This rare-earth stock could be sitting on $80bn

Tom Bulford looks at a small-cap 'rare-earths' producer that could be sitting on an $80bn fortune.

I wouldn't much like the task of scouring the radioactive waste of uranium mines. But as I discovered last week, this is what some people are prepared to do in search of rare earth metals.

We can't live without rare earths

Rare earths are crucial to many modern-day electronic gizmos. Take your mobile phone, for instance. Without europium, terbium, dysprosium, gadolinium and yttrium it would be the size of a brick.

Catalytic converters, lasers, fibre optics, microphones, speakers and many other things need rare earths. And if the environmentalists' dreams are to come true, we'll need a lot more.

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President Obama wants one million electric cars on the roads of the USA by 2015. That won't happen without large batteries made with rare earths. Wind power is another popular environmental cause. But an increasing number of wind turbines use a magnetic drive to improve their reliability and mechanical efficiency. It's made with rare earths.

In the 1980s the opening up of global trade saw raw materials sourced from the lowest cost producer. In the case of rare earths that was China. So while the rest of the world came to rely upon Chinese supply it did little to develop its own sources.

Now, as China industrialises, it wants to keep back more and more of its rare earths for its own booming high tech industries. China has supplied 95% of the rare earths needed around the world, but as it cuts its exports a massive squeeze is emerging.

And there's something that's compounding the problem. This is a delay to the expansion plans of one of the largest non-Chinese producers. By re-opening the Mount Weld mine in Western Australia, Lynas Corporation believes that it can contribute 20,000 tonnes to global supply. A processing plant has been built at Gebeng on Malaysia's west coast but now the locals are having second thoughts.

Why Malaysia has grave concerns about rare earths

The culprit is iron phosphogypsum, a crumbly, off-white waste product. When Gebeng hits full capacity it will generate 64,000 tonnes of phosphogypsum every year enough to cover a one-hectare site to a depth of five stories.

Distributed throughout this waste would be about 106 tonnes of the radioactive element, thorium. Lynas has offered tentative plans to recycle this waste, while the International Atomic Energy Agency has found that this thorium would be at 'relatively low concentrations' with radioactivity 'at a low enough level that the agency wouldn't consider it a radioactive material when being transported.'

But this has not been enough to appease the Malaysians. Unsurprisingly they don't like the idea of being treated as a dumping ground for radioactive waste and are arguing that it should be kept in a nuclear-style storage facility.

The second great hope for non-Chinese supply is Molycorp, the US producer which is planning to double the output of its Mountain Pass mine near Las Vegas by 2013. The issue here, though, is that Mountain Pass produces a preponderance of 'light' rare earths.

Tantalus could be sitting on an $80bn rare earths resource

This brings me to Tantalus Rare Earths (TAE).

Tantalus has a rare earths project in northern Madagascar with three apparent merits. The rare earths are near the surface, allowing for low-cost extraction; they contain a low ratio of the radioactive elements uranium and thorium, a potential problem that other rare earth miners tend to gloss over; and the deposit has a high proportion of the more valuable 'heavy' rare earths.

Tantalus is now negotiating a deal with China Non Ferrous Metals, which can supply not only finance but also the ore processing know-how. Once this is in place, Tantalus can progress towards first production.

The figures certainly sound interesting. So far Tantalus has made a preliminary in-house resource estimate of 55 million tonnes of ore grading 0.084% rare earths. With a sale price of $180/kg this has a market value of around $8bn. According to Ivan Murphy at Tantalus, the production costs would be no more than $7/kg.

What's more, the final size of the resource could be ten times the amount announced already. The one drawback for UK investors is that shares in Tantalus Rare Earths are traded on the open market of the Frankfurt Stock Exchange. A secondary listing, though, in Toronto or London is a possibility.

This doesn't yet fit with what I'm looking for at Red Hot Penny Shares. But it's a fascinating story and one that's well worth keeping an eye on. It's on my watch list from today.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.

Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd. Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be volatile, relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you've bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3780.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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