By The Gold Report, on December 30th, 2011
Rare earth element coverage has exploded since The Gold Report started covering this sector in early 2009. At that point, the REE junior mining market was a $2 billion industry. Today, REE juniors are a $10 billion+ industry—give or take a one-day market fluctuation, and Streetwise Reports now has a dedicated newsletter to cover the sector: The Critical Metals Report. Let’s look back at how far we have come.
A quick search of media stories from the month of December, 2009 shows 24 clips including references to the 15 lanthanides and their related elements scandium and yttrium. By contrast, one day in December, 2011 produced 56 stories on the same resources. Even the tone of REE coverage has transformed over the years. Two years ago, an analyst piece from veteran metals consultant Jack Lifton titled “Underpriced Rare Earth Metals from China Have Created a Supply Crisis ” was a common headline as the world discovered that cheap supplies had left manufacturers vulnerable to a monopoly with an agenda. That supply fear made REE the investment de jour and sent almost all of the rare earth prices through the roof. In December of 2010, the headlines in big outlets like The Motley Fool announced that the “Spot Price of Rare Earth Elements Soar as much as 750% since Jan. 2010.”
Reality soon set in as investors realized that this was not a simple supply and demand industry. First, demand was still vague, subject to change and very specific about the type and purity of the product being delivered. Second, the ramp-up period for companies exploring, getting approval for development, mining, processing efficiently and delivering to an end-user was very, very long. Some became discouraged. That is why this year, the consumer finance site, The Daily Markets ran an article with the headline: “Why You Shouldn’t Give Up on the Rare Earth Element Minerals” by Gold Stock Trades Newsletter Writer Jeb Handwerger.
Through it all, Streetwise Reports has focused on cutting through the hype to explain what is really driving demand, how the economy and geopolitics shape supplies going forward and which few of the hundreds of companies adding REE to their company descriptions actually had a chance of making a profit.
Back in June of 2009, in an interview titled “The Race to Rare Earths,” we ran an interview with Kaiser Research Online Editor John Kaiser that concluded “China’s export-based economy, once dependent on American greed, is now but a fading memory. While the U.S. was busy printing and preening, the Chinese were long-range planning. But America wasn’t the only country caught off guard by China’s strategic, if surreptitious, supply procurement.” Even while other analysts were panicking, Kaiser was pointing out how investors could be part of the solution–and make a profit in the process.
“For the juniors, the opportunity right now is to source these projects. They get title to them, and when these end users want to develop them, they’re going to have to pay a premium to have these projects developed,” Kaiser said. “So it will not be economic logic that results in these companies getting bought out and having their deposits developed. It’ll be a strategic logic linked to long-term security-of-supply and redundancy concerns. And we’re seeing that sort of psychology at work in this market. It’s a bit of a niche in this market. Not as big as gold, but it is an interesting one because of the long-term real economy link implications.”
After years of covering the space by interviewing the growing chorus of analysts and newsletter writers singing the praises of rare earth elements, in June of 2011, we launched The Critical Metals Report to give exclusive coverage to the entire space, including rare earth elements, strategic metals and specialty metals. One of the first experts interviewed was Emerging Trends Report Managing Editor Richard Karn in an article called “50 Specialty Metals under Supply Threat.” He warned that investing in the space is not as simple as some other mining operations. “The market is just starting to become aware of the difficulty involved with processing these metals, which, in many cases, more closely resemble sophisticated industrial chemistry than traditional onsite brute processing. Putting flow sheets together that process these metals and elements economically is no mean feat.”
In this early article, Karn busted the myth that manufacturers would find substitutions, engineer out or use recycled supplies for hard-to-access materials. “The advances we have seen especially in consumer electronics over the last decade and a half have not been driven by lone inventors or college kids tinkering in their parents’ garages, but rather by very large, well-equipped and well-staffed research arms of powerful corporations. The stakes are high and if a certain metal is critical in an application, they will buy it regardless of the price,” he said.
Similarly, a July 2011 article for The Critical Metals Report featured Energy and Scarcity Editor Byron King sharing “The Real REE Demand Opportunity” driven by the automobile industry and beyond. He was one of the first to point out that not all rare earths are the same with Heavy Rare Earth Elements demanding big premiums.
“Going forward, the serious money will be in HREEs, which have a lot of uses other than EVs,” King said. “For example, yttrium is used in high-temperature refractory products. There’s no substitute for yttrium. Without it, you can’t make the refractory molds needed to make jet-engine turbine blades. If you can’t make jet-engine turbine blades, you don’t have jet engines or power turbines. The price points for these HREEs will reflect true scarcity and unalterable demand. People will bite the bullet and pay what they have to in order to get the yttrium.”
House Mountain Partners Founder Chris Berry also addressed the impact of electric vehicle demand on vanadium, a popular steel alloy strengthener now being used in lithium-ion batteries in the interview “Can Electric Vehicles Drive Vanadium Demand? ”
“The use of vanadium in LIBs for EVs is not significant yet, but could eventually become important as the transportation sector electrifies. One of the real challenges surrounding LIBs is settling on the most effective battery chemistry. In other words, what battery chemistry allows for the greatest number of charge recycles, depletes its charge the slowest and allows us to recharge the fastest? Today, based on my research, lithium-vanadium-phosphate batteries appear to offer the highest charge and the fastest recharge cycle. It seems that the lithium-vanadium-phosphate battery holds a great deal of promise, offering a blend of substantial power and reliability. I am watching for advances in battery chemistry here with great interest,” Berry said.
In September, Technology Metals Research Founding Principal Jack Lifton shared his insights on why some junior REE companies are prospering while others wither and die. In the article, “Profit from Really Critical Rare Earth Elements,” he said: “Rare earth junior miners are now being culled by their inability to raise enough capital to carry their projects forward to a place where either the product produced directly or the value to be gained from the company’s development to that point by a buyer can be more profitable than a less risky investment. The majority of the rare earth junior miners do not understand the supply chain through which the critical rare earth metals become industrial or consumer products. Additionally, they do not seem to recognize the value chain issue, which can be stated as ‘How far downstream in the supply chain do I need to take my rare earths in order to be able to sell them at a profit?’”
Then Lifton made this important point for Critical Metals Report readers. “It is very important for the small investor to understand that the share market does not directly benefit the listed company unless the company either sells more of its ownership or pledges future production for present, almost always sharply discounted, revenue.” As always, Lifton encouraged investors to follow the money to a specific end rather than the general market demand often envisioned by investors accustomed to the more defined gold market.
In October, JF Zhang Associates’ Principal Consultant and Chief China Strategist J. Peter Zhang shared his insights on “U.S. Manganese Supply as a Strategic Necessity.”
Manganese is now largely used largely in the production of low quality stainless steel, but is being incorporated into lithium-ion batteries. That increased demand is focusing attention on the limited supply outside China. “There really is no electrolytic manganese metals production in the U.S. or anywhere outside China except for a small percentage from South Africa. We don’t produce even a single ounce in North America. Relying on other countries to supply essential commodities (like oil for instance) is always a problem. If China suddenly decided to reduce production, or in the likely event that its domestic demand increases, the world would be out of options. Policymakers need to understand this risk and Congress needs to take action to minimize the potential impacts,” he said. “From the end of 2008 to 2009, China tied things up. Since then, the price has doubled, tripled and quadrupled. That should be a wakeup call. North America needs to either establish a strategic reserve system for critical metals or build production capacity to mitigate supply risk. I think there is some sense of urgency right now, but a lot more needs to be done.”
Picking the right junior is the trick. In the November article “Navigating the Rare Earth Metals Landscape” Technology Metals Research Founding Principal Gareth Hatch outlined the odds. “TMR is tracking well over 390 different rare earth projects at present; I can’t see more than 8-10 coming onstream in the next 5-7 years. Projects already well past exploration and into the development and engineering stage, and beyond, clearly have first-mover advantage.”
Just this month, in an interview entitled, “The Age of Rare Earth Metals” Jacob Securities Analyst Luisa Moreno compared the impact REEs will have on our daily lives with the transformation in the Bronze Age.
“There is an economic war over the rare earths, with China on one side and other industrialized nations on the other—Japan, the United States and the E.U. China is probably winning. It has decreased exports in the last few years and increased protection. It has attracted a great deal of the downstream business and it is positioning itself well. At this point, it produces most of the world’s rare earths, and prices are at record highs. Japan and the other countries have been left with few options, and those options are more expensive, such as substitution, recycling and adapting production lines to use less efficient materials.” Moreno then pointed to the seven companies that could come to the world’s rescue and usher in a miraculous new world of smaller, stronger, more powerful gadgets based on a steady supply of REE materials from reliable sources.
Macro-economic insights, specific investment ideas and the most current expert advice: That is why we have become critical reading for the REE investor today and will continue to be required reading in 2012. Are you getting the latest information on Critical Metals companies? Sign up here and enjoy a year of TCMR free. You can also hear top experts in the space commenting on the ideal way to start REE investing on our YouTube page.
By The Gold Report, on October 12th, 2011
 The rare earth sector has seen astronomical gains in recent years as Chinese export restrictions, short-sighted U.S. policy and investor interest combined to make front page news. In this exclusive article for The Critical Metals Report, Chris Berry, founder and president of House Mountain Partners, LLC, argues that a “Great Reset” is changing the face of the sector, rewarding explorers far more selectively.
What Economic Uncertainty Means for the Rare Earth Sector
The competition among non-Chinese junior mining companies to successfully mine rare earth elements (REEs) began as a footrace and evolved into a full-on stampede. That race is now unraveling, thanks to slower global economic growth and the sheer number of exploration companies involved in rare earth exploration. We have seen estimates of over 300 companies involved in this global search, and when you factor in the relatively tiny size of the rare earth market (approximately 130,000 tons produced in 2010, according to the U.S. Geological Survey) we still stand by what we’ve said all along—there is room here for a few major players and not much else. We believe the rare earth industry is in the beginning stages of a phase we call “The Great Reset.” We base this theory on four ideas:
- Everything reverts to the mean. This includes rare earth oxide (REO) prices. While we believe we will see a permanently higher price for select REOs, this is not the case for the entire suite of oxides, and prices cannot continue rising indefinitely. The laws of supply and demand have proven this.
- Demand projections for REOs are being re-evaluated downward due to anemic global economic growth prospects. With a tremendous debt overhang in the United States and Europe and evidence of growth slowing in China (the three biggest economies in the world), lower aggregate demand for finished goods that use REOs is a given. We have seen forecasts for REO demand in 2015 that are higher than they are today, and don’t disagree, but the downward revision is indicative of lower demand for most REOs.
- Companies such as Toyota and General Motors are actively researching substitutes for REOs in their products. This type of research has been in progress for some time and we think that these companies would not be spending the R&D dollars if they didn’t want to avoid high REO prices.
- Demand projections for “green” or “clean tech” applications such as hybrid electric vehicles, wind turbines and solar cells are not factoring in whether or not manufacturers of these goods can ensure a steady supply of raw materials (specifically REOs) to meet their production forecasts. The rare earth industry is a customer-driven business in that the customer needs REOs of a highly specific type and purity. If a wind turbine manufacturer can’t procure a specific purity of neodymium oxide, for example, the wind turbine may get built without neodymium, implying demand destruction. We have seen estimates of the use of up to one ton of neodymium needed to produce one megawatt of generating capacity from a wind turbine. China alone has plans to install 100 gigawatts of generating capacity from wind (up from 12 gigawatts in 2009). When you factor in European and American projections for wind power (not to mention other parts of the world), this begs the question of whether or not there is enough neodymium to go around and if there currently is not, will there be enough to satisfy these growth targets in wind generating capacity? We are well aware of the benefits of neodymium-iron-boron magnets in miniaturization and efficiency, but think that if a product can be manufactured economically without REOs, then the manufacturer will choose that path or abstain from building the product at all.
To be clear—we have not “thrown in the towel” on REOs and the important role they play in certain sectors of the economy. What we are saying is that the role will be different from what many in the sector currently suggest. Like many other facets of life, the rare earth sector is Darwinian in nature and will evolve to equilibrate supply and demand. The gratification that comes along with healthy and growing demand for a product (in this case REOs) will be delayed, to the chagrin of investors and rare earth mining company CEOs alike. This “reset” shapes how we think about the rare earth space now and in the future and in deciding how and where to invest. Below is a price chart of the Bloomberg Rare Earth Mineral Resources Index and its one-year performance.
The One Sector Where Supply and Demand Don’t Matter
There is one area of the economy, however, which we think is immune to the vagaries of supply and demand of REOs: the military. While the potential for substitution exists with consumer products, we believe there is no such “wiggle room” when analyzing a country’s defense capabilities. The neodymium-iron-boron magnets we mentioned above are critical in actuators of precision-guided bombs and are designed specifically around these magnets. Actuators are responsible for control of the bomb, and this is just one of several products (lasers and radar being two significant other products) that must use rare earths to function optimally. Without the magnets in the bombs, performance is reduced—implying an inferior product—something nobody should be willing to accept. The U.S. Military is responsible for a small overall percentage of REO demand in the United States, but it is significant nonetheless.
The Rare Earth Supply Chain: The Key to It All
So at this point, we believe two things: first, demand for most REOs will decrease in the near term, and second, that it will be exceedingly difficult for the majority of the junior mining companies involved in rare earth exploration to achieve commercial production of REOs. Despite this, the singular crucial issue that put the rare earth story on the front page of every newspaper around the world in the first place still haunts us—Western dependence on a critical resource from a strategic adversary. While a seemingly endless amount has been written about China’s control of the supply of REEs, what we think is most important (and most often missed by the pundits) is the fact that China also effectively owns the entire mine-to-magnet supply chain. This is the crucial vulnerability. The mining of rare earths is the easy part. It is the resulting steps where intellectual property is created that really matter. In 2010, the United States Government Accountability Office (GAO) was commissioned to deliver a report on the use of rare earth elements in the Department of Defense supply chain. Regarding military capabilities, the report states (Ed. Note: bold text is ours),
“For example, the M1A2 Abrams tank has a reference and navigation system that uses samarium cobalt (SmCo) permanent magnets. The samarium metal used in these magnets comes from China.”
Whether we’re discussing heavy rare earth elements (HREEs) or light rare earth elements (LREEs), a particular concern is the fact that the West is realistically years away from having a supply chain built that can diminish foreign dependence on REOs. Viewed that way, reduced demand for certain REOs could be a blessing in disguise in that it can give Western policymakers more time to formulate a viable strategy, though based on recent behavior in Washington DC (i.e., the debt ceiling debate), we’re not holding our breath. The chart below shows the supply chain for rare earth permanent magnets used in wind turbines and hybrid vehicle motors, among other products. China is responsible for the entire upstream portion of this chain and has designs through mercantilist export policies on owning the entirety of the downstream portion of the chain as well.
There are myriad issues surrounding China’s trade policies and her seeming inability to “play fair” on the world stage. The World Trade Organization recently found that China was in violation of international trade rules for curbing exports of rare earths. The Chinese government is likely to appeal this ruling, effectively kicking the can down the road and prolonging export curbs of rare earths from China indefinitely. Though one could, based on this factor, infer higher prices for REOs, we still believe that slower economic growth and potential for substitution point to lower REO prices going forward.
To get a sense of how Chinese export quotas of REOs have decreased in recent years and the resulting increases in prices of REOs, see the charts below:
Here are the YTD percentage increases in prices of select REOs. More than anything else, we believe, this makes the case for our thoughts on mean reversion and demand destruction described above:
What to Focus on in the Rare Earth Space Going Forward
There are numerous important factors to consider when undertaking due diligence of a mining opportunity (management capability, grade, tonnage, etc.) that we use in the Discovery Investing Ten-Point Factor Model, but we think that there are three keys one must consider initially before looking further at a given rare earth exploration company as an investment.
Despite the fact that we believe the “easy money” has already been made in this sector, we do believe that opportunities for profit exist. Much has been made in recent months of “critical” or “strategic” metals and what constitutes a metal joining this group. We would certainly include rare earths here and, in fact, take this one step further. We consider rare earths to be “political metals.” In the rare earth sector, geopolitics trumps all, and this is the first factor to consider when investing in the junior mining rare earth sector. It should be clear that we have our doubts about permanently increasing demand for REOs. However, due to the significant enhancements REOs provide in military applications, access to a reliable supply of these metals is now on the radar (pardon the pun) of politicians from Brussels, to Ottawa, to Beijing, to Washington DC. In the United States, Sen. Lisa Murkowski (R-Alaska) has been an ardent supporter of rebuilding the U.S. industrial base and supply chain for critical minerals, including rare earths. Rare earth deposits are of strategic significance. A deposit in a safe and stable political jurisdiction is an absolute must.
Second, when comparing rare earth deposits, a decidedly large slant towards HREE mineralization is also a must. After all, the HREEs are truly “rare,” and forecast to be in deficit going forward. In our opinion, investing in a large LREE deposit that promises tens of thousands of tons of REO production per year, when the Chinese dominate this portion of the market and are set to do so going forward, is not a wise move. In the price chart we printed above, dysprosium oxide and terbium oxide (two of the most sought-after HREOs) have increased in price by 704% and 439% respectively, year-to-date. We do not expect continued triple-digit gains in these REO prices, but do believe that deposits with a high percentage of HREEs have potential to outperform going forward.
Finally, while the geopolitics and HREE content are important, without a solid understanding of the metallurgy of a deposit, you could quite literally be investing in moose pasture. This is one of the ultimate differences between rare earths and other metals. Separating 17 metals from each other is an enormously difficult task both technically and financially. This is also a competitive advantage the Chinese have over the West—they have “cracked” the metallurgy of their primary rare earth deposits. While we don’t expect miracles, we do want to see Western rare earth companies making steady progress into understanding the mysteries of the metallurgy. This is one of the biggest risk factors when analyzing a rare earth exploration company.
The Future Is Never Certain, but There Will Always Be a Place for REOs
It appears to be a rather hazy future for the rare earth sector as slow economic growth, potential for substitution, manufacturers potentially misreading demand for their own products that use REOs and price mean reversion all come together to take some of the “froth” out of this market. We think this is a good thing. Regardless, the big picture issues surrounding the need for REOs in various military and clean tech applications are going to keep the industry front and center, but it will evolve much differently than many expect. The Great Reset will ensure that.
By The Gold Report, on September 28th, 2011
 As exciting as the critical metals sector is becoming, Gold Stock Trades’ Jeb Handwerger warns that the public is being bombarded with misleading information, even at the highest levels of commerce and policy. In this exclusive article for The Critical Metals Report, Jeb gives his take on Molycorp’s recent presentation to Congress, and outlines key points investors and policymakers alike should use to inform their decisions.
This week, Molycorp Minerals (MCP:NYSE) went to bat before the House Foreign Affairs Committee, represented by CEO Mark Smith. What was needed was a confident batter presenting an urgent case for national survival. But instead of a strong slugger, all we got was a little leaguer. Opportunities were missed and runners were left stranded. The industry sent a very conflicted Mr. Smith to Washington.
First of all, Mr. Smith never questioned the categorization of the metal class, namely that heavy rare earths (HREEs) are lumped in with the more common, garden-variety light earths (LREEs). Not once were the members of the committee informed of the importance of the highly critical dysprosium and terbium minerals, or the serious consequences China’s supply monopoly poses for American industry. Meanwhile, Alaska-based miner Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) is sitting on a mountain of dysprosium and terbium in North America’s backyard.
Indeed, the Machiavellian hand of China’s mining industry was not merely overlooked, but praised. Mark Smith’s presentation before the Congressional Committee read like an apologia for the nation’s draconian quotas. Not once in his presentation did he make reference to American sources of these valuable minerals. Instead, Molycorp was hailed as king of the REE hill, as if there were no other viable rare earth entities. It became an obvious case of not-too-skilled investor relations.
In every missed opportunity there exists a valuable learning experience. What else was omitted that would have made for a stronger presentation?
- Where does Molycorp get its heavy rare earths? Smith claimed Molycorp possesses a complete suite of rare earths at their Mountain Pass property. Assays have shown that this mountain possesses predominately light rare earths with little or no heavies.
- Why does Molycorp venture to far-away Estonia to process U.S. ore when it can be done more efficiently and economically on American soil? A new industry could be created here offering jobs to build a new, native industry.
- What was the significance of the aborted deal between Hitachi and Molycorp? The Japanese claim that Molycorp did not possess sufficient heavy rare earths to satisfy Japanese industrial needs. Smith glossed over the strategic importance of heavy rare earths right here in the United States.
- Why was no mention made of the Critical Minerals Act that has been languishing on congressional desks for many months? Encouraging Federal Government to support this act might have served to fast-track vital legislation. What could be more pertinent than weaning the U.S. from its dependency on China?
- Chinese policy makers have stated that the nation needs strategic rare earths for its own markets and that there are simply not enough of these resources to go around. They’ve even said they would welcome American firms to develop the sector on Chinese soil. Why not explore this opportunity to assist our Chinese colleagues, thereby furthering a more harmonious relationship?
Let’s hope that a more voluble and reasoned representative will inspire Congress at the next opportunity. Sadly, only four committee members were present at the hearing. Perhaps such North American players as Ucore, Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A) and Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) can send a slugger up to bat to advance our indigenous rare earth industry.
It’s not just Congress who could use some enlightenment on this oft-misunderstood market; even major investment firms demonstrate limited understanding of the rare earth sector. J.P. Morgan recently downgraded Molycorp’s rating, slanting its sector thesis by forecasting declining prices. Nowhere did they differentiate between the heavies and the lights. Dysprosium and terbium prices have not gone much lower. Investors fear that Molycorp and Lynas Corp. (LYC:ASX) will flood the rare earth supply when they come online, but this is not the reality.
Right now, LREE-heavy Lynas and Molycorp are half a loaf. All these two giants have to do is look to our recommendation list to find suitable heavy rare earth additions to complete the catalogue, or else they open themselves up to evisceration by bankers who may be playing both sides of the field.
Finally, is it not passing strange that JP Morgan chose to issue this negative pronouncement on the eve of Bernanke’s two-day conclave in Washington? Keep in mind that J.P. Morgan is being sued by individual silver investors who allege the bank “amassed an unfairly large position in silver futures and then used its position to drive down prices of silver and increase its own profits.” (Wall Street Journal) This lawsuit may indeed throw into question good-old J.P.’s credibility as an impartial observer. Do not forget that our rare earth stocks have an incredibly large short-interest position. This is not the time to flee the battlefields in this vital sector.
Gold Stock Trades Editor Jeb Handwerger is a highly sought-after stock analyst who is syndicated internationally and known throughout the financial industry for his accurate and timely analysis of the equities markets—particularly the precious metals sector. You can read his daily bulletin for timely updates on the rare earth sector by clicking here.
By The Gold Report, on August 19th, 2011
Rare earth elements have made possible improvements in everything from smart phones and plasma televisions to clean energy technology. In this exclusive interview with The Critical Metals Report, Jason Burack, independent investor and cofounder of Wall St. for Main St., and Kevin Kerr, commodities trader and president of Kerr Trading, share the names of the rare earth element companies to watch as the market grows.
The Critical Metals Report: The rare earth element (REE) space is the most complicated space in the mining and metals sector. Mining these elements is complex, often involving permitting and infrastructure issues. Once mined, separating REEs to high manufacturer purity levels is even more complex. Then selling the isolated REEs often involves highly specialized marketing. Why should an investor place money in the REE space?
Jason Burack: REEs have an amazing amount of innovation upside right now. Because of the innovations coming down the pipeline, the market has the potential to exhibit an annual double-digit growth rate, which offers far more upside than most other commodity sectors. It’s an amazing growth opportunity for investors because the REEs are going to play an important role in making high-end technologies efficient and also in supporting new innovations. In new high-end technologies, REEs are the secret sauce.
Kevin Kerr: These are the metals of the future. There are applications with these metals that we can’t even conceive of yet. It’s very exciting to be involved in these elements. I think part of the benefit of REE mines is that they are limited. There are few players out there that really have all those elements and are innovating. The ones that do have all the pieces in place offer good opportunities for investors. There’s always risk with anything new, but the risk/reward balance is very good in this sector.
TCMR: Can you comment on some of the recent innovations?
KK: For years, REEs were just wasting away; they were not really considered a good investment until engineers realized they were vital to some of the things we use every day—everything from specialized glass to green energy technologies and special batteries to super magnets. The list goes on, including developing technologies like water purification systems, which I believe Molycorp Minerals (NYSE:MCP) is exploring. Prices have exploded.
JB: The primary use for REEs for a long time was the europium in color TV sets. Molycorp, which was supplying much of this demand, had decades’ worth of used tailings sitting around doing nothing. The Chinese saw the potential of this market and spent a lot of time and money to build out uses for the other REEs mined alongside the europium.
TCMR: The United States and Mexico have filed a Memorandum of Understanding with the World Trade Organization over China’s protectionism regarding REEs. China controls about 95% of the world’s REE supply today. The Chinese government increased tariffs and reduced exports, while cracking down on illegal miners. This will further limit the supply and tighten their grip on prices. Do you think the U.S. and Mexico are going to get anywhere by filing complaints against China? Or are we just going to have to wait for another supply of REEs to come to market?
JB: I would prefer a free market solution to government intervention, but REEs are not a free market right now. China has a monopoly on supply and processing, but the government seems to be willing to reduce control. What China cares most about is the high-end value chain products because they saw what oil processing and related innovations did for the U.S. economy. China cares most about the higher value-added product jobs. That is why they are limiting export. They want the manufacturers to come to them.
As a result, you are going to see these other deposits, like Mountain Pass, coming back online. You are going to see Lynas Corporation’s (ASX:LYC) Mount Weld and Great Western Minerals Group Ltd. (TSX.V:GWG; OTCQX:GWMGF) come online. The supply problems, at least in the light rare earth elements (LREEs), will start to resolve themselves over the next couple years. The problem with the heavy rare earth elements (HREEs) is in supply. China is going to guard their higher-end jobs because they want that value-added industry.
KK: China certainly has a monopoly on HREEs. The question is how long will it take to build the next HREE processing facility outside of China? The answer is a long time, mainly because of environmental and regional problems. Also, who’s going to partner up to build this facility? The red tape, whether it’s in the EU or the U.S. or Mexico, is far more extensive than it is in China. They are years and years ahead of us in the game of producing HREEs.
TCMR: Kevin, you’ve spent 23 years as a commodity trader. What does that experience tell you about the REE space? And what’s the path for investors to make money here?
KK: This is one of the opportunities that a trader will see only once in a lifetime. A lot of people say, “This is just a bubble.” I don’t agree. I’ve seen many contracts and future markets come and go, but with REEs, it’s different. These are vital commodities that we are all using every day. We don’t want to lose our ultra-light cell phones and go back to the Gordon Gekko–style phones with the big battery. These things are only going to be more in demand, especially as the world population grows.
Investors can see it as a monumental opportunity. There’s certainly risk, and that’s important to stress. Anytime you’re trading in something new, you have to look out for those risks. But ultimately these markets are going to be some of the leaders in the 21st century.
JB: Because of the innovation upside as more people switch to newer smart phones and to alternative energy technologies, as the military becomes more efficient with less manpower and more unmanned vehicles, REEs play an important role. And the REEs market can grow a lot per year as the pie gets bigger with new innovations.
TCMR: You suggest in your Dragon Metals Report that three metals reign supreme among REEs. What are those and what are their primary uses?
JB: Well, if I was rewriting the Dragon Metals Report today I would actually expand the three to six: three lights and three heavies. The number-one LREE is neodymium, which is used in the neodymium-iron-boron magnet, a permanent magnet technology. Neodymium-iron-boron magnet technology has allowed for miniaturization of a lot of high-end electronics. It has literally made everything smaller, thinner and lighter. Consumers just love the fact that their iPad is so thin now. People talk about the operating systems and the processing speeds and all their applications, and they love them. They wouldn’t have any of this without the neodymium-iron-boron magnets.
The next two are lanthanum and cerium. Lanthanum will have a humongous industrial demand increase in petroleum refining. Oil and REEs are linked in this aspect. You will see a humongous increase as lanthanum is used very heavily in the refining process to crack heavy sour crude oil. The other one is cerium, which is used in car catalytic converters. Also, you’re going to see Molycorp bring on this XSORBX water filter, which combines cerium and nanotechnology. It’s the only filter that’s capable of removing pathogens and pharmaceuticals that the modern municipal water filtration systems cannot remove.
The heavies tend to be more prevalent on the Department of Energy’s Critical Metals Strategy list, so they have even better supply/demand fundamentals than the lights. Dysprosium is used in a trace amount in the neodymium–iron–boron magnet, but the magnet wouldn’t be as good as it is without the dysprosium in it. Dysprosium is not very common in terms of the percentage amounts in most REE deposits. It’s the most critical on the entire Department of Energy’s Critical Metals Strategy list because it’s rare and it’s very important to clean energy. The other couple of heavies that people should learn the names of are terbium and europium. Terbium is used in compact fluorescent light bulbs as well as in smart phones. Europium is going into smart phones too.
TCMR: In many cases REE production in China has caused vast environmental degradation. Some Chinese farmers can’t safely plant crops near the mine sites, and drinking water in these areas can sometimes be deadly. Nonetheless, Molycorp plans to mine 20,000 tons per year of REEs in California, which is not considered a “mine friendly” state. What makes you think Mountain Pass will be permitted?
JB: Molycorp is using innovative technologies in their processing facilities now. Yes, California does have environmental concerns, but California wants to transition to clean energy and the state has been subsidizing that. Molycorp has to demonstrate that it can operate in an environmentally responsible way and that they can do it at scale. The company has the capital and the know-how to be able to do it. It’s already a previously mined ore body with decades of data, so that’s an advantage. The infrastructure is there.
There is new technology to process the REEs safely and do all the refining. It’s going to cost a little bit more money up front, but Molycorp management is saying their production costs are going to be even lower than China’s costs. It’ll be an impressive feat if Molycorp management actually delivers on these promises.
TCMR: It’s possible that these companies spending hundreds of millions of dollars to bring their mines into production and build the facilities to properly separate those metals from one another could be jeopardized if China opens the tap, floods the market with heavies. How are companies going to deal with that?
JB: We don’t have a free REE market. Governments will probably buy REEs for a secure supply to protect REE miners bringing production online. In fact, Japan, the U.S. and the EU have all recommended that their governments start stockpiling a safe and secure REE supply to protect themselves from the Chinese monopolizing the industry.
KK: This is a real concern. China could dump pretty much anything on the market, and they do once in a while. They’re shrewd traders. No one can say for sure what they will do, but the stockpiling that’s gone on will have some effect as well.
TCMR: In early August, we witnessed a massive selloff of REE names. On August 8, names like Quest Rare Minerals Ltd. (TSX.V:QRM; NYSE.A:QRM) and Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) fell at more than 10% and 13% respectively. Are these so cheap now that it’s time to fill your boots?
JB: If I was building a model REE portfolio and I had to concentrate the majority of my money into three companies, they would be Neo Material Technologies (TSX:NEM), Molycorp and Great Western Minerals. Then I would sprinkle some of the other top juniors like Quest, Avalon, Tasman Metals Ltd. (TSX.V:TSM; OTCPK:TASXF; Fkft:T61), Stans Energy Corp. (TSX.V:HRE) or Ucore Rare Metals Inc. (TSX.V:UCU; OTCQX:UURAF). Lynas and Rare Element Resources Ltd. (TSX:RES; NYSE.A:REE), which might have some more heavies in the deposit, are wait and sees.
Investors really need to be discriminatory with their capital. If they are going to put a model REEs portfolio together, I think the heavy concentration should be in Neo Material Technologies, which is already profitable. They don’t have to worry about the prices of the supply, and they make a value-added product so their profit margins are safer. Molycorp has the funding in place already, and it already knows its ore body. I think Molycorp and Great Western Minerals Group Ltd. are going to end up consolidating the sector with some of these other juniors.
TCMR: You’ve said “for this industry to flourish over the longer term it will have to consolidate.” What are consolidators going to be looking for in companies that are just below them on the food chain?
KK: The race is on to figure out who’s going to team up and create the next HREE processing facility outside of China. Everyone is looking for who has the cash, who has the supplies and the infrastructure. We’ve already seen some consolidation in the last nine months, and we’re going to see a lot more.
JB: If I was looking to consolidate the industry, I’d stick with my vertical integration strategy, focus on those making the higher value-added products. There aren’t a lot of people around that have the technical know-how to do it. And there aren’t a lot of these facilities in the world. Only a handful of facilities exist outside of China. I think one of them in France just sold for a big amount of money. Great Western Minerals has a couple of them and so does Neo Materials Technologies.
So, if I was looking to acquire and consolidate the space, I think Molycorp is going to end up being the control stock here, like PotashCorp (TSX:POT; NYSE:POT) has become in the fertilizer industry. I think Molycorp will go after Ucore for some of the heavy deposits and then the processing facilities like Stans Energy. Then maybe they’ll go after some other processing companies or do a joint venture with Neo Material Technologies further up the value chain.
TCMR: Ucore was just given “priority permitting assistance” from the U.S. Department of Agriculture. What does that mean for the stock?
JB: Ucore is going to be a big winner. I project the supply crisis in LREEs will be solved by the 2014-2015 timeframe depending on what true demand turns out to be. Then only the heavies will be in true supply deficit/crisis mode. For a company like Molycorp, which is going to be a lower cost producer, that’s going to be fine. Some of these other juniors that are planning on bringing production online from 2015 to 2017, primarily with light and very little heavies, are going to see a lot of trouble. Ucore has an infrastructure advantage, so they can be online and producing probably before 2015, probably the end of 2013 if everything goes according to plan.
TCMR: What about Ucore’s Bokan Mountain in terms of its HREE versus LREE content? Is this the kind of play that might suit a Molycorp?
JB: Yes, Bokan has higher heavies than lights compared to some of the other deposits. The infrastructure advantage is so good that the capital expenditure (capex) to get Bokan Mountain back into production is going to be minimal compared to some of these other mining projects.
TCMR: Molycorp, Lynas and Great Western are projected to be the first REE miners to reach production. But what are some companies that you think could surprise you and our readers?
JB: Commerce Resources Corp. (TSX.V:CCE; Fkft:D7H; OTCQX:CMRZF) and Medallion Resources Ltd. (TSX.V:MDL; OTCQX:MLLOF) could surprise along with Greenland Minerals & Energy Ltd. (ASX:GGG).
Greenland is a developing country. Most of the country’s revenue is coming from fishing and it is just starting to develop natural resource plays. If it is done environmentally responsibly, I think there will be less red tape in Greenland. And the deposit in Greenland is absolutely massive. The question is about the infrastructure because it’s a developing country.
In general, though, I wouldn’t risk putting a lot of capital into the plays below the cuff, the top two tiers of companies I suggested in my model REE portfolio, because the supply issues are going to solve themselves, especially in the lights, by 2014 or 2015.
TCMR: Kevin, what are you hearing about Stans Energy in Estonia and about the feasibility study on the Kutessay II project in the fourth quarter?
KK: It depends on who you talk to and when you talk to them about Stans. The concerns are legitimate about how much control Russia has over Stans and what they want, what the facility’s condition is, et cetera. I’m holding my judgment until I see it for myself. They are certainly one to be watched.
JB: The positives include a tremendous infrastructure advantage. Stans has the processing facility there; it just needs to be renovated, so the capex is not going to be absolutely massive. The company can probably keep the capex below a couple hundred million bucks. That’s a big advantage. And, it also has a technical advantage because the people who used to work at the facility still live around there. The company also has an innovation deal with a renowned Russian laboratory that specializes in REEs to separate them and innovate with them.
On the negative side, the company’s total grade of the ore body is low. That means the margin for error is very low on the mining side. Stans will have to make up for it on the processing side. And then you have the geopolitical risk on top of that. Investors are going to have to weigh these risks and rewards to determine if they are comfortable with Stans.
TCMR: Are you following any other companies that you think investors should be interested in?
JB: I think the most undervalued one right now is Great Western Minerals. It just announced a breakthrough deal with an already established and successful Chinese REE processor to team up to build another REE processing facility in South Africa closer to its Steenkampskraal Mine. Great Western Minerals is the only non-Chinese future REE miner to announce such a deal. It adds a lot of credibility to the company.
TCMR: How can people get your Dragon Metals Report and find out more about you both?
KK: We actually have our own website, dragonmetalsreport.com, where people can pick up the report and watch a video interview. They’ll be able to see samples of the report before they purchase it.
TCMR: Do you have some parting thoughts on the REE space before we let you go?
KK: I really believe this is a once-in-a-lifetime trader’s opportunity. I’ve never seen a market that has so much innovation potential that we can’t even conceive of yet. I probably won’t see a market like it again in my lifetime.
TCMR: Thank you for your insights.
Kevin Kerr has had over two decades of intensive industry and trading experience as a floor trader and broker as well as an OTC derivatives broker in New York and London. He travels the globe in search of resource opportunities and is the author of A Maniac Commodity Trader’s Guide to Making a Fortune: A Not-So Crazy Road Map to Riches, which was published by John Wiley and Sons. Kevin has appeared on Cavuto on Fox, Kudlow & Co. on CNBC, The Daily Show on the Comedy Channel, Fox Business News, NBC, ABC, CNN, and many more. He has acted as an analyst and trading advisor for publications at prestigious publishers like Weiss Research, Dow Jones Newswire, and Agora Financial. Kevin’s website, www.kerrtrade.com, offers visitors his blog and video blog, media page and events schedule, and political and economic commentary.
Jason Burack is an investor, entrepreneur, financial historian, Austrian School economist, and contrarian. Jason co-founded the startup financial education company Wall St for Main St, LLC, to try to help the people of Main Street by teaching them the knowledge, skills, research methods, and investing expertise of Wall Street. You can also find Jason’s work at his blog website at www.jasonburack.com
By The Gold Report, on August 3rd, 2011
 “What do you get when you put a professor, a fisherman and a creative Wall Street journalist together? Answer: science fiction, fishy stories and IPOs trying to sell the latest version of snake oil to unsuspecting investors.”
Many years ago, farmers in Pennsylvania noticed a murky liquid seeping up through the soil. It didn’t take long for entrepreneurs to find a use for this oily stuff. It was advertised as a cure for baldness, impotence and sundry medical conditions. Little did the super-salesman of that time realize that they had come across a vital component of the industrial revolution. They called it Snake Oil.
Recently, a professor at the University of Tokyo, spinning a story, announced a latter-day version of the discovery of the lost continent of Atlantis. Brought up from the briny depths of King Neptune were stories of huge deposits of rare earth elements (REEs) located 20 fathoms beneath the sea. You might as well chalk this one up to tales about Rhinemaidens, leprechauns and sunken pirate treasures. Truth be told, the professor’s article may have value for readers of science fiction. You might find a pot of gold at the end of Finian’s Rainbow more quickly than you can bring up REEs from Davy Jones Locker. The search costs would be prohibitive. You would be well advised to file this story into the bin labeled Myths and Fairy Tales.
Now back to reality. Mitsubishi has joined the growing ranks of Lynas Corporation (ASX:LYC) investors. The company recently disclosed the purchase of a 10% stake accumulated between the dates of May 24 and June 7 at the cost of approximately AUD$325 million. In the face of the Malaysian brouhaha and the World Trade Organization (WTO) ruling against China, Mitsubishi’s buy and Siemens’ recent joint venture is a bold vote of confidence that Lynas is here to stay and that REE resources must be produced outside China.
The WTO may take a long time in the execution of its decision as the matter falls into the delaying hands of lawyers, appeals and politicians. However, experienced market players have been through news-driven developments on other occasions. Stocks can be drawn and quartered by media stories that can exacerbate day-to-day events and cause short-term fluctuations only to be forgotten the next day. With Lynas, we are witnessing a classic example of how panic can influence hasty and erroneous conclusions. It is important to play our cards close to the vest.
In assessing the barrage of stories flooding the news, we are deluged with often-conflicting items. One story purports that the Malaysian Prime Minister is requiring Lynas to institute several corrective procedures before moving forward there. Lynas responded that it would get the work done within the targeted end of 2011 timeframe.
Stories and opinions from anonymous sources hinting at further delays could be planted to confuse the lay retail investor. Possible short sellers are driving skeptical stories in order to turn a profit. Gold Stock Trades takes anonymous sources and fishy stories with a grain of salt.
Articles in the press, namely The Wall Street Journal, have highlighted the possibility that we may be witnessing a bubble in the rare earths. They cite a preponderance of short sellers hovering as vultures in the skies over the sector. Moreover, there may be the presence of a fine Chinese hand at work. After all, it is to Beijing’s benefit to throw as many monkey wrenches as possible into the grist for the Malaysian mill.
Where does this leave investors? At this moment (and I stress moment), we take a long-range view. Gold Stock Trades is convinced that the REE arena will reemerge as a source of profit once this particular black swan is overcome. We maintain a cool hand in what is a developing story.
Not all the cards are in the hands of the Malaysian bureaucracy and the Green Party. Many interests are looking forward to Lynas providing REEs, particularly Japan and its highly technologically dependent industries. Lynas may well have other moves that it can make. Is it too fantastically far-fetched to think it could dump Malaysia and move to another venue closer and more economical to its Australian base? Think Papua or Borneo. After all, Sumitomo Corporation of Japan has bankrolled Lynas thus far. This is only a matter of conjecture at this point and Lynas will make every attempt to satisfy whatever corrective measures are necessary to develop the Malaysian project. One way or another, these critical ores will be refined to satisfy the survival, not only of Japan but advanced industrial interests elsewhere.
At this point, what may be impediments on the Lynas road to production may actually accrue to the benefit of other REE recommendations on our select list. These companies are undervalued and just emerging. They have resisted falling below long-term trendlines and are now testing overhead resistance areas. The survival of Japan’s modern industrial base is at stake. It is full speed ahead for large, corporate investors who stand undeterred in their growing position of the stock.
The Lynas stock chart reveals the penetration of the 50- and 200-day moving average to the upside. This strength continues in the face of bad press, negative news and announced government hurdles. Technically, this reveals that the stock has passed from weak to strong hands. Additionally, a very significant development has occurred with another one of my recommendations. Tasman Metals Ltd.’s (TSX.V:TSM; OTCPK:TASXF; Fkft:T61) Norra Karr Project has been declared a National Interest by the Swedish Government. This classification is crucial because it guards Norra Karr from any land use issues that may occur in the future. The importance of this development is best expressed in the following words issued by the government: “REEs are of great importance in modern society and access to these elements is very limited within Europe. The Swedish Geological Survey is therefore of the opinion that assets such as these should be accessible to future generations. Norra Karr is a very important project from a material supply point of view, both for Sweden as well as for Europe. The mineral resource at Norra Kärr is the only NI 43-101 compliant REE resource in mainland Europe.”
Tasman’s Norra Karr project is located near the capital of Stockholm. The site has great infrastructure, which allows year-around access. This is no Wall Street house hyping a stock. It bears the official seal of the Swedish Government. Attention must be paid.
Tasman has found support at the 200-day moving average and maintains its long-term uptrend. The company did not violate March lows in its most recent selloff since May. Tasman has been stuck in a range between $3.50 and $6.00. In May, the commodity selloff brought Tasman down along with it extending the consolidation. Now it is forming a six-month base and did not break down technically in early June. Tasman is forming a W consolidation and I expect a breakout into new highs by Autumn of 2011.
Similarly, Ucore Rare Metals Inc. (TSX.V:UCU; OTCQX:UURAF) is in a kindred situation. The governor of Alaska is on record advocating fast-track development of this company. Ucore’s Bokan Deposit is the only heavy REE (HREE) mine on American soil. It has based and reversed in the $0.60-$0.65 area for many months, making a major move. I would not be surprised if Molycorp Inc. (NYSE:MCP), which is not exposed to HREEs, gets interested in Ucore’s assets before it is too late. For the past six months, Gold Stock Trades has been highlighting Ucore as a takeover target by such entities as Molycorp. Such majors stand to profit from the inclusion of HREE Ucore’s dominance. The possibility of Ucore being taken over by resource-hungry majors is gaining increasing attention from brokerage houses and institutional interests. The National Strategic and Critical Minerals Policy Act is now moving through both the Senate and House of Representatives. It enjoys bipartisan sponsorship at the highest levels because of the importance of fast-tracking domestic production of vital metals for national interest including Ucore’s Bokan Mountain HREE deposit. That is not Snake Oil; that is real opportunity.
Gold Stock Trades Editor Jeb Handwerger is a highly sought-after stock analyst who is syndicated internationally and known throughout the financial industry for his accurate and timely analysis of the equities markets—particularly the precious metals sector. You can read his daily bulletin for timely updates on the rare earth sector by clicking here.
By The Gold Report, on July 27th, 2011
 As uncommon as they may be, rare earth elements are all around you—in your laptop, your cell phone and your flat-screen television. But despite their frequency in our everyday lives, investors still have a lot of false preconceptions about these 16 elements. In this exclusive interview with The Critical Metals Report, Luisa Moreno, a senior analyst with Toronto-based Jacob Securities, delves into the unique challenges rare earth miners encounter and how those can be opportunities for investors.
The Critical Metals Report: Japanese explorers discovered a massive rare earth element (REE) deposit on the floor of the Pacific Ocean earlier this month. Will this discovery impact the REE sector in any tangible way in the near term?
Luisa Moreno: Any major news like that is likely to have some impact on mining stocks. However, when news of the discovery first surfaced, the media entertained the idea as though it could be a viable and significant discovery. I don’t think it is. I tend to believe that it would be cheaper for the Japanese to invest in one of the most advanced rare earth projects outside China rather than pursuing a project 3-6 km. down on the ocean’s surface. I can’t imagine how that can be more economical relative to other ongoing projects right now.
TCMR: Mining rare-earth elements is more complex than other mining because of the need to separate the different elements from one another. Investors often receive conflicting information about REE. If you could clear up any misconceptions about REE mining, what would it be?
LM: As you mentioned, there are 16 elements. It’s important to understand that each element has different uses, target markets and prices. We can’t talk about rare earths as one product or one material. For instance, the magnet industry in North America is not very strong. It’s far stronger in Japan and Korea. Companies trying to target that market will need to go to Asia to find partners. The catalyst market is far broader in North America. Companies that want to sell cerium for catalyst applications will find a lot of potential partners in the U.S.
The other aspect is metallurgy. Most of the projects are dealing with minerals that have not been processed commercially. In that sense, they are early stage and it’s a bit like a science project. It’s important for investors to track the progress of the metallurgy. For instance, Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF), which has complex mineralogy, delayed their feasibility study by an additional four months to improve its metallurgical process, however other companies are only in the initial phase of their metallurgical testing. Compare that to Molycorp Minerals (NYSE:MCP), which has a well-understood metallurgy and has processed rare earths for many, many years.
When mining does actually commence, investors should expect to see variations not just in grades but in actual distribution of the 16 elements. Small variations will likely be common, but there may be occasions where unanticipated changes in rare earth distribution would significantly impact revenues and even costs.
Furthermore, the price correlation between the 16 elements is not very well understood and variations in price trends are likely to affect mine economics.
TCMR: There are also deleterious elements in there, like thorium or uranium, that can make disposing of the tailings a difficult task.
LM: That’s definitely another consideration: the environmental impact. There are guidelines in place to properly dispose of uranium, thorium or any other radioactive materials that might be present in a deposit. But the consideration right now is that deposits that have a high percentage of radioactive elements will probably have to endure a more comprehensive permitting process that could cause delays. Also, the companies that deal with those radioactive elements will likely face higher operating costs associated with handling and disposal of these elements.
TCMR: If the metallurgy proves to be difficult, could that mean that some of these companies would be forced to go with a straight concentrate versus separating out the individual metals?
LM: There is not much of a concentrate market outside China right now, but if they cannot prove in the lab that it’s possible to economically separate those elements, I don’t see anybody else in the world willing to do that. These elements are not really useful as a concentrate. In some instances, they can be used in a combination, like didymium, which is a combination of neodymium and praseodymium or in combination with other elements like zirconium. The elements can be used as concentrate in some applications but it will not be economic for companies to sell all the product like that.
TCMR: Can you tell us about the applications and locations of rare earths?
LM: Rare-earth elements are used in technologies, such as computers, light-emitting diodes and cell phones. They also aid in the efficiency of alternative energy products like wind turbines and solar panels. The elements themselves can be found all over the world, but most of the manufacturing of these components is in Asia due to inexpensive labor costs and economic focus.
TCMR: In a recent report, you said that continued economic turmoil in the U.S. and Europe could lead to the withdrawal of project financings. That would likely separate the pretenders from companies with legitimate REE projects.
LM: We will likely see a difference in the market for projects that are more advanced and companies that have partners like Frontier Rare Earths Limited (TSX:FRO). Frontier announced that it could sign an agreement in the next three to five months with KORES, a Korean resource company, where the company will take 10% of the Zandkopsdrift deposit after the completion and publication of a preliminary economic assessment (PEA) and potentially 10% next year upon a positive feasibility study. That’s the sort of things that the market wants to hear—some validation from future partners that could bring financing and expertise. Avalon also said recently that it has a few memorandums of understanding with unnamed parties.
TCMR: Do you think the market would’ve preferred to see a bit more transparency from Avalon about who those new partners are?
LM: Absolutely. Memorandums of understanding are a good starting point for sure: they are agreements that potential collaborators sign to say, “We’re watching you. We want to do a little more due diligence to see the viability of your project.” But it’s different from an agreement like Frontier’s with well-defined milestones and a disclosed partner.
The market is getting much more knowledgeable about the space and locating companies that are able to differentiate themselves.
TCMR: Developing Ucore Rare Metals Inc. (TSX.V:UCU; OTCQX:UURAF) Bokan Mountain property in Alaska would require the lowest capital costs, less than $200M, of any of its peers. What should we expect from the company’s scoping study, which is due in the fourth quarter?
LM: The capital expenditure is low in relation to scale. Frontier wants to produce 20,000 tons/year. Avalon is talking about producing anywhere from 10,000–15,000 tons/year. Ucore is less than 5,000 tons, and may even start with 3,000 tons. The operation is much smaller.
The company did tell me that it is looking for technologies that will make the project cheaper, such as using chemical processing vessels made of more economic materials. Other companies, such as Lynas Corporation (ASX:LYC), seem to be using more expensive equipment and have experienced relatively higher capital costs. It appears however, that there are new processing technologies and equipment, and some companies like Ucore and Great Western Minerals (TSX.V:GWG, OTCQX: GWMGF) are investigating them.
TCMR: You have a target price of $1.09 on Ucore and it’s currently trading around $0.72. However, the company could get to that target because this project might get support from the U.S. government.
LM: The government may support them by fast-tracking the permitting and giving favorable loans. That would essentially make the government a development partner, at least in the short term.
TCMR: Why would the government do that?
LM: The government might do that because Ucore is the best known project right now on U.S. soil that may have an economic deposit with high percentage of heavy elements. Many of these elements are used in military applications. They are of great national security importance. It’s an opportunity for the government to be independent from China for these elements.
TCMR: Bokan Mountain is near a former uranium mine. Is there uranium at this property?
LM: The Ross Adam Mine, the former uranium mine, is not part of the Dotson Zone, which is Ucore’s principal economic target. According to the company, the uranium and thorium concentrations are low in that area.
TCMR: Do you think that the government would also be willing to support the Bear Lodge Project in Wyoming that Rare Element Resources Ltd. (TSX:RES; NYSE.A:REE) is working on?
LM: Rare Element would certainly benefit if the government implements policies that involve fast-track permitting. But, in the case of Ucore, the governor of Alaska is pushing a lot of these policies that are supporting the company directly. Rare Element, as well as all the rare earth companies, would also benefit if the U.S. government decided to lend at trivial rates to rare earth companies. I have a target price of $18.43 on Rare Element and it’s currently trading around $10. 26.
TCMR: Rare Element has done some metallurgical testing on Bear Lodge and had 90% recovery rates—certainly among the highest of its peers.
LM: The company’s deposit has primarily bastnaesite, which is a mineral that has been processed commercially, and ancylite—a less-known RE mineral. It has tried to use the same process as Molycorp, but reported in the NI 43-101 that it was not very successful. Rare Element came up with its own process and it seems it could end up with one of the highest recovery rates in the industry. If they are able to reproduce these results at a commercial scale, that will be great for them.
TCMR: The company has $73M in cash, which should carry it through the feasibility study that is currently underway. What are you expecting from that feasibility study?
LM: I expect it to be positive. I’ve run my own economic assessment of the project. I expect the company to have some of the lowest cash costs per kilo because of the type of deposit and the potential to have good recovery rates.
TCMR: Are there any other stories that have been overlooked in this sector?
LM: Montero Mining and Exploration Ltd. (TSX.V:MON), a small company in Africa, is progressing very well. It has a similar deposit to Molycorp’s with low percentage of heavy elements, but it is trying to fast track its project to production. It recently signed a memorandum of understanding with Korea Resources Corp. (Kores).
There are other projects in countries off our radar like Russia, India, Sri Lanka and Malaysia. We should expect to see increasing production from existing mines and new mines coming online in those regions, where some companies that are not listed could affect the market. We will probably hear more about that in the coming years.
TCMR: Isn’t Montero’s main project Wigu Hill in Tanzania?
LM: Yes. It has various grades depending on the zone. I think the average is about 5%, but in some zones it has 15%. The metallurgy has been cracked, so it doesn’t need to spend too much time on that. I believe that it could be in production within two years.
There could be other stories like that with simple deposits and simple metallurgy that come to the market fairly quickly. As long as they have offtake agreements and clients to sell those products to, I think that’s very positive for them.
TCMR: Why do you support a neodymium-equivalent measure of resources versus a percentage of total rare earth oxides, or TREO?
LM: It’s very simple. Deposits that have gold and copper often have a smaller percentage of gold grade than copper, but you do not base your analysis solely on that. The size of the resource and grades count but the price of gold versus copper is also very important in assessing the economics of the project. It’s no different for the rare earths. Some of the prices of these elements, like some of the most obscure ones like thulium, a heavy element, have historical prices above $2,000/kg. Then you have other elements like lanthanum and cerium, which are historically cheaper and two years ago had prices below $10/kg. A neodymium-equivalent approach shrinks the differences within grades and better expresses the differences in prices.
TCMR: There is a lot of potential for mergers and acquisitions in this space. Who’s going to take out whom?
LM: Consolidation has already started, in a way. Molycorp has been actively looking into vertical integration and expanding potential products. It purchased AS Silmet in Estonia and Arizona-based magnet company Santoku America.
Molycorp has relatively lower percentages of the heavy elements, like dysprosium, which is one of the most critical elements and one of the rarest. In order for Molycorp to be a leading rare earth company, it should be able to provide at least most of the critical elements. For it to be able to provide dysprosium at quantities that satisfy the market, it will have to find other deposits. That’s why I suggest that Molycorp could potentially acquire Ucore or Matamec Explorations Inc. (TSX.V:MAT) in Québec. Those two companies are smaller and cheaper, but they offer a good amount of these elements to balance their total production. I have a speculative buy rating with a target price of $1.50 on Matamec. It’s trading at around $0.40.
Rare Element Resources could definitely benefit from that as well. The company has a little higher percentage of the critical elements, but lower production. If Rare Element acquires or merges with another rare earth company with high percentage of heavies and critical elements, it can increase its total production, and at the same time have a better balance of rare earth distribution with higher amounts of the heavy rare earths.
We should see consolidation over the next 15 month, especially as companies come out with progress reports on their metallurgy and PEAs.
TCMR: Thanks.
Luisa Moreno is a senior mining and metals analyst at Jacob Securities Inc. in Toronto. She covers industry metals with a major focus on electric and energy metal companies. She has been a guest speaker on television and at international conferences. Luisa has published reports on rare earths and other critical metals and has been quoted in newspapers and industry blogs. She holds a bachelor’s and master’s in physics engineering as well as a PhD in materials and mechanics from Imperial College, London.
By The Gold Report, on June 29th, 2011
 Is there a clear path to meeting growing global critical metals demand? An important first step, according to Laurentian Bank Securities’ Technology and Strategic Metals Analyst Jim Powell, would be to establish supply sources that aren’t concentrated in a single country—particularly one that isn’t inclined to share its resources with the rest of the world. In this exclusive interview with The Critical Metals Report, Jim points out some potential plays to look for while the landscape is changing.
The Critical Metals Report: There’s a lot of confusion about the future supply and demand equation for critical metals, which we’ve defined as rare earth elements (REEs), minor elements and strategic metals. What do you consider the most important minerals and why?
Jim Powell: In terms of investment options, I’d focus primarily on electrolytic manganese metal (EMM), fluorspar, graphite, tungsten and rare earths.
TCMR: Why is that?
JP: A lot of these are controlled by one supplier—China—in most cases. The overall EMM market isn’t huge, but it’s large enough to leave room for other suppliers. At this time, China supplies more than 98% of that market.
Fluorspar is used in acids and fluorine-based chemicals, so a lot of chemical companies need it, as do steel and aluminum manufacturers. Fluorspar is more than 50% supplied by China.
TCMR: How about graphite?
JP: Graphite’s another mineral that’s also controlled largely by China. There used to be a fair number of producers in North America and Europe, but most of them shut down over the last 10 years as China outpriced them in the market. Graphite is a refractory used primarily in nuclear reactors and batteries. Actually, there’s more graphite than lithium in lithium-ion batteries.
Tungsten is somewhat underappreciated for what it does. It’s widely used in tooling, in the mining industry—even in products, such as the Blackberry. Those little vibration elements used in the Blackberry are made of tungsten. China currently produces in excess of 80% of the global supply of tungsten with a handful of minor suppliers in Canada and Russia sharing the rest.
Of course, China also dominates the supply of rare earths, which are pretty mainstream because even though it’s a very tiny market, REEs are very critical elements. There are lots of investment options there—almost too many.
TCMR: You’ve mentioned batteries, manufacturing, tooling and electronics. Where is the major demand for these elements? Is it technology for alternative energy? Is it magnets? What’s driving the demand?
JP: A lot of it’s technology-related; the bulk of the rare earths go into technology-type applications. As I said, batteries use graphite and a variant of electrolytic manganese—EMD, electrolytic manganese dioxide. The current generation of batteries for cars, such as GM’s Volt, is manganese-type batteries. So, there’s another clean-tech focused use.
Industrial use is also important. Tungsten is pretty much all industrial use, and so is fluorspar. EMM is used largely to manufacture stainless steel and aluminum.
TCMR: You said that China dominates the market for the EMM that’s used in the new batteries?
JP: Yes, and probably the biggest issue with that is what happens if China uses it all domestically. If it can, it will. We’re seeing that with the export quotas China has on rare earths, and that could start with some of these other minerals as China runs out of internal supplies. The carbonate deposits from which China mines EMM are running low, and it might just decide not to supply the rest of the world anymore. As a result, we have a somewhat unreliable supplier—one that may at any time just use it internally to satisfy its own demand.
TCMR: Are you following any companies that have the potential to create EMM supplies outside of China?
JP: Yes. There’s only one company—let’s face it—that’s solely focused on it. American Manganese Inc. (TSX.V:AMY, OTCPK:AMYZF) is poised to become the lowest-cost EMM producer. That’s mainly due to the fact that the type of deposit AMY has is easily leachable into acid. In addition, the company has lower-cost power in Arizona versus competitors in China and South Africa. Those are its main technical advantages.
TCMR: You have a target price of $2.90 on that; is that correct?
JP: Yes. And that’s what I’m sticking with, even though it’s a fair bit away from current pricing. I actually felt the target was somewhat conservative—not aggressive at all; a relatively high discount rate. It’s just that AMY will be able to make EMM for around $0.50/lb., whereas it currently sells in Europe for $1.55/lb. to $1.60/lb., and around $1.80/lb. in the U.S. AMY’s production costs will be so low that the company could even make money selling their product into China.
TCMR: China’s lock on rare earth supplies, worsened by its export quota policies, has increased REE prices significantly. How will high rare earth prices and lack of supply affect future demand? Will manufacturers engineer alternatives to these elements?
JP: There are ways of doing things without some of the rare earths, but some of the heavy rare earth elements (HREEs) used in phosphorous, for example, are harder to replace. Neodymium as a permanent magnet is the most superior type of magnet. An alternative is an induction motor, which is larger and less efficient but can do the job. The Volt uses an induction motor, as does the Tesla Motors car in California, so those are examples that use a substitute for REEs that costs less but weighs a little bit more and delivers lower performance. So, there are ways around it.
You’re also seeing Sumitomo Corp. (TKY:8053; OTCPK:SSUMF) selling cerium, lanthanum and other products coming out of its deal with Molycorp Inc. (NYSE:MCP) in Japan where customers are either designing the REEs out of their products or learning how to use less. That’s partly because they just won’t accept the high REE prices anymore, but I think a bigger part is lack of availability. Besides, manufacturers don’t want to be tied to one supplier that could change its mind about shipping the product at any point in time.
TCMR: Are other companies positioning themselves to meet that demand outside of China?
JP: Yes, early on I think it will be Molycorp and Lynas Corporation (ASX:LYC) that help ease supply issues with many of the light rare earth elements (LREEs). I have no doubt that both of them will reach production within the year. It will probably bring pricing down quite a bit on the lights, though, and probably result in an oversupply of certain light minerals, such as cerium and lanthanum, in the short term.
TCMR: How about the heavies?
JP: I believe that over the longer term, the heavies will still be in demand, and that demand won’t be met until larger rare earth producers, such as Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) and Quest Rare Minerals Ltd. (TSX.V:QRM; NYSE.A:QRM) come online, which isn’t until 2015–2016. So, they’re still some time away from production. In the short term, that’s going to keep the HREE prices high.
TCMR: Are you watching any other companies in the HREE space?
JP: Well, we’re focused primarily on the heavies, so we do cover Quest and Avalon and like the heavy nature of their deposits. Another interesting one that pops to mind that we don’t cover is Tasman Metals Ltd. (TSX.V:TSM; OTCPK:TASXF; Fkft:T61); it’s in Sweden. Its advantage over others has been its good geography, relatively low costs and the fact that you can actually drive there in a regular car. Avalon and Quest are fairly remote, in terms of getting in their supplies and people to mine their deposits, and both have fairly high capital costs—in the $500 million to $1 billion range. Quest has a great open-pit deposit, so it will be fairly low-cost once it gets to production.
TCMR: But you say the company won’t be producing until 2015–2016?
JP: That’s right. Avalon is about a year ahead of Quest, in terms of getting to production.
TCMR: Back in April, you had a speculative buy on Quest with a one-year price target of $10.80. Is that still what you’re targeting?
JP: That’s still what we’re looking at, even though there’s been a bit of a selloff. It’s not surprising; it’s just the way the markets have been selling off. So, yes, our targets are still current on Quest, and we continue liking it. We maintain our target on Avalon, too—at $8.70.
TCMR: Any other rare earth plays on your radar?
JP: Hudson Resources Inc. (TSX.V:HUD) has a deposit in Greenland that looks pretty interesting. It’s high in neodymium, which is going to be an in-demand element for a long time because it’s used to make the permanent magnets.
TCMR: One of the trends in the rare earth sector is the idea of vertical supply chains. What role will vertical supply chain integration play in creating strategic advantages for some of these companies?
JP: Well, some of them, including Molycorp and Great Western Minerals Group Ltd. (TSX.V:GWG; OTCQX:GWMGF), are moving from mining the minerals right through to manufacturing the magnets or developing the operations to produce them. I’m not a huge fan of a company buying its customers out in order to supply itself. I find it very rare for that to work in any industry.
My preferred way to go with vertical integration would involve strategic partnerships between the customers and the producers, or equity stakes. The companies doing this are going back in the supply chain and securing a supply, and this makes a lot more sense to me. It’s probably a better way to do it, in my view, than becoming your supplier or buying your supplier. I can’t find another industry where this actually makes sense and works well.
Once companies specialize in a certain segment, I don’t like them generally moving out of that segment into new areas just to capture a little bit more margin, which is what’s taking place here. The margin in the manufacturing of the magnet is in the 20%–30% range.
TCMR: And what about integrating the processing or milling into the mining company?
JP: Right now, it would be a strategic advantage to have a separation facility attached to a mine, and a few companies are looking at that. Avalon has scoped it out and is working on a plan to get there, but it’s a very expensive proposition and the knowledge isn’t necessarily readily available in the Western world. Still, to be the first mover on getting a separation facility would probably be a good idea for Avalon and any other company that’s looking to get into that market. In the short term, it’s advantageous to get those facilities online because the companies don’t want to ship the concentrates back into China for separation.
Once the separation facilities exist in the Western world, though, other companies—including smaller ones that will just mine and produce a concentrate—should be able to avoid that very large capital investment. They shouldn’t have a problem either sending or selling the concentrate to other companies for processing.
TCMR: How important is processing in the value equation? How much more could a company make on processing its own concentrates?
JP: The way it works now, the rare earth companies that don’t have these facilities—which now are available only in China—produce concentrates of all of their rare earths sort of mixed together. They then sell that to a facility that can separate it off into the individual oxides and maybe further process that, and some of it into metals. The difference between the concentrate sale price and a separated sale price is about 30%–40%. In other words, a company could realize a 30%–40% higher margin by separating it itself.
TCMR: That’s significant.
JP: It is but the cost of building and running a separation facility is also significant, so some of the juniors will be better off just producing a concentrate.
TCMR: With production still five years or more off for a lot of these companies, what’s Laurentian Bank Securities’ strategy for evaluating risk and investing in this sector? How do you determine which companies are likely to do well that far out?
JP: We start with the management. We meet with them and determine if they know what they’re doing, what their strategy is and if their plan for five years out makes sense. We also look at whether the elements these companies will potentially be producing will have value in the future.
That’s the juncture at which we split out companies that focus primarily on light rare earths versus the heavies. With Molycorp’s mine coming onstream and producing lights to add to the supply stream within the next year, we expect many of the LREEs to decline in value. We use different long-term price targets on the different elements just to determine where they are and where they’re going to be.
TCMR: What about some of the critical metals beyond rare earths?
JP: Again, our evaluation considers supply and demand and where we think costs will come in. For example, not many folks are looking at producing EMM in the market outside of China, so American Manganese’s deposit and its low-cost power put it in a good position to do well in that market and capture a large part of the market share outside of China.
There’s not a lot of new supply coming online in graphite, and we haven’t found many companies really engaged in working on that yet. It’s not like REEs, where several hundred companies are working on it. However, we’re aware of several smaller deposits, so we should see more plays in this space before too long.
With fluorspar, maybe two or three public companies are focused on it; so, as with graphite, fluorspar isn’t something that’s going to flood the market all of a sudden. There are a few tungsten producers and that market is very small, but I think the right producer with the right grade and right cost structure could do well in that market. And as I said, in our view, tungsten is an undervalued commodity.
TCMR: What tungsten plays do you like?
JP: There’s a combination of exploration companies and producers in the tungsten space. I cover Colt Resources Inc. (TSX.V:GTP; OTCQX:COLTF), which has what looks to be a significant deposit once it proves it out. Among the producers are Malaga Inc. (TSX:MLG) and North American Tungsten Corporation Ltd. (TSX:NTC). Malaga has its Pasto Bueno tungsten mine in Northern Peru, which has been producing for years. It’s a rather small-scale operation right now, but it is in production. North American has been producing for some time, as well.
TCMR: How far away is Colt Resources from proving out?
JP: Well, it’s doing a lot of drilling right now. The deposit is a historic resource of about 1 million tons (Mt.), which is very tiny, but it’s at .87 grade—a relatively high grade. Visiting the site, you can see tungsten outcropping in several areas; so, once the company completes the step-out drilling and gets an NI 43-101 resource estimate, I think it will grow quickly into a deposit of significance.
TCMR: Any last words you’d like to leave our readers with, Jim? What’s the most important thing for them to consider when they’re looking at this space?
JP: I think you have to look at where technologies and consumer trends are going in order to pick these plays. If you’d picked rare earths a year ago, you’d have done really well; but at the time, who realized it would take off the way it did?
We’ve been looking at a bunch of these different sectors that aren’t in vogue right now—not popular. We’ve focused our research on the fundamentals, which include controlled supply, few suppliers outside of China and areas in which we expect to see demand increase over the next five or six years.
TCMR: Thank you very much, Jim. This has been very informative.
Jim Powell, P.Eng. and Certified Financial Analyst (CFA), is a technology and strategic metals analyst with Laurentian Bank Securities.
By The Gold Report, on March 24th, 2011
 The peripatetic Mercenary Geologist Mickey Fulp covers a lot of territory in this Gold Report exclusive interview. He touches on why he looks forward to a correction in gold, how some of his favorites in the still-hot rare earth element (REE) sector are faring, which company is ready to step up as a leader among the next generation’s crop of REE juniors and what criteria he uses to evaluate the “best of the best” stocks that he presents in his periodic Musings. Among them—if he can’t see a double within 12 months, Mickey will walk on by.
The Gold Report: Returns from some of the companies you’ve written about since you launched Mercenary Musings in the summer of 2008 have been nothing short of astonishing. While some of the price appreciation came with the markets recovering from their 2008 lows, we see doubles, triples, quadruples, five and sixbaggers—even one twentybagger. Now that the markets have rebounded, how much do you expect juniors to increase over the next 12 months?
Mickey Fulp: That is a speculation fraught with difficulty. I expect commodities to remain at high prices but also expect food inflation and resulting unrest and turmoil in emerging market countries to continue. This could affect all world stock markets negatively. All the North American markets are long overdue for a correction.
TGR: If you’re anticipating a pullback in the general markets, do you think your picks in 2011 can achieve doubles in 12 months or less?
MF: I pick only the stocks that I think have strong chances to double in 12 months or less. That is the criteria under which I operate.
TGR: Gold experienced a 23% gain in the last nine months. To what extent do you foresee that rate of appreciation continuing?
MF: Gold is overdue for a correction and, in fact, was in the midst of one with a 7% drop before Middle East turmoil in late January caused safe-haven and speculative buying. In my opinion, recent geopolitical issues have distorted the precious metals markets, caused safe-haven buying and prevented a full-blown correction from occurring.
TGR: How much of a correction are you anticipating in gold? Then, once it does correct, do you expect it to return and exceed its previous high this year?
MF: A market correction is defined as a 10%–30% drop. Corrections are always healthy because markets, commodities or stocks appreciate too fast and become frothy, risky and overbought. A 10-year chart of gold shows a near-constant increase in price year-over-year, so I expect that trend to continue. The gold price is driven largely by worldwide currency devaluation and gold always maintains its purchasing power over the long term.
TGR: To what extent will gold prices need to continue increasing for gold juniors to appreciate?
MF: The gold price recently forged ahead of the stock market with a selloff in junior gold explorers as profits were taken after a robust run-up over several months. Keep in mind, juniors generally correct more than the gold price because they are purely speculative and volatile plays.
TGR: In a December Mercenary Musing, you wrote that nearly all juniors will have a low to high double in any given 52-week period. Could you elaborate on that?
MF: I’ll challenge anyone to find an active junior with a running 52-week high and low that’s not at least a double. That’s because juniors operate in phases of acquisition, financing, exploration, receipt of results and reporting. The stock price tends to go from low to high within each phase. Low and high price cycles correspond to low and high volumes. By employing a contrarian philosophy, i.e., buying at low volumes and low prices and selling at high volumes and high prices, we can achieve consistent doubles.
TGR: Could you update us on some of the undervalued juniors you discussed during your interview with The Gold Report last fall?
MF: With Otis Gold Corp. (TSX:OOO; OTCBB:OGLDF), Mine Ridge drill results are complete and the company hit on 31 of 35 holes in 2011. I think resources will increase significantly with a new qualified estimate, but delivery of that has been delayed. Also, the company recently announced new drill-hole success at the Dog Bone Ridge prospect with 2 of 5 blind holes hitting significant gold mineralization, including a near-surface intercept of 9 meters at 1.3 g/t Au and another with 138m of anomalous gold.
I covered OOO a year ago at $0.52. It reached a high of $0.84 in late December but has drifted down since then. I see two reasons that the market capitalization of Otis Gold has been lower recently: 1) Lack of timely news releases on drill results and delay in a new resource estimate due to tardiness of company geologists in logging and processing core, drawing cross sections, reporting drill results and delivering data to resource engineers; and 2) Lack of a focused and concerted marketing and promotion effort by management. Simply put, the Otis Gold team has not performed to my expectations. I hope that improves.
TGR: That said, do you still like the company?
MF: Yes. Because I like the company’s share structure, flagship project and people, I continue to hold my shares of Otis Gold. The target price for both my subscribers and me is more than $1.04 by mid-May, basically 15 months to double. The catalyst will be a new resource estimate that I expect will significantly increase the number of ounces of gold in the ground. But even if the price doubles, Otis will still be undervalued with respect to its peers.
TGR: Rare earths continue to be a hot topic, though now people more often call them either “strategic” or “technology” metals. You’ve described this as a “conflicted categorization.”
MF: All these newly coined terms for what used to be called “minor” or “specialty” metals are conflicted categorizations and confuse the investor. I object to the terms rare, strategic, technology and/or critical metals. The specialty metals have the following characteristics: They have minor but special uses, do not trade in appreciable tonnages or dollar amounts, do not trade on open world markets and often are controlled by a single country, company or cartel. Security of supply is a concern to those who depend on geopolitically unstable, corrupt or unfriendly sources. Rare earth elements are a part of the much larger group of specialty metals.
TGR: As you’ve pointed out, the REE sector graduated from “flavor of the year” in 2009 to forge ahead in 2010 with valuations increasing exponentially. Although much has been written about China’s export quotas, particularly in terms of the REEs, another issue came up during a strategic metals conference in January—the cost to extract and refine these metals.
MF: Metallurgy and processing is a potential fatal flaw for all REE projects. There should be priority given to construction of a complex to separate and process heavy rare earth elements (HREEs) outside of China, and preferably in North America. It is the logical solution for a HREE project on this continent to ultimately succeed.
TGR: How has this potential, fatal flaw impacted investment in the industry?
MF: So far, there has been little impact on speculation in the companies with exploration projects of merit. I expect increased awareness as we get further into 2011 and hope to see a new effort made to address this important issue. There are, however, alternatives for developers and miners, such as offtake contracts or strategic alliances with users who have access to processing facilities in China.
I just think it makes sense if we can go mine-to-market for all the rare earths in the United States. Our government seems to think so, too, though they say it will take 15 years to happen. Being an exploration geologist and, as such, realistically skeptical but generally optimistic, I think that can be fast-tracked.
TGR: You’ve indicated that only a few companies in the REE space have the share structure, people and flagship projects worthy of speculation for ultimate success through the 2011–2016 period. You consider three of the stocks you hold long-term plays. Can you provide us with a quick update on these companies?
MF: Sure. The three are Quest Rare Minerals Ltd. (TSX.V:QRM), Rare Element Resources Ltd. (TSX.V:RES; NYSE.A:REE) and Tasman Metals Ltd. (TSX.V:TSM; Fkft:T61; OTCPK:TASXF).
Quest released final drill results from 2011 drilling at Strange Lake in mid-January. Geologists have outlined a thick, high-grade zone called the Pegmatite Spine both within and extending the currently known resource to the north. A new resource estimate is expected within the next month and the company will proceed to a prefeasibility study. I expect an AMEX listing in Q2; if performance mimics recent AMEX listings by RES and Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF), we will see increased interest from American investors, better liquidity and a higher share price. I am a committed long-term investor in this company.
Rare Element Resources announced final drill results from both its Sundance Gold and the Bull Hill REE projects. Gold results were positive on all three known deposits, and the company just announced 947,000 ounces (Koz.) of gold in an inferred resource estimate. I expect to see RES announce the spinout of a new gold company within the next year. At Bull Hill, the mineralized areas continue to expand significantly. The company anticipates delivery of a new resource estimate in Q2 and a prefeasibility study to commence shortly thereafter.
Tasman is currently drilling at its flagship Norra Karr property in Sweden. Its 2011 program is designed to drill the deposit on 100-meter centers, generate material for further metallurgical testing, deliver a new resource estimate and complete a scoping study. The company also will commence work on its other significant rare earth projects in Scandinavia. I will visit this project in late spring.
TGR: You describe next-generation companies as penny stocks that might achieve something big between 2016 and 2021, and you have identified a company in the REE space that you say could be a leader in this next generation of successful REE companies. It seems we may have quite a wait in store if something big won’t happen until 2016 or so; could you talk about what might be attractive about this particular stock in the meantime?
MF: The company is Medallion Resources Ltd. (TSX.V:MDL; OTCQX:MLLOF), and its experienced management has a strategic plan to shortcut peers with forward-thinking acquisitions. The company’s current projects are not why I own it. By the end of 2011, I expect news about a monazite heavy mineral sands project that can be fast-tracked to production and an HREE ionic clay project outside of China.
TGR: You just returned from PDAC. What’s the “buzz” in the precious metals from that conference?
MF: Although precious metals markets are completely overbought, the gold and silver bugs are full of grandiose ideas about exorbitant prices in the future. To me, it’s a broken record that’s reminiscent of the Beatles’ “Number nine, number nine, number nine” from the White Album. The junior resource stocks will continue to sell off as industry and market pros take profits and front-run ahead of the Sell-in-May–and-Go Away philosophy. It is always a good idea to take profits when markets are going higher, using open-order programmed selling and setting programmed profit stops to sell on the corrections and downticks.
TGR: Did you uncover any interesting new companies that you will be looking into?
MF: Yes, in fact, I recently invested in three newly formed companies in the uranium, precious metals and oil and gas sectors. They are high-risk speculations that may be presented to subscribers in the future as the companies and their markets develop and the risks are better quantified.
As a professional junior resource investor, my risk appetite is much higher than I would encourage for anyone else. I currently cover 11 stocks but speculate in well over 30. I present only “the best of the best” to subscribers (i.e., those that I think have the best chances to double within 12 months). I encourage every investor to visit my website and read my musings for doing thorough due diligence on junior resource stocks.
Michael S. “Mickey” Fulp is author of The Mercenary Geologist. He is a certified professional geologist with a B.Sc. in earth sciences with honors from the University of Tulsa and M.Sc. in geology from the University of New Mexico. Mickey has more than 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development.
By The Gold Report, on February 8th, 2011
Access to sources of real-world critical metals is in serious jeopardy. A variety of experts gathered recently in Vancouver to learn more about the reasons we’re at risk and what we can do about it. Join The Gold Report as we venture into the complex, complicated, cloudy, uncertain, conflicted world they explored.
The same issues that have jolted U.S. officials awake to awareness about the nation’s vulnerabilities in the supercharged atmosphere of the critical metals space drew an eager, attentive audience to the world’s first-ever Critical Metals Investment Symposium, sponsored by Cambridge House, a Vancouver-based producer of resource investment conferences.
 Morning Notes publisher Mike Berry, who co-chaired the two-day gathering, credits Cambridge House with taking an innovative approach by catering to the needs and interests of a wider-than-usual audience, including end-users and government authorities and financiers as well as junior explorers and institutional investors. As Cambridge House Chairman Joe Martin tells The Gold Report, “The manufacturing sector normally doesn’t pay much attention to the supply side, and maybe it’s time that those who in the past have just been buying these critical metals should take a look at where they coming from—and where they may come from.”
What Makes Them Critical?
 The “critical metals” space isn’t the exclusive domain of Block F on the periodic table. Rare earth elements (REEs) are part of it, but not all of it. The critical metals also include molybdenum, vanadium, manganese, lithium, niobium, cobalt, tantalum, tungsten, indium and others. Most of them “used to be called minor metals, “but they are not so minor anymore,” says Kaiser Bottom Fishing Report Publisher John Kaiser, who was billed as symposium strategist. “These are metals required for the economic development and national defense, thus essential for industry and national security.”
Another point John makes about critical metals is that they “tend to be incremental but critical inputs to end products whose total value vastly exceeds their costs.” In other words, their importance to various applications is one factor that makes these inputs critical.”
In addition to the importance of the critical metals to their components, the insecurity of supply is another factor that makes these metals critical. This is a highly charged, complicated issue that has triggered tremendous price volatility for some of these metals and, well, critical shortages. “We have a gathering storm in the supply chain with regards to supplies of critical metals,” Mike Berry says. “While rare-earths, for example, aren’t necessarily rare in the earth’s crust, their availability to end-users will become highly restricted over the next five to 10 years.”
Among the metals of most concern for defense purposes are neodymium, samarium and yttrium.
It isn’t just tanks and destroyers and smart bombs at risk. As cell phone users, automobile owners, airline passengers and in myriad other capacities, all of us stand to benefit from sorting out the critical metals issues. Lacking stable supplies of these ingredients, our ability to enjoy improvements in these conveniences will diminish—or vanish. Along with other nations struggling with slumping or stagnant economies, the U.S. finds itself on the brink of another crisis involving the availability of critical metals.
A “most disturbing fact,” Mike says, is that the U.S. is “100% dependent on imports for 19 critical metals and dependent for 80% of its supply for 32 others.” Although using the word “materials” rather than “metals,” in the same vein, a U.S. Department of Energy Critical Materials Strategy Paper issued in December notes that China now provides 95% of the critical materials used in parts of the clean-energy sector—wind turbines, electric vehicles, solar cells and energy-efficient lighting, which the paper says collectively account for 20% of the consumption of critical materials.
 According to Metals Consultant Jack Lifton, “Alternate energies for a green future are impossible to build and operate without rare metals. These include cadmium, tellurium, selenium, indium, gallium and germanium for solar; rare earths for wind power and electric cars; and uranium and thorium for nuclear generation of electricity.”
 Nor is clean energy technology by any means the only sector facing supply shortages. For instance, The Gold Report caught up with Mercenary Geologist Mickey Fulp at the symposium and discussed graphite, one of the materials that came up during a presentation. As it turns out, China is the most significant graphite-producing nation, providing nearly one-half what the U.S. uses annually, much of it going into the graphite electrodes that give conductivity to the mass of manganese dioxide in dry-cell batteries.
According to Mickey, “A lot of past-producing graphite mines in the world have shut down because it’s cheaper to get the graphite from China,” With graphite, he adds, “infrastructure and transportation costs and proximity to market are very important because graphite is an industrial mineral.” He says that what’s expected to be in shortest supply is long flake graphite—a substance used to manufacture plates and brushes for the electrical industry.
 Vanadium is another metal on the critical list for which the U.S. has no domestic supply. While Mickey isn’t on the vanadium bandwagon, House Mountain Partners founder Chris Berry—who joined his father at the symposium—is a big believer in the potential of vanadium-redox batteries (VRBs) for mass energy storage. Chris says that 100% of the vanadium used in the U.S. comes from China, Russia and South Africa. “If you’re a believer in mass energy storage associated with wind and solar generation, VRBs are vital. One of the knocks against clean power generation like solar and wind energy,” he explains, “is that it’s very uneven and can’t be stored easily. VRBs are the answer” for storing energy for use during either on-peak or off-peak demand.
According to John Kaiser, up to 97% of vanadium’s present use is as an alloying agent to strengthen steel for rebar, car axles and jet hulls and engines. He says that industry analysts predict a potential shortage of vanadium based on steel usage alone as early as 2013, driven by the incredible consumption of steel by China and India.
Global steel demand is set to increase by about 6% over the next 5 to 10 years. If that projection pans out, and Chris’s vision materializes, he suggests that supplies will be available. “A handful of juniors in North America, as well as in some other parts of the world, are actively exploring for and planning to put vanadium mines into production over the next couple of years,” Chris says. “There are a number of deposits in Canada, the United States and even Brazil. They’re not ready for production, but the idea is to get the metallurgy figured out, determine the cost of production and have them producing vanadium over the next two to three years.”
Mickey disagrees. He points out that most vanadium deposits currently being explored also contain titanium; they are iron-titanium- vanadium deposits. “For the most part,” he says, “titanium is produced from heavy mineral sands, beach sand. A big portion of that comes from the East Coast of the United States, where draglines scoop up sand and basically run it across a magnet on a conveyor—a magnetic separation process that draws out the titanium and the iron. Then they use the sand to build highways and make cement. It is much cheaper extracting titanium that way than from a hard rock mine in a remote part of the world with mining, crushing, milling, transportation of concentrates, etc. All the world’s current vanadium demand is met with production from steel smelters and as by-product of uranium mining. It takes a minimum of 5–10 years to explore, permit, develop and produce from new mines. Future increase in demand is dependent on currently unproven technologies. In my opinion, there will be no standalone vanadium mines in the foreseeable future.”
Supply Chain Broken
According to John Kaiser, one thing that makes rare earths particularly complicated is that the miners can crack the rocks but extracting the elements is another matter. Because rare earths are so similar to one other, extraction produces a mixed-oxide concentrate. To separate the rare earths into their individual oxides may take 50 tanks to separate light rare earths; it may take 1,000 tanks of sequential solvent extraction to properly separate then heavy ones. “This is a chemically intensive, very complex process,” John says, indicating that no such processing facilities exist in the U.S. at this time. In fact, he adds, “There is no knowledge base for doing it in North America right now.”
Mickey concurs—to a degree. He agrees that “without a heavy REE separation facility we’re missing a key component. These facilities are very complex chemical plants, standalone entities that don’t have anything to do with mining.” But he says that Molycorp Inc. (NYSE:MCP) can currently separate the light rare earths. Part of the company’s “mine to magnets” business plan is to close gaps in the domestic supply chain.
In December, Molycorp struck a deal with Japan’s Hitachi Metals Ltd. (TKY:5468, OTCPK:HMTLF) to produce alloys and magnets in the U.S., moving Molycorp a step closer to establishing a rare-earth manufacturing chain in the U.S. Molycorp also recently announced that its expansion plan is expected to enable annual production of up to approximately 40,000 metric tons of rare earth oxide (REO) equivalent at its Mountain Pass facility by the end of 2013, and is involved in a transaction with Sumitomo Corp. (TKY:8053, OTCPK:SSUMF) that will provide Sumitomo with “substantial quantities” of several rare-earth products over the next seven years.”
In terms of the heavy rare earths, Mickey says, “There is no facility in North America to process heavy REEs. In fact, there is no functioning heavy rare earth separation plant anywhere in the world outside of China.”
Well-funded and debt-free, Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) may be the first to bring separation capability to North America. Avalon President and CEO Don Bubar, who was among the speakers at the Critical Metals Investment Symposium, says that his company wants to complete the facility by 2015 or 2016, get “first mover” advantage and potentially do separation processes for other metals mining companies.
Supply Risks
We can expect supply pressure on critical metals from growing demand to come from the rising deployment of innovative existing technologies, and the emergence of new technologies, too—nanotechnologies, disruptive technologies and/or future sustainable technologies (FST) to replace obsolete technologies with greener, cleaner, faster, sturdier, stronger and/or more efficient ones.
John Kaiser brings in Jevons Paradox, noting, “High prices stimulate innovation to make better, more efficient use of a product; ironically, as you make more efficient use of a critical input the total demand for it goes up. So, for all those worried about new innovations reducing use of REEs, the 400,000 ton prediction by 2040, I would say processes like the ones we are seeing now are going to create the demand to take up all the supply.”
While a host of issues, such as these, surface when the security-of-supply subject comes up in critical metals conversations, though, one five-letter word dominates the discussion: C-H-I-N-A.
800-Pound Gorilla
Back in the 1980s, rock-bottom production costs and low export prices on REEs from China led to its lock on the rare earths space, to the point that China now accounts for most of the world’s REE supply—between 95% and 97%. Now, though, China’s cutting back on exports in the interests of addressing its domestic needs. Molycorp CEO Mark Smith says that internal demand is growing so fast that China will be consuming all of the rare earths it produces by 2012. In fact, last July China reduced its rare earth export quotas for the rest of the year by 72%. “China cut its second-half 2010 export quota by 50%, and has just issued first-half 2011 quotas that are down yet another 11.4%,” says John. As he puts it, “The wakeup call for the rest of the world has happened.”
Whether focused on creating strategic stockpiles for future use or simply conserving its reserves, when China shifts from producer/exporter to buyer/importer, it turns the entire market on its head. As Jack points out, “China used 55% of all of the world’s metals last year. If Chinese GDP continues to grow at 10%, in 6.4 years, China will require 100% of the volume of metals produced in 2010.”
And then what? From Mike’s point of view, “There is much focus on China’s recent announcement of export limits on rare earths, but in reality, China will shortly become an importer of rare earths and are looking to the rest of the world to begin finding and mining and refining these metals.”
Looking forward to continuing education on the critical metals front, John stresses, “We really need to solve these security-of-supply problems. Otherwise these are slippery slopes to war and other unhappy developments as countries take drastic steps to make sure that their needs are taken care of.”
The Investment Case
The changing China picture and the renewed focus on critical metals, coupled with exploding demand and efforts to rebuild a supply chain and technological advances—many directed toward environmental protection—contribute to a picture that suggests upside potential in critical metals markets.
Last summer, John observed that prices for some high-demand metals derived from REE deposits continued to reach new heights, almost daily. About the same time, Molycorp’s IPO filing indicated that prices for rare-earth oxides, which had plummeted about 50% during the global economic crisis, climbed an average of about 70% since October 2009. More recently, John says, price increases have been significant for tungsten, rare earths, tin, antimony and others all have seen significant price increases. “China is in the process of creating a cartel—they call it now the unified pricing system. They want to see higher process for rare earths. The high prices are now the new reality.”
Valuations of some of the companies in the critical metals space, likewise, have soared. Look at Rare Element Resources Ltd. (TSX.V:RES; NYSE.A:REE), for example—which doesn’t even anticipate initial production from its Bear Lodge Project in Wyoming until 2015. Last summer, an investor could have picked up its shares for less than $2 each. In mid-October, it was CAD$7.65 and on February 4 it closed at CAD$13.88.
Along with Molycorp, which will be in production in 2012, Mickey considers Rare Element Resources most likely the next company to have a mine in the light rare earth element space in North America. At this time, the property has 17.5 million tons of about 3.5%, dominated by light—but he says that the key to Rare Earth Elements is they also have significant metals that Molycorp doesn’t: significant dysprosium, a higher grade of europium and significant terbium.”
Sector consolidation might also bode well for investors. The supply chain dynamic seems to make combinations and integrations a strong possibility in the case of the critical metals, and as John points out, the sector is not only dominated by small players but the sector itself is very small.
Our symposium sources pretty much agree that there’s a bubble in the critical metals space. “Yes, we’re in a bubble,” Mickey says. “But I think this bubble has a long way to go.” He opines that most of the rare earths stocks are valued “way above the fundamental metrics that would be supported by current market capitalizations, so there is extreme downside risk—but the upside is still tremendous over the next two to five years.”
Now Is the Time
As Cambridge House’s Joe Martin suggests, the junior resource sector has a track record for seizing opportunities, securing the necessary financing, and demonstrating solutions. “These junior explorers are very reactive to market conditions and commodity changes, and if a commodity is in demand, they’re out in the field, looking at properties and projects around the world to meet that demand.” He fully expects the sector to help overcome the security-of-supply problems in the critical metals space.
With China’s shifting exporter-to-importer status imminent, “This year the sector goes critical,” John Kaiser says, “because serious money has to come in and fast-track the major projects that are in the running to deliver new supply by 2015.”
The next Cambridge House Critical Metals Conference is June 3 & 4 in Vancouver, preceding the World Resource Investment Conference.
Want to learn more about REES? Check out Jon Hykawy’s interview, REEs Explained, (6/25/10) and Jack Lifton’s North America Doesn’t Need China’s Rare Earths (6/21/10).
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