"Rare earth metals are feeding the production of high-tech and green products. Demand is expected to jump more than 60% in the next five years alone," says Zahid Fazal, partner and leader of Ernst & Young's mining practice in Quebec. "The problem is Chinaaccounts for virtually all rare earths production, and their export restrictions are driving prices higher. What's more, Chinese domestic consumption of rare earth materials is predicted to outpace supply between 2012 and 2015."

Fazal says the situation represents a unique opportunity for Canadian and other companies to rebuild the supply chain outside ofChina. While this could help prevent a supply shortage and keep a lid on soaring prices, these projects are higher risk and that brings additional challenges into the mix.
"We're already seeing companies crowd the market with new projects aimed to fill the estimated supply gap," Fazal explains. "But because these projects are risky, getting the right financing in place can be difficult, and we could see a fierce fight for cash in a limited investor pool."

In a new paper, Technology minerals: The rare earths race is on!, Ernst & Young found besides financing, speed to market and choice of minerals will be vital to a company's success in this new sphere.
"It's going to be a race to the finish line to develop the next producing asset. Companies that enter production first are more likely to capture the current price premiums, with the market likely to be very sensitive to future increases in supply," says Fazal. "Of course, at the end of the day, high risk endeavours like this can equal significant potential rewards for those that are successful."

For example, early movers like US-based Molycorp and Australia's Lynas are expected to potentially produce well over 20% of 2013E world supply. However, while they may have taken the lead in the light rare earths sector, there is still time to develop a number of vertically integrated players in the heavy rare earth space where first mover advantage could generate real benefits.

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