Monday, June 15, 2009

Alternative energy...becoming a little less alternative

Over the years things like hybrid vehicles have gone from kooky concept to a common day commuter. It's success isn't because it is a car that gets super gas mileage, in fact it's mileage doesn't exceed that of a conventional clean diesel engine by much. Also, it has many fancy and expensive parts that mark up the price of the vehicle a good 10,000 dollars more that an average straight gasoline engine in its class. So why are they so popular? It is because more and more people are looking to do the right thing and make a difference when it comes to the environment, even if it costs a little more up front.

Even though these hybrid vehicles are a little primitive in their ability to deliver amazing fuel economy, they are a good start and are improving leaps and bounds every time a new one comes out.

The following components contain these respective Rare Earths:

The electric motor uses: Neodymium and Praseodymium and to a lesser extent, Terbium and Dysprosium

In the batteries: Lanthanum, and to a lesser extent Cerium, Praseodymium, and Neodymium

In the regenerative breaking system: Neodymium and Praseodymium, and to a lesser extent, Terbium and Dysprosium.

The amount of rare earths that go into the battery is about 75-80% of the total amount of rare earths that go into the car. That makes for one heavy about 40 pounds.

The next question that comes up is why does a hybrid car cost so much more than a regular car? The big price difference is in the added technology which contains light and heavy rare earth elements that aren't exactly cheap.

Neodymium = 5.1/kg or $11.2/lb
Praseodymium = 5/kg or $11/lb
Dysprosium. = 40.3/kg or $84.6/lb
Terbium = 136.6/kg or $320/lb
Lanthanum = 2/kg or $4.4/lb
Cerium = 1.2/kg or $2.70/lb

As we know it, the batteries are about 80% of the Rare Earth consumption of a hybrid. The main component of the battery, Lanthanum only costs 2 dollars per Kg or about 4.4 dollars per pound. The lesser components cost 11.2 dollars per pound for Neodymium and 2.4 dollars per pound for Cerium. This means that the battery carries about 30 pounds if lanthanum costs 125 dollars, and the rest of the battery costs about 65 dollars. So the battery alone has 200 dollars worth of Rare Earths.

There's probably another 10 pounds of Terbium and Dysprosium which cost 320 dollars per pound and 85 dollar per pounds respectively. This should add up to about 1500 dollars worth of metals for a total of 1700 dollars per vehicle. Where does the rest of the price premium come from? We can probably chalk that up to intellectual rights as well as a premium to accelerate the cost recuperation process.

One thing to consider is that as economies of scale become more efficient the cost of building these parts will go down. That being said, I'm not sure consumers will notice the difference when signing the paperwork for the purchase of their new vehicle. The price of Rare Earths is most likely to continue to increase as the demand for hybrids balloons in size. As it stands now there are about 250,000 hybrid cars on the road. This when transposed into demand for rare earths represents about 6.5% of the rare earth market.

In the coming years, the number or hybrid vehicles on the road should increase 12 fold to 3 million vehicles or more, just over 20% of the total market for vehicles. What this will do the rare earth market is quite remarkable. If you assume a constant rate of growth for all other applications for rare earths, the demand will double and the percentage of the demand dedicated to the automotive industry will go from 6.5% to around 50%. This is a staggering rate of growth and is occurring in a market that is basically a necessity for most people, a car.

As I mentioned earlier, these hybrids, which the Toyota Prius is synonymous for still have a long way to go before they become truly an efficient vehicle. After all, the EPA highway rating for a Prius is only about 45 mpg where as or a 2009 VW Jetta TDI, gets around 50. I have read many accounts of people habitually get 58+ mpg's (miles per gallon). Granted, city driving the hybrid is still better. The point is that there are many improvements still to be made. For example, the VW polo that Europeans enjoy gets a whopping 90-100 mpg’s. That is because it is a hybrid Diesel. A combination of efficient technology with the most efficient fuel should be the wave of the future.

One of the technological break-through that is still to come with respect to the automotive industry is in the batteries. The Nickel batteries are a bit of a handicap when you consider that the entire electronics industry when to lithium because lithium holds a charge for several times longer than nickel batteries. Vanadium is in that same category when it comes to the ability to hold a charge for a long time but isn't nearly as commercially used. The shift from Nickel to Lithium and or Vanadium is a change that is coming down the road for the auto industry that should improve the efficiency of these vehicles by a good stretch.

Of course everyone wants to know how to profit from this boom. I was a speaker at a show recently and was asked a surprising number of times about battery companies. These companies will stand to make money as the price of the batteries will be marked up by some margin. The problem however is that the consumer is only willing to pay so much. When the price of the inputs reaches a certain level, the end product producers will to maintaining the price in order to sell product, thus lowering their margins. That is my issue with end users such as battery makers and car companies.

The beneficiaries of this kind or boom will be the producers (mining companies). Given the fact that China controls 90-95% of the rare earth market and wants to internalize its production by restricting exports to the rest of the world, the price is set to increase for the category of metal making exploring and mining these deposits very attractive. If we look at a world class deposit such as Avalon's (T.AVL) Thor Lake which has incredible Heavy Rare Earth concentrations and tremendous size to the project, this company should become what Barrick (T.ABX) is to gold or what Microsoft (MSFT) is to computers. So at 1.80/share and a market cap of about 150 million dollars, it looks fairly undervalued. There are other fantastic advanced projects such as Rare Earth Elements (V.RES). There are a rising number of exploration companies such as Galahad Metals (V.GAX), Matamec (V.MAT) which have show some very encouraging initial results of both light and heavy rare earths, and there will be many more coming up as we get to a mania stage of the rare earth market. This mania phase is probably sill 6-12 months out, but it is good to be well positioned for it well in advance.

The lithium market isn't fundamentally as strong as the rare earth market, but neither was the coal market when the price of coal went from 40 dollars to about 150 dollars. There is a large amount of lithium in the ground, the issue is bringing it to market, IE mining it fast enough. That will also create a mania in this market, probably not to the extent of the rare earth market but none the less, it will be impressive. Western Lithium's (V.WLC) Nevada Kings Valley project is truly impressive and has a strong possibility in becoming a significant source of lithium. The historical numbers show 11 million tonnes of Lithium Carbonate equivalent. Channel Resources (V.CHU) has an interesting brine type deposit with a historical 2.7 million tonne Lithium Carbonate Equivalent deposit. Like these there are others. A vanadium project of note is Apella's (V.APA) Lac Dore and Iron-T vanadium projects are significant is size and grade.

If you are looking for the next mania in any market it will be the green sector and it will be kicked off by the auto industry's uses of metals such as Rare Earths, Lithium and Vanadium and it is coming sooner than you might think.

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