LOS ANGELES (Reuters) - The future of wind farms and hybrid cars may well hinge on what happens to a 55-acre (22.3-hectare) hole in the ground at the edge of California’s high desert.

Rick Sixberry, operations general foreman at Molycorp Minerals Mountain Pass Mine in Mountain Pass, California, surveys the open pit August 19, 2009. REUTERS/David Becker

The open-pit mine at Mountain Pass, California, holds the world’s richest proven reserve of “rare earth” metals, a family of minerals vital to producing the powerful, lightweight magnets used in the engines of Toyota Motor Corp’s Prius and other hybrid vehicles as well as generators in wind turbines.

Seeking to replace China as the leading supplier of these scarce materials, Colorado-based Molycorp Minerals LLC plans to reopen its long-idled quarry to resume extracting and refining thousands of tons of rare earth ore in the next few years.

Last month, Molycorp reached a joint venture deal with Arnold Magnetic Technologies Corp. of Rochester, New York, to make “permanent” magnets from rare metals at Mountain Pass.

Backed by hundreds of millions of dollars from equity investors, including Goldman Sachs, Molycorp aims to avert a looming rare-earths supply crunch that threatens to muffle the green-technology boom.

“The world has been looking for an alternative to these rare-earth permanent magnets for over 20 years, and one has not been found,” Molycorp chief executive Mark Smith said. “What Molycorp is proposing as a business strategy is to fill that supply chain and go all the way from mining to magnets.”

Success hinges on Molycorp’s ability to operate the mine and its processing facilities much more efficiently than in the past.

At the peak of its operations two decades ago, the mine produced 20,000 tonnes of rare earth oxides a year, accounting for the entire U.S. supply and about a third of the world’s total. Most of the rest came from China.

CHINA FACTOR

But as Chinese production and exports grew through the 1990s, rare earth prices worldwide plunged, undercutting business for Molycorp, then owned by oil company Unocal.

Mountain Pass operations came under further pressure after a 1996 wastewater spill. Mining there ceased in 2002 when Molycorp’s old permit expired.

“Most companies that were in the business stopped producing because it wasn’t profitable anymore,” said James Hedrick, a rare earths specialist for the U.S. Geological Survey.

Refinement of previously extracted ore at Mountain Pass resumed on a small scale in 2007, two years after Unocal was acquired by Chevron Corp. Last year, Molycorp was sold to a group of private investors.

Chinese rare earth production, meanwhile, has swelled to about 97 percent of global supplies, or 139,000 tonnes of refined material in 2008, experts say. Output is expected to reach 160,000 tonnes a year by the middle of the next decade.

But global demand is climbing faster, driven by the clamor for clean energy and clean cars, leading to projections of a 40,000-tonne annual shortfall by 2015.

“We’re reaching a crunch point,” said Jack Lifton, a commodities analyst and leading authority on rare metals.

Rare earths go into hundreds of gadgets and consumer goods, usually in minuscule amounts. Some products use more.

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The electric motor in Toyota’s market-leading hybrid car, the Prius, requires 1 kilogram (2.2 lb) of neodymium, the key component in the alloy for permanent magnets. And each Prius battery uses 10 to 15 kg (22-33 lb) of another rare earth, lanthanum, according to Lifton.

“The Prius automobile is the biggest user of rare earths of any object in the world,” he said.

CRUNCH POINT

With China seen sharply curtailing its rare earth exports to feed rapid expansion of its own industries, the projected global shortage will only grow more acute.

Looking to meet the challenge is Molycorp, with a new 30-year mining plan given final approval in the summer of 2004 following a 15-year regulatory review.

Smith said his company has since been perfecting an advanced extraction process that will allow Molycorp to nearly double the amount of rare earth metals it can pull from the bastnaesite ore it mines.

“It means I don’t have to extract as much ore from the surface pit to have the equivalent amount of material for sale to a customer,” he said. “It lowers our costs tremendously.”

Plans call for mining to resume at Mountain Pass by 2012, at the rate of about 1,000 tons of ore a day, enough to produce 20,000 tonnes of rare earth oxides for sale each year. Smith said the mine has approval to double that volume in time.

“If we put our facilities into the fully permitted production rates, we could come very close to meeting the needs of most of the rest of the world,” he said.

But Molycorp first needs to drain some 95 million gallons (360 million litres) of water that has filled the pit’s bottom and remove surface rock covering the ore, a two-year process.

Mountain Pass is considered the world’s richest reserve of its kind, with ore deposits averaging a concentration of rare earths above 9 percent. Most deposits around the world outside China report ore grades under 5 percent, Smith said.

It’s also the largest outside of China, estimated to hold 20 million to 47 million tonnes of ore. The mine is further blessed with negligible traces of uranium and thorium -- two radioactive elements often found together with rare earths that can make recovery of them more costly.

Mountain Pass, not far from Las Vegas, first opened in the 1940s, when rare earths were mined for use in tracer ammunition for the military and the flints of cigarette lighters.

With the advent of color television in the 1960s, Mountain Pass became the world’s only supplier of europium, used to produce red picture tones. By the 1980s, lanthanum, neodymium and other rare earths were being mined for new discoveries in batteries and magnets.

Molycorp is ahead of the game but not alone. A number of companies are seeking to develop rare earth deposits elsewhere, including two promising sites in western Canada and two more in Australia that have attracted Chinese interest.