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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
My company:
Technology Metals Research
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The Jack Lifton Report
  • Down Under Down Under: A Visit to Arafura Resources Nolan's Bore Rare Earth's Project in Australia's Northern Territories 16 comments
    Jun 25, 2011 5:28 AM | about stocks: ARAFF, MTCEF
    Sydney, Australia, June 25, 2011: My business partner, Dr. Gareth Hatch and I are in Sydney where we have just wrapped up a busy week.

    We were first both invited speakers at a Rare Earth & Strategic Metals Conference here, and then we both conducted a well-attended workshop on understanding and participating in the rare earth supply chain for junior miners, refiners, and end-users. The workshop attendees/participants included public companies such as Matamec(TSX Venture: MAT) as well as closely held ventures from Russia and Europe. The Australian government was represented as were Australian universities and a well regarded`Australian national laboratory that studies, develops, and validates metallurgies for miners and prospective miners.

    On Thursday we flew to Alice Springs in the Northern Territory, and then drove for an hour and a half to the Aileron Roadhouse, which is just a few KM from Nolan's Bore, a water well originally dug to provide water for cattle grazing and now the center of the rare earth ore bodies being brought into production by Arafura Resources (ASX: ARU). In fact the company's mining will begin literally at Nolan's Bore, which Mr Nolan seems to have drilled many decades ago right through the center of a rich mineralization of rare earths.

    Gareth and I visited`the drilling camp on the mining site where Arafura has already begun an impressive program to verify the extent of its deposits. 

    Gareth will provide the technical details of what we observed and learned when he reports on the Arafura visit on TMR, techmetalsresearch.com, our web site.

    Just for now I want to tell you the initial results of my observations of the operations and the managers and workers of Arafura Resources:

    Arafura Resources has a first class operational management (I have never yet met its administrative managers), a skilled and dedicated workforce, and a first class operation. Arafura's business model is excellent. It's exactly what it should be and it is running smoothly.

    I decided to draft this note this evening while I am still in Australia, because earlier this week before I ever met any of Arafura's staff I saw a story that Arafura had decided to postpone the completion of its bankability/feasibility study by 6 months to a year in order to assure that it wasn't prematurely rushed into operation.

    This "slow down" is a very good idea. It seems to me that to closely study a complex undertaking, before committing to specific expensive undertakings, that are difficult once underway to modify is the soul of professional and well thought out business models and an indicia of good management.

    Siting an extraction and S/X plant capable of producing 10-20 KT/year of separated rare earth oxides is not to be rushed or done except after studying the needs of such a facility thoroughly, with care for details, and the best possible estimate of the future of variable costs. 

    Yet I see stories that "something is wrong" or that "there`are problems with the company" and other such punditry based on the fact that the pundits involved do not know how a good business should be run and have not looked at the hard data and plans of the company.

    The rare earths' sector is rapidly separating itself into wannabes (want to be in operation) and gonnabes (going to be in operation).

    The gonnabes are going to be because they have a good deposit, a metallurgy that works, a marketing plan, and management that efficiently manage both the mining and the financing operations.

    The cold cruel world of capitalism also requires that the gonnabes are among the first to produce and, at the same time, can sell profitably at the lowest price and highest quality among their competitors.

    I'm placing Arafura Resources in my list of the top 10 global rare earth projects I have seen.

    My list will appear next month, July, on TMR's web site along with the overall reasons that I have decided to create it, and the reasons for my choices.

    Be aware all ye pundits that I consider this week's announcement by Arafura Resources to be very positive, and that I am curious why anyone would come to any other conclusion.

    I'm going from here to Singapore for further work on the rare earth's sector, and I'll be home on July 3. 

    Please make wise choices in your investments and don't make investment decisions based on the analyses by those who don't understand how a profitable business must be built and operated.






     
    Themes: rare earths, australia Stocks: ARAFF, MTCEF
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Comments (16)
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  • RIGHT ON JACK!! I can't wait for your "TOP TEN" and how the quasi pundits will respond.
    25 Jun 2011, 07:39 PM Reply Like
  • RIGHT ON JACK!! I can't wait for your TOP TEN and the response from the quasi pundits.
    25 Jun 2011, 07:44 PM Reply Like
  • Jack,

     

    I would tend to agree that one should not rush the EIS.

     

    However, I would disagree that a simplified flow sheet for metallurgy makes sense right now.

     

    Delay is no good if that is the reason. I too look forward to your list.
    28 Jun 2011, 11:38 AM Reply Like
  • Jack,
    You can taunt the analysts for doubting the re-study and I'm glad you see this as prudent. But there is a funding side you are giving little comment. Perhaps getting things right in the planning trumps all. It is hard to disagree directly with that. But the kinds of changes in the announcements are rather large at this stage IMO. Why are such major changes necessary now? Should this have been seen earlier?
    I feel:
    1) A delay at the bankable feasibility level with prices continuing to rocket suggests weak fundamentals in the business plan at this stage in the project.
    2) Adding a nine to twelve month delay when the project was still quite far away suggests more and more significant delays before production is likely. Note: this is not Arafura's first announced delay. If these delays cause Arafura to start up after LREE prices begin to correct, funding will be a big problem. This is still a large unfunded project right now.
    3) Reassessing to focus more on rare earths in the project and less on gypsum from Nolan's suggests poor focus in the prior plan more than a great prudence currently. At best this is some new found prudence.
    But calling it a great managerial achievement has the feel of spin at this stage. I think if the funding pitch is that tough at this stage the whole business model may be questionable.
    And of course the changes mean additional feasibility costs too Granted these may be recouped in operations, but current share holders bare a risk of dilution from another potential capital raise.
    Bottom line: If Arafura gets it's funding and LREE prices stay high, you may well be right. But there is a risk. If funding gets tough or LREE prices soften, the additional feasibility could be costly. And either way I think there is good reason to ask why these large changes were needed so far down the road? I think many Arafura holders felt like there should have been more clarity at this stage. At best your position is still the best of a tough situation. And on the other hand, it may be a missed opportunity. Junior's don't normally get that many opportunities. We'll see if ARU can make more opportunities in the future.
    Major work in the expanded BFS includes:
    1. Design and optimization of a modified mine site beneficiation circuit which aims to generate a higher mineral concentrate grade with associated reduction in reagent, transport, capital and waste management costs, both at the Nolans Bore Mine and Whyalla Rare Earths Complex. (page 2 top)
    clients.weblink.com.au...
    I read this to mean they want to do something more like the Mount Weld concentrator to save on transportation costs and de-risk Whyalla. If that is true then they should have listened to Kingsnorth and similar comments years ago. This seems to be the main change (and the flow chart changes that will follow from this change). I have to say Steve Ward is a smart guy. But this criticism is truly old news from my prior research. I don't know why it took this long to come around to this change.
    28 Jun 2011, 12:03 PM Reply Like
  • The funding was going to be a billion more, more or less; that seems to be unchanged. That funding requirement has apparently been long figured into Arafura's market cap. The stock's drop since appears to be roughly a dollar-for-dollar offset factoring in dilution for the added cost of the extended study, plus a 10% or so discount-- a fairly bubbly, smallish, by vc standards-- for the additional year till production.

     

    Add a billion to the current market cap, devalue Arafura relative to Molycorp and Lynas for the additional year's head start they have on ARA, and you get the current market cap. Subtract the time & nuisance value of Malaysian game-playing and sincere Californian nimbyism and ARA starts to look as cheap as the good Dr seems to suggest it may be.
    28 Jun 2011, 09:23 PM Reply Like
  • Chihawk,

     

    I would submit that it's even more serious than you suggest, although I like your post overall.

     

    To your point on number 1, if the metallurgical recoveries were cost effective last year, then surely they are cost effective upon a 1,000% price increase.

     

    In other words, it would seem to me that there would be no need whatsover to redo the "flow sheet" if there were not serious metallurgical issues, and of course that is what haunts every REE play.
    29 Jun 2011, 10:51 AM Reply Like
  • prescient,
    If I understood Ward correctly on the flow chart, it was a revamp to focus on rare earth instead of gypsum. That is clear as mud, like the rest of the announcement to be honest. But my guess is they will do more like Mt Weld (do the flotation more than once) to concentrate further what they send to Whyalla. This would reduce the gypsum produced, but make rare earth processing easier.
    But if I am guessing right, then they are accepting a mistake that has been written about for years. If you are right they are in a bigger pickle. Either way more explanation is needed and it is hard to see a scenario where management will please shareholders short term. I like Ward's knowledge, but the management here has been weak IMO.
    29 Jun 2011, 11:09 AM Reply Like
  • Exactly, this makes no sense. Now, Arafura's rare earth bearing minerals are notoriously tough nuts to crack, which makes me think that they may have serious metallurgical issues.

     

    Who knows, hopefully it works out, but that's why I like detailed studies filed by qualified professionals under regulatory scrutiny for their work. Arafura's "presentations" are a black box.
    29 Jun 2011, 01:50 PM Reply Like
  • Malaysian game-playing, complete with an implicit request for bribes: Check. www.reuters.com/articl... Lynas- down sharply. Arafura- up just a little bit.
    30 Jun 2011, 10:40 AM Reply Like
  • Author’s reply » I just read Keith Bradsher's article on the Lynas-Malaysia problems, and he does a very good job of deconstructing the story down to its basics. There are very serious engineering and materials problems that have to be corrected, This will be a large added cost and a costly time delay even if everything can be fixed. This is NORMAL in large construction projects, especially if such have not ever before been done. However this makes the costs per kg and the timelines simply wrong and such numbers as "margins" must now be recalculated.

     

    The public has been following this story as a "its been done before therefore it must be easy to do" adventure. It is anything but that as this latest saga shows.
    30 Jun 2011, 08:45 PM Reply Like
  • Jack,
    I read the article and the IAEA report. By engineering and materials problems do you mean technical reason 1 & 2 (a waste plan and decommissioning plan) in the IAEA report?
    Certainly, these things will effect margins. But post Fukashima, won't many of these costs be incurred by all of the producers of REE's used in magnets? Granted basteasite mines will face less of this producing Neodymium, but how can this issue be avoided to meet the Dysprosium market? I'd say we are simply going to see a permanent increase in the mid-HREE prices when these costs are passed through to the final product.
    1 Jul 2011, 01:27 AM Reply Like
  • Author’s reply » Chihawk,

     

    The engineering required to contain radionuclides and remove them from a process stream and contain them is one that must be addressed with extreme attention to detail among every other consideration. I was surprised by the New York Times account of the failures in the plant's construction. Using mild steels to handle corrosive materials and having cracks in concrete vessels that were bad enough so that the sealant vendor was holding off do not give me confidence that just the drafting of procedures to handle and dispose of materials at decommissioning is going to solve the regulator's concerns.
    Radioactive material management is a skill learned from experience and at huge costs in time and money. Governments and specialized miners have these skills after having spent the time and money.

     

    You're right that every REE miner is going to face these challenges. In particular those working with monazite to extract the HREEs. I urge my clients in this situation to be ready to address this issue first and foremost when they are out seeking finance. I have written that this issue, radioactive materials, is the 800 lb gorilla in the REE room.

     

    For Lynas this means delays and costs that are today unknown. Certainly this will put them a year behind schedule.

     

    Note well that the Chinese ionic absorption clays, which are very very low grade, are nonetheless essentially thorium free. This Chinese advantage will be hard to overcome and expensive. If deposits similar to the Chinese are found outside of China those deposits will be very much more attractive than monazite for that reason, little or no thorium/uranium, alone.

     

    I am no longer surprised at the simplistic reasoning in the REE production sector. I simply write off those who ignore problems as having already failed.
    1 Jul 2011, 06:40 AM Reply Like
  • Jack,
    Thank you for the time and response.
    The New York Times article raises concerns for me on multiple fronts. The claims are the least of my concerns. They are unsubstantiated, contrary to the IAEA findings and Malaysian government comments, and directly denied by Lynas. Both you and I hear many unsubstantiated claims from our contacts in the legal, construction, environmental and rare earth industries (Ex: the water you mentioned in a discussion at a Canadian conference- I heard there's barium in it).

     

    But both of us would not make direct comments till we could establish their accuracy. Generally, I find business journalism upholds this standard better than political journalism. Regrettably, I feel the New York Times is taking a political position on this matter and is applying a lower journalism standard in response to it. I think the timing of the story also raises those questions too.

     

    So setting aside the New York Times article, you and I can certainly agree that Rhodia upholds the expectations you have for radioactive material management and skill. I say we watch their actions. If they stand by Lynas as they have, I'll withhold my judgments as well.

     

    I respectfully disagree with the one year delay assumption. The Malaysian government has denied ever making that reported statement. And Lynas has denied the claim, provided a more detailed timeline and suggests a delay of three months in their announcements. Considering they have been construction this plant for nine months and are saying they the construction and commissioning is six months away, I consider the comment reasonable.

     

    Honestly, from a legal perspective the two requirements are regulatory in nature without requiring additional construction or a redesign of the plant. The one year claim seems excessive and counter productive to both Lynas and the Malaysian government. I would appreciate more detail from those seeing a one year delay before I accept the already denied conclusion.

     

    Privately in a phone call, Lynas said they have been working on the conditions since May and that the factors can be done by the time of commissioning at a $10-$15 million cost. That cost seems preliminary to me, but their claim of working on it since May is consistent with the IAEA visit.

     

    I have always felt the Chinese will remain the low cost producers. Thank you for the radioactivity information on the ionic absorption clays. I had not considered that and it is an important point. But even if the pollution to the clays would limit their future, the cost savings on labor and materials in a demand economy are just too great for a free world company to surpass.

     

    Personally, I think Moly is climbing Jacob's Ladder on this front. But integration and innovation are a good way for the free world to make up the cost difference. I think our innovation is the key to supporting our manufacturing industry.

     

    You and I are in total agreement about the industries production capacity and margin assumptions being ridiculous. Privately, many of the money managers even acknowledge this obvious fact. But most of them feel the prices and earnings will still be high enough for it not to matter. I think that is a very casual approach that will offend any engineer or bookkeeper. But lets face it, those are the smart people not in charge.:-)

     

    And from an investment perspective, it is hard to see a junior making it to production in such an expanding industry without seeing considerable earnings and success. Earnings will drive the producer's stocks even if the pot is not pure gold at the end of the junior's rainbow IMO.

     

    My best guess is that a large price difference in rare earths remains indefinitely between China and the Western World. That is not important if the gap is not too large. But it does say that Western manufacturing must never neglect innovation and R & D. We cannot build a cheaper car, windmill, or magnet for a device over China long term. But we can support the technology that will create a new device or a more advanced version of these devices.

     

    On this topic I greatly appreciate your Congressional testimony and tireless efforts to support American manufacturing. You are an admirable American Jack. And I hope you enjoy this Fourth of July weekend. Your deserve the celebration and appreciation.
    Take care.
    1 Jul 2011, 02:22 PM Reply Like
  • Jack,
    Any thoughts about the Lynas Siemens deal? Does the fact that the NYT has offered nothing further or produced any hard evidence change your mind at all?
    I mean I see this as the NYT offering and unnamed source versus Lynas' denial baiting the NYT for facts (with no NYT response); the Malaysian government saying they were misquoted in the NYT in a separate Lynas story; The IAEA report saying Lynas is safe; and now Siemens and Sojitz saying supportive remarks about Lynas. You're a good guy Jack. You took a stand when the facts were not clear. How about now? Are things clearer in your opinion. Or do you still have the same opinion?
    8 Jul 2011, 11:23 AM Reply Like
  • Author’s reply » Chihawk,

     

    The driver for all these fantasies, the best of which is that an agreement to take all or a part of its needs from your product line, at a market price if it is delivered on time and to specification, which is called a LOI, letter of intent, has collateral value at the bank, is the stock market. These silly statements trying to confuse corporate procurement policy and individual decision making have "announcement value only" for those pumping a share price.

     

    I was just in Singapore, and I was interviewed two weeks ago by Malaysian Public Radio. I was in Australia before I went to Singapore, and I asked Lynas if I could visit Mt Weld. I was refused with the comment that we are not allowing visitors at this time. I did go to see Arafura's drill camp, and my colleague went to review Alkane's metallurgy at its provider of metallurgical process design.

     

    I think that the Malaysian public feels that it has been left out of the permitting process, and I think the best case for Lynas is a one year and more delay.

     

    I think Siemens needs neodymium and dysprosium or it will be squeezed out of the wind turbine market to say nothing of the (much much bigger) OEM automotive market. Siemens is interviewing every rare earth junior that has any credibility as are all of the others in its industries that have any common sense.

     

    What is abundantly clear to me in this fog of BS is that the world's non-Chinese end-users of REEs have no way to judge who might deliver REEs outside of China, to their individual specifications, on time, and at a price the end-user can live with. Companies like Lynas are desperately selling the company to the investing public. End-users need the product, which none of them is yet selling from new production.
    9 Jul 2011, 05:02 AM Reply Like
  • Jack,
    I respect you and I respect your knowledge and comments, but I disagree with this comment. Lynas is right not to allow you at Mt. Weld. You have unfairly judged them with no substantiated evidence on your side IMO. You exaggerate the "Save Malaysia" protests, fail to acknowledge a very sensible long term organic development of Lynas as a junior, and see long delays inconsistent with the actions of the companies and business around Lynas.

     

    Your knowledge of rare earth and China are great. Your understanding of juniors and their development I respectfully question. And I will confidently suggest that the next six to nine months (allowing for slippage) will prove one of us right. I like my chances sir. I've been at the stock side of this a while too.

     

    You pooh pooh the LOI as announcement fodder but ignore that any agreement this size would always be first announced in a LOI rather than a firm agreement. I further submit that a company of Siemen's stature does not give out LOI's like birthday cards. They are a serious and respected company that does due diligence before publicly moving forward IMO. Dismissing that as large multi-national desperation (when these companies could literally buy rare earth mines and processing) is poor investing IMO.

     

    But the Siemens contract is more than just a top multi-national company with a great reputation. The structure of the contract is absolutely game changing. It allows Lynas margins previously unavailable to miners. It is a partnership with manufacturing that respects Seimen's intellectual property but provides further growth to Lynas as a JV. It also gives Lynas a highly capitalized partner that can benefit Lynas when consolidation happens in the future in the rare earth space. Lynas could also expand this approach and do something similar with GE, Phillips, LG, Samsung, Hyundai, ect. and dominate the rare earth manufacturing supply space they are creating with this JV.

     

    In other words, the Siemens JV exposes the flaw in "mine to magnets". Moly will struggle to get customers because their approach makes these global companies too dependent on Moly. The Global companies know they depend on the rare earth, but they now see they can have a muti-mine source in Lynas that will not compromise their own business model. And they can spread the cost risk through the JV so that pricing fears are alleviated. That is a big change and I guarantee you Hitachi (currently in an agreement with Moly) is feeling jealous of that.

     

    Many say prices will fall after new supply comes on line. Some market actions (lack of firm Moly contracts, Moly insider selling, and the slow in Moly press releases) suggest that Moly and others may not be that close. Lynas is doing the opposite with an IAEA approval, 7 firm contract and 2 LOI's, and a dug out mine, a completed concentrator and 40% construction completion on the Advanced Materials Plant. I think those doubting Lynas should address this proof and offer verifiable facts, or risk their reputation in the process.

     

    But the long term beauty in the Lynas/Seimens JV is that Lynas is now the first to start insulating themselves from this anticipated price drop. As a JV with access to manufacturing margins they now get 45% of those margins when they expand from the drop in raw material pricing when the rare earth prices correct. That is brilliant forward thinking that is typical of Lynas in building their company and typically lacking in all of their competitors.
    9 Jul 2011, 04:10 PM Reply Like
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