capital market perspectives on rare earth

Capital Market Perspectives on Rare EarthsLaurentian Bank Securities

January 2011

Jim Powell, P.Eng, CFATechnology and Strategic Metals Analyst

22

Equity Capital Markets View

Rare earths are still relatively new to Canadian institutionalinvestors, however familiarity is increasing.

Investors concerned at entering into the market at this point• Potential bubble, high valuations• Appropriate entry point for stocks

Export quota restrictions and high pricing support near terminvestment in rare earths

Supply constraints may damper the industry

33

New Investment Opportunity

Investor familiarity increasing: knowledge of rare earths increasingas more companies meet investors, no longer need to explain whatrare earths are and why they are important

Metallurgy is complex and separation techniques contribute to riskversus traditional mining companies (gold, silver, copper, etc.)

Very few resources to draw upon in this space (two Canadiananalysts)

Several new companies and projects adds to the confusion(“..market may support 4 to 6 rare earth producers…”)


44

Bubble or Investment Opportunity?

Difficult question to answer when one is within the bubble

Always a select group that will believe it is a bubble and difficult tochange opinion

Investors need to weigh the opportunity of missing a greatinvestment to being the last one in.

Most stocks within the rare earth sector move on external events(Export quota reductions out of China, demand forecasts, etc.)


55

Past Bubbles - Molybdenum

$-

$5

$10

$15

$20

$25

$30

$35

$40

$45De

c-99

May-0

0

Sep-0

0

Feb-0

1

Jun-0

1

Nov-0

1

Mar-0

2

Aug-0

2

Dec-0

2

May-0

3

Oct-0

3

Feb-0

4

Jul-0

4

Nov-0

4

Apr-0

5

Aug-0

5

Dec-0

5

May-0

6

Sep-0

6

Jan-0

7

Jun-0

7

Oct-0

7

Feb-0

8

Jul-0

8

Nov-0

8

Apr-0

9

Aug-0

9

Dec-0

9

May-1

0

Sep-1

0

US$/

lb

Not as much a bubble asa victim of economicdownturn

Price “post-bubble”remains higher than “pre-bubble” levels.


Source: Bloomberg

66

Past Bubbles - Uranium

$-

$20

$40

$60

$80

$100

$120

$140

$160

Dec-9

9

May-0

0

Sep-0

0

Feb-0

1

Jun-0

1

Nov-0

1

Mar-0

2

Aug-0

2

Dec-0

2

May-0

3

Oct-0

3

Feb-0

4

Jul-0

4

Nov-0

4

Apr-0

5

Aug-0

5

Dec-0

5

May-0

6

Sep-0

6

Jan-0

7

Jun-0

7

Oct-0

7

Feb-0

8

Jul-0

8

Nov-0

8

Apr-0

9

Aug-0

9

Dec-0

9

May-1

0

Sep-1

0

US$/

lb

Significant bubble (spotmarket) through 2007

Price “post-bubble”remains higher than “pre-bubble” levels.


Source: Bloomberg

77

Rare Earth Pricing

Data through year endshows significantincrease in LREO

Harder to value in bubbleterms since it comprisesa group of elements

Very different marketdynamics than Uraniumor Molybdenum

We expect prices toremain strong in the shortterm due to reduction inChinese exportrestrictions

Average REO Pricing

$0

$50

$100

$150

$200

$250

$300

$350

Q1-04

Q3-04

Q1-05

Q3-05

Q1-06

Q3-06

Q1-07

Q3-07

Q1-08

Q3-08

Q1-09

Q3-09

Q1-10

SPOT

HREO

US$

/kg

$0

$10

$20

$30

$40

$50

$60

LREO

US$

/kg

Average HREO Average LREO

Source: Arafura Resources, Metal-Pages, LBS


88

Rare Earth Company Stocks – Externally Event Driven

Rare Earth Stock Chart - Price Weighted Index

0.001.002.003.004.005.006.007.008.009.00

7/28/2

010

8/11/2

010

8/25/2

010

9/8/2010

9/22/2

010

10/6/2010

10/20/20

10

11/3/2010

11/17/20

10

12/1/2010

12/15/20

10

12/29/20

10

Inde

x Valu

e (Pr

ice W

eight

ed)

Rare Earth Stocks - Price Weighted Index Chinese exportquota reductions

Chinese fishing boatseizure by JapaneseAuthorities


99

Rare Earth Company Stocks – Market Value

Rare Earth Stock Index - Total Market Cap

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

7/28/2

010

8/11/2

010

8/25/2

010

9/8/2010

9/22/2

010

10/6/2010

10/20/20

10

11/3/2010

11/17/20

10

12/1/2010

12/15/20

10

12/29/20

10

Tota

l Mar

ket C

ap (M

illion

s)

Total current market capof $10.5 billion

Two companies represent$7.6 billion

Average stock is up242% over the past 5months


1010

Long-Term Chart – Positive Trend

Trend in export growth over the past 20 years is positive for rare earths (partially due to shutdown in miningoperations outside of China)

Pricing and exports had been in the past susceptible to economic recessions. Going forward, pricing andexports now impacted by export quota restrictions.

Long-term impacts both positive and negative


Source: Research in China, China Research and Intelligence, LBS Estimates

Gross Volume versus Value of Exports from 1990 to 2011E

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

E

Gros

s Exp

orts

(ton

nes)

0

200

400

600

800

1,000

1,200

1,400

Gros

s Exp

ort V

alue (

$US,

milli

on)

1111

Positive Trends – Technology and Clean Technology

Increased usage of rare earth materials in technology andindustrial products

Media awareness is very high (particularly in the US)

Good pricing environment (for producers)

High energy prices support the need for increased use in cleantechnologies (electric cars, wind turbines, etc.)


1212

Negative Trends – Technology and Clean Technology

Scarcity of supply (outside of China)

High prices may discourage use of rare earths in new products

Increased recycling

Research and development focused on reducing use of rareearths in new products

New technologies such as flash ram drives replacing magnetichard drives, digital download replacing physical media, etc.


1313

Negative Trends – The Electric/Hybrid Vehicle

Potential to be a significant driver for rare earths over the next decade High prices and supply uncertainty impact market acceptance Using permanent magnet motors offers a significant performance / weight advantage for the

vehicle Scarcity of supply a negative driver for increased adoption

Near term production Hybrids/EVs

Induction Motor Permanent MagnetTesla Roadster Nissan LeafChevy Volt Toyota PriusMini E Honda InsightRav4 Hybrid Ford Focus Electric


1414

Summary

We are seeing increased interest in rare earth stocks inCanada, Europe and in particular the US.

External events are key influences in stock price.

Bubble or not, higher rare earth prices likely to stay.

Long-term trend for the industry looks good, we caution on thehigh prices over extended periods of time may hinder furtheradoption of rare earths or cause manufactures to seekalternatives


capital market perspectives on rare earth

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