Vale has rare earths…now what?

Traders got excited about Vale last week when they learned that the Brazilian mining giant has found relatively high-grade rare earth deposits on its land. But beyond the buzz, what does this mean for the company?

Vale (VALE, quote) is up 15% over the last week, riding a general rebound in the still-battered mining sector.

Apparently government prospectors found rare earth elements — an increasingly strategic resource used in microchips, electric cars, and high-tech weapons — “similar in quality to some Australian deposits” on the company’s massive Salobo copper project.

Closer investigation reveals that the Australian deposits in question are at Olympic Dam, which contains an estimated 10 million tons of rare earth oxides, or enough to feed existing demand for these substances for the next 75 years.

Olympic Dam is so big that even if monopoly producer China were to cut off all rare earth exports, the site could keep non-Chinese high-tech manufacturers going for two centuries — or even allow them to ramp up production.

While that kind of scale resolves any questions about the long-term viability of rare earth technologies, it raises new economic and environmental questions.

BHP Billiton (BHP, quote) has been mining gold, silver, copper and uranium at Olympic Dam for years, but its current plans to expand the project have focused exclusively on its existing output.

For a site that is already producing 235,000 tons of copper, 4,500 tons of uranium, 800,000 ounces of silver and 100,000 ounces of silver a year, squeezing an extra 10 pounds of rare earths out of every ton of rock is simply not a priority.

Instead, it is more likely that those strategic elements would continue to be thrown out in the mining waste that has already gotten local environmentalists to protest any expansion of the project.

Rare Earths

Rare earth minerals

At some point — maybe in 30 years, when BHP expects bulk mining to run out — those tailings may be worth enough for the company to exploit or sell to a more specialized rare earth producer.

Vale is in a somewhat different position because Brazilian President Dilma Rousseff has formally “requested” that the company look into ways to secure the country’s rare earth supply.

Now that we know these minerals exist on Brazilian soil, that may be enough to satisfy her.

It has already attracted the Chinese. Last month, a group of five companies paid $1.95 billion for a 15% stake in Brazil’s closely held Companhia Brasileira de Metalurgia e Mineração, which produces more than 80% of the world’s niobium.

And the Pentagon is equally concerned. A Department of Defense report released this week in Washington says “it is essential that a stable non-Chinese source of (rare earth oxides) be established so that the U.S. RE supply chain is no longer solely dependent on China’s RE exports.”

In the meantime, much like Olympic Dam, Vale’s property is so rich in more traditionally marketable commodities — notably copper — that Vale is unlikely to consider itself primarily a rare earth producer any time soon.

Salobo is currently on track to mine 100,000 tons of copper next year, ramping up to 200,000 tons a year starting in 2014.

With copper at $6,800 per metric ton, that means Salobo’s copper is worth $680 million in added annual revenue for Vale next year, and $1.3 billion a year shortly thereafter.

Rare earths are definitely more expensive — spot quotes range from $22,000 a ton for lanthanum oxide to $140,000 a ton for heavier products like praseodymium-neodymium blends — but much harder to mine and sell.

Olympic Dam’s deposit runs to the light side of the rare earth scale, so Vale might need to produce about 60,000 tons of rare earths a year to make as much money here as the copper will be generating beyond 2014.

Since that is more than all non-Chinese manufacturers put together currently want, you can see for yourself that as yet rare earth mining may be strategically important, but difficult to scale high enough to be worth the giant miners’ time.

Meanwhile, to get a taste of pure rare earths, an ETF like REMX (quote) provides the most diversified exposure: