A new process was proposed in this research, in order to address the problems of difficult treatment, low efficiency and heavy pollution of Bayan Obo complex iron ore. The isothermal reduction experiments, using carbon-bearing pellets which were mainly made of Bayan Obo complex iron ore and pulverized coal, were investigated in the temperature range of 1623–1723 K with different heating time. The results indicate that the pellets could not melt well at 1623 K and 1723 K, and the iron nugget and slag can separate in a clear manner at 1673 K for 12 min. The contents of C and S in iron nugget are 2.09% and 1.62% respectively. The iron nugget can be used partly to substitute the steel scrap for EAF steelmaking. The RE₂O₃ content is 14.19% in the rare-earth-rich slag. Nearly all rare earth is concentrated into one phase during solidification, which is identified as cefluosil ([7(Ca, Ce, La, Nd)₂·SiO₄] (F, O)₁₀). The slag was leached by hydrochloric acid and the leaching efficiency of rare earth is 98.70%. After being filtered, the solution can be used to extract rare earth and the leached residue will be treated to recover CaF₂ and ThO₂.