A former General Motors business unit with ties to Pentagon contractors has become a major player in the global rare earth supply chain and is predicting higher profits in the next few months as prices of these vital elements soar.

Headquartered in Toronto, Canada, Neo Material Technologies remains one of the few companies producing rare earth oxides, powders and magnets. A classic middle man that processes rare earths for other companies, Neo Materials sees several factors behind the expected price increases.

Constantine Karayannopoulos, Neo Material’s chief executive, has told analysts that miners are aggressively increasing concentrate prices while speculators hoard oxides. Moreover, Karayannopoulos says, producers have slowed down the supply chain in anticipation of still higher prices.

“We’re in an environment where prices are going up daily and sometimes hourly,” Karayannopoulos said in a recent conference call with analysts. “In this environment you’ve got to sit back, take a deep breath and just wait for reason to return.”

Meanwhile, industry observers say China’s decision to cut back on rare-earth exports by adopting stricter quotas also is a major factor in higher prices for these elements used in precision munitions, guidance systems and secure fiber optic communications.

For instance, the price of neodymium used in the Predator unmanned aerial vehicle has increased more than four-fold to $88.50 a kilogram in roughly a year, the news agency Bloomberg reports.

Ironically, the U.S. was a world leader in the field until the nation’s sole mine based in southern California closed about a decade ago. As a result, China now controls as much as 97 percent of the market, though the Mountain Pass mine is scheduled to reopen by next year.

Without dwelling on China, Karayannopoulos predicted Neo Material will introduce its “biggest ever” price increases in June. His comments came as Neo Material registered enormous gains in sales and profits.

The company recently reported that 2010 net income climbed some 185 percent to $56.3 million. Revenues for the year rose 80 percent to $337.6 million, meaning the bottom line improved twice as much as sales. Neo Materials stock has returned more than 80 percent to shareholders in the past year.

Then again, Neo Material plays a unique role in the global rare-earth supply chain. Its products are used in micro and precision motors, sensors and other applications requiring high levels of magnetic strength, small size and reduced weight.

Consider that it maintains an 80 percent market share for some of its products. Key technology clients include Epson, Hitachi, Phillips and Panasonic. Nearly 51 percent of the company’s sales occur in China.

Neo Material doesn’t currently report direct sales to defense contractors or the Pentagon. But an industry trade group says the former GM division made magnets for Department of Defense subcontractors used in components for Joint Direct Attack Munition (JDAM) smart bombs, cruise missiles and submarines.

To pursue exotic materials research, GM created Magnequench in 1986. The automaker established a joint venture with Sumitomo Special Metals and China’s Academy of Sciences.

The collaboration led to the discovery of a new compound for permanent magnets composed of neodymium, iron and boron, later called “Neo” materials. A decade later, the automaker sold Magnequench to two Chinese firms with ties to that nation’s government.

Following a later merger, a new parent company was christened Neo Material Technologies. Today, that company boasts 20 locations in 10 countries that include China, Japan, Canada and Europe.

And the firm’s Magnequench division ranks as the leading producer of powders used to produce high-performance, bonded rare-earth magnets. Last year, Magnequench accounted for less than half the parent company’s sales but had twice as much profits as a division focused on performance materials.