mining, Metallurgy and Exploration Inc., IMCOA.


9

Exhibit 8. Rare Earth Oxide Usage By Industry (2010E)

Magnets

25%

Battery Alloy

14%

Metallurgy ex batt

9%Auto catalysts

7%

FCC

15%

Polishing Powder

14%

Glass Additives

6%

Phosphors

6%

Others

4%

Source: Roskill.

The permanent magnet industry is the largest user of rare earth elements,

representing approximately 25% of current demand. We expect that as this

market grows it will represent over 30% of the rare earth market by 2015. We

also predict that the battery alloy market will increase in importance in terms of

tonnes demanded by 2015. We summarize in Exhibit 9 the uses and projected

CAGRs of the sectors that use rare earths (from 2010–2015).

Exhibit 9. Rare Earth Uses And Demand Drivers

Application Rare Earths Demand Drivers 2010E–2015E

CAGR

Magnets Neodymium, Praseodymium, Samarium, Terbium, Dysprosium

Renewable power generation, hybrid vehicle electric motors, hard drives for computers, mobile phones, MP3 players, cameras 16%

Battery Alloy Lanthanum, Cerium, Praseodymium, Neodymium Hybrid electric vehicles, hydrogen absorption alloys for rechargeable batteries 18%

Phosphors Europium, Yttrium, Terbium, Lanthanum, Dysprosium, Cerium, Praseodymium, Gadolinium LCDs and PDPs, energy-efficient fluorescent lights 30%

Fluid Cracking Lanthanum, Cerium, Praseodymium, Neodymium Petroleum production – heavy oil and tar sands 6%

Auto Catalysts Cerium, Lanthanum, Neodymium NOx, Sox reduction, recycling of rare earths not prevalent 8%

Polishing Powders Cerium Mechano-chemical polishing powders for TVs, monitors, mirrors and (in nano-particulate form) silicon chips 15%

Ceramics Lanthanum, Cerium, Praseodymium, Neodymium, Yttrium Ceramic capacitors PSZ in advanced ceramics (turbine blade coatings) 3%

Glass Additive Cerium, Lanthanum, Neodymium, Europium Cerium cuts down transmission of UV light. La increases glass refractive index for digital camera lenses. 4%

Fiber Optics Erbium, Yttrium, Terbium, Europium Signal amplification 30%

Source: IMCOA, U.S. Geological Survey, CIBC World Market Inc.


10

Project Locations

Exhibit 10. Select Global Earth Deposits

7

29 30

10

9

24

2

1

3

18

6

2025

21

19

4

11

27

16

23

8

5

12

2814

17

22

26

31

1315

Company Project Resources Production Capacity Completed Engineering

1 Baogang Rare Earth Bayan Obo 56,392,000 55,000 Production

2 Various Jianxi 9,303,300 55,000 Production

3 Various Sichuan 510,000 10,000 Production

4 CBMM Morro Dos Seis Lagos 11,730 650 Production

5 Indian Rare Earths Limited Orissa N/A 12,700 Expansion

6 JSC Sevredmet Lovozerskoye 1,150,000 4,000 Production

7 Lynas Corp Mount Weld 1,183,400 22,000 Construction

8 Molycorp Minerals Mountain Pass 1,840,000 42,402 Construction

9 Alkane Resources Dubbo 545,340 2,580 DFS

10 Arafura Nolans Project 848,400 20,000 PFS

11 Avalon Rare Metals Nechalacho 3,057,000 9,296 PFS

12 Great Western Hoidas Lake 62,208 5,000 RD

13 Greenland Minerals Kvanefjeld 4,889,900 43,700 PEA

14 Rare Element Resources Bear Lodge 398,860 10,000 PEA

15 Quest Rare Minerals Strange Lake 1,147,082 12,120 PEA

16 Frontier Rare Earths Limited Zandkopsdrift 947,000 17,039 RD

17 Great Western Steenkampskraal 29,400 2,500 RD

18 Kazatomprom/Sumitomo Ulba N/A 13,608 RD

19 Matamec Explorations Zeus 31,800 N/A RD

20 Montero Mining Wigu Hill N/A N/A RD

21 Namibia Rare Earth Inc. Lofdal N/A N/A RD

22 Neo Materials/Mitsubishi Pintinga N/A N/A RD

23 Pele Mountain Resources Eco Ridge 67,222 N/A RD

24 Stans Energy Kutessay II N/A 1,000 RD

25 Tantalus Rare Earths AG Tantalus N/A N/A RD

26 Tasman Metals Norra Karr 326,700 5,000 RD

27 Ucore Uranium Bokan Mountain N/A N/A RD

28 US Rare Earths Lemhi Pass 567,455 N/A RD

29 Vietnam Gov't Mau Xe North and South 11,740,000 30,000 RD

30 Vietnamese Gov't Toyota Tsucho/Sojitz Dong Pao 759,000 7,000 PEA

31 Wealth Minerals Ltd Rodeo de Los Molles 1,176,000 N/A RD

Source: Company reports, USGS, and U.S. Department of Energy.


11

Processing Given the chemical similarities of rare earth elements, developers and producers

face challenges to process these elements economically. Most rare earth

deposits primarily comprise mineralization in the form of monazite or bastnasite.

Here we examine these two processing techniques.

The first step is mining – undertaken using traditional hard rock mining

techniques, either open-pit or underground mining methods. This step in the

process does not account for a significant portion of overall operating costs

given the low tonnage nature of these operations.

Ore is transported to a mill where standard floatation methods increase the

concentration of REO. Molycorp’s Mountain Pass deposit previously used

floatation techniques to create a 60% REO concentrate similar to that produced

by Bayan Obo. From here the next step really depends on the type of

mineralization being processed. For bastnasite, additional upgrading of the

concentrate can be achieved through leaching. At Mountain Pass, leaching using

HCl, along with roasting, was previously used to increase concentrate and

oxidize the material (see Exhibit 11 for a simplified flow diagram). Exhibit 12

details a simplified flowsheet for monazite concentrate production.

Exhibit 11. Generalized Bastnasite Beneficiation Flow Diagram

Source: Society of Mining, Metallurgy and Exploration Inc.


12

At Bayan Obo, concentrate undergoes the “cracking” process, whereby

concentrate is baked with sulfuric acid at temperatures of 300o Celsius to

600o Celsius and processed further. Ore from Avalon’s Nechalacho deposit,

which principally contains monazite ore, will also require this step. As “cracking”

is most often associated with monazite processing, Bayan Obo ore is believed to

contain significant amounts of this rare earth-bearing mineral.

Exhibit 12. Generalized Flow Diagram For Extraction Of Monazite And Xenotime From Ti-Zr-REE Mineral Sand


These steps take a company to the point at which it has a workable rare earth

element (REE) concentrate on site. 43% RE concentrate sells today for

US$38.00/kg. A significant value-added margin can be captured in the value

chain by moving to the next step in the refining process – producing separated

rare earth oxides. This step is costly, however, both in terms of capital and in

accounting for ~70% of the operating costs of the overall operation. The

majority of these costs are related to power and reagents.


13

Rare earth elements are quite similar chemically, making them difficult to

separate. Fractional crystallization and ion-exchange techniques have proven

effective at separating these elements but only on a small scale. Large-scale

operations, such as the one at Mountain Pass or Mount Weld, will likely use

liquid-liquid solvent extraction (SX). Exhibit 13 illustrates the process used

previously at Mountain Pass. Molycorp, Avalon, and Frontier all plan to become

separated rare earth oxide producers.

While each of the steps detailed in Exhibit 13 uses well-known technology,

determining the number of steps required to reach the end-result requires a

significant amount of testing to ensure the right processes and reagents will be

used in the chemical plant. This knowledge base is a significant barrier to entry

for projects that have not yet started this work in earnest.

Exhibit 13. Mountain Pass Previous Separation Process Using SX


Molycorp plans to take processing one step further through the conversion of

oxides to metals, metals to alloys, and alloys to finished rare earth magnets.

These steps increase operating costs but also realized prices. Molycorp estimates

that its operating margins will increase 62% as it moves through processing

neodymium oxides to alloys.


14

Supply And Demand Our forecast growth rates for applications in which rare earth elements are a

component are primarily in the double digits to high single digits. We expect the

five-year CAGR for overall REO demand to be 12.5% to 2015. This forecast

assumes that 245,000 Mtpa of REO will be required by 2015, an estimate higher

than most forecasts currently in the marketplace but consistent with the Chinese

Rare Earth Association. While the aggregate graph below (Exhibit 14) would

suggest that the REO market is balanced, it does not reflect the markets of each

individual element, which is a far more accurate way to look at the rare earth

market, in our view. Each element has a unique set of demand drivers and

production profiles, making each element a market unto itself.

Exhibit 14. Supply And Demand Projections

-

50,000

100,000

150,000

200,000

250,000

300,000

2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

RE

O (t

onne

s)

REO Existing Supply REO New Supply REO Demand

Source: Roskil, USGS, and CIBC World Markets Inc.

In an effort to establish a supply/demand forecast for each of these markets, we

estimate: 1) the individual element requirements for each of the various

industries that comprise the demand side of the equation; and, 2) the varying

deposit compositions that will come into production over the next five to

10 years, forming supply. By combining estimated production rates with

estimated demand growth rates for the various end-user industries, we create a

matrix through which to forecast individual supply and demand balances for

each element.

As is evident in Exhibit 15, we forecast elements like cerium, which comprises

the bulk of rare earth deposits, to be in a surplus for the foreseeable future

while we estimate that magnet elements like neodymium and praseodymium will

be in deficit. Deficit markets will likely drive prices higher and support a

longer-term supply-side response. Note that information on recycling,

anticipated by-product production, and the actual start dates of most mines are

our best estimates at this time.


15

Exhibit 15. Supply And Demand Balances – Select Rare Earth Elements

(25,000)

(15,000)

(5,000)

5,000

15,000

25,000

35,000

45,000

55,000

La Ce Pr Nd Sm Eu Gd Tb Dy Y

Oxi

de T

onne

s

2010E Supply Demand Balances 2015E Supply Demand Balance 2020E Supply Demand Balance

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

La Ce Pr Nd Sm Eu Gd Tb Dy Y

Sur

plus

/ S

hortf

all a

s %

of D

eman

d

2010E Supply Demand Balances 2015E Supply Demand Balance 2020E Supply Demand Balance

Source: CIBC World Markets Inc.

CIBC’s Rare Earth Forecast To generate our rare earth pricing forecasts, we reviewed the key supply and

demand drivers for each of the metals in the sector. We believe that supply

generated by recycling, by-product production, and new projects coming online

in the near term have the potential to flood the market, triggering a drastic drop

in price for some of the light rare earths, particularly cerium and lanthanum.

These we have labeled the Bearish Elements. Elements for which we anticipate a

sustained deficit in our supply/demand forecast we have labeled as Bullish and

we expect their prices to increase substantially. Other elements we have labeled

as Neutral and these we forecast to post more modest price increases.

Bullish elements, in our opinion, are praseodymium, neodymium, terbium, and

yttrium. Neutral elements are lanthanum, europium, dysprosium and

gadolinium. Finally, bearish elements are cerium and samarium.


16

Exhibit 16. CIBC Rare Earth Forecast

0%

200%

400%

600%

800%

1000%

1200%

1400%

1600%

2009A 2010A 2011E 2012E 2013E 2014E 2015E

Per

cent

age

Incr

ease

Fro

m B

ase

Yea

r

Neutral Elements Bearish Elements Bullish Element

Source: CIBC World Markets Inc.

To form our long-term forecast, outlined by metal in Exhibit 17, we estimate

that prices will re-base similar to other large increases in commodity prices at

200%–400% higher than our initial year of study, that being 2009. The path a

particular element takes depends on our projected supply/demand balance

looking out five years from now.

Exhibit 17. Long-term Rare Earth Forecast

REO Spot Prices 2010A 2013E 2015E

Yttrium US$/kg $105.50 $26.07 $107.60 $67.25

Lanthanum US$/kg 93.00 22.53 17.49 17.49

Cerium US$/kg 96.00 21.52 16.60 12.45

Praseodymium US$/kg 138.50 46.44 120.32 75.20

Neodymium US$/kg 150.00 47.56 122.85 76.78

Samarium US$/kg 91.00 16.62 18.00 13.50

Europium US$/kg 660.00 552.89 1,392.57 1,392.57

Gadolinium US$/kg 100.50 22.29 54.99 54.99

Terbium US$/kg 780.00 537.02 1,055.70 1,055.70

Dysprosium US$/kg 467.00 229.36 688.08 688.08

Source: Metals Pages and CIBC World Markets Inc.

Demand We take a top-down approach to generate our demand forecast. Using industry

growth rates and average historical weightings for metal usage by industry, we

first distinguish those industries that are particularly heavy users of rare earths;

we then forecast each industry’s usage by metal. This method allows us to

capture the cross-utilization of metals in different industries and the variability of

growth rates across sectors. While it is possible that demand intensity will

change due to new uses for rare earths (e.g., development of magnetic

refrigeration), it is difficult to forecast these changes. Given the unique

characteristics of these metals, new uses are being discovered and developed

every day, making the possibility of greater-than-anticipated demand growth a

distinct possibility.


17

The usage allocation per industry, outlined in Exhibit 18, then drives our forecast

demand for each rare earth element. We believe that the fastest-growing areas

of demand – particularly permanent magnets, rechargeable batteries, and

phosphors – will be the most important to the rare earth industry moving

forward. Elements like neodymium, praseodymium, dysprosium, yttrium,

terbium are tied to the fastest-growing industries.

Exhibit 18. End-use By Metal

Metal Usage (% Of Total Demand)

Application La Ce Pr Nd Sm Eu Gd Tb Dy Y Other

Magnets 23.4% 69.4% 2.0% 0.2% 5.0%

Battery Alloy 50.0% 33.4% 3.3% 10.0% 3.3%

Metallurgy Ex-batt 26.0% 52.0% 5.5% 16.5%

Auto Catalysts 5.0% 90.0% 2.0% 3.0%

FCC 90.0% 10.0%

Polishing Powder 31.5% 65.0% 3.5%

Glass Additives 24.0% 66.0% 1.0% 3.0% 2.0% 4.0%

Phosphors 8.5% 11.0% 4.9% 1.8% 4.6% 69.2%

Ceramics 17.0% 12.0% 6.0% 12.0% 53.0%

Others 19.0% 39.0% 4.0% 15.0% 2.0% 1.0% 19.0%

Source: IMCOA.

Permanent Magnets

Permanent magnets are highly sought after given their strength and ability to

maintain their magnetism over extremely long periods of time. Magnets derived

from rare earth elements such at neodymium, praseodymium, and dysprosium

are the strongest-known permanent magnets. Their strength allows components

to be reduced in size and weight, as can be seen in Exhibit 19, and can be made

resistant to temperature changes like excessive heat generated from the friction

of moving parts in a vehicle or generator.

Exhibit 19. Differences In Electric Generators

Source: Avalon Rare Metals.


18

Rare earth magnets, typically NdFeB, are the strongest and most resistant to

heat degradation. There are few manufacturers of these types of magnets

outside of China and Japan: 80% of production comes from China, 17% from

Japan and 3% from Europe. There are two types of Nd magnets: bonded and

sintered. Sintered magnets are stronger, pure magnets, while bonded magnets

are better suited for smaller applications like disk drives and small motors. On

June 8, 2010, Molycorp signed a letter of intent with Neo Material Technologies

(NEM–TSX), a North American company with processing facilities in Canada and

China. The agreement is for a technology transfer: Neo’s principle product –

bonded NdFeB magnet powder – in exchange for offtake from Molycorp’s

Mountain Pass mine once in production. Subsequently, Molycorp signed a

Memorandum of Understanding (MOU) with Hitachi (6501–T) for the license of

technology in order to produce sintered NdFeB magnets. There are only nine

other companies worldwide with access to these rights, giving Molycorp a

strategic advantage through this significant barrier to entry. While the cost of

the strategy is not well known at this time and magnet production will represent

only a small component of Molycorp’s business, there is potential value creation.

Today’s rare earth industry is fragmented, with a number of companies

undertaking separation, upgrading, converting and magnet manufacturing.

Vertically integrating these steps under one banner and at fewer sites can

engender a dramatic reduction in transportation costs and the capture of

value-added margin at each of these steps. Molycorp estimates that operating

margins on its neodymium line can be increased by 62% by further processing

oxides to alloys.

This strategy also demonstrates how rare earth miners could potentially skew

their leverage to particular rare earth commodities by conducting further

value-added activities down the rare earth value chain. The Mountain Pass mine

is not necessarily endowed with above-average quantities of neodymium, but

through upgrading and value-added processing, neodymium, praseodymium and

dysprosium actually comprise the majority of the company’s projected revenues.

Wind Energy

Wind turbines have traditionally used large gearboxes to drive electrical

generation. One of the biggest challenges facing renewable energy and, in

particular, wind energy is capacity utilization. Replacing the gear-driven turbine

with a direct-drive permanent magnet generator increases the availability and

reliability of each turbine given fewer breakdowns and less routine maintenance

downtime. GE’s (GE–NYSE) newest direct-drive wind turbine boasted 25%

efficiencies over those turbines using gear boxes.


19

Exhibit 20. Direct-drive Wind Turbine

Source: GE.

Prior to the financial crisis, the wind energy industry was growing at 20% per

year, and we anticipate it to ramp back up to these levels by 2012–2013.

Moreover, with permanent magnets displacing more traditional turbines, the

growth in the wind sector may be much higher, according to Keith Delaney,

Executive Director of the Rare Earth Industry and Technology Association.

Molycorp estimates that for every MW of installed capacity a turbine will require

approximately a quarter tonne of REO in the form of neodymium, praseodymium

and dysprosium. To calculate this we first look at the end-product,

differentiating between oxides, metals and alloys:

• Each 1 MW turbine will require 500 kg of permanent magnets. These

magnets are an alloy typically made up of iron, boron, and didymium metal,

which is a mixture of neodymium, praseodymium, and often dysprosium.

• A 500 kg permanent magnet would require 160 kg of didymium metal.

• To produce 160 kg of the metal, 243 kg of didymium oxide is required or a

quarter of a tonne.

China is expected to be the largest growth region for wind power going forward

with announced plans to install 150 GW of capacity by 2020. If this capacity

were solely driven by direct-drive turbines, this initiative alone would equate to

all of the estimated 2010 global production of Nd and Pr.


20

Exhibit 21. Global Installed Wind Capacity 2002–2030E (Moderate Case)

8%

13%

18%

25%32%28%21% 24% 26% 27%26%

0

500

1000

1500

2000

2002

A

2003

A

2004

A

2005

A

2006

A

2007

A

2008

A

2009

A

2010

E

2015

E

2020

E

2030

E

Inst

alle

d W

ind

Cap

acity

(G

W)

Installed Wind Energy Capacity CAGR %

Source: Global Wind Energy Organization

Hybrid Electric Vehicles

Permanent magnets also have developing applications in hybrid-electric cars.

Estimates from Avalon Rare Metals suggest that there will be 1 kg–2 kg of REO

equivalent required for each hybrid vehicle manufactured (for electric brakes

and the drive motors for all types of electric vehicles). See our discussion of

rechargeable batteries later for industry growth rates. Other potential growth

areas for permanent magnets include other renewable power applications

(run-of-river, tidal power), electric bicycles, and magnetic refrigeration.

Exhibit 22. Uses For Permanent Magnets In Hybrid Cars

Source: Shin-Etsu Rare Earth Magnets.

Phosphors

Rare earth elements are used extensively as phosphors in the electronics and

lighting industries. Color televisions and LCDs use heavy rare earth elements like

europium, terbium, and yttrium for their unique ability to change colors upon

sending an electrical current through them (also called

electro-phosphorescence).


21

Terbium and europium are also used in energy-efficient lighting. We believe that

this area of growth for the rare earth sector will be the most robust, given there

are few substitutes that work as effectively, recycling these elements is difficult,

and the overall growth of energy efficiency, as well as that of personal television

and computing, seems to be continually expanding. These factors combine to

create most of the pricing differences between light and heavy rare earths and

we believe will continue to support prices going forward, as there is little

downside risk, barring a disruptive technology.

Exhibit 23. Personal Technology Demand Outlook

55%

55%

55%

55%40%66%

4%6%13%46%134% 7%8%8%8%8%

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

2010A 2011E 2012E 2013E 2014E 2015E

Veh

icle

Sal

es (

MM

)

Smart Phones Laptops and Netbooks Tablets Smart Phone Growth Tablet Growth Laptop Growth

Source: Forrester.

Exhibit 24. A Plasma Television Pixel

Source: www.beingmanan.com.


22

The energy-efficient lighting industry is constantly trying to find an alternative to

the incandescent light bulb, which, given its production of waste heat, is one of

the most inefficient sources of light energy. While new technology has been

proven to work and consumers can now replace incandescent light bulbs with

those that use 20%–30% less electricity, these new light bulbs tend to be more

expensive and require a warm-up period to reach full potential. However, they

can also save a user US$40 over the five-year life of a bulb, on average. Multiply

this by 30 lights in a house and there could be a saving of US$440–US$1,500

per annual electricity bill. A further initial drawback to these newer lights was

that they cast a more unnatural light than incandescent bulbs. It was found that

by adding a coating of terbium and europium to the inside of the tubes in these

lights they could be made indistinguishable from traditional light bulbs. Needless

to say, if this industry is to continue it will need to continue to use these rare

elements.

Exhibit 25. The Range Of CFL Lightbulbs

Source: U.S. Department of Energy.


23

Rechargeable Batteries

Rare earths are used in nickel-metal-hydride (NiMH) batteries. The metal “M” is

most commonly a combination of rare earths lanthanum, cerium, neodymium

and praseodymium combined with nickel, cobalt, manganese and/or aluminum.

These batteries are used in various applications already, including car batteries

in hybrid electric vehicles (HEV), electronic devices, and power tools.

Exhibit26. Electric Vehicle Sales 2007-2020E

14%

8%13%

13%17%

23%39%

32%28%

41%0%

39%18%25%

21%38%73%

147%346%473%211%160%0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015E 2016e 2017E 2020E

Veh

icle

Sal

es (

MM

)

Hybrid and Plug In Hybrid Vehicles Battery Electric Vehicles Hybrid Growth Rate Battery Electric Growth Rate

Source: JD Power & Associates.

These batteries offer comparable energy densities to lithium batteries

(power/weight), explaining why they have been used exclusively in hybrid cars

produced today. The key disadvantage of the technology is the limited shelf life,

as the batteries lose their charge over time (1% per day). There is a significant

risk that lithium-ion batteries will be used more prevalently going forward,

similar to the substitution that has occurred in hand-held devices and laptop

computers. However, with the amount of growth anticipated in the sector we

believe it is plausible that both technologies are used going forward.

Exhibit 27. NiMH Car Battery For A Toyota Prius

Source: Toyota.


24

Supply Our supply forecast is predicated on a bottom-up approach, taking current

production levels in China and elsewhere and adding near-term production and

development projects that are sufficiently advanced to come online in the next

10 years. Exhibit 28 summarizes select development projects held by publicly

listed companies.

Once Ignored On The Periodic Table, D

on't I

gnore Them Now - M

arch 06, 2

011

25

Exhibit 28. Select Investable Deposits In Development Outside China

Mountain Pass Mount Weld Zandkopsdrift Nolans Project Dubbo Bear Lodge Hoidas Lake Nechalacho Steenkampskraal Strange Lake Kvanefjeld Norra Karr

Owner Molycorp Lynas

Frontier Rare

Earths

Arafura

Resources

Alkane

Resources

Rare Element

Resources

Great Western

Minerals

Avalon Rare

Metals

Great Western

Minerals

Quest Rare

Minerals

Greenland

Minerals Tasman Metals

Location United States Australia South Africa Australia Australia United States Canada Canada South Africa Canada Greenland Sweden

Tonnage (MM tonnes) 19.62 14.61 43.78 30.30 73.69 11.53 2.56 315.01 0.17 114.82 400.81 62.35

Grade (% TREO) 9.4% 8.1% 2.2% 2.8% 0.7% 3.5% 2.4% 1.4% 17.0% 1.0% 1.2% 0.5%

Grade (REO Eq) 9.8% 11.1% 3.9% 4.7% 2.7% 5.2% 4.6% 4.9% 27.8% 3.7% 2.0% 2.1%

Contained REO (tonnes) 1,840,000 1,183,400 947,000 848,400 545,340 398,860 62,208 4,297,829 29,400 1,147,082 4,889,900 326,700

Mineralization Bastnasite Monazite Monazite Apatite Trachyte

Bastnasite/

Monazite

Bastnasite/

Apatite Fergusonite Monazite Pegmatite/ Aplite Steenstrapine Eudialyte

Engineering Complete Construction Construction RD PFS DFS PEA RD PFS RD PEA PEA RD

Expected Production (tonnes) 40,000 22,000 20,000 20,000 2,580 7,000 5,000 10,000 2,500 12,000 44,000 5,000

Finished Product

Separated/Oxide

s/Metals/Alloys/

Magnets

Separated

Oxides

Separated

Oxides

Separated

Oxides Concentrate Concentrate Concentrate

Separated

Oxides N/A

Separated

Oxides Concentrate N/A

Capex (US$MM) 780 594 700* 430 180 89 N/A 1,100 N/A 563 2,310 N/A

Opex (Total Annual) 266 154 368* 150 N/A 72 N/A 464 N/A 440 472 N/A

Production Year 2012 2011 2015 2013 2014 2015 N/A 2015 N/A 2015 2,015 N/A

Bullish Element Weighting 16.540 19.600 25.770 29.070 36.047 17.659 30.040 37.230 27.410 46.146 26.000 55.725

Light Weighting 99.840 99.200 98.310 99.380 94.729 99.133 97.270 93.690 98.970 87.988 97.100 89.122

Yttrium 0.100 - 4.120 1.320 15.814 0.809 0.370 11.690 5.000 28.128 7.700 36.260

Lanthanum 33.200 26.000 25.360 19.740 19.535 31.214 20.330 15.830 21.630 13.213 27.500 10.305

Cerium 49.100 51.000 44.200 47.530 36.822 47.110 42.770 35.720 46.550 27.427 42.000 22.328

Praseodymium 4.340 4.000 4.550 5.820 4.031 4.046 5.770 4.510 5.000 3.003 4.200 2.863

Neodymium 12.000 15.000 15.740 21.200 14.109 11.850 22.760 17.830 16.660 10.711 12.900 11.260

Samarium 0.800 1.800 2.310 2.370 2.171 2.341 3.660 3.910 2.500 2.603 1.600 2.290

Europium 0.100 0.400 0.590 0.400 0.078 0.549 0.720 0.490 0.080 0.200 0.100 0.382

Gadolinium 0.200 1.000 1.440 1.000 2.171 1.214 0.890 3.710 1.550 2.703 1.100 3.435

Heavy Weighting - 0.700 1.690 0.410 5.194 0.696 2.720 5.130 1.030 12.112 2.250 10.878

Terbium - 0.100 0.170 0.080 0.310 0.171 0.220 0.540 0.080 0.601 0.200 0.763

Dysprosium - 0.200 0.770 0.330 2.016 0.405 0.420 2.710 0.670 4.104 1.100 4.962

Holmium - 0.100 0.130 - 0.388 0.026 0.090 0.480 0.050 0.901 0.200 1.145

Erbium - 0.200 0.320 - 1.163 0.055 0.310 1.260 0.080 2.803 0.600 3.435

Thulium - - 0.040 - 0.155 0.004 0.080 - 0.070 0.501 0.100 0.573

Ytterbium - 0.100 0.230 - 1.008 0.032 1.300 - 0.070 2.803 0.050 -

Lutetium - - 0.030 - 0.155 0.004 0.300 0.140 0.010 0.400 - - Source: Company reports and CIBC World Markets Inc.


26

Our supply forecast does not take into consideration capital constraints for

developers or any permitting or political opposition to the development of

projects. Overall, this creates a market for rare earth oxides that is in deficit

over the next three years, then moves promptly into balance as more

development-stage projects come into production. In Exhibit 29 we summarize

the development progress of a number of rare earth projects outside China.

Exhibit 29. Development Stages Of Select Rare Earth Projects

Mountain Pass (Molycorp), 42,402

mtpa Mount Weld (Lynas), 22,000 mtpa Kvanefjeld (Greenland Minerals),

43,700 mtpa

Dubbo (Alkane), 2,580 mtpa

Steenkampskraal (Great Western),

2,500 mtpa

Nolans Project (Arafura), 20,000

mtpa

Nechalacho (Avalon), 9,296 mtpa Hoidas Lake (Great Western

Minerals), 5,000 mtpa

Strange Lake (Quest Rare

Minerals), 12,120 mtpa

Bear Lodge (Rare Element),

7,000 mtpa

Norra Karr (Tasman Metals),

5,000 mtpa

0%

5%

10%

15%

20%

25%

30%

35%

Development Stage

RE

O E

q G

rade

Bubbles represent relative size of expected production.


At the individual element level, it is apparent that each of these markets may or

may not be balanced over the next five years. Light rare earths, like cerium, are

likely to be in surplus over the next few years, making it likely that their

respective prices correct faster than those for other elements. Elements like

neodymium, praseodymium, and yttrium appear to be in deficit for the

foreseeable future.

It is important to consider that this supply/demand balance includes some

by-product and recycled material production, although there is limited

information on the potential supply from these sources. Previously, it was not

deemed worthwhile to recover rare earths as by-products given the elements’

historically low prices. Mine managers that have been pumping these elements

to tailings are perhaps looking at ways to capture the recent run-up in prices.


27

Exhibit 30. Race To Full Production – Rare Earth Developers

2010E 2011E 2012E 2013E 2014E 2015E 2016E

Mount Weld 3,000 5,197 20,788 20,788 20,788

Mountain Pass - 11,000 11,000 22,000 22,000

Dubbo - - - 2,580 2,580 2,580

Steenkampskraal - - - 2,500 2,500 2,500

Zandkopsdrift - - - - 12,417 23,179

Nolans Project - - - - 5,000 10,000

Nechalacho - - - - -

Source: Company reports and CIBC World Markets Inc.

Our analysis leads us to believe that the prices of some elements will be

supported at current levels while the prices of others will drop as more supply

comes online. We, therefore, see rare earth prices diverging based on the supply

and demand assumptions we make for each individual element.


28

Rare Earth Pricing Rare earth prices are based on the processing industry that occurs in China.

Metals and oxides are priced excluding freight. As seen in Exhibit 31, some

heavy rare earths command substantially higher prices than the lighter rare

earths. Since China’s announcement in August 2010 that it would curtail

exports, prices outside China have risen exponentially, while prices inside China

have also steadily increased for the most part.

Exhibit 31. Rare Earth Spot Prices

Heavy Rare Earths

Light Rare Earths

$105.50

$93.00

$96.00

$138.50

$150.00

$91.00

$660.00

$100.50

$780.00

$467.00

$- $100 $200 $300 $400 $500 $600 $700 $800 $900

Y

La

Ce

Pr

Nd

Sm

Eu

Gd

Tb

Dy

Oxide Price FOB China (US$/kg)

Source: Metals Pages.

As seen in Exhibit 32, prices for most elements have rocketed higher, though

the light rare earth prices outside of China seem to be increasing more than the

prices for heavy rare earths. This is counterintuitive given that we know most

deposits are comprised of light rare elements. A reasonable explanation can be

found upon examination of Chinese export behavior, whereby rare earth

producers are restricted on exporting material based on tonnage, not rare earth

element. Therefore, given the opportunity to export a tonne of any product, we

believe Chinese producers are opportunistically exporting the more expensive

heavier rare earths, creating a disconnect in market prices for rare earths in the

spot market. We believe that this situation will continue in the near term, but

correct in the long term, giving producers with leverage to heavy rare earths

essentially an embedded option upon the correction.


29

Exhibit 32. Select Rare Earth Historical Prices FOB China

Light Rare Earths

Medium Rare Earths Heavy Rare Earths

Mixed Products

Dy Oxide 99% min FOB China (US$/kg)

0

50

100

150

200

250

300

350

400

450

500

4/13

/200

1

4/13

/200

2

4/13

/200

3

4/13

/200

4

4/13

/200

5

4/13

/200

6

4/13

/200

7

4/13

/200

8

4/13

/200

9

4/13

/201

0

Eu Oxide 99.9% min FOB China (US$/kg)

0

100

200

300

400

500

600

700

3/7/

2003

9/7/

2003

3/7/

2004

9/7/

2004

3/7/

2005

9/7/

2005

3/7/

2006

9/7/

2006

3/7/

2007

9/7/

2007

3/7/

2008

9/7/

2008

3/7/

2009

9/7/

2009

3/7/

2010

9/7/

2010

Gd Oxide 99% min FOB China (US$/kg)

0

20

40

60

80

100

120

11/1

5/20

07

2/15

/200

8

5/15

/200

8

8/15

/200

8

11/1

5/20

08

2/15

/200

9

5/15

/200

9

8/15

/200

9

11/1

5/20

09

2/15

/201

0

5/15

/201

0

8/15

/201

0

11/1

5/20

10

2/15

/201

1

Nd Oxide 99% min FOB China (US$/mt)

0

20

40

60

80

100

120

140

160

4/13

/200

1

4/13

/200

2

4/13

/200

3

4/13

/200

4

4/13

/200

5

4/13

/200

6

4/13

/200

7

4/13

/200

8

4/13

/200

9

4/13

/201

0

Pr Oxide 99% min FOB China (US$/kg)

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

4/13

/200

1

4/13

/200

2

4/13

/200

3

4/13

/200

4

4/13

/200

5

4/13

/200

6

4/13

/200

7

4/13

/200

8

4/13

/200

9

4/13

/201

0

Pr-Nd 99% min FOB China (US$/mt)

0

20

40

60

80

100

120

140

160

11/1

5/20

07

2/15

/200

8

5/15

/200

8

8/15

/200

8

11/1

5/20

08

2/15

/200

9

5/15

/200

9

8/15

/200

9

11/1

5/20

09

2/15

/201

0

5/15

/201

0

8/15

/201

0

11/1

5/20

10

2/15

/201

1

RECO3 42-45% REO FOB China (US$ / mt)

0

5

10

15

20

25

30

35

40

6/29

/200

1

6/29

/200

2

6/29

/200

3

6/29

/200

4

6/29

/200

5

6/29

/200

6

6/29

/200

7

6/29

/200

8

6/29

/200

9

6/29

/201

0

Sm Oxide 99% min FOB China (US$/kg)

0

10

20

30

40

50

60

70

80

90

1004/

13/2

001

4/13

/200

2

4/13

/200

3

4/13

/200

4

4/13

/200

5

4/13

/200

6

4/13

/200

7

4/13

/200

8

4/13

/200

9

4/13

/201

0

Tb Oxide 99% min FOB China (US$/kg)

0

100

200

300

400

500

600

700

800

900

12/1

2/20

03

6/12

/200

4

12/1

2/20

04

6/12

/200

5

12/1

2/20

05

6/12

/200

6

12/1

2/20

06

6/12

/200

7

12/1

2/20

07

6/12

/200

8

12/1

2/20

08

6/12

/200

9

12/1

2/20

09

6/12

/201

0

12/1

2/20

10

Y Oxide 99.999% min FOB China (US$/kg)

0

20

40

60

80

100

120

1/12

/200

6

5/12

/200

6

9/12

/200

6

1/12

/200

7

5/12

/200

7

9/12

/200

7

1/12

/200

8

5/12

/200

8

9/12

/200

8

1/12

/200

9

5/12

/200

9

9/12

/200

9

1/12

/201

0

5/12

/201

0

9/12

/201

0

1/12

/201

1

La Oxide 99% min FOB China (US$/kg)

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

4/13

/200

1

4/13

/200

2

4/13

/200

3

4/13

/200

4

4/13

/200

5

4/13

/200

6

4/13

/200

7

4/13

/200

8

4/13

/200

9

4/13

/201

0

Ce Oxide 99% min FOB China (US$/kg)

-

20.00

40.00

60.00

80.00

100.00

120.00

4/13

/200

1

4/13

/200

2

4/13

/200

3

4/13

/200

4

4/13

/200

5

4/13

/200

6

4/13

/200

7

4/13

/200

8

4/13

/200

9

4/13

/201

0

Source: Metals Pages.


30

Bubbles It is well understood that commodities can reach pinching points, whereby

supply is outstripped by demand, creating significant price upswings. This has

been the case with several minor metals in the last 10 years as resource-hungry

China and industry changes have created demand surges. The initial phase of

these swings is usually prompted by users stockpiling the commodity based on

projected supply shortfalls in order to maintain their production levels.

Speculators entering the mix and further bidding up prices can often compound

this effect. Particularly large swings in price materialize when the commodity

represents a small portion of the overall cost of an end-product, i.e., demand is

relatively inelastic. Two case studies we examined closely were uranium and

molybdenum. Both metals achieved stratospheric highs in the previous decade

only to come crashing down. This leads us to a discussion of bubbles.

Exhibit 33. Bubbles In Recent History

Low Peak Base

Uranium 10.9 138 48.5

Moly 3.4 39.25 15.45

Gold 103.5 850 460.7

NASDAQ 547.84 2652.05 2089.21

Low Peak Base

Uranium 2003–Present 1266.1% (64.9%)

Moly 2003–Present 1154.4% (60.6%)

Gold 1976–1983 861.0% (45.8%)

NASDAQ 1992–2005 671.4% (21.2%)

Source: Bloomberg.

Investors are concerned that today’s rare earth market is starting to look like a

bubble. We would argue that, if this is indeed a bubble, there is still plenty of

room for even higher prices given that, on average, rare earth oxide prices

delivered to China have risen 706%. Compare this to uranium’s nearly 1,300%

run from 2003–2007.

We also note that the market for rare earths is even smaller than the markets

for uranium and molybdenum; products are predominantly tailored to

customers’ ultimate specifications. The lack of a standardized product may make

it difficult for speculators to enter the market or, if they are able to do so, quite

difficult for them to exit. We, therefore, believe that we are not in a bubble in

rare earth pricing but rather in a stockpiling phase as end-users gear up for the

following years of famine in the industry, waiting for more supply to be brought

online. Chinese export quotas have also skewed proper price discovery in the

market for light and heavy rare earths due to their quota system being based on

weight and not value.

In Exhibit 34, we examine the charts of different bubbles, looking at a simplified

version of American economist Hyman Minsky’s bubble stages.

1. Disturbance

2. Expansion

3. Euphoria

4. Market Reversal

5. Stability


31

It should be noted that in the chart for molybdenum the financial crisis of 2008

complicates the analysis somewhat. We believe both the molybdenum and

financial bubble bursting at the same time exaggerated this correction.

We also note that when these bubbles settled back down, commodity prices

were substantially higher than prior to the run-up in pricing. In fact, the

uranium, gold and molybdenum prices at the end of the cycle were 300%–350%

higher than they were prior to the four- to six-year period of escalating prices,

significantly outperforming inflation as well. So while the current rare earth

market is indicating some signs of a bubble, e.g., tight supply/demand

fundamentals, stockpiling and inelastic consumers, etc., we do not believe we

are at or near a peak yet.

Moreover, a look at individual metals prices highlights that not every rare earth

element is showing signs of being caught in a bubble. China is exporting the

more expensive, heavier rare earths, due to export restrictions being based on

tonnage, somewhat suppressing prices. With fewer exports of light rare earth,

their prices have increased significantly compared to those for heavier rare

earths.

Exhibit 34. Significant Historical Bubbles

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1/1/

2003

1/1/

2004

1/1/

2005

1/1/

2006

1/1/

2007

1/1/

2008

1/1/

2009

1/1/

2010

Molybdenum CPI

1 2 3 4 5

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

1/1/

1992

1/1/

1993

1/1/

1994

1/1/

1995

1/1/

1996

1/1/

1997

1/1/

1998

1/1/

1999

1/1/

2000

1/1/

2001

1/1/

2002

1/1/

2003

1/1/

2004

1/1/

2005

NASDAQ CPI

1 2 3 4 5

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

6/1/

2003

12/1

/200

3

6/1/

2004

12/1

/200

4

6/1/

2005

12/1

/200

5

6/1/

2006

12/1

/200

6

6/1/

2007

12/1

/200

7

6/1/

2008

12/1

/200

8

6/1/

2009

12/1

/200

9

6/1/

2010

Uranium CPI

1 2 3 4 5

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

6/6/

1976

12/6

/197

6

6/6/

1977

12/6

/197

7

6/6/

1978

12/6

/197

8

6/6/

1979

12/6

/197

9

6/6/

1980

12/6

/198

0

6/6/

1981

12/6

/198

1

6/6/

1982

12/6

/198

2

6/6/

1983

Gold CPI

1 2 3 4 5

Source: Bloomberg.


32

Price Target Calculations And Key

Risks To Price Targets

Avalon Rare Metals Inc. – Price Target Calculation

Our price target is based on a 1.0x NAV10% multiple derived from the discounted

cash flow of the Nechalacho project and the addition of net debt. Driving the per

share amount is our dilutive equity issue assumption.

Avalon Rare Metals Inc. – Key Risks To Price Target

Our price target is based on an assumed sustained rise in rare earth oxide prices

from historical levels. Should prices deviate substantially from these assumed

prices, our valuation for the company could be affected. Our price forecast is

also based on the assumed growth of several sectors, including automotives,

electric vehicles, personal computing, and wind energy; deviations in growth

rates from our forecasts could materially impact demand, the balance of supply

and, thus, prices.

Our price target is also based on an equity financing conducted at a higher price

than current share prices; substantial deviations in the stock price from our

forecast could also impact our per share NAV for the company. Valuation for the

company could also be affected by higher-than-forecast capital expenditure

requirements, operating costs, the price of construction inputs and reagents,

and fuel and labor costs in the Northwest Territories.

Frontier Rare Earths Limited – Price Target Calculation

We use a 1.0x NAV multiple based on our NAV12% calculation. This methodology

is consistent with that applied to other base metals names in our universe,

although we use a slightly higher discount rate in this case to reflect the

early-stage nature of Zandkopsdrift and the risks involved.

Frontier Rare Earths Limited – Key Risks To Price Target

Zandkopsdrift is an earlier-stage project and has not completed preliminary

engineering or metallurgy study yet. Should recoveries, process methodology, or

costs deviate substantially from our estimates (currently based on comparable

projects), our price target would be affected. Political issues around Black

Empowerment and the ownership of mineral exploitation rights could also impact

our NAV, should they deviate significantly from our assumed ownership of the

project. Our long-term rare earth oxide price forecast is higher than the

three-year trailing average and below current spot prices for most elements. A

deviation of prices from our forecast would materially impact our valuation and

price target for the company. Currently, we assume that the market will value

rare earth projects based on a 1.0x NAV methodology; given the strategic

nature of the resources, they may trade as uranium, another strategic metal,

does, where stocks can trade at a multiple of their NAVs. Should this occur, our

price target calculation would be materially impacted.


33

Molycorp, Inc. – Price Target Calculation

Our price target for Molycorp is based on a NAV multiple of 1.0x our NAV10%

estimate. This is consistent with our valuation of other base metals names in our

coverage universe. We do not attribute value for the production of magnets, as

the visibility of these cash flows is not clear at this time.

Molycorp, Inc. – Key Risks To Price Target

Key risks to our price target include significant deviations in individual rare earth

prices from our forecast levels. Prices could shift based on supply-side response,

demand drivers such as new uses for elements or substitution, Chinese export

policy, and global growth in the industries that are heavy users of these

elements (e.g., the permanent magnet industry, the flat panel display industry,

and the rechargeable batteries industry). Capital cost overruns and significant

deviations from our operating cost estimates could also impact our valuation and

price target for the company. The Mountain Pass mine as of the date of this

report is not fully financed; although preliminary agreements are in place to

fund the capital shortfall, signing of these agreements under terms other than

what we have assumed could impact our price target. Moving from construction

to production carries with it start-up risk and risks to the timing of cash flows;

deviations from our assumptions for initial production levels and for timing could

also impact our valuation for Molycorp.


34

IMPORTANT DISCLOSURES:

Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or

at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein

accurately reflect such research analyst's personal views about the company and securities that are the subject of this

report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii)

no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific

recommendations or views expressed by such research analyst in this report.

Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from

revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking

Department. Research analysts do not receive compensation based upon revenues from specific investment banking

transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from

executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets

generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that

such analyst covers.

In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report,

CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities

discussed herein, related securities or in options, futures or other derivative instruments based thereon.

Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures

set forth below, may at times give rise to potential conflicts of interest.


35

Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered

by CIBC World Markets Inc.:

Stock Prices as of 03/06/2011:

Avalon Rare Metals Inc. (2a, 2c, 2e, 2g) (AVL-TSX, C$7.12, Sector Outperformer)

Frontier Rare Earths Limited (2a, 2c, 2e, 2g) (FRO-TSX, C$3.03, Sector Outperformer - Speculative)

Molycorp, Inc. (2a, 2c, 2e, 2g) (MCP-NYSE, US$49.26, Sector Outperformer)

Companies Mentioned in this Report that Are Not Covered by CIBC World Markets Inc.:

Stock Prices as of 03/06/2011:

Alkane Resources Ltd. (ALK-AUS, A$1.34, Not Rated)

Arafura Resource Limited (ARU-AUS, A$1.24, Not Rated)

General Electric (GE-NYSE, US$20.37, Not Rated)

Great Western Minerals Group (GWG-V, C$0.82, Not Rated)

Greenland Minerals And Energy Limited (GGG-AUS, A$1.25, Not Rated)

Hitachi Ltd. (6501-T, ¥500.00, Not Rated)

Lynas Corporation Limited (LYC-AUS, A$2.20, Not Rated)

Matamec Explorations Inc. (MAT-V, C$0.49, Not Rated)

Mitsubishi Corp (8058-T, ¥2296.00, Not Rated)

Montero Mining Exploration Ltd. (MON-V, C$0.60, Not Rated)

Neo Material Technologies Inc. (NEM-TSX, C$8.72, Not Rated)

Pele Mountain Resources Inc (GEM-V, C$0.44, Not Rated)

Quest Rare Minerals Ltd. (QRM-V, C$5.80, Not Rated)

Rare Earth Metals Inc. (RA-V, C$0.43, Not Rated)

Rare Element Resources Ltd. (RES-V, C$11.08, Not Rated)

Stans Energy Corp (RUU-V, C$2.31, Not Rated)

Sumitomo (8053-T, ¥1248.00, Not Rated)

Tasman Metals Ltd. (TSM-V, C$5.00, Not Rated)

UCore Rare Metals Inc. (USU-V, C$1.10, Not Rated)

Wealth Minerals Ltd. (WML-V, C$1.13, Not Rated)

Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to

Important Disclosure Footnotes" section of this report.


36

Key to Important Disclosure Footnotes:

1 CIBC World Markets Corp. makes a market in the securities of this company.

2a This company is a client for which a CIBC World Markets company has performed investment banking services

in the past 12 months.

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past 12 months.

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past 12 months.

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the past 12 months.

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past 12 months.

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from this company in the next 3 months.

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from this company in the next 3 months.

3a This company is a client for which a CIBC World Markets company has performed non-investment banking,

securities-related services in the past 12 months.

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from this company in the past 12 months.

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from this company in the past 12 months.

4a This company is a client for which a CIBC World Markets company has performed non-investment banking,

non-securities-related services in the past 12 months.

4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related

services from this company in the past 12 months.

4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related

services from this company in the past 12 months.

5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common

equity securities.

5b A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a

long position in the common equity securities of this company.

6a The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its

common equity securities.

6b A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this

company has a long position in the common equity securities of this company.

7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1%

or more of a class of equity securities issued by this company.

8 An executive of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has

provided services to this company for remuneration in the past 12 months.

9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company

to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer,

director or advisory board member of this company or one of its subsidiaries.

10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC

World Markets Corp., has a significant credit relationship with this company.

11 The equity securities of this company are restricted voting shares.

12 The equity securities of this company are subordinate voting shares.

13 The equity securities of this company are non-voting shares.

14 The equity securities of this company are limited voting shares.


37

CIBC World Markets Inc. Price Chart

No rating history data found for Avalon Rare Metals Inc.


38

No rating history data found for Frontier Rare Earths Limited


39

No rating history data found for Molycorp, Inc.


40

CIBC World Markets Inc. Stock Rating System

Abbreviation Rating Description

Stock Ratings

SO Sector Outperformer Stock is expected to outperform the sector during the next 12-18 months.

SP Sector Performer Stock is expected to perform in line with the sector during the next 12-18 months.

SU Sector Underperformer Stock is expected to underperform the sector during the next 12-18 months.

NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock.

R Restricted CIBC World Markets is restricted*** from rating the stock.

Sector Weightings**

O Overweight Sector is expected to outperform the broader market averages.

M Market Weight Sector is expected to equal the performance of the broader market averages.

U Underweight Sector is expected to underperform the broader market averages.

NA None Sector rating is not applicable.

**Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada.

"Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues.

***Restricted due to a potential conflict of interest.

Ratings Distribution*: CIBC World Markets Inc. Coverage Universe

(as of 06 Mar 2011) Count Percent Inv. Banking Relationships Count Percent

Sector Outperformer (Buy) 138 44.1% Sector Outperformer (Buy) 135 97.8%

Sector Performer (Hold/Neutral) 128 40.9% Sector Performer (Hold/Neutral) 117 91.4%

Sector Underperformer (Sell) 30 9.6% Sector Underperformer (Sell) 27 90.0%

Restricted 16 5.1% Restricted 16 100.0%

Ratings Distribution: Metals & Minerals Coverage Universe

(as of 06 Mar 2011) Count Percent Inv. Banking Relationships Count Percent

Sector Outperformer (Buy) 16 48.5% Sector Outperformer (Buy) 15 93.8%

Sector Performer (Hold/Neutral) 10 30.3% Sector Performer (Hold/Neutral) 9 90.0%

Sector Underperformer (Sell) 2 6.1% Sector Underperformer (Sell) 2 100.0%

Restricted 5 15.2% Restricted 5 100.0%

Metals & Minerals Sector includes the following tickers: ADV, AVL, BAN, BIM, CCO, CLM, CS, DML, EQN, FM, FRO, GCE, GMO, HBM,

IMN, IVN, LIF.UN, LUN, MCP, ML, MNB, NML, PDN, QUX, S, SGQ, TCK.B, TCM, TKO, UEC, UUU, WRN, WTN.

*Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets Inc.

do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World

Markets Inc. has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and

sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting.

Important disclosures required by IIROC Rule 3400, including potential conflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the web at http://researchcentral.cibcwm.com under 'Quick Links' or by writing to CIBC World Markets Inc., Brookfield Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request.

http://researchcentral.cibcwm.com/


41

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CIBC Report: A Rare Earth Element Industry Overview

Economy & Finance

Transcript of CIBC Report: A Rare Earth Element Industry Overview