In 2010 and 2011, I wrote that it seemed to me that the obvious success stories in the rare earth space, aside from such financed projects as Molycorp and Lynas, would be the “cheap and cheerful” projects. By this, I meant projects like those belonging to Ucore Rare Metals (TSXV: UCU | OTCQX: UURAF) and Matamec Exploration (TSXV: MAT) and Great Western Minerals Group (TSXV: GWG). These projects that could be completed for less than $400 million dollars and on a reasonably tight time frame. I appreciated the lower capital expenditure of these projects because it meant that only a few investors were needed to finance them, and I appreciated the tighter time frame because, as I wrote, I expected rare earth oxide prices outside China to fall and money to become harder to come by.

Unfortunately, what I didn’t appreciate was just how fast the rare earth prices would fall, and how completely this would completely obliterate the average financial investor’s interest in rare earth companies. Of course, that hasn’t been assisted by strong financial results out of Molycorp or Lynas. The result is that there are very few private equity investors that are interested in rare earths. If any entity is going to finance a rare earth project, then it has to be an interested party like an end-user.

A good example of one such supporter of the space is the German Rohstoffallianz. The RA was formed by a consortium of German business to help secure supplies of certain critical materials, rare earths among them. But the criteria that are likely to be applied by strategic investors like the German RA are likely very different from those applied by financial investors to select the ideal rare earth project.

We believe that a likely list of such criteria would include the following:

1. Near-term production. At minimum the project must be capable of completing its DFS or engineering study in 2015. That puts it on track to be producing at nameplate capacity before 2020, which includes the effect of what will probably be a two year-long production ramp.

2. Long mine life, at least 20 years and preferably more than 30. There is no point in spending money to supply a necessary amount of REO for only 5 years.

3. A necessary level of output of the (truly) critical rare earths. To me, the critical rare earths are the magnet materials, not yttrium. If anyone cared about yttrium, it wouldn’t sell at the low price that it does. There must be a sufficient output, not in percentages but in tonnes, of neodymium, praseodymium and dysprosium. Yes, I do believe that dysprosium use as a percentage of magnet mass will decrease, but dysprosium use won’t decline to zero, it is always going to be cheap insurance against demagnetization.

4. The project must be located in a region of geopolitical stability. If you are building a project to supply industry for 20 or 30 years, stability means STABILITY. If I had to look for good projects outside of areas like North America, Western Europe and Australia, I would, but there are enough rare earth projects around that I don’t. So that’s where a supplier to a group like the RA is likely to be located.

5. Robust economics. If a project is going to be a long-term supplier, it has to be able to weather a sustained period of low prices. My previously published REO price deck was intended to show how low prices could go if sufficient supply entered the market to saturate demand for almost all the elements. If a project can generate positive cash flow with that deck, it can take the worst that the future rare earth market can dish out.

6. Almost non-existent remaining technical and social acceptance risks. If the project clears all the above hurdles, then it has to possess a simple, preferably proven flow sheet, and there should be almost zero potential for there to be social resistance to the new mine.

One of the things that won’t matter as much is capital expenditure. As long as the capital expenditure is low compared to the other projects that meet all the above criteria, the strategic investor has picked a reasonable option.

My database contained 38 reasonably advanced projects, since nothing else is going to get past the first criterion, anyway. By applying the above cuts to that group, I was left with only five projects, and two of them are Molycorp and Lynas. Knowing that writing any names will result in wailing and gnashing of teeth, the only others that made the grade are Arafura Resources (ASX: ARU), Rare Element Resources (TSX: RES | NYSE MKT: REE) and Quest Rare Minerals (TSX: QRM | NYSE MKT: QRM).