Clint Cox: Digging for Opportunities in Rare Earths

Why all the buzz about rare earths elements (REEs)? In this exclusive Energy Report interview, industry expert Clint Cox, The Anchor House, tells how he separates the hype from reality, and what a challenging and complex market it is. It's estimated that 25% of new technologies such as hybrid cars use rare earths, and that demand is increasing. Clint talks about China's current market dominance and the potential for production in North America. In a companion article, Alternative Energy Becoming a Little Less Alternative, Victor Goncalves of The Green Money Report examines how the growth of hybrid vehicles on the road will affect the rare earth market.

The Energy Report: Clint, can you please clarify the difference between rare metals and rare earth?

Clint Cox: Rare earths are a subset of rare metals. Rare metals is the overarching definition of a bunch of these smaller-market metals — such as tantalum (Ta), niobium (Nb), rhenium (Re), gallium (Ga), germanium (Ge), and more—that are just now starting to hit their stride with the technology boom. Rare earths, however, are specifically the lanthanides from the periodic table. Look near the bottom of the periodic table from your old high school textbook. The lanthanides include everything from lanthanum (La) to lutetium (Lu) and also includes yttrium (Y). So it’s 16 altogether, although promethium (Pm) is never found in nature because it’s radioactive and it has such a short half-life. Those are the rare earth elements. The rare metals would include all of these rare earth elements plus all the other rare metals.

But, then, even within the rare earths there is some division and that is between the lights and the heavies.

Allanite, Hoidas Lake
TER: Does the weight differential equate to a different end user usage of light vs. heavy metals?

CC: The division is fairly arbitrary, and there are many different definitions of “light” and “heavy” used by the industry – even long-time veterans in the rare earth business disagree on where the division is between the two. But there’s usually less “heavy” rare earths found in most deposits.

TER: So the heavier rare earths are found less frequently?

CC: For the most part, yes, but each site is incredibly different. There are no two sites that are alike. Some rare earth minerals have a distribution that favors the heavies, some the lights. And sometimes you’ll have lights and heavies together in the same deposit, but concentrated in different minerals, but for the most part, you’re either going to have a light deposit or you’re going to have a heavy deposit.

Rare Earth Minerals
TER: Any input for potential investors on how to approach investing in this complex market?

CC: From an investor standpoint, when you look at rare metals and investing in a rare metals company, you have to know what market you’re looking at. For example, if you’re looking at tantalum, you’re probably going to be looking at the capacitor market because that’s one of the key uses for tantalum. If you’re looking at the niobium market, you’re going to be looking at alloys. Lithium, you’re going to be very cognizant of what’s happening in the battery industry and what direction lithium is taking there. If you’re going to invest in rare earths, you have to understand 15 to 16 different markets and it’s very complex.

TER: Precious metals and certain oil and gas stock are on an upswing. But there seems to be a lot of buzz about rare earth or rare metals. Why?

CC: Yes, it’s really been a hot topic in the last couple of weeks. It’s interesting because there are a number of companies that are rare earth companies and they’ve been looking for rare earths, drilling and making an effort to be part of the rare earth industry for years. But they haven’t got much publicity or traction with the investor community because it’s so difficult to explain and so complex. But several newsletter writers have recently recommended the rare earth industry, and several mentioned rare earth from the podium at the recent investor conference in Vancouver. That’s giving it traction.

TER: It’s been reported that 95% of the rare earths comes from China. What should investors be aware of as they’re looking at this and are there really investment opportunities here?

CC: It’s a very interesting question, because China does control 95% of the output in production, so they’re a very key and important player. One of the things to keep in mind is, as an investor, there are different ways to make money in this market. I think that if you had invested in these rare earths before these recent reports came out or before the Vancouver conference, you would have done very well. Your stocks would have popped a little bit. So I think you can make money in this industry without ever producing a single kilogram of rare earths. You can make plenty of money, so that’s one of the things to keep in mind is that’s speculation.

If you’re investing for the long term, you really want to look for companies that can get the stuff out of the ground and turn it into a concentrate and then process it or give it to a processor that’ll put it into and one of the many forms to be consumed by end users. There are two different styles of investing, and I’m the latter version. I try to look for the long term, who’s going to get to production and who’s going to provide end users with product. In the short term, there’s going to be a lot of Johnny-come-latelies who try to make money off of the fact that there’s a big buzz in the rare earth industry.

As a word of caution to investors, you are competing with China. Keep in mind that approximately 50% of the rare earths that are produced come out of an iron ore mine as a byproduct up in Bayan Obo—it’s in Inner Mongolia, China —and you’re competing with a byproduct mine. They’re getting this rare earth stuff very, very cheaply and that’s where you get 50% of the rare earths, so you have to think about how you’re going to compete with that cost. It’s very cheap for them to compete. You have to look at the costs here and the costs are very high, very high, especially when you’re doing it from a hard rock or from a mineral that’s never been processed before.

TER: The sense I’m getting is that people are concerned about China’s current dominance of the market. They think they’re going to start doing something like increase the cost of the rare elements or force companies that make hybrids to produce their motors in China and then export them. If I were Toyota (TM), why wouldn’t I pay four times more and not be reliant on China?

CC: That’s a great question. That is what’s being held out as one of the key reasons why to invest outside of China. China has increased their taxes to take rare earths out and they have decreased the export quotas and they are using and consuming more rare earth within China. I don’t want to mislead. Part of that is because so many companies from overseas have moved production facilities to China so that they can be guaranteed rare earths. And that’s basically what China has said. If you bring your production facilities here, you will be guaranteed whatever rare earths you need for your production. And that’s smart, and great for them because it creates jobs, it creates stability, it puts the ball in their court. But China has the tricky task of trying to balance the preservation their own resources while maintaining their position in the market. But remember, it is in China’s best interest to grow and protect the industry on a worldwide basis.

The question is— and I think the market has not answered this yet because there are no major facilities outside China—how much premium will an end user pay for a guaranteed supply outside China? We don’t know that yet and that’s going to be the question. 10%, 15%, 25%? Because if it’s 100%, then you’ve got a lot of companies that might be feasible. If it’s 10% or 25%, you have to be very cautious because the market is extremely volatile and China can always put more product out there. I don’t think China wants to use up all their resources and they’re encouraging sources outside of China right now. In fact, two Chinese companies have bought into two Australian companies recently, so, obviously, they’re watching the market outside China. But I think that’s the big question—what will the premium be?

TER: These rare elements are used in military technology. As an investor, should I be looking at the government subsidizing the difference in production costs?

CC: There are a lot of uses for rare earths all over the defense industry, everything from missile guidance systems, SONAR, RADAR, to high-tech alloys. There is a realization that they need to have security of supply.

TER: Are there enough rare earth potential mine sites in North America to satisfy the U.S.’s strategic needs?

CC: Absolutely, if there’s no cost constraint— that’s the caveat. If there was a defense need and they were willing to pay any price, then you could have plenty of production in North America. But it would be difficult at today’s prices, and with the current mining restrictions. There has to be some changes in order for these rare earths to come to market, and even then it would take some time.

TER: So this gets us back, in essence, to the hype vs. reality. Everyone’s hyping up the rare earth elements. But, in the end, it gets down to what’s the cost of production and who’s going to pay for it?

CC: It all comes down to economics. You’re absolutely right. Can you get it out of the ground? I love hearing a lot of these guys talk about, hey, we’ve got $500 rock in the ground and that’s great. But if it costs you $3,000 to take your $500 rock out, it’s not very helpful. So you have to know how much it costs to produce a rare earth concentrate. Most companies have no idea. They’re still working on the metallurgy and that’s great; that’s what they should be doing. But I think you have to be careful because a lot of companies put the hype out before they have reality and the reality is you have to know how much it’s going to cost to process what you have.

Each rare earth mineral has its own percentage of rare earths, its own distribution of the elements, and its own metallurgical issues. This affects your costs and can change the economics dramatically.

There’s a big difference between lights and heavies; there’s a big difference between a mineral that has been processed like bastnaesite, monazite and xenotime. These things have been processed. We know that there are ways to do it vs. some of these other minerals that are being looked at that have never been processed before. We don’t even know if it can be done. And if it can be done, it may be way out economically and not even feasible.

TER: How does an investor who is not a geologist know they have a company that could viably bring rare earth production into reality?

CC: That is about the scariest question right there. I’ve been working full-time on this for several years. All I do is focus on rare earths and I still have yet to come up with a method that’s foolproof. It is so complex and I’ve worked with so many people in the industry to try to understand how the industry works and what it takes to get a mine to production. For the average investor I would say it’s incredibly complex—and dangerous.

There are literally hundreds of questions you can ask an exploration company. What is your distribution of the elements? What percent rare earth oxide (REO) do you have? What mineral do you have? But these are just the basics, and even these answers can mislead. I haven’t even learned to ask all the right questions and this is all I do. I’m still learning every week.

You’re really dealing with 15 to 16 different markets and the most complex metallurgy I know of all at once. Plus, the majority of production and end users are overseas. So, unless you spend time with people in the industry there’s really no way to know what questions to ask. Like I said, I’m still trying to learn.

I don’t think there’s any way to do anything but speculate with the exception of a few companies that are actually making money in this industry that aren’t junior exploration companies, but they’re processors. With that exception, there are no non-speculative plays in this industry. I think it’s all speculative on the junior exploration side and I don’t know if anyone can dispute that. It’s so complex. So, a word of caution. Be careful. Do your research. Be very, very careful.

TER: Any newsletter writers you’d recommend who know the rare earth investment world?

CC: You can meet with folks and talk with them. Find out what they know about the market because there are some guys that are writing about this market that actually understand it fairly well. There’s some that don’t. I’m not going to differentiate between those in public. There’s always going to be speculators and people are always going to throw their money at stuff that they sometimes don’t fully understand. And, like I said, I include myself in that number. David Morgan really helped me get started in this business, so I write for him several times a year. But I’m still learning, so I invite investors to do their research and question all of us.

TER: Any final comments you have for investors who are beginning to look at the rare earth area?

CC: Just be very, very careful. It’s a fun industry; I love it. I find it extremely exciting. There’s tons of new stuff going on all the time. Somewhere around 25% of new technologies use rare earths, so it’s very exciting. No doubt about it. But be very, very careful and learn as best you can how to separate the hype from reality. I think that’s the key.

You just have to learn step by step. Where did past production come from? Mountain Pass in California used to be the largest rare earth mine in the world. A private company now owns it, but they used to dominate the market. So what caused the shift? How come China took over the rare earth market? What has happened in-between and who have the players been? If you do some research on the history, it becomes very interesting.

I’ll leave you with an anecdote. In 1966 Dr. Karl J. Strnat developed the samarium cobalt magnet and that changed the magnet industry and all of our lives forever. It changed the way things are done. And, of course, samarium became very much in demand. Everything was great and everything was going fine for the samarium market until 1982 when two different teams developed the neodymium iron boron magnet—then the samarium market tanked, and neodymium became the dominant new hot item in the rare earth industry and it shifted the entire industry towards where it is now. So things can happen and change this market so quickly. Everyone is focused on certain elements today, but there might be a shift three or four years from now. You don’t know. So I would say that’s the thing. It changes on a dime; you have to be very alert and very clear minded about how you research this stuff in trying to understand it.

Clint Cox formed The Anchor House, Inc. in 1995. He began writing about REEs several years ago, and has since immersed himself in the market. The rare earth market is now the primary focus of his work. Clint also publishes a rare earth blog (theanchorhouse.com) and writes periodically for The Morgan Report .

Comments

[Davewmart:]

Thank you for an informative article.
Perhaps, here or in another post, you would clarify what you think in three critical areas:
Lithium production: Some hold this to be a major constraint for EV and hybrid build.
Since you need relatively little lithium or lithium carbonate per kwh of storage, it would seem to me that you could go to much more expensive sources if need be.
I have seen figures which indicate that at around $32/kg you could get lithium from seawater:
gas2.org/2008/10/13/li.../
Lithium then, would not seem to me to be a great constraint on EV and hybrid car construction, although of course there might be considerable turmoil from efforts to get lithium from the cheapest sources in Bolivia and Chile.
The second very important rare earth for battery purposes is lanthanum, which is used in NiMH batteries.
Again, it is not scarce in any ultimate sense, but since quite a lot of lanthanum is used per kwh it forms a much larger proportion of total battery costs.
On the face of it then, this would seem a much more well-founded concern.
Lastly there is a somewhat amorphous question regarding the use of rare metals in wind-turbines and some thin-film solar panels.
Do you see any pinch points for present world-wide construction plans?

Jun 26 07:36 AM

[HaavBline:]

Some good useful if elementary information, but frankly, also a tedious, chatty teaser of an article. At the end, no investable ideas were offered.

Hope some readers come forward with some concrete ideas.

Jun 26 11:47 AM

[Alexander P...:]

A great deal of work went into this interview and Mr. Cox clearly has a level of knowledge in this sector that few could hope to match.

Given all that, I hope I am not being churlish in pointing out that this articles gives an aura of an open market discussion of freelytradable natural resources, unfettered by government intervention, in perpetuity.

Friends, may I humbly remind us all that we are talking about the People's Republic of China, where the government, often with great vision and a deft hand, nonetheless still controls all commodities and prices. All commodities and prices.

A S Prisant, COO/Prism Ltd
Investor, Hong Kong Stock Exchange

Jun 26 11:49 AM

[Alan Young:]

Nice background, but I agree with HaavBLine: it should not have been that hard to mention one or two plausible investment possibilities.

There are only 4 publicly-traded companies I've been able to find (2 in Australia, 2 in Canada) that specialize in Rare Earth resources. They all trade at speculative prices, so the potential upside is huge. Let's get a mineralogist on the job and sort them out.

Jun 26 01:14 PM

[buddhabill:]

Stock symbols, please?


On Jun 26 01:14 PM Alan Young wrote:

> Nice background, but I agree with HaavBLine: it should not have been
> that hard to mention one or two plausible investment possibilities.
>
>
> There are only 4 publicly-traded companies I've been able to find
> (2 in Australia, 2 in Canada) that specialize in Rare Earth resources.
> They all trade at speculative prices, so the potential upside is
> huge. Let's get a mineralogist on the job and sort them out.

Jun 26 01:41 PM

[EconoMarcus:]

To all those complaining about missing investment ideas in this article: I do not really understand your problem. Look at the top of the article. There's a link to another companion article. But you'll have to click that mouse button on your own...

Jun 26 01:41 PM

[Marginaltho...:]

James Dines has been hyping up rare earth metals for several months now. We've got a group of people blowing hot air into another mini-bubble.

Just remember to get your corn out before the group comes crashing down into penny stock territory (like the uranium juniors).

Jun 26 02:54 PM

[Windsun33:]

Is it a bubble, or it is people just now realizing that the US has almost no production or source of them outside of China?


On Jun 26 02:54 PM Marginalthoughts.com wrote:

> James Dines has been hyping up rare earth metals for several months
> now. We've got a group of people blowing hot air into another mini-bubble.
>
>
> Just remember to get your corn out before the group comes crashing
> down into penny stock territory (like the uranium juniors).

Jun 26 03:01 PM

[Marginaltho...:]

Without seeing exactly the exact uses of these commodities and realistic projections of the trend of these uses along with potentially more cost effective substitutes that can achieve the same thing (or perhaps economies of scale where these commodities can be gathered from other places at higher prices, e.g. sea water), this conversation, and article, are pretty much hype.


On Jun 26 03:01 PM Windsun33 wrote:

> Is it a bubble, or it is people just now realizing that the US has
> almost no production or source of them outside of China?

Jun 26 05:09 PM

[jimp:]

www.lynascorp.com/

Excellent information from an upcoming Rare earth producer/miner.

Jun 26 06:38 PM

[EconoMarcus:]

I was interested in Lynas as well. But now CNMC (China Nonferrous Metal Mining) has bought about 52% of them. Since I wouldn't be too surprised if the Chinese government tried to secure Lynas' minerals below market price at some point my interest has moved away from Lynas. About 95% of the Rare Earths market are already in Chinese hands. Demand will grow and sooner or later the western world will realize that they need to, no, them *must* develop their own natural resources. So I think it might be more profitable to invest in projects outside of Chinese influence.

> www.lynascorp.com/
> Excellent information from an upcoming Rare earth producer/miner.

Jun 26 09:33 PM

[comox:]

Jack Lifton has 2 good articles on this subject that it explain it well:

seekingalpha.com/insta...

seekingalpha.com/insta...

I did some amateur legwork on this Rare Earth market more than a month ago before the Dines Newsletter created a runup, and found these possibilities:

Great Western Minerals Group (TSX Venture: GWG)
They produce powders and manufactured items, as well as explore, so they have some advantages over pure explorers. With Molycorp looking for an interest in them, they may be a takeover target, and that may be the best way to capitalize.
I bought them at .09 in May, they went as high as .18 and have fallen back down to .11 (which represents a good entry point again). As every penny is 9% at this point, I am toying with buying at .11, selling at .13 for a quick 18%.

Neo Material Technologies Inc. TSX:NEM. Currently $2.19 www.amr-ltd.com/

Just fended off a takeover by Pala (May 12), which started at $1.40 and escalated to $1.70. Offer rejected as financially inadequate. So Pala, or someone else, may be back soon at a higher price.

Had disappointing 1Q09 results, due to the reduced global demand. Lost $4 million, but has lots of cash to wait out downturn ($49 million). Were very profitable in 2008, up until last quarter downturn.
Shareholder Equity $173 million over 115 million shares = $1.50/share.
Cash $49 million, Current Assets $114 million.
No long term debt.
Analysts recently put "Buy" rating on it, with target of $2.50, $3.75.
Recent price range of $1.00 - $5.08.

Avalon Rare Metals (TSX: AVL)
I hate waiting for explorers to do their drilling and develop their deposits and production plants. The best play here is to await a takeover. AVL has already run up and fallen back a bit, so don't know how much more upside there is.

Jun 27 11:17 AM

[Alan Young:]

Excellent --this correlates just about 100% with my own thoughts. I got in to Lynas at .52 AUD (a little late, but still plenty of potential). My thesis is that the Australian owners will make at least some of the production available to the non-Chinese markets, increasing demand for their output. Also long GWG.

On Jun 27 11:17 AM comox wrote:
>
> I did some amateur legwork on this Rare Earth market more than a
> month ago before the Dines Newsletter created a runup, and found
> these possibilities:
>
> Great Western Minerals Group (TSX Venture: GWG)
> They produce powders and manufactured items, as well as explore,
> so they have some advantages over pure explorers. With Molycorp looking
> for an interest in them, they may be a takeover target, and that
> may be the best way to capitalize.
> I bought them at .09 in May, they went as high as .18 and have fallen
> back down to .11 (which represents a good entry point again). As
> every penny is 9% at this point, I am toying with buying at .11,
> selling at .13 for a quick 18%.
>
> Neo Material Technologies Inc. TSX:NEM. Currently $2.19 www.amr-ltd.com/
>
>
> Just fended off a takeover by Pala (May 12), which started at $1.40
> and escalated to $1.70. Offer rejected as financially inadequate.
> So Pala, or someone else, may be back soon at a higher price.
>
> Had disappointing 1Q09 results, due to the reduced global demand.
> Lost $4 million, but has lots of cash to wait out downturn ($49 million).
> Were very profitable in 2008, up until last quarter downturn.
> Shareholder Equity $173 million over 115 million shares = $1.50/share.
>
> Cash $49 million, Current Assets $114 million.
> No long term debt.
> Analysts recently put "Buy" rating on it, with target of $2.50, $3.75.
>
> Recent price range of $1.00 - $5.08.
>
> Avalon Rare Metals (TSX: seekingalpha.com/symbo...)
> I hate waiting for explorers to do their drilling and develop their
> deposits and production plants. The best play here is to await a
> takeover. AVL has already run up and fallen back a bit, so don't
> know how much more upside there is.

Jun 27 05:29 PM

[jimp:]

Regarding Lynas Corp, & CNMC. CNMC got 700 + million shares at $0.36. for bailing out LYNAS when its prior financing fell through. From the investor relations call, CNMC are acting as investors/shareholders, not to control or monopolize for China, but to make a profit. I highly recommend listening to the "investor relations call" on there website.
Outside of China, I believe Lynas corp will be one of the first to have a fully integrated source of supply from its Mt. Weld mine to an Advanced Materials Plant on through to customers. "Lynas owns the richest deposit of Rare Earths in the world at Mt Weld." Unless China can still totally control the rare earths market in the future, Lynas appears to have a bright future.

Jun 27 06:44 PM

[EconoMarcus:]

Responding to the two statements below:
You may be right. I hope you are. But let's also be objective: CNMC has bought 51.6% of Lynas. Not 49%, not 80%, but just a bit more than 50%. Does this really look like a pure financial investment and not more? In the short term CNMC will likely play its "good guy" role. Why not? Lynas has yet to start large-scale production. Let them go on cranking up production. But what when China's need for REEs surpasses its own sources (and that might be pretty soon). The way I see China I have no doubt that they will make sure their country comes first. Good luck!

On Jun 27 05:29 PM Alan Young wrote:
> My thesis is that the Australian owners will make at
> least some of the production available to the non-Chinese
> markets, increasing demand for their output..

On Jun 27 06:44 PM jimp wrote:
> From the investor relations call, CNMC are acting as
> investors/shareholders, not to control or monopolize for China,
> but to make a profit.

Jun 27 09:18 PM

[User 439664:]

lyscf comming on line with production in early 2010 with full contrcts see it at 3.50 us

Jul 02 09:38 AM