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Jack Lifton is an Independent consultant and commentator, focusing on the market fundamentals and future end use trends of the rare metals. He specializes in the sourcing of nonferrous strategic metals and on due diligence studies of businesses in that space. His work includes exploration,... More
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  • In Xanadu did Goldman Sachs Decree a Rare Earths Surplus for all to see 1 comment
    May 5, 2011 10:19 PM | about stocks: MCP, GWMGF, UURAF, REE, FREFF, RHA
    I guess that there's no need now to worry about the future supply of the rare earth metals. The Wall Street Journal has now reported, on May 6, 2011, in an article entitled "Rare Earths Grow Less Rare" that Goldman Sachs says that although supplies will remain tight in 2011 and 2012 and prices will remain high we can be assured (by Goldman Sachs analysts) that the rare earth supply shortage situation will end in 2013 as new supplies come on stream from outside of China.

    I sincerely wonder if this is even good nonsense.

    With the exception of the fluid cracking catalyst manufacturing industry, which uses chemical compounds of the rare earths produced early in the rare earth refining process by separation plants, the only commercial size operating ones of which outside of China today are, to the best of my knowledge, in Mountain Pass, California and Talinn, Estonia, the overwhelming majority of end users of the rare earths use, and  require, high purity metals and alloys of the rare earths for their products.

    The only three companies outside of China today producing either high purity metals or alloys,, or both, are

    1. Molycorp's (NYSE:MCP) Estonian operation formerly known as Silmet and its Arizona operation, formerly owned and operated by Japan's Santoku STC),

    2.Great Western Mineral Group's (GWMG) wholly owned  UK subsidiary operation, Less Common Metals, Ltd., and

    3. Japan's Santoku (NYSE:STC) based in Kobe, Japan.

    The feed stock for all of these operations, other than the Estonian one, comes from China. And, in any case, the high purity metals and alloys capacity of all three combined is less than 5% of the world's total demand.

    A number of junior mining ventures have announced that they will be producing "rare earths" in 2011-15. The mining analysts do not seem to know or recognize that the production of rare earths is not a well-defined phrase. Mines produce ore concentrates. Most so-called  "metal" mines then chemically extract the metal values, as chemical compounds, from the mechanically produced ore concentrates. Different metal miners then traditionally do their own thing, so to speak, with the chemical solutions containing the extracted metals..

    Copper miners, for example, typically refine their ore concentrates to the metallic state. The quality (grade) of the copper) metal produced is determined by the extent and capability of the processing undertaken by the miner. Even those miners of copper who produce high purity copper "cathodes" by electro-refining are not normally the producers of the final use products, such as wire rod, sheet,  and plate. These are produced, for example in the case of electrical conducting wire, by a specialized industry (for example, a  'wire' industry),, which itself sells only fabricated copper forms to manufacturers who make such devices as electric motors and generators and wiring harnesses for motor vehicles. I can't think of a vertically integrated manufacturer,for example, of electric motors-i.e., one that mines copper, refines and purifies it, fabricates industrial forms, and builds electric motors. If a reader knows of one please let me know.

    The reason that there are no vertically integrated manufacturers of electric motors is the complexity, the engineering and management skills, and the capital costs that would be required. Traditionally end users of fabricated forms of metals want multiple suppliers to keep the costs down and also want the security of assured supply to be at a maximum. 

    analogously, lead miners may smelt the ores they mine and concentrate and produce ingots but they do not make battery alloys, battery plates, or batteries.

    Iron miners do not generally produce steel, and even the ones who do that, such as China's immense Bao Steel, do not produce automobiles, dishwashers, or household tools.

    The first rare earth products that will be produced outside of China will be mechanically concentrated ores, the lowest value sellable product in the supply chain. It will then be necessary, in all cases,  to chemically extract the mixed rare earths from the ore concentrates, and by chemical processing isolate the mixed rare earths from any other metals that may be present in the ore. The result will be isolated, but still mixed together, rare earths either in chemical solution or as chemical solids, typically carbonates, These forms at this early stage of refining are also a selling point in the value chain. 
     
    The next step, historically first done commercially in the USA by Molycorp,is to treat the mixed rare earths in chemical form in a solvent exchange  "separation plant." This is an expensive facility to build as it can easily involve hundreds of repetitive steps taking up to a month to finish a single batch of material, and although batches can be run almost continuously the size of the plant must reflect the  optimum large batch size for producing enough volume to make a profit by selling the resulting commercially pure separated chemical compounds.

    Molycorp has said that it officially plans to ultimately produce 50,000 mt/year of rare earths, which means, if this means rare earth metals, its separation plant must be delivering 140 tons a day of product and must be processing 4,175 tons at any one time. If this is to be done in one separation plant it will be the largest one in the world. I don't think that Molycorp cannot do this I only question the amount of time it will take to construct, prove out, and operate a plant of this size. By the way if Molycorp is speaking of the production of metals then the throughput of chemicals will be some 250 tons a day with a load of 7500 tons just of product in the system. That's 15 million pounds of mateial being processed at any one time. 

    In any case whatever the output of the Molycorp separation plant it, the output, will need to be of very high quality (purity) in order to minimize the cost and time required for the next step, the ultrapurifcation of the rare earths by the method of ion-exchange. The separated, commercially pure, rare earth compounds that are the output of the separation plant are  sellable at a higher price than that to be realized  either from the ore concentrate or from the sale of the isolated mixed chemically extracted rare earth compounds that were fed into the separation plant.The ultrapurified forms from the ion exchange process are of much higher value yet.

    Note that at any step in the purification process all of the rare earths have to be separated from each other in order to purify them. This means that economically the very small amounts of the higher atomic numbered "heavy' rare earths in any deposit cannot be produced economically unless as many of the other rare earths as possible in the ore body from which the "heavies' are produced can also be sold not just recovered. 

    This is the dilemma of the deposits of the rare earths that show relatively high values for the heavy rare earths. They cannot possibly be profitably produced just by producing and selling  only the heavy rare earths, because their processing will be too expensive to compete for markets for their simultaneously produced light rare earths when up against lower cost light rare earth producing behemoths such as Molycorp, Lynas, or Bao.

    A straightforward solution would be for an end user to buy both the critical heavy rare earths and all of its needs for the light rare earths from the heavy rare earth producer. This might necessitate paying more than the market price for the light rare earths but it would secure the supply of the critical heavy rare earths, for example, for under the hood applications of rare earth permanent magnets by an automaker.

    In any case, before we make the most important rare earth product, magnets, we must first be able to make pure metals and pure alloys. The processes for these require tight controls of temperature and pressure and expensive equipment operated by skilled workers.

    Rare earth metals can be produced by reducing a chemical form such as a chloride with high purity magnesium, calcium, or lithium. They can also be prepared by electrochemical reduction of molten ionic salts of the rare earths. The analyst community writes about these processes as if they are easy to do because others, such as the Chinese, have done them and are doing them, so how hard can it be?. I have actually heard it said that if the Chinese can do it then anyone can do it. This is racist sentiment, and even worse, it is not true.

    The production of high purity metals is as much an art as it is science and engineering. It requires diligent attention to operational  details and mis-steps that can contaminate and thus ruin the end product. Continuity of engineering, a practice denigrated by American capitalists, is key to any such project. One learns how to purify metals by doing it not by reading manuals. 

    However, that having been said, let's say that it is now several years from now and we have non-Chinese production of high purity rare earth metals. These are very sellable at significant margins over production cost, and, in my opinion, represent the best first selling point in the supply chain for a vertically integrated (from the mine onwards) rare earth producer. It will not be easy for a miner to become a producer of high purity rare earth metals. This challenge will separate the men from the boys immediately.

    To make rare earth permanent magnets, which are the most profitable selling point that any rare earth vertically integrated producer could hope to reach requires the skills to make high purity fabricated forms of neodymium-iron-boron and samarium-cobalt alloys. The knowledge of how to add various other enabling elements such as dysprosium will also be required. Such knowledge today requires access to proprietary information about complex physical and chemical processes that have been developed through man years of research and development and trial and error. Theses skills CANNOT be learned from a manual or by reading patents.

    I am reluctant to believe that junior miners with only, at best, limited knowledge of the chemistry and metallurgy of the rare earths will even be able to produce separated commercially pure chemical compounds. Yet I am told by analysts that all one has to do is find a rare earth deposit and the end-use product, the rare earth permanent magnet, can not only be produced but can be produced easily by the junior miner. Oh, and all of these skills, I am further informed, will be learned and mastered in just a couple of years.

    What I think is that of the 215 listed rare earth junior miners outside of China as of May 6, 2011, there will now be a cull. If rare earth  pricing requires that one must produce high purity metals to provide a minimum return on the needed investment to develop a mine then perhaps a dozen of these ventures will survive even until 2013. If it is necessary to produce alloys from which rare earth permanent magnets can be formed in order for a rare earth miner to be profitable then only at most half a dozen will survive and then only if they can produce the alloys in-house.

    There is a caveat. A miner producing rare earths as a byproduct of a profitable operation such as iron ore mining or gold mining can, of course, be a profitable rare earth ore concentrate seller, because his overheads are covered by the primary production. I know of one such venture, not yet listed, currently in operation, and I am looking at another two later this summer. I call these boutique metals operations, and, of course, they do not need to produce rare earths to be profitable.
     
    Note that even the above caveat has a caveat. A rare earth refiner who needs feedstock, such as we are hearing is the case with some of the Chinese rare earth separation plants, needs a steady high volume flow to "load' his plant. He cannot be changing the feed chemistry in his process arbitrarily at any time. The minimum requirement will be to load the plant for a process cycle. This means that the refiner needs to only source from fairly large operations, and this minimum size is going to be an issue of long term capital outlays with a low probability of a competitive return on the investment. For those who will not do their own separation and further refining  It is a horse race to see which if any of the ore concentrators/chemical extractors can be first to a very limited market.
     
    I do not think that the world demand for high purity rare earth metals and alloys, for use outside of China, will be met by non-Chinese production by 2013, because until there is a high rate of production of commercially pure separated rare earth chemical compounds there will simply not be enough feedstock to gamble on continuous large scale production of these high tech materials by those who have never before done such high volume processing of such complex materials.
     
    The problem is thus the potential of an export reduction or total cutoff of rare earths contained in finished goods, which is not the case at the moment. This potential Chinese action is a critical issue for the Japanese rare earth permanent magnet and battery alloy manufacturing industry. It is not an issue in the USA or Europe where neither product type is produced, or has been produced, except in very limited volumes,in more than a decade. It will only be an issue in the USA and Europe if China cuts off the export of rare earths contained in finished goods such as batteries, lasers, and rare earth permanent magnets.
     
    I think that Goldman Sach's analysts are wrong, because they do not understand manufacturing, chemical, or mining  engineering,and they do not understand the makeup of the "rare earths" market, and most of all because they underestimate the power and growing technical and financial skills of China, Inc. 
     
    The survivors of the coming rare earth junior mining cull will be the earliest to production of commercially useful forms of the rare earths, the high purity chemicals, metals, and alloys. There will be no large scale sustained production of any of these forms, outside of China, the metals and alloys in particular, for several years yet.
     
    As for the production of high volumes of rare earth permanent magnets with tightly held specifications by those not now producing them I think its more than 5 years before we see a new competitor to China and Japan in this category, if ever.
     













     


    Disclosure: I am long OTCQX:GWMGF.
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  • EasyMike
    , contributor
    Comments (27) | Send Message
     
    Another great analysis Jack and I've already made money based on some of your writing! Thank you!

     

    I'm afraid I have to take issue with your position that Goldman Sach's analysts are wrong. They're not. They're just liars. Once you view them through this lens, you'll understand why they say what they say.

     

    Best of luck to you and yours,
    Mike
    21 Jun 2011, 04:56 PM Reply Like
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