Merger and acquisition activity in the rare earth elements sector could become a “front and centre theme”, Mackie Research analyst Matt Gowing said on Monday.

 

China, which represents over 95% of global production “is on the prowl” for external rare earth resources, and may become a net importer of heavy rare earths in the next five years, said Gowing.

 

He drew distinction between the likely future price performance of light rare earths and heavy rare earths. “We think the heavy will outperform the lights in the near future,” he said.

 

“We are a little more cautious on the light rare earths, and we are looking for prices to come down a bit.”

 

Most new mines being developed outside China will produce mainly light rare earth elements, and there will be a “severe shortfall” in heavy rare elements over the next few years, Gowing said. In a presentation, he predicted that only two emerging producers would enjoy increasing prices in the next five years – Avalon and Quest – as they would have a greater proportion of heavy rare earth output compared with other companies.

 

Gowing gave a buy recommendation for Avalon, with a target price of C$10,50 a share. The company rose 5,7% on the TSX to trade at $7,53 a share by 10:15.

 

China has been cutting rare earth exports as it seeks to reduce pollution in the sector, which has caused international prices for the elements, used in hybrid cars and LCD televisions, to rise dramatically over the past three years.

 

Reports quoting Chinese industry officials say this could increase operating costs by 70% for some operations in the country.

 

The country has also started building facilities to stockpile rare earth elements.