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For rare earths, an abundance of interest

The entrance gate to Steenkampskraal mine, located in a remote corner of South Africa's Western Cape province. The mine was abandoned in 1963 and is now being turned into a rare-earth facility.

Erin Conway-Smith/erin conway-smith The Globe and Mail

Filled with radioactive waste, its buildings gutted and crumbling after 48 years of disuse, the abandoned Steenkampskraal mine would seem to hold little value to anyone.

Until recently, the decaying apartheid-era mine in a remote patch of South African desert was mainly of interest to scientists studying the effects of high radiation on the thousands of bats that hibernate in the empty mine shaft.

But soon the bats will be evicted, the radioactive waste will be buried and the shaft refurbished. The Canadian owners of this mine are scrambling to tap the mine's rare-earth minerals – possibly the hottest commodity on the planet these days, with immense strategic and technological significance, and pivotal to a global geopolitical rivalry.

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As prices soar, there is a frantic global rush to develop new sources of rare earths. These obscure minerals – 17 different elements with futuristic names such as neodymium, samarium, yttrium and lanthanum – are crucial for everything from guided missiles and hybrid cars to flat-screen televisions, iPods and BlackBerry phones.

Western leaders are increasingly anxious about China's chokehold on a 97 per cent share of the supply, controlling the market with its abundant, low-cost production. The country dominates with just 37 per cent of the world's proven reserves. It produced 118,900 tonnes of rare earths in 2010, and exported just over 30,000 tonnes. Leaders have watched nervously as China restricts its exports, resulting in price rises of up to tenfold for some rare earths over the past year.

China updated its rare earth quotas this week, which put them on par for 2011 with last year's numbers. The U.S. and the European Union later complained that Beijing had, in fact, added products to the list, and are calling for a new, fairer export restrictions policy.

The new quotas came after the World Trade Organization recently ruled against China for limiting exports of nine raw materials such as coke, zinc and bauxite. The case is expected to empower the U.S. and the European Union to file another complaint against China over its quotas on the export of rare-earth materials. Beijing maintains its rare-earth quotas fall within trade regulations.

China has openly used its monopoly as a political weapon, dramatically raising the stakes in the rare-earth business by cutting off supplies to Japan during a territorial dispute last year.

This, in turn, has triggered the interest of U.S. politicians, who allege that Chinese "hoarding" is a threat to the Pentagon's missiles and California's high-tech sector. Even Sarah Palin, the populist Republican, has complained that China is "bending us over a barrel" by controlling the rare-earth industry and forcing the United States to become dependent on Chinese production.

Never has an industry enjoyed so much influence from so little production. The global rare-earth industry is worth only $1.5-billion, yet the industries relying on it are worth an estimated $4.8-trillion. And they are vital to some of the world's fastest-growing products: smart phones, electric cars, high-tech weaponry, wind turbines, and almost anything with miniature electronics.

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Working '25/8' in South Africa

The mine at Steenkampskraal contains some of the world's richest grades of rare earths. But the ore also contains thorium, which is highly radioactive, creating problems of storage and disposal. This small tract of desert is one of the most radioactive sites in the world, according to a consultant at the mine.

The mine site is riddled with radioactive waste from its production years of 1952 to 1963. Even the crumbling buildings, segregated under apartheid rules into detached houses for white employees and hostel dormitories for black workers, still contain radioactive material. And none of it was cleaned up when the mine shut down.

Great Western Minerals Group Ltd. of Saskatoon, a small company with a market valuation of less than $300-million and a stock price below $1, is hoping to reopen the long-abandoned mine as swiftly as possible, as it races against a group of other upstart rare-earth companies to bring new production to market. It's a daunting task fraught with risk, especially given that rare earths are difficult to mine due to their low concentrations. That, along with the need to remove radioactive elements, can inflate costs to the point of being uneconomic.

"I'm working 25/8," says Vincent Mora, the newly hired project director at the site. "The company gets e-mails from me at 1 o'clock in the morning and 3 o'clock in the morning. I'm holding a minimum of two to three meetings a day with different contractors. If the contractors can work at the same time, we do it. We don't wait for the signature of the contract – they start working right away."

Because of the radiation at the mine site, Mr. Mora and his colleagues are required to carry dosimeters and wear plastic covers on their shoes as they tramp around the mine site. The site is fenced off, with signs warning of the radiation risk, although it fails to deter the neighbouring sheep farmers who drive their truck into the mine site to discuss the jackals and lynxes that are killing their animals.

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Great Western is competing with other companies such as Lynas Corp. in Australia and Molycorp Inc. in the United States to develop new sources of rare-earth supply outside China. The company is aiming to start production in South Africa by the end of next year, about 18 months ahead of the original schedule. The South African mine can produce a range of rare-earth minerals, and it will be integrated into a supply chain with Great Western's downstream production plants.

"If we're first into production with all of the rare earths and the downstream capacity, it will make us a leader in this game," says president and chief executive officer James Engdahl.

Great Western acquired the mine by purchasing the South African company Rare Earth Extraction Co. Ltd. (Rareco) for about $20-million, and is planning to spend a further $60-million to put the abandoned mine into production and build a separation facility. By acquiring Rareco, it inherited a deal with the South African government that exempts it from royalty payments if it cleans up the radioactive waste material on the mine site, which would otherwise be the government's liability.

Great Western says the radioactive waste will be processed and then stored underground at the mine site in a layer of impermeable clay. The storage would be safe because the clay is thick and the site is remote and arid.

Great Western already has plants in Britain and the United States where it produces rare-earth alloys for use in magnets, batteries and aerospace products. It aims to produce about 5,000 tonnes of rare-earth oxides annually at the South African mine – almost double its original plan of 2,700 tonnes.

The Pentagon gets interested

While its investment is relatively small by global standards, Great Western has already attracted attention from U.S. politicians, who are seeking ways to block China's control of a strategically important industry.

"They're realizing that rare earths are absolutely critical to all of their weapons – your cruise missiles, your laser-guided bombs and so on," Mr. Engdahl said in an interview. "The U.S. is looking beyond its borders, particularly to Canada. They'll want to have Canadians involved in solving the issue."

Last month, a U.S. congressional committee invited Great Western's president to testify about the industry. Describing the situation as a "crisis," Mr. Engdahl told the committee that the United States needs to plug the holes in its supply chain, especially in the manufacturing side, if it wants to avoid a dependence on specialized imports from China and Japan for its energy and military technologies.

The supply crisis has become a politically sensitive subject in the United States, provoking a series of counteractions, especially after China cut its rare-earth exports to Japan last September when the two countries were feuding over their rival claims to disputed islands in the East China Sea.

The Obama administration has ordered the Pentagon to devise a plan to ensure U.S. access to rare-earth minerals. Several members of Congress from both parties are planning bills to build stockpiles of the minerals and to provide support for a domestic rare-earth industry. One bill, recently approved, authorizes the U.S. Energy Department to make loan guarantees to support rare-earth exploration and development in the United States, with the aim of creating a complete supply chain and production capability within the next five years.

Japan, too, is aiming to reduce its reliance on Chinese rare earths, partly by reducing its consumption and boosting its recycling, but also by diversifying its suppliers away from Chinese sources. Great Western signed a deal in April with Aichi Steel Corp., part of the Toyota group, to provide a long-term supply of rare-earth alloys for Toyota's automotive magnets.

Japanese scientists also said recently that they have found large rare-earth deposits on the floor of the Pacific Ocean, which could be a promising, albeit high-cost, new source for these elements.

China's stranglehold

China has only a third of the world's proven rare-earth reserves, but it took control of the industry in the 1990s by driving down prices, exploiting its cheap labour and low environmental standards. Western sources of supply were forced out of business. At the time, world demand was low, and the West ignored the trend.

But this abruptly changed when rare earths were needed for new technologies in laptop computers, rechargeable batteries, smart phones and clean-energy products such as solar panels and wind turbines. Suddenly the world needed the minerals and China controlled virtually all of the supply.

World prices soared dramatically when China reduced its export quotas by 40 per cent last year and a further 35 per cent in the first half of this year, seeking to build a stronger domestic industry. It has also introduced an export tax on some rare-earth products. Many experts believe that these restrictions are a violation of Beijing's obligations under the World Trade Organization, and there have been rumours of a possible WTO case against China.

Until recently, it seemed that the Australian company, Lynas, would be the first to challenge the Chinese monopoly. But its mine is closely linked to a planned opening of the world's biggest rare-earth refinery in Malaysia, and the refinery has been stalled by protests and regulatory reviews.

Luisa Moreno, an analyst with Jacob Securities, said China has tried to acquire stakes in Lynas and Molycorp in separate bids in the past. But such an acquisition is unlikely because of the geopolitical significance of the industry, which is "massive," she said. "China would love to be able to control the industry, but that is not going to happen, especially because of the defence component of it," she said in an interview.

Despite their name, rare-earth minerals are not actually rare – they exist in many places in the world. Great Western, Lynas and Molycorp are front-runners in seizing the opportunity. "Even by themselves, those three projects, when in full production, will increase the global supply by 100 per cent," said Jon Hykawy, an analyst at Byron Capital Markets who has travelled often to China to study the industry.

Still, production from the three Western companies won't do much to address the need for some of the heavy rare earths, Mr. Hykawy noted.

Other Canadian companies are also developing rare-earth mines, including Stans Energy Corp., which owns a former Soviet mine in Kyrgyzstan, and Frontier Rare Earths Ltd., which is planning a mine in South Africa within about 100 kilometres of the Great Western site. Several rare-earth mines are planned in Canada, including a project by Avalon Rare Metals Inc. in the Northwest Territories and a project by Great Western in northern Saskatchewan.

Jacob Securities is forecasting a 20 per cent rise in global production of rare-earth minerals in 2012. "As new mines come into production in 2012, it will likely lead to an overall surplus," it said in a recent report.

But further down the road, it predicted, a shortage could develop again, with China likely to become a net importer of rare earths within the next five to 10 years.

"China has no intention of relinquishing the control it has in the rare-earth industry," the report says. "Chinese companies are aggressively pursuing rare-earth opportunities around the globe, and the idea, it seems, is to consolidate the industry into a few large players."

Another report, by Goldman Sachs, suggests that rare-earth prices will continue to increase next year, with a "modest surplus" finally developing in 2013 to ease the situation. But prices could rise further if China is successful in halting illegal production from unauthorized small mines, it said.

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