Mike Niehuser isn’t a rare earth expert per se, but the Beacon Rock Research founder says many of the same investment principles hold true for resource stocks across sectors. At the end of the day, all resource stocks, rare earth plays included, are story stocks, and it takes intuition to buy or sell successfully. In this exclusive interview with The Critical Metals Report, Niehuser tells the spellbinding stories of two promising rare earth companies.
The Critical Metals Report: You have given several interviews on The Gold Report, but what makes you an expert in rare earth elements (REEs)?
Mike Niehuser: I don’t consider myself to be an expert in anything. I’m a generalist. REEs are complicated in most every way. But the very same investment principles hold for REE companies as for other mining, resource or small-cap company. As an investor, I am more intuitive than data driven. Mining and resource stocks are all story stocks. You can make some relative data comparisons, but each data point requires some subjective judgment on the substance of the company and the nature of the competitive environment. Small-cap companies are by definition the least understood and therefore hold the greatest opportunity for above-average returns. In the case of mining stocks, you can never know it all, and I enjoy being frustrated. I’m curious by nature, and I love learning. I think success depends on applying a craftsman-like attitude of study.
TCMR: What do you look for in REE companies?
MN: Management is the beginning and the end for investing in small-cap companies. I look for companies with teams that have hung together through the good and bad times. If they have, this is an indication that they see something that works in their team and have tested their mettle in adversity. In addition, I look for some sense of accomplishment on a bedrock of humility, where unexpected results fuel their curiosity and power through piles of data. In the case of REE companies, the sector is redeveloping and old assumptions and new techniques all need to be questioned.
TCMR: So management is first. What’s next?
MN: I don’t want to sound like a broken record, but with REE companies or any mining company, political jurisdiction is becoming increasingly apparent as the differentiator. I suppose it is natural for governments to see higher metal prices as an opportunity to rewrite laws to take a greater share. If nothing else, I don’t feel as safe traveling as I did just a few years ago. If I don’t, neither will others, and I know capital won’t either. I think these governments will find out that they can’t develop resources economically without collaborating with others, and this includes foreigners. This will mean they will need to use permitting to select the right partners. This is where management comes in: They can create greater value for shareholders and the nations in which they operate. There are less attractive partners, ones which perhaps nations feel better dealing with, but the results don’t trickle down to the people.
TCMR: Who are you referring to?
MN: National companies subsidized with government support may be tempting for countries willing to bend the rules. Small companies cannot compete here except on quality. Mining is a long-term business; if successful over decades, the real winners will be both small-cap companies that operate in political jurisdictions and the governments that have the best interests of their people at heart. In general, shareholders of publicly traded mining companies have an increased expectation for integrity and fair play. They know that cutting corners for short-term gains will be met with dramatic unexpected losses over the long term.
TCMR: What makes REE companies attractive today?
MN: The mining industry has been beat up in a risk-off investment climate, despite near-record precious and base metal prices. Unlike precious metals, REE prices are well off record highs, taking the miners in this sector down even further. In general, most of the money is made in the market by select investing at market bottoms, so we see an opportunity for careful stock picking. I do have a couple of opportunities to share with you, but let’s get through the fundamentals first.
TCMR: So in addition to management and country risk, what is important when screening the REE companies?
MN: Rare earth projects are complicated, as they are always composed of a basket of REEs that have discrete supply and demand characteristics with varying opportunities for recovery. The best snapshot for even the novice investor is Technology Metals Research’s TMR Advanced Rare-Earth Projects Index. This chart shows the universe of companies with compliant resources by grade and, most importantly, the potential basket price based on the composition of metals. This is only a two-dimensional snapshot, as it does not take into account the size of the project, which is important for achieving critical mass to support what could be an extensive capital investment. It is interesting that the chart demonstrates that heavy rare earth (HREE) deposits appear diametrically opposed to deposits with high grades of light rare earths (LREEs). Investors should be aware that the market for REEs is much smaller than the one for copper or lead and that the REE markets for specialty industrial uses is much smaller. In any event, TMR provides an excellent chart on their website that is free to view, and articles with a helpful blog in which they provide timely public responses.
TCMR: Why should investors care if companies have more LREEs or HREEs?
MN: HREE prices have held up better than those of LREEs in the recent downturn. Some LREEs are in perceived oversupply, and with additional production from new mines, including Molycorp Inc.’s (MCP:NYSE) Mountain Pass or possibly Lynas Corp.’s (LYC:ASX) Mount Weld, the prices of some of these LREEs may never recover. On the other hand, all REE companies appear to have been taken lower by the market indiscriminately, along with most junior resource stocks. We believe that trends toward shortages in some REEs, particularly HREEs, will continue to stand out.
TCMR: Why are HREEs so important?
MN: The U.S. Department of Energy lists neodymium, an LREE, and four HREEs including dysprosium, europium, terbium and yttrium as the five elements of highest importance for clean technology and at greatest risk for supply in the next five to fifteen years. Dysprosium is clearly recognized as the most critical REE, having both high importance for clean tech and high supply risk through 2025. Terbium is also expected to have a high level of supply risk through 2025. The U.S. Department of Defense recognizes a strategic deficit in yttrium, which is critical to several advanced weapon systems such as stealth helicopters and precision-guided weapons, as well as dysprosium and terbium for permanent magnets.
TCMR: Why should investors consider REE companies?
MN: Some experts are starting to declare a bottom in HREE prices. While this is not certain, the trends toward a supply-demand imbalance for HREEs appear very probable. The only thing that would take it off course would be overwhelming new supply, a tanking global economy or a reversal in trends toward innovation in sectors that are currently firmly dependent on REEs. What is more than certain is that many of these REE companies, even those with heavies, are trading near cash on the books, which suggests that both light and heavy REE projects are getting no value in the market. Most projects will not survive; in fact, the survivors might be counted on one hand. But I would agree that signs are showing that we may be passing the bottom.
Keep in mind that China has dominated the REE supply chain for decades. As a nation, it has relied on its competitive advantage for low-cost mineral production as a pillar of economic policy. Although it is the major producer, it has recognized that it does not have a sustainable source of HREEs; it could potentially run out in five to fifteen years, and may become a net importer, particularly for dysprosium. China is also attempting to develop a balanced domestic economy by manufacturing value-added goods and regulating domestic mining of REEs, particularly HREEs, which are cheaply mined from ionic clays, but cause environmental damage to rivers.
TCMR: What differences do you notice most in evaluating REE companies?
MN: As we discussed, management and political jurisdiction are the first differentiators on the list. But on a project level, the composition of metals is important. Capital will pursue projects with the best distribution of heavies, grade, volume, political jurisdiction and management. I think companies with the optimal mix will move higher.
TCMR: Who should investors take a closer look at?
MN: I have a bias toward small companies that are not well known. Those with the best chance of being discovered sooner rather than later have the greatest near-term upside potential. There are a lot of fine companies out there. For example, Molycorp should be applauded for becoming the first producer of REEs in the current metal cycle, but it is well past discovery. There are three or four other names also past discovery, but the latest developments suggest a less-than-competitive mix of investment characteristics. I am looking for companies with surprise potential, like with any small-cap investment. Today I would suggest two companies, which oddly enough are both headquartered in Nova Scotia, one four time zones to the west of its project in Africa, and one four hours east with a project in Alaska. I think both companies have accomplished management and have projects in promising political jurisdictions.
TCMR: Which company presents the best value today?
MN: Namibia Rare Earths Inc. (NRE:TSX) is trading just above cash value and is, in my view, the newest and deepest-value REE company. The company just published its initial HREE resource at its Lofdal project in Namibia, which is exceptional in that it has the highest total rare earth oxide (TREO) basket price of any of the 44 companies presented on the TMR chart. The exploration team has completed a very tight drill program and they have potential to upgrade the classification of the resource by successfully completing the metallurgical program now underway. They might move Indicated and Inferred resources into the Measured and Indicated without additional drilling. They have also built the resource from surface to 75 or 150 vertical meters. As some of the best results have been at 175 meters and to 250 meters, the expansion potential is real. They are waiting on assays to a depth of 350 vertical meters.
TCMR: How does Namibia rate as a mining jurisdiction?
MN: I think Namibia is one of the only countries in Africa I would feel comfortable taking my family. Namibia is a former German colony that was occupied by South Africa until gaining its independence in 1990. It is a young country, but being a former German colony, it has exceptional infrastructure, including power and roads. It is a big country, slightly larger than Texas, but with only about 2 million people. Environmental tourism is one of its major industries. In terms of being a stable mining jurisdiction, Namibia is one of the world’s leading uranium producers and mining is a major industry. Their mining laws are well tested and evolving; the government there appears to have more interest in creating wealth than settling old scores.
TCMR: How else does the company stack up?
MN: Namibia Rare Earths’ management team ran Etruscan Resources in West Africa. They had great exploration success working in five countries and building the largest land position of any junior resource company. This led to the development of operating mines in Niger and Burkina Faso and advanced projects in Cote d’Ivoire and Mali. They were instrumental in helping these countries develop and attract capital. They discovered REEs at their Lofdal project in Namibia while it was an asset of Etruscan before being spun out. The current resource at Lofdal is the first one on its 200-square-kilometer project, and management thinks there’s high potential to find more. They think the geology at Lofdal is like a treasure chest. Management has focused on resource development and building a credible resource with great potential for expansion, as opposed to rushing Lofdal to a PEA or to complete off-take agreements. Consequently, having achieved the highest basket price among other REE companies, it certainly is going to get a close look.
TCMR: What type of REEs does Namibia Rare Earths have at Lofdal?
MN: Namibia Rare Earths has an Indicated resource estimate of 900,000 tons of 0.62% TREO, of which 86% is enriched by HREEs. There is an additional Inferred resource of 750,000 tons at 0.54% TREO with 85% HREE enrichment. The four highest metal types by value include dysprosium, terbium, europium and yttrium, and only about 2% by value being the LREEs lanthanum and cerium. This is an exceptional HREE resource. If the metallurgical report provides for the upgrade of classification to Measured and Indicated, it may also provide for a lower cut-off grade and we could be talking a 6 million ton (Mt) resource. This would be at a lower grade, but there are indications from sorting tests that they could upgrade the resource to 1% TREO, which could triple the value of the feed to a mill. Investors interested in Namibia Rare Earths should keep an eye open for deeper drill results that would confirm the potential to expand the existing resource even further as well as the results of the metallurgical study.
TCMR: Who is the other Nova Scotia company you wanted to mention?
MN: Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) has a HREE project in southeast Alaska. The Bokan Mountain project is located near Ketchikan, Alaska. The company is rapidly advancing the project and has recently completed several “firsts,” which investors may not have taken into account. It recently announced successful separation of HREEs including dysprosium, neodymium and erbium, producing a purified salable product. In addition, this process nearly removes all of the undesirable elements including iron, uranium and thorium, which may be returned to the mine in paste backfill together with all of the mine tailings. This means Ucore’s Bokan operation will have minimal daylight expression at surface and a very small environmental footprint.
TCMR: The paste backfill must have pretty good appeal for government regulators.
MN: That is certainly correct, but Ucore has impressed several layers of government in Alaska, and the U.S. The U.S. Department of Defense has recognized the importance of the project in securing a sustainable North American resource of HREEs. It has also received support from its congressional representative to advance road access and other infrastructure developments in national lands. The state of Alaska also sees the potential for drawing value-added businesses to Alaska, like permanent magnet manufacturers. Support includes ongoing financial support for metallurgical study at the University of Alaska Fairbanks, and support for developing cheaper hydropower alternatives near the mine. The company is currently reviewing the latest solid-phase extraction that removes deleterious elements, purifying the concentrate on a molecular level.
TCMR: How does Ucore’s resource at Bokan Mountain stand up?
MN: Bokan Mountain has an Inferred resource of about 5.3 Mt of 0.65% TREO, of which 40% is enriched by HREEs. This is a modest initial resource estimate. The project is open to expansion, and it has excellent potential for value enhancement with the new solid-phase extraction process. The positive results of the study have led the company to delay completion of the PEA, but it has good potential for accelerating in improving the confidence in the bankable feasibility study. Upon completion of the PEA, Ucore will also be able to actively pursue off-take partners. From our vantage point, we see its partnership with the Department of Defense as providing substantial long-term support, mitigating political risk.
TCMR: When will interest increase in REE companies like Namibia Rare Earths and Ucore?
MN: I think the market is always looking for a bottom and is ready to start accumulating companies that look like winners. Ucore’s recent price movement supports this idea. The market is looking for companies with the ability to jump the metallurgical hurdle. This is why Namibia Rare Earths, while less advanced than Ucore, still presents a deep-value exploration opportunity.
TCMR:Thank you, Mike.
MN: My pleasure.
Mike Niehuser is the founder of Beacon Rock Research LLC, which produces research for an institutional audience and focuses in part on precious, base and industrial metals, oil and gas and alternative energy. Previously a vice president and senior equity analyst with the Robins Group, he also worked as an equity analyst with The RedChip Review. He holds a bachelor’s degree in finance from the University of Oregon.
Lisa Reisman describes herself as a “classic libertarian,” but the managing editor of MetalMiner.com nonetheless believes government has a role to play in protecting and developing domestic supplies of critical metals. In this exclusive Critical Metals Report interview, Reisman argues for private/public partnerships and explains why today’s low prices don’t faze her—or surprise her.
The Critical Metals Report: Lisa, many of the companies in the rare earth elements (REE) space are trading near 52-week lows. Has the bubble burst or is this a consolidation?
Lisa Reisman: To some extent, the bubble has burst. But this is true for a number of commodities, not just REEs. The current lows are directly related to the same policy changes that caused the upswing in the first place. When China, the 800-pound gorilla in the sector, shifted to a policy limiting exports, buyers tended to hit the panic button and bought forward for a long period of time. Prices got a boost at the time, but those large buyers were then out of the market while they subsisted off their stockpiles. Thus, we would expect the stocks of the REE producers to fall a little bit.
TCMR: The MetalMiner IndX on MetalMiner.com tracks a number of markets, such as aluminum, raw steel, rare earths, precious metals, renewables, copper, automotive and construction. By far the worst performing index is REEs; it has lost almost half of its value. Why?
LR: There is an adage that goes “nothing kills high prices like high prices.” When things begin to get frothy, people get nervous and sell. Investors use the opportunity to take some profit.
The REE prices got too frothy. This is a spot market; the published prices tell you what current demand looks like. And it is looking dour. The same is true for other metals. For most of them, the slope in the aggregated chart is down to the right.
Also, when people start to panic over export controls, they start to look for product substitutes and alternative materials. That cannot be done across the board or quickly in all cases, but where it can be done, it is done. This creates demand destruction. To some extent, that is what we are seeing in REEs.
TCMR: How much of a role does China’s economic slowdown play in REEs’ price weakness?
LR: It plays a significant role. Many of the large buyers, like the original equipment manufacturers (OEMs), have bought or are buying forward. Once the big companies are taken care of, who is left in the REE spot market? The companies that did not plan ahead, often smaller companies, are the only ones buying in the spot market right now.
TCMR: The U.S., the European Union and Japan are quietly fighting with China through the World Trade Organization (WTO) over China’s export restrictions. What do you think is the likely outcome?
LR: I think the WTO will rule in favor of the Western nations by finding that some of the export restrictions, or perhaps the way China has implemented them, violate WTO rules. But China is holding fast and makes some valid points in its defense. The environmental factors, China asserts, are a legitimate rationale for export limitations.
TCMR: If that happens, will China change the way it does business?
LR: It might not be business as usual for China, but China will look for other levers to manipulate and it will attack the problem from a different direction. China is enough of a player in every market that when it decides to buy or not, it will affect pricing.
The real question for the WTO goes beyond REEs. It hears cases over steel and aluminum quite often. In general, China does not play by the same set of rules as everyone else. That has to come to an end at some point.
TCMR: How are manufacturers that use REEs responding to supply risk?
LR: The largest OEMs—the Boeings, Apples and HPs of the world—have very extensive supply-risk management strategies in place. They track, rank and rate all the materials they buy. The aerospace sector has been brilliant in identifying sources of supply around the world. The Toyotas of the world are looking not only at the supply end, but also on the recycling end to bring materials back. They are rethinking the whole supply chain.
Things get a little more dicey among the middle-market and smaller firms. Some of them face tremendous risks for not thinking through the supply options for REEs. For example, I spoke at an event over a year ago on base metals markets. But peoples’ questions centered on REEs. It was obvious that REE price spikes were making these companies frantic and export price controls put tremendous strains on their businesses because they were not prepared with alternative sources.
It’s not a clean division by company size, but you see different levels of sophistication amongst companies in terms of how they handle supply risk.
TCMR: Do you believe REE prices will stabilize where they are now or is there room for more downward momentum?
LR: When I look at the REE trend line, I do not see a floor. A floor would be a flat line for a couple of months. Instead, we see a steady descent with a little upward blip in April and May. Since May, the numbers have continued to fall. I am not suggesting prices will move down again in September, but the fact that we have not seen a floor tells us that further weakness remains.
TCMR: Will the heavy rare earths (HREEs) find the floor faster than other REEs?
LR: That is possible. The place to look, particularly with HREEs, is their end-use applications: the wind energy industry or the magnets used in hybrid electric vehicles. Some of those end-uses look good; the U.S. auto market for electric vehicles seems to be holding its own from a demand standpoint. However, the energy tax credits for the wind industry in the U.S. are set to expire, which may decrease HREE use.
TCMR: Other critical metals are experiencing price corrections or price weakness—tantalum and manganese, for example. What is happening with their prices?
LR: A lot of what has happened with tantalum prices is the result of the Dodd-Frank Act. The Dodd-Frank financial reform legislation contains a clause that requires firms to show that they are not obtaining certain minerals from “conflict regions.” The minerals include gold, tin, tungsten and tantalum. And the “conflict regions” are not necessarily entire countries, but can be regions within a country.
Now that the rules have been published requiring third-party formal audits (e.g., attest services), the market for these metals will begin to stabilize. Uncertainty forced companies to stop sourcing these minerals from the DRC altogether. Purchasing behavior shifts as a result of policy changes, but now that the rule has come out, companies know where they can source materials and we suspect prices will stabilize.
A company can buy tantalum from the Democratic Republic of Congo (DRC). It just cannot buy tantalum mined in a conflict region within the DRC. Prior to the publishing of the rule, the company may have panicked and decided to source its tantalum from Brazil or China. That starts to create havoc with pricing. By changing companies’ behavior, Dodd-Frank has had an effect on tantalum prices.
Companies in search of safe supplies are buying forward or on contract, or they are buying less. There is no more spot buying from Joe Trader. That puts pressure on prices.
TCMR: Are there similar problems with manganese?
LR: To some extent, yes, although manganese is not a conflict mineral. It is, however, mimicking the REE markets because China also closely controls manganese supply. Because the U.S. is not producing a lot of these metals, we are beholden to Chinese policies. China of course wants prices to be higher.
TCMR: Do you believe the U.S. government should get involved in developing domestic supplies of critical metals?
LR: As a classic libertarian, I do not want government involved in much of anything. However, to the extent that some of these metals play a role in national security, the answer is yes. There is a compelling reason for the government to get involved. The U.S. needs to make sure it has clean lines of supply.
Domestic mining is one great solution because we are sitting on some of these minerals. But I also support identifying alternative sources of supply and opening up other channels. We should be creating closer private/public partnerships with junior mining firms in Canada and other friendly regions.
The government certainly could be more mining friendly. For example, American Manganese Inc. (AMY:TSX.V; AMYZ:OTCPK; 2AM:FSE) has mines here in the U.S. From a strategic and military standpoint, we ought to foster the development of a junior mining firm like American Manganese so it can get to market faster.
And it goes beyond manganese. The steel producer Nucor Corp. (NUE:NYSE) had to cope with complicated and uncoordinated rule making and different agencies in the permitting process at its DRI facility in Louisiana.
The federal government needs to create more streamlined rules. I do not mean we should skirt environmental laws—just make them more effective. Rather than taking a “why should we do this project” approach, the Environmental Protection Agency could shift its attitude to “is there any reason why we should not do this project.”
TCMR: Are there other companies that could benefit from government taking a more active role in fast-tracking projects or declaring certain metals strategic assets for development?
LR: The American Resources Policy Network uses a pyramid to illustrate the priorities for each strategic metal. Once you’ve located the metal in the pyramid, you need to look at the companies in the space. For example, Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) comes to mind as a tantalum miner. We have next to no domestic supply, but Commerce Resources is pretty far along in its process. It would benefit from streamlined rules and public/private partnerships. Dozens of other junior mining firms would also benefit.
That approach is popular in Canada and Japan. The Japanese government brought together junior mining firms from Canada with the largest Japanese end-users and paired them up, like a matchmaker. The U.S. government does not do that.
TCMR: The sector’s biggest player, Molycorp Inc. (MCP:NYSE), recently announced it will raise almost $600 million through equity and bond financing. But it recently missed the Street’s Q2/12 targets by a fair margin. What happened there?
LR: Wall Street’s expectations do not always reflect what is happening in the industrial market. The Street is unhappy because it invented earnings targets for Molycorp based on last year’s frothy price scenarios.
Molycorp is sitting on the most amazing book of business of any metal producer in the U.S. Everything it produces is booked out and sold going forward. Molycorp is in an envious position compared to other producers.
TCMR: Will Molycorp’s struggles keep investors away from the sector?
LR: That is a different question and the answer could be yes. Molycorp has been the golden child of the REE industry. If you look back a few years, the green economy has not quite developed as people had expected. In the last four years, natural gas production has been the biggest winner, not wind energy. With the expiration of the tax credits, people are not buying and building windmills in the same volume as they were two or three years ago. Other trends are not exactly on target either—the move to hybrid electric vehicles and small cars, for example. I think Molycorp is modeling what is happening with all these trends. But overall, it remains in a great position.
TCMR: Why should investors in companies that are developing critical metals assets or projects remain optimistic?
LR: Investors in general focus on the short term. When they see low REE prices, they hit the panic button. That is why they might be more negative on the sector.
We look at the world in terms of control of these key metals. Do we want to be beholden to one country, and a communist country at that? When you see countries controlling more than 90% of the global supply of something, to me that is a no-brainer. It tells me just how important it is to support these junior mining firms.
You also need to look at the domestic end-use need. Yes, we all like our iPhones and our iPads and such. But we also need REEs for weaponry, satellite systems and for our national defense. That is why I am focused on the long term. We need to stay optimistic and not be so sensitive to what the prices do next quarter.
Ultimately, the passage of these rules will create a more level playing field among producers and suppliers of these minerals. Legitimate and legal sources of supplies coming from locations outside of the prohibited conflict zone stand to gain (or have already seen some benefit) as companies have already started to shift supply sources. Those that would have received an immediate benefit will already be in the production phase of their projects. Newer projects may also see some lift, particularly if metal shortages ensue though we don’t see material shortages for these materials in the short term.
TCMR: Lisa, thank you for your time and your insights.
Lisa Reisman is co-founder and executive editor of the highly acclaimed metals website MetalMiner with over 36,000 monthly readers. MetalMiner provides sourcing and trading intelligence for global metals markets and publishes over 30 original pieces of content on a weekly basis. MetalMiner has been referenced in a wide range of publications including The Financial Times Blog, The Wall Street Journal Blog, CNN, Forbes, The Christian Science Monitor as well as American Metal Market and a range of metals trade publications. Earlier this year, MetalMiner launched its global metals pricing service, MetalMiner IndX(SM), which includes over 600metals price points in an easy-to-use web interface.
Molycorp’s poor performance has impacted the entire rare earth sector. Until the rare earth element “super-cycle” gains steam again, investors need to reset their expectations. In this exclusive Critical Metals Report interview, Chris Berry of House Mountain Partners discusses what really matters in a rare earth element company, and why investors should exercise patience.
The Critical Metals Report: On Aug. 2, Molycorp Inc. (MCP:NYSE) posted a loss of $0.03/share. Given that Molycorp is the rare earth element (REE) flagship story, what impact will this have on the broader space?
Chris Berry: The earnings miss was definitely a shock and the market took the shares down accordingly. It appears that Molycorp fell victim to a phenomenon that we are seeing across the spectrum of natural resource companies: higher costs and falling or stagnant metals prices. This compresses margins, which affects profitability and destroys shareholder value. The company also shipped less product than it anticipated and will have to raise more capital, which were two more big surprises.
“Companies with economic HREE deposits in reliable geopolitical jurisdictions still deserve a premium, and this is where the opportunity lies.”
Markets these days are particularly unforgiving, and raising additional capital on favorable terms is difficult at best. I have ratcheted down my expectations for outsized returns in mining shares until we get a clearer picture of global growth and industrial demand. For the last 10 years the commodity super cycle has been in full force, driven mainly by countries in the emerging world like China and India. And while I believe the super cycle is still alive and well despite slower economic growth, it is a long-term phenomenon. I agree with the theory that metals prices will be permanently higher as billions of global citizens urbanize and enhance their lifestyles. However, I disagree with the theory that metals prices will continue to increase permanently. The cyclicality of mining shares validates this.
TCMR: In a recent edition of Morning Notes, you note that many of the market leaders in the REEs space are “stuck in neutral” and reaffirm that China remains in control of the REE value chain. How could that affect smaller REEs players?
CB: I think this actually presents an opportunity. In that same Morning Notes edition, we profiled 20 REE companies and showed their year-to-date (YTD) returns and cash balances. Their returns were not pretty; the average return was about -30%, but many of the companies have surprisingly ample cash balances. This is a positive sign, as financial sustainability is crucial. These companies need to manage their cash prudently and aim for specific goals in a market where good news is often ignored and bad news is severely punished.
Meanwhile, China is moving to consolidate its industry supply chain and continue its market dominance. Lackluster demand for REEs should buy time to accomplish this as Western dependence on REEs and other critical metals fades from the front pages of the newspaper in favor of economic headwinds, the U.S. Presidential election or any number of other topics.
Companies with economic Heavy Rare Earth Element (HREE) deposits in reliable geopolitical jurisdictions still deserve a premium, and this is where I think the opportunity lies. They will attract renewed interest based on demand from the emerging world.
TCMR: If China still controls the value chain, does that give smaller players a better chance at share price appreciation, given that the bigger players have not done much to move the needle?
“We still believe that fundamentals matter the most.”
CB: No, not necessarily. Smaller players have a better chance at share price appreciation by demonstrating solid economics at their deposits and striking accretive deals with end users. There are enormous metallurgical and financial complexities involved in bringing an REE operation from exploration and development to production and integration into the supply chain. Share price appreciation can occur if these challenges are met with success. Recently, we’ve seen the two leaders in the space stumble. Molycorp will go back to the capital markets to fund its buildout at Mountain Pass. Lynas Corp. (LYC:ASX) is having difficulty finding a location to store the tailings from its Mount Weld deposit. Right now investors are trying to figure out who has the best opportunity to get into third place.
We still believe that the fundamentals matter the most. Well-managed companies with ample cash to get through today’s uncertain markets, whose REE deposits are in reliable geopolitical jurisdictions are the candidates most likely to create value and integrate into a global REE supply chain in the future.
TCMR: And those with low-cost operations.
CB: Right. We believe that the lowest-cost producer always wins across just about any industry. That is one of the reasons China dominates the market.
TCMR: But if cost escalation is happening so fast, how can we be certain that the low-cost producers will remain low-cost producers?
CB: You cannot. The macroeconomic picture and the industrial demand picture are very uncertain right now for all metals. We have seen cost inflation in feasibility studies across the lithium, graphite and manganese sectors and in the earnings reports of major gold producers as well. This tells me that cost inflation is endemic and no metal or mineral is really immune. It also goes back to why I think a “reset” of expectations for share returns is prudent.
Because of this phenomenon, management capability and financial soundness are the two most important factors we look at when evaluating a junior.
TCMR: Will China eventually become a net importer of REEs?
“Cost inflation is endemic and no metal or mineral is immune. This is why I think a ‘reset’ of expectations for share returns is prudent.”
CB: A lot of that depends on its growth trajectory. I have seen pronouncements made that China will be a net importer of REEs within the next few years, but this is a fragmented market and nobody can know for sure if the data coming out of China, be it growth rates or production numbers for metals, is entirely accurate. I do think the country is on a course to become a net importer and I say this by looking at the amount of research and development (R&D) going on in the REE space in China.
In its 12th five-year plan, China committed to spending roughly US$630 billion (B) on developing intellectual property and next-generation technologies. What the Chinese call “the seven pillars” form the foundation of its intellectual property development strategy. All of the pillars relate to industrial minerals like graphite, rare metals or lithium.
Trying to forecast supply and demand in the REE space is difficult when you consider the enormous sums going into R&D and intellectual property development. Perhaps a group of scientists will achieve a breakthrough in battery technology that offers dramatic performance enhancements and requires no REEs. If the technology can be commercialized, this would obviously shift the supply and demand projections significantly. I realize it may be a stretch to think this way, but with the pace of change in materials science today, the possibility certainly exists.
TCMR: Are the Chinese likely to do more offtake agreements or simply buy REE companies outright?
“China has very deep pockets, and it thinks 50 years out. It will continue to acquire assets.”
CB: China’s rise is a sensitive political issue in capitals all over the world. Whether it is offtake agreements or takeovers, this is more of political issue than a financial or economic issue. China has certainly been demonized in the Western press and is on a worldwide shopping spree for natural resources and intellectual property. It has very deep pockets, and it thinks 50 years out. China will continue to acquire assets because it has to feed a hungry and growing population striving for a better quality of life. Earlier this week the lithium-ion battery manufacturer, A123 Systems Inc. (AONE:NASDAQ), signed a non-binding Memorandum of Understanding with Wanxiang Group, a large Chinese auto parts manufacturer, to have Wanxiang make a strategic investment of up to $450 million. A123’s grave financial difficulties are no secret, so Wanxiang has effectively “bought” the state-of-the-art technology A123 has developed and could end up owning 80% of A123. This is only one example of China’s attempts to move up the value chain.
TCMR: You and your father created the Discovery Investing Scoreboard (DIS) to help investors determine which companies are better bets than others. Does it specify which companies are well positioned for the shifts in the REE space?
CB: I think DIS does identify which companies are well positioned in the REE space. The idea behind DIS is to crowd score a company. DIS users—and we have about 960 now—score 10 specific factors. We use word scores rather than numbers to “rank” a company: very good, good, nominal, somewhat poor or poor. This is because people think in terms of words instead of numbers. Once you have scored each factor, the system then kicks out a weighted score between 0 and 10, 10 being the best, 0 being the worst. Users can change their assumptions about a company in real-time, so if a company issues a favorable bankable feasibility study or an unexpectedly poor earnings report, you can adjust accordingly and get an idea of what the “crowd” is thinking about a name. Users can see their scores and compare it to the crowd score and track them over time.
Though the crowd sizes are still small, our initial data appear to show that the direction of the crowd score is an indicator of future share price. In other words, as the crowd score ticks up, share price has moved in the same direction over time. Conversely, as a crowd score has fallen, share price seems to fall as well. We’re watching this closely.
Right now, the highest-ranked companies include Orbite Aluminae Inc. (ORT:TSX), Medallion Resources Ltd. (MDL:TSX.V; MLLOF:OTCQX; MRD:FSE), Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE) and Frontier Rare Earths Ltd. (FRO:TSX).
TCMR: But none of them is scored higher than 7. The closest is Tasman at 6.26 out of 10.
CB: It is fair to say there is no clear frontrunner, because we all have different viewpoints, opinions and biases. Of the 775 companies, I think the highest-ranked is around 7.8. Though many of the share prices of REE companies have been punished in 2012, we think that watching the trend of the crowd score can provide significant insight into how a company is “viewed” by the marketplace. As the size of the crowd continues to grow, we will be watching for more evidence of these types of relationships closely.
We find that the scores of the people who really love a company and those who really hate a company tend to get diluted. Most of the scores are between 4.5 and 6.5. It’s very difficult to value a junior mining company because there typically have no revenues or cash flows to discount to get a net present value. The DIS is designed to take that subjectivity and guesswork away.
TCMR: Three of your top four have had good years. Alkane is up 8.29% YTD and Medallion is up about 38% YTD. Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A) is up 21.5% YTD, but has a DIS score of only 5.8? Why so low?
CB: It is more important to look at the decile of a company. Each company has a score that places it in a given decile relative to its peers. So 5.8 isn’t a terribly low score. It’s important to look at the trend of the crowd score rather than just the static number. When we break down the ten factors, it appears the crowd really likes the company’s asset and has this factor ranked highest, along with the capability of management. It is interesting to note that the most important factors in the eyes of the crowd for Tasman and Medallion were the potential for their assets and the capability of management—exactly the same as Rare Element Resources. This should give everyone insight into what the “crowd” is concerned with. Company management teams should find this of particular interest. With Frontier, it appears that stakeholder relations are key, and this makes sense when you look at the company’s relationship with KORES.
TCMR: Let’s move to the market’s sour take on graphite plays. Is that specific to graphite or is it part of the larger trend?
CB: It is not specific at all. There has been a predictable pattern with share price appreciation of certain metals and minerals in recent years. Uranium went to $140/pound and collapsed. Lithium took off and then came back down to earth. Most recently, REE prices went parabolic, and have since come down. Graphite has followed the same pattern. Some people call this the “mystery history” curve when a company’s share price rapidly appreciates due to investor excitement and then falls as the company matures from exploration to development to possible production. We wrote a Morning Note several months ago discussing this and basically stating the case that the mystery phase associated with graphite was over and now the companies in the space would need to begin the process to defining and developing a resource, proving economics and making the push towards production.
“The more information we know about a deposit, the better. End users want proof that a mining company can produce graphite to their very strict specifications.”
Regarding graphite, investor exuberance more than anything pushed shares higher and interest in graphene must also be mentioned. In addition, global growth rates and industrial demand have been falling for months. Graphite is an industrial mineral, so as we’ve seen growth slow, intuitively graphite prices must soften as well. On the positive side, graphite does offer multiple avenues of demand. In addition to current-day demand from refractories and steelmaking, you have future avenues of demand like fuel cells and batteries. I think this paints an overall positive longer-term picture for graphite demand.
When analyzing a given metal or mineral, I spend just as much time researching end users as I do researching juniors. Despite the uncertainty in various economies, long-term deals involving graphite are occurring. Earlier this year, SGL Carbon and ArcelorMittal S.A. (MT:NYSE) signed a five-year deal worth several hundred million dollars for SGL Carbon to supply graphite electrodes to ArcelorMittal. This was the biggest contract in SGL’s history. This is only one example, but is indicative of a strong future for graphite.
TCMR: You talk a lot about graphite companies having a balanced footprint. What does that mean?
CB: Think of the footprint as the composition of a given deposit. There are different types of graphite—flake, amorphous and vein—and flake is comprised of different sizes. Generally speaking, the supply-and-demand dynamics are different for the various types and flake sizes and they all command different prices on world markets.
When I look at a graphite project, I want to get an idea for what the actual composition is, what the percentages of large, medium and small flake are and what the carbon content is. This gives me a rough idea of the potential economics.
To be fair, many of the junior mining companies involved in graphite have not done enough drilling on or analysis of their properties to know what the footprint actually looks like. However, with the “mystery” phase of graphite behind us, it is crucial to understand this information about a deposit.
TCMR: Does the graphite space need more companies reaching the bankable feasibility stage, like Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX), or is it more important that companies reach agreements with end users?
CB: The more information we know about a deposit, the better. I think a graphite company would have trouble securing an agreement with an end user without a bankable feasibility study or a great deal of due diligence. Graphite is a product requiring high degrees of specificity in terms of purity. End users would naturally want proof that a mining company can produce graphite to their very strict specifications before entering an agreement. Failure to do so would interrupt and perhaps halt an end user’s supply chain.
TCMR: But end-user agreements have been signed throughout the REE space with far less than bankable feasibility studies.
CB: This is because China owns the entire REE value chain from “mine to market.” This is not the case with graphite. Though China controls upwards of 80% of global graphite production, there exists a viable graphite supply chain outside of China, so you don’t see the same urgency with graphite that you do with REEs.
TCMR: What are the top three crowd scores in the graphite space on DIS?
CB: There are no surprises here: Flinders Resources Ltd. (FDR:TSX.V), Northern Graphite and Focus Graphite Inc. (FMS:TSX.V) are the Top 3.
With respect to Flinders, the crowd seems most impressed with its management and financial soundness. The company has $18 million (M) in the bank and is working towards bringing its 100% owned Kringel graphite mine back into production. The fact that this is an existing mine is key as the company’s capital expenditures and infrastructure costs will be relatively low.
The crowd has ranked Focus Graphite’s asset potential and financial soundness as its best attributes. The Lac Knife deposit is one of the highest-grade graphite deposits in the world and its location in Quebec is also key, as it is no secret how favorably the provincial government looks upon mining exploration there. The refunding of exploration expenditures can help defray dilution and strengthen a company’s share structure.
With Northern Graphite, the crowd has ranked management’s capability and the asset potential highest. Bissett Creek is lower grade than most deposits out there, but it is big and highly scalable.
TCMR: What is the timeline to production for Focus?
CB: It is aiming for production in late 2013 or early 2014. I think the ultimate goal is to be able to produce 20 thousand tons (Kt)/year of 95% graphite, although I assume the company will ramp up to this amount rather than producing 20 Kt in year one. Focus’ next big catalyst is the release of its preliminary economic assessment. Lac Knife is a high-grade deposit, so we think the costs-per-ton are pretty favorable, and so the market is waiting to see confirmation of the initial economics. Strong economics and good metallurgical results are the keys here.
TCMR: Focus says it will be producing for about $350/ton (t), which would be quite low.
CB: It would be at the lowest I have seen, and puts Focus in a position to compete with the Chinese. At the end of the day, this is what matters. It’s really not accurate to say that Focus, Northern Graphite and Flinders are competing against each other because they aren’t. They’re competing against the lowest-cost producers—those who are in China currently.
TCMR: Flinders’ biggest advantage seems to be that it is in Europe.
CB: Yes, Flinders has a readymade market right in its backyard. It has a historical resource estimate of about 8.8 million tons at about 6.5% graphitic carbon. Flinders plans to release an updated resource estimate in the next month or so. That will tell us more about the footprint of the deposit and some potential economics. There are graphite mines in Norway, Germany and Austria, but there is a place for Flinders.
TCMR: Does Northern Graphite’s Bissett Creek deposit have a balanced footprint?
CB: Yes, its footprint is slanted toward higher-value graphite. When you look at graphite, you want a deposit that has predominately jumbo and large flake. That is because the highest-value graphite is actually spherical. You can reduce jumbo flake into a spherical shape, but you cannot take smaller flake and “upsize” it.
TCMR: Northern Graphite recently put out a release saying that it has created spherical graphite.
CB: Yes, the company has developed a proprietary process for creating spherical graphite and is working with Hazen Research and the National Research Council of Canada on continuing these tests and optimizing the entire process. For an additional $10M in capex, Northern Graphite can build a spherical graphite plant and I think this is sensible as it allows the company to capture the highest additional margin.
TCMR: When will Northern be in commercial production, and it will be rerated then?
CB: Its plan is to be in commercial production in 2014 and will ramp up production from there. I think it will be rerated between now and 2014 as the company has to raise $100M for capex and secure offtake agreements—two big challenges even in the best of times. However, successfully accomplishing these goals should give the share price new life, subject to the details.
TCMR: I have to ask you about vanadium, which seems to have been lost in the critical metals shuffle. What is the latest vanadium news?
“If the battery and energy storage businesses really find their legs, vanadium demand will explode.”
CB: Like graphite, vanadium has multiple avenues of demand. Right now, more than 90% of the vanadium produced is used to strengthen steel. If you look at growth in steel demand, you will see vanadium demand move in tandem. So assuming average GDP global growth increases at about 5%/year out to 2020, you can say vanadium demand would increase at about the same rate. Today, vanadium is a 60,000 metric ton (mt)/year market. Do the math, and you can see the potential for vanadium demand growth just from its steel application.
But one of the most exciting growth avenues for vanadium is energy storage. If the battery and energy storage businesses really find their legs, vanadium demand will explode. While vanadium redox batteries have not been widely adopted due to a host of factors, including cost, a great deal of R&D is underway. A breakthrough could tip the scales in favor of increased demand very quickly.
TCMR: Which up-and-coming vanadium players do you follow?
CB: The two companies I focus on are Largo Resources Ltd. (LGO:TSX.V) and American Vanadium Corp. (AVC:TSX.V). Denison Mines Corp. (DML:TSX; DNN:NYSE.A) is the only company that produces vanadium as a byproduct of uranium operations in the Western U.S. and it’s only a small amount at that.
TCMR: Largo plans to be in production on its Maracas vanadium-platinum group elements project in Brazil in late 2013. It has all the money it needs and is fully permitted. Why does the market not appreciate it?
CB: I think it is just a matter of time. In addition to what you listed, Largo has an offtake agreement with Glencore International plc (GLEN:LSE). The Maracas deposit is the highest-grade, undeveloped vanadium deposit in the world and it is fully funded for construction. Everything you would want to see in a junior that is close to production is embodied in Largo. The company needs to prove to the market that they can build the mine and graduate to the status of a producer. I think the roadblock here is psychological more than anything else.
TCMR: Where is American Vanadium in terms of development?
CB: It is further behind. American Vanadium’s main project is in Eastern Nevada, called Gibellini Hill. The company plans to build an open-pit mine and produce 11 million pounds of vanadium pentoxide per year by late 2014, maybe 2015. While the grade at Gibellini is lower than many would like at about 0.25% vanadium pentoxide, the deposit is at surface, it is scalable and it is in Nevada, one of the best mining jurisdictions in the world. The capital expenditure needed to bring this into production could be very favorable. I think this company will look to Asia for offtakes or joint venture partners to fund it through feasibility and into production.
TCMR: Why wouldn’t an American company partner with American Vanadium?
CB: Politically speaking, an American partner would be a much better fit. But a lot of American companies already have offtake agreements in place. It would be difficult for not just American Vanadium, but any junior to try and “break in” to these established relationships. There is huge demand in Asia for both infrastructure and energy storage applications and so American Vanadium focusing on that part of the world is a wise move.
TCMR: Chris, thank you for your time and insights.
Chris Berry, with a lifelong interest in geopolitics and the financial issues that emerge from these relationships, founded House Mountain Partners in 2010. The firm focuses on the evolving geopolitical relationship between emerging and developed economies, the commodity space and junior mining and resource stocks positioned to benefit from this phenomenon. Chris holds an MBA in finance with an international focus from Fordham University, and a BA in international studies from The Virginia Military Institute.
Equity investing is squarely in a risk-off phase and few sectors have been hit harder than junior mining. Rare earth elements equities are no exception, but most of the materials themselves have not dropped nearly as much. The Critical Metals Report sat down with Siddharth Rajeev, vice president and head of research at Fundamental Research Corp., for a good hard look at small caps in this space. Where have these equities been, and where are their valuations heading? Read on for more.
The Critical Metals Report: Siddharth, despite the poor price performance of critical metals equities since the fall of 2011, most of the prices for the underlying commodities have indicated relatively stable demand. What’s your view?
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Siddharth Rajeev: It’s tough to generalize on the mining sector because each critical element has its own supply and demand drivers. We have a positive outlook on a few elements; this is not so with others. However, it’s true that commodity prices have not dropped as much as equities. If you look at industry data, you can see that mining companies are in a much better position now compared to four or five years ago. For example, the margins, return on equity and balance sheets of gold and copper producers have improved significantly over the past five years. Despite that, why is the TSX Venture, 50% of which is comprised of mining companies, down by 60%? I believe that the market is overreacting, just as it did in 2008. Therefore, we believe there is a good opportunity to buy quality assets at this time at cheap valuations.
TCMR: Does it help to look at these equities over a two-, three- or even four-year timeline? Most companies would show stock appreciation within that timeframe, whereas very few, if any, show positive year-over-year movement.
SR: It’s much easier to analyze and predict an outcome if you have a longer-term outlook. It’s extremely difficult to predict an outcome for, say, three to six months, as short-term prices depend heavily on speculation, market sentiment and liquidity. Long-term prices depend only on fundamentals, which is much easier to analyze. That’s the most important message investors should take away—consider long-term outlooks when considering small-cap resource equities.
TCMR: Siddharth, you’re vice president and head of research at Fundamental Research Corp., the largest independent equity research firm in Canada, and you produce research reports on publicly traded small-cap companies. How do you decide which companies Fundamental covers?
SR: Our goal at Fundamental is to bring more transparency and provide high-quality independent analysis on small- to mid-cap companies to enable investors to make an informed decision. Large-cap companies are more transparent and there are thousands or even millions of people following those companies. The large-cap sector is more efficient in the sense that stock mispricing is rare. Small- and mid-cap sectors are not as efficient because stock mispricing is common in these spaces. Therefore, risk-tolerant investors have an opportunity to gain higher returns in this space. Our goal is to enable investors to differentiate the good small caps from the bad.
TCMR: If a stock consistently underperforms the broader market, does it remain under coverage?
SR: Yes. The junior mining space is very dynamic, so things can turn around in months or even days. Large-cap companies cannot do that; for example, Microsoft cannot change its “fundamentals” in such short periods. Juniors can—through JV partnerships, property acquisitions and changing their management teams. There have been a lot of cases where we have changed our outlook from negative to positive due to positive developments. We don’t easily write off underperforming companies in our coverage universe.
TCMR: Do you have any evidence that would suggest that your research increases the liquidity of these companies?
SR: According to the Journal of Applied Corporate Finance, analyst coverage combined with an effective investor relations program increases liquidity and decreases trading costs by 85%. In general, as per the efficient market hypothesis, anything that improves information flow to the market will create a more efficient market. Analyst coverage, with its broad reach and influence over investors, is probably the most effective way to increase information flow. Internally, we know this is the case.
We see that, on average, companies under coverage experience an increase in daily average trading volumes. They also experience an increase in the number of days their stocks trade—in some cases, the number of days doubles.
TCMR: What are some critical minerals equities that have performed well since your firm initiated coverage?
SR: We produced reports on three critical metals companies. I am pleased to say that stock prices of all three companies have performed well since that time. Focus Graphite Inc. (FMS:TSX.V) is up 8%, Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) is up 11% and Lomiko Metals Inc. (LMR:TSX.V) is up 14%.
TCMR: The investment thesis for rare earth elements (REEs) was that the “greening” of America and the rest of the world would call for massive amounts of these metals and no one outside of China produced them. Then the bottom fell out the market. How has that thesis changed? Or does it remain basically intact?
SR: REEs are a very broad sector—it’s not possible to give a general comment with any accuracy. But we believe this thesis only remains for heavy rare earth elements (HREEs) that are scarcely available, and this is shown by the fact that prices of light rare earth elements (LREEs) dropped much more than the scarcely available HREEs.
TCMR: How critical is it that some of these plays soon reach production and start generating cash flow?
SR:Most REE juniors are far from production. Only very few companies intend to be in production in the near term—names like Molycorp Inc. (MCP:NYSE), Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) in South Africa and Australia’s Lynas Corp. (LYC:ASX). We believe investors can generate good returns in this space by identifying companies with solid early-stage projects.
TCMR: What are some REEs companies under coverage?
SR: Quantum Rare Earth Developments Corp. (QRE:TSX.V; BR3:FSE; QREDF:OTCBB) is focused on exploring and developing the Elk Creek carbonatite complex. The company recently came up with a promising new resource, which stated 19.3 million tons (Mt) grading 0.67% Nb2O5 and an increase in Inferred resources to 83.3 Mt grading 0.63% Nb2O5. The U.S. produces very little niobium. That’s been the case for a long time. Brazil is the number-one producer of niobium, accounting for about 92% of global production. Therefore, we believe Quantum Rare Earth Developments, if it is able to continue to advance the project, will play a key role in the U.S. domestic niobium supply.
TCMR: There are now enough graphite equities in play to create an entire index, perhaps two. A year ago, there were only a handful of names. How did graphite become the hottest critical mineral of them all?
SR: Just like REEs, it is important to understand the different types of graphite. We are bullish on large-flake graphite. This is because the key demand drivers (lithium-ion batteries, fuel cells, nuclear reactors) currently use small-flake and synthetic graphite, which is more abundant but much more expensive to use because of the processing they must undergo to enable them to be used in these applications. Therefore, we believe large-flake graphite will be in more demand due to their highly superior economics.
A lot of junior graphite companies have popped up in the last 12 months; most of them have yet to do any metallurgical studies to determine if the deposit is large, medium or small. A lot of companies might not survive after the metallurgical studies are completed.
TCMR: What are some graphite equities under your coverage?
SR: Focus Graphite Inc.’s flagship project is the 100%-owned Lac Knife graphite property in Quebec. At 15.7% Cg (carbon as graphite), it is the highest-known graphite deposit grade in the world. Metallurgical testing shows the deposit contains 46.1% large-flake graphite and 39% medium-flake graphite. An initial preliminary economic assessment is expected shortly, which we believe will be a catalyst. In addition to advancing its project, Focus recently signed a license agreement with Hydro-Quebec to develop a graphite purification facility and a graphite anode production facility for lithium-ion batteries.
Another story we like is Flinders Resources Ltd. (FDR:TSX.V). A lot of historic work has been done on its Kringel project. It has a historical resource of 7 Mt at 9% graphite, which is high-grade material. It has a fully permitted mine that can be put into production in the next 18–24 months. It recently announced good drilling results—Flinders has extended beyond the historical zone and is continuing to gather information for its resource estimate sometime before the fall. We think these results are continuing to prove up the historical resource.
Lomiko Metals is a very early-stage project. It just acquired a project in Quebec. Some historic work has been done on the property, and it is going to commence an exploration program. Lomiko recently received a drilling permit.
Standard Graphite Corp. (SGH:TSX.V) is a company we track. The company recently acquired the Mousseau East deposit, which hosts a non-NI 43-101 historical resource of 800,000 tons at 8% Cg down to 40 meters and a 3% cutoff. It also has a few other properties, Sandy Lake and Sandy Lake NE, which are next to the Lac Knife deposit hosted by Focus Graphite.
TCMR: Thanks for sharing your knowledge with us.
Siddharth Rajeev has been vice president and head of research at Fundamental Research Corp., an institutional research firm in Vancouver, since 2006. He holds a bachelor of technology in electronics engineering from the Cochin University of Science & Technology and Master of Business Administration in finance from the University of British Columbia. He is ranked as a four-star analyst in the energy and mining sectors by Deutsche Asset Management.
China’s sudden cuts to rare earth export quotas and domestic production marked the beginning of a Rare Earth Economic War, proposes Jacob Securities’ Senior Mining and Metals Analyst Luisa Moreno. The good news is that partnerships between end-users and mining companies may just be the secret weapon to level the playing field for critical metals producers operating beyond China’s borders. In this exclusive interview with The Critical Metals Report, Moreno points to the companies that are closest to delivering high-quality goods for the benefit of manufacturers and investors alike.
The Critical Metals Report: Last year you published a research report called the Rare Earth Economic War. When we talked last time, you said that China was on one side and industrialized nations were on the other, with China winning. Does China’s new five-year plan with an emphasis on consumer consumption change that balance?
Luisa Moreno: China’s new five-year plan as it concerns raw materials suggests that China wants to better utilize its resources primarily for its own economic development, which in part supports the concept of a raw materials economic war. China, just as most nations, would like to be self-sufficient in key mineral resources. The country has about one-third of all the total rare earth element (REE) resources, but it supplies the world with more than 95% of its rare earth needs. I believe China is in a resource-preservation mode. However, what is not so fair are the differences between China’s domestic rare earths prices and international prices, which are usually much higher, and China’s dramatic decrease in production and export quotas in such a short period of time. China is well aware of the critical uses of some of the rare earths and it seems that it is determined to allocate a limited amount to the world and increasingly consume most of it by attracting REE-dependent manufacturing into China. The leaders plan to manage sustainable growth of the Chinese REE sector by attracting companies that utilize these resources. That would bring jobs while developing advanced rare earth-based technologies. It is no different from what other nations would like to do. Of course, China is at an advantage because it has the largest capacity in the world for the production of these elements and the know-how to refine them. The rest of the world is left with the option of moving manufacturing to China for better access to these materials.
TCMR: So you are saying that China is still winning?
LM: I believe so. Actually, the recent move by the U.S., EU and Japan to file a law suit against China may end up supporting that conclusion, if they are unable to persuade it to change its rare earth policies. It seems that China is increasingly consuming most of these elements and it is trying to control supply and prices.
TCMR: Can lawsuits and political pressure really make China change its export habits?
LM: Potentially. I think a negative ruling could make leaders think twice before deciding on export quotas or other related trading policies. But China will put Chinese interests first, obviously. I don’t think that the rest of the world has much leverage with what is now the second-largest world economy. I think the lawsuits bring attention to how other nations may feel, but might not necessarily be sufficient to change China’s policies regarding rare earths or other critical materials.
TCMR: China’s Ministry of Commerce recently announced that the export quotas would remain essentially the same—30,184 tons (t) in 2012—but only 50% of the quota was used last year. Is that quota meaningful?
LM: 2011 was an exceptionally bad year, the tsunami in Japan, the second-largest REE consumer, having caused a slowdown in demand, not to mention the global economic slowdown in the second half of the year, which was marked by poor economic conditions in Europe and negative economic politics in the U.S. The second half of 2011 was clearly not a favorable one for rare earths and many other commodities. Now that the rare earth element export quotas are separated into lights, mediums and heavies, I think it will become more evident where the real demand is and how tight the export quotas really are, assuming that we see some economic recovery.
I think the new invoicing system that China is implementing to better control production and exports may decrease illegal exports of rare earths as well. Right now, official export numbers are not the total picture because so much is illegally produced and exported. I’m not sure China will be able to control all of the illegal exports, but at least reining it in a little bit will impact the supply-demand equation.
If Lynas Corp. (LYC:ASX) comes into production and Molycorp Inc. (MCP:NYSE) ramps up production, we should see an increase in production of light rare earth elements (LREEs). That may make export quotas for LREEs less meaningful. However, China will probably maintain export quotas for some of the most critical REEs, including the light element neodymium and some of the heavy rare earths (HREEs) like dysprosium and yttrium. For the next five to 10 years, as long as there is a risk that some of these elements might be in shortfall, we may still see an REE export quota of some sort.
TCMR: You called 2011 an exceptional year in terms of bad economic news, but could the drop in rare earths prices indicate that it had been in a bubble? Have companies’ efforts to re-engineer products and eliminate their needs for rare earths been successful? Or was it just the economy in general that accounted for the price drops?
LM: Likely it was a combination of all those things. I think the current and future demand for materials such as dysprosium should be healthy, but I’m not sure if $3,000/kilogram (kg) was justifiable. Similarly, the prices of lanthanum and cerium, which are fairly common elements historically below $10/kg , were above $100/kg back in August, a level we now know is not really sustainable. Prices seem to have been in a bubble and when demand decreased, REE prices also fell significantly. Chinese officials may have wanted prices to stay high and some Chinese refiners even suspended production for a few months when prices were falling and demand was weak.
TCMR: Considering that not all REEs are created equal in terms of market value, what are some of the most in-demand elements, and could those prices break out this year?
LM: I think the critical elements identified by the U.S. Department of Energy—neodymium, praseodymium, terbium, dysprosium and yttrium—could experience a significant increase in demand; some may even be in shortfall right now. It is possible that the prices of these elements may rise, but in the short term, we might see continued decreasing prices until they stabilize. I have already seen signs that they are starting to stabilize. If there is stability, or better yet growth in the global economy, the prices for some of these elements could potentially increase this year.
TCMR: You mentioned Molycorp and Lynas. Molycorp just announced the start-up of its manufacturing facility in Mountain Pass, California. Will that produce mostly LREEs? Could those two companies make a difference in global supply in the next couple of years?
LM: Absolutely. Light rare earths are the most sold or consumed elements—particularly lanthanum and cerium. They are the cheapest, but they are the ones that are sold in the highest volume. Lynas and Molycorp could also produce significant amounts of neodymium, which is very important for the production of super magnets used in hybrid cars, computers and wind turbines. Molycorp really does not have much of the heavies like dysprosium and terbium at Mountain Pass. Lynas might be able to produce some of the most critical heavies from its plant in Malaysia, but it would be rather expensive given that it only has small percentages of heavy lanthanides. In any case, even if both companies ramp up production, it won’t completely close the gap in demand that exists for some of these critical elements outside China.
TCMR: When do you see each of those companies going into production?
LM: There have been delays with the Lynas project because of permitting issues, but I think it hopes to start production in Malaysia before the end of the year. Molycorp expects to reach its phase one annualized production of 19,050t of mixed rare earth oxides by Q312 and separated products perhaps before the end of the year. It’s hard to say exactly when these companies will be able to reach their target production. As you know, with mining projects delays are not unusual, but both companies are working very hard to deliver on their promises.
TCMR: What are your top picks for non-Chinese companies that could supply some of the heavy elements in the future?
LM: My top picks include Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) and Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX). I cover both companies and they both have a favorable REE distribution with high percentages of the critical elements. I think Matamec has made significant progress with its metallurgy and its partnerships. The company just announced that Toyota Tsusho Corp. (TYHOF:OTC; 8015:JP) has signed a binding memo of understanding with Matamec, which means it has priority over the development of the Kipawa. That is very good for Matamec.
Ucore should come out with a preliminary economic assessment (PEA) in the next few weeks, and we should be able to better assess if it is an economically viable project. The project is in Alaska and we believe it is the most significant HREE deposit in the U.S. It’s very interesting.
TCMR: Could either of these companies be takeover targets for a Molycorp looking to cover the HREE space?
LM: If Molycorp wants to become the leading rare earths company, it will have to find a solution for the heavy rare earths. I think Matamec could have filled that role, but because Toyota has now the binding agreement, it will be difficult for Molycorp to approach Matamec. Besides, it seems that Toyota is interested in a 100% offtake deal with Matamec. Ucore, on the other hand, continues to be another good option for Molycorp, although the company is still working on its metallurgy and may be seen as too early stage. When the PEA comes out, hopefully we’ll have a much better idea of the progress of the project.
Another company that would also be of interest is Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE), which has the Norra Karr deposit in Sweden. It is close to Molycorp’s Silmet refinery in Europe. Tasman has one of the highest percentages of heavies. Contrary to Ucore and Matamec, it actually has a very large resource. My understanding is that in terms of the metallurgy, it made significant progress but it is not as advanced as Matamec or Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A). Hopefully, it will file a PEA this year as well.
TCMR: Matamec is trading at $0.32 today and Ucore at $0.41. Could the recent news be catalysts for both of those companies?
LM: I think so. As the market looks around for HREE alternatives to Molycorp, I think there is great potential for Ucore and Tasman to be recognized by the market as potential targets. Matamec is currently working on the details of a definitive agreement with Toyota Tsusho, to be completed by July.
TCMR: You have commented on the importance of metallurgy and the refining process for extracting and efficiently delivering high-quality oxides for each individual mineral source because each one is very different. What companies are well on their way to doing this?
LM: Like I said, Matamec is well underway in doing this. Now, it has a fantastic partner, which is Toyota Tsusho and all the associated companies and likely universities that will be involved in developing that project.
I think another company that has made significant progress is Montero Mining and Exploration Ltd. (MON:TSX.V). It has a deposit in Tanzania and it just announced that it has produced an oxide concentrate. That’s really good.
Rare Element Resources Ltd. is another. I visited its pilot plant last year. It has also made significant progress. The resource is mainly comprised of bastnasite mineral, which, relative to other deposits, might mean that it will have fewer processing challenges. It has been able to produce a mixed oxide concentrate and is moving towards separating the elements and producing individual elements oxides. As I said, it’s already at the pilot level and completed a prefeasibility study. Rare Element is one of the most advanced projects; we believe however that the company needs to secure offtake agreements and a JV partner capable of co-financing the $375 million project.
Another one that I like is Frontier Rare Earths Ltd. (FRO:TSX). It just published a comprehensive PEA, which included a separation plant. No other company has done that yet. Frontier has a partnership and partial offtake agreement with Korea Resource Corporation and the support of a consortium of Korean companies.
TCMR: Could other REE companies that you’re following break out in the next few years, either because of agreements with partners or as takeout candidates or because they might actually start producing?
LM: I think we should perhaps pay more attention to what is going on in Brazil. We believe that Neo Material Technologies (NEM:TSX) spent some time there before being acquired by Molycorp. It seems that the company may have been looking at recovering xenotime from tailings at the Pitinga mine in Brazil.
Another private project is owned by Mining Ventures Brasil. It seems to have a colluvial deposit with high percentages of xenotime and monazite. The distribution for the heavies may be quite favorable. It’s an early-stage project; the company is moving forward with the metallurgy now. There is a possibility that things could work out pretty fast for them.
Another private project still in Brazil is the one that it is ongoing at Companhia Brasileira de Metalurgia e Mineração (CBMM). It is the largest producer of niobium but it also has rare earths in its deposit.
Medallion Resources Ltd. (MDL:TSX.V; MLLOF:OTCQX; MRD:FSE) is a public company targeting monazite deposits around the world. Monazite, just like xenotime, has been used in the past to recover rare earths. The model is to find these monazite deposits because they represent a far easier metallurgic process than other sources. That could allow Medallion to fast-track its project.
A lot of folks are trying to find solutions for these metals.
TCMR: The sheer number of early-stage projects presents a challenge for potential investors. How can investors pick which companies might be successful? What should they focus on when there are so many moving parts—the management, the location, the metallurgy and the different elements themselves?
LM: To start, investors should be looking at the same factors they usually use to assess mining companies. Beyond that, the most important factors for REE projects specifically are metallurgy and industry partnerships. However, it depends what investors are looking for. Essentially, there are some names in the rare earths space that are well known and respected. Examples of that are Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Rare Element Resources Ltd. They were the first ones to publish PEAs and are still perceived by some as the frontrunners. There are, however, lesser-known companies that have received far less love from the market, despite having made significant advances. That includes Matamec and Frontier, which I still feel are somewhat under the radar.
If investors are anticipating a bounce in rare earths stocks and would like to hold rare earths companies that have made major progress in metallurgy, with solid industry partnerships and have great potential for significant long-term upside, I think names like Matamec and Frontier might be good. They’re relatively more advanced, particularly in metallurgy, which is very important because you can have 100 million tons at high grades, but if the metallurgy is complex and you are five years away from solving the processing to a level where it’s economic to recover these elements, that might not be so competitive in this market. Those that are more advanced will be better positioned to secure development partners. That’s very important because the PEAs coming out show that projects are capital expenditure intensive and industry partners can help finance these projects.
Rare earths are not commodities; end users, usually through joint ventures, guide companies toward production of appropriate materials. It’s a very complex space. As I said, although Matamec and Frontier have made significant progress, they consistently have underperformed some of their peers. So investors who are interested in those names will have to be really patient. We believe, however, that Molycorp is the undisputable leading non-Chinese rare earth listed company at the moment and investor interest in this space should follow and analyze this company to determine a good entry point.
TCMR: You’re going to be speaking at the International Rare Earths Summit in San Francisco in May. What message will you be delivering?
LM: Seeing as a significant part of the audience is expected to be end users who are extremely concerned about the long-term availability of these elements, I’ll be talking about the challenges that rare earth miners and future producers face, focusing on how end-users may better participate in the development of a global rare earths supply industry. They could surely help fast track the development of the rare earths industry outside China.
TCMR: Thank you very much for your time, Luisa.
Luisa Moreno is a senior mining and metals analyst at Jacob Securities Inc. in Toronto. She covers industrial materials with a major focus on technology and energy metal companies. She has been a guest speaker on television and at international conferences. Moreno has published reports on rare earths and other critical materials and has been quoted in newspapers and industry blogs. She holds a bachelor’s and master’s in physics engineering as well as a Ph.D. in materials and mechanics from Imperial College, London.
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.
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.
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.
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
“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.