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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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  • Decoupling The Rare-Earth Junior-Mining Market From Emphasis On Molycorp And Lynas 5 comments
    Dec 3, 2011 1:51 PM | about stocks: MCP, LYSCF, AVL, GWMGF, UURAF, TASEF, REE, RAREF, MTCEF, QRM, TEFFF
    There is not a global “rare-earths market.” There are local, regional, markets for individual rare earths in separated. highly refined forms such as chemicals for manufacturing fluid cracking catalysts, and metals for producing alloys to manufacture rare-earth permanent magnets, or nickel-metal-hydride battery electrodes.

    Even if your thinking is that the markets are totally globalized, you will still have to reconcile your belief with the fact that rare-earth prices within China are substantially lower than they are outside of China. China solves the arbitrage problem (buying low and selling high) by strictly limiting export volumes (otherwise they would all flow to the region of higher price, right?). In addition, China strictly limits the imports of rare earths in any form. I have personally been involved with attempts to import both ore and scrap rare-earth permanent magnets into China for processing. Both projects were initiated by Chinese companies looking for supplies for the Chinese market. Both projects were denied licenses by the Chinese government. This experience is why I question those who say that their markets will include mainland China. I do not believe that Chinese companies will be allowed to pay above Chinese market prices. for natural resources that can be produced in China.

    A small number of the total number of rare earths, perhaps five of the 16 naturally occurring rare earths, are critical in their uses. There are no economic substitutes for them giving the same or similar performance. Everyone reading this article will I hope, have previously gone through my colleague Gareth’s definitive Critical Rare Earths Report, available from the TMR web site.

    I predict that very few of the specialty-metal junior miners that could produce the particular heavy rare earths demanded by the current- and near-term market, will ever get into actual production, and of those, only the ones developing deposits containing commercially recoverable heavy rare earths will survive. Commercial in this sense means that they will be able to produce heavy rare earths at the lowest cost and at less than the total market demand.  Keep in mind that ore concentrates are nearly the least valuable forms of the rare-earth supply chain (the raw un-concentrated ore being the least valuable).

    The ore concentrate must be “cracked,” i.e., its metal values must be separated chemically from the minerals, and immediately within the cracking process or just after it the nuisance metals, such as radioactive thorium and uranium, must be removed or left in the tailings (residue). The resulting pregnant leach solution (PLS) must then be separated into the individual rare earths and these must be in as pure a form as possible.

    The purified individual rare-earth chemicals so produced. must then be reduced electrochemically or metallothermically to pure individual metals.

    The metals will then be made into alloys, and the alloys into products such as rare earth permanent magnets, and nickel metal hydride battery electrodes.

    Some of the purified chemical forms will be processed directly into, for example, fluid-cracking catalysts, without going through the metallic form at all.

    The ONLY WAY rare earths become of value, industrially, is by passing through the above supply chain until they have been transformed into a finished useful form. The exact makeup of these useful forms is dictated by the end user. The supplier at every level of the supply chain must conform to, and target, the end users’ requirement. This is why the stockpile discussion is so premature. The real question is: “What is to be stockpiled?” That question can only be answered by a close study of  individual companies and industries and their specific demands.

    The rare-earth part of the junior-mining sector has been for at least the last four years viewed in isolation by mining and financial analysts wearing blinkers.  A myopic vision of this small sector of the natural-resources market, which has vastly overemphasized its importance, has thus been developed and continues to be maintained.  A fantasy of growing and infinite demand and inelastic prices (prices not driven by simple supply and demand) increasing without limit, has placed the most emphasis on those rare-earth juniors who say that they will produce in the near term, from single mines, as much material as the Chinese are now producing from a combination of dozens of mines and refineries constructed and put into operation over a thirty-year period. As one analyst has put it “only the grade and total weight matter” in non-Chinese rare-earth production. Nothing could be farther from the truth.

    The decades and thousands of man-years it has taken the Chinese to achieve their current capacities and capabilities are simply ignored by “investor analysts” who wouldn’t and don’t know the difference between neodymium and salami to start with and think that “the” solvent exchange is on Bay Street in Toronto near the Toronto Stock Exchange.

    One of the positive results of the recent apparent correction (i.e. drop) in rare-earth stated prices is that this has exposed just how foolish the stock market has been in valuing a tiny metals market.  There was never any rational way that the prices for anything could simply increase by a factor 10 in just a few months and hold there and then go up again.  Rare earths have been treated as if they are vaccines when there is a plague among us. No price was considered too high for these “critical” substances. In fact they are critical mostly to lifestyle not life itself, and certainly not to the strength of the US, or any other, military, but rather to the efficiency of its defense technologies.

    I asked myself when the current mania began, that if rare earths are so important, then why did the financiers and industrialists in the USA, in particular, actively push the Chinese into the position of being the sole source of them when ALL of the major discoveries of and advances in the use of the rare earths over the last 30 years have been made in the USA?

    The answer to this question is economics. Economics is also the reason that the prices of the rare earths are rapidly correcting as Chinese intentions become clearer.

    China has grown into a world-class economic power through the extraordinary creation of a huge sustained rate of growth of its GDP, based on the marshaling of its national resources of people, resources, and capital into the largest single-goal-directed economic entity in mankind’s history. The single goal of the Chinese Communist Party, the sole political entity in China, is to raise the standard of living of all Chinese people as much as possible, by any means possible, in the shortest period of time. In China, the political system to achieve this is known as “socialism with Chinese characteristics” and the chosen economic system to achieve this goal as “capitalism with Chinese characteristics.”

    I think that the misunderstanding of “capitalism with Chinese characteristics” by the socialist-capitalists of the West is manifested most clearly in the idea that the goal of Chinese state economic planning is and must be individual “profit”, in exactly the same sense as is the goal of private capitalism outside of China.  Individual profit is allowed at the moment so that wealth can be created rapidly in the service of the goal of the state.

    China has been very lucky to have had a foundational  leader to unify the country, albeit ruthlessly and brutally, who was followed in short order  by a brilliant economic leader such as few countries have ever had.  In a way this is exactly the opposite of the experience of the former Soviet Union, which embarked under Stalin on a dead-end course to state bankruptcy with a goal of nineteenth-century empire building, almost completely overthrowing the ideas of  the Soviet Union’s foundational leader. The Western democracies without even so much as an industrial plan, such as the USA, look economically precarious to the central economic planners of China, who themselves are dismissed as nothing more than the latest iteration of Soviet central planning. China is not following the Soviet model of the path to communism, but China learned from the Soviet failure, and it learned well.

    China, since the reforms of Deng Xiaoping,  has created and nurtured until now an export-driven economy, which has allowed the Chinese to rapidly accumulate large amounts of reserve currencies (principally US dollars and Euros) representing the surplus of the payments they have received from their largest trading partners. China’s currency has not been allowed to become “convertible” in the free market. Its value vis a vis the reserve currencies, is set only by the Chinese government and not by the market. The Chinese store of assets anchored by its hard-currency reserves is the most powerful weapon in the history of economic nationalism.

    It now seems that the Chinese have become aware that the growth of their manufacturing economy is slowing, so that if a high “floor” rate of growth is to be maintained, then it is the time for some structural adjustments.  China has stated as official policy that it now wants to transform itself into a mixed economy, led ultimately by domestic consumption. This means that the types and amounts of resources now allocated to export, will have to be reviewed to see what amounts of them will have to be redirected to support the growth of the domestic consumer economy.

    To bring its particular sub-sector of the domestic natural-resource market into conformity with the new program direction, rare-earth mining has had first of all a cap placed on output and then, just now, an output licensing system put in place so that supply could be accurately measures and prices accurately “discovered.” In this way,  the legal market could become the total market, with taxes calculated and collected on all production, as well as facilitating accurate measurement of supply for state-planning purposes. Just this week it was been announced that of 80 applications for rar-earth production operating licenses received since the reforms began earlier this decade, the Chinese government has selected just 15 that conform to the NEW environmental standards. Production from unlicensed sources will now be a serious felony and the total of the amounts purchased either for use internally or for export will be checked to make sure it matches LICENSED output.

    This has resulted in a price correction that has been described as the deflation of a bubble. In fact the prices were earlier driven up by Chinese speculators and illegal miners trying to manipulate information even as they moved to offload inventory, before it became worthless or dangerous, because it wouldn’t have a necessary license to enable it to be sold in the legal market. The new regulation scheme will stabilize prices, since supply will be able to for the first time to be matched to demand.

    We will also now see a clear differentiation in supply and demand between the light rare-earth elements (LREEs), and the heavy rare-earth elements (HREEs). HREE production is, at best, flat in China, currently the sole producer, even as demand proceeds to grow. This can only result in firm current pricing and a steady increase in prices over the years to come for the HREEs.  Since non-Chinee HREE production will, at best, grow slowly, if even at all, it is likely that HREE supply will not meet demand anytime in this decade.

    This is a far cry from the situation in the LREEs where China is operating at less than one-half of mining capacity ,and possibly at even a lower level of utilization in refining capacity, and there is at the same time a strong possibility that Lynas (ASX:LYC, OTCQX:LYSDY) or Molycorp (NYSE:MCP) or both will come into large-scale production by 2014. This situation will simply maintain the probability of oversupply of the LREEs in the near to mid term. This should stabilize and hold down the prices of the LREEs, as speculation is discouraged internally by new Chinese moves.

    Finally it is obvious that the overwhelming market for the rare earths as raw materials is Southeast Asia, primarily China (60%) and Japan (30%), totaling 90% of the world market. It is incredibly naïve to maintain that as large a production as is predicted for even just Molycorp, could be absorbed by the US market unless you assume the total collapse of the Chinese and Japanese export markets for REEs. The only way that Molycorp could sell its total planned production would be by marketing into China and Japan. This will place Molycorp, at least in China, in direct competition with a mature Chinese mining sector, with much lower costs across the board than have ever been previously achieved, in practice, outside of China. Lynas faces the same marketing problem, but its mix of REEs is perhaps better suited to the world market place. In order to sell anything into China, any supplier must conform to strict Chinese import rules, regarding radiation and other contamination levels. This makes a non-Chinese rare-earth supply chain even more important to potential large-scale and therefore lowest-cost producers, but it is not the mining costs that are determinative – it is the lowest overall cost to the sale point of your rare-earth product that is important.

    First to pass the post is also going to be a very important benchmark for the success of a large LREE venture. If Lynas should succeed in getting the go-ahead from the Malaysian government soon, then it will rapidly thereafter begin producing large quantities of LREEs and some HREEs also from its Australian ores. This fact is a key reason why Molycorp is attempting to accelerate its target date for actual production, from newly mined material. Both Lynas and Molycorp have large fixed costs of operation. Any inability to sell all that they can produce may be fatal to their survival in the face of a market that is not as large as it is held out to be. In fact they are of course competitors with each other. If either is to survive, this will be if and only if, the Chinese do not choose to again ramp up LREE production, targeted for the export market.

    Governments may well buy small quantities of critical metals for security purposes, but the government of Australia needs hardly any such material and the actual needs of the US military are small.  If there is a revival of the total REE supply chain in the USA then a stockpile to protect the INDUSTRIAL supply chain could be enough reason for private industry to fund a Molycorp or a Lynas.

    The key stockpilers of the REEs as rare materials over the next decade are likely to be the nations and industries with the most pressing needs for them. Those would include China, Japan, Korea, India, the EU, and last, and presently least important, the USA.

    Stockpiling may be used as a reason to capitalize security of supply. In other words stockpilers will pay more to ensure domestic supply.

    With regard to HREEs, based on the information that I have about the deposits, management, markets and politics to be served by the potential rare-earth mines that can produce HREEs, I have reduced my interest in the space to the following. I may have missed a good one or included a bad one, but I think that the survivors in 2015 must be in my list today:

    • Avalon Rare Metals (TSX:AVL, AMEX:AVL)
    • Great Western Minerals Group (TSX.V:GWG, OTCBB:GWMGF)
    • Matamec Explorations (TSX.V:MAT, PK:MTCEF)
    • Quest Rare Minerals (TSX.V:QRM, AMEX:QRM)
    • Rare Element Resources (TSX.V:RES, AMEX:REE)
    • Tantalus Rare earths (TEFFF.Pk)
    • Tasman Metals (TSX.V:TSM, PK:TASXF, F:T61)
    • Ucore Rare Metals (TSX.V:UCU, OTCQX:UURAF)

    I believe that REEs can be produced as secondary values / byproducts at the lowest costs, by:

    • AMR Minerals
    • Alkane Resources (ASX:ALK, OTCQX:ANLKY)
    • Orbite Aluminae (TSX.ORT.A)
    • Rare Earth Metals (TSX.V:RA)

    Low-thorium deposits are highly desirable for LREEs and, of course, HREEs but they are few and far between. Owners of such deposits include:

    • Rare Earth Metals (TSX.V:RA)
    • Tasman Metals

    Recycling from industrial process and end-of-life scrap plus REE containing slags and residues, can provide a limited but significant and immediate supply of products at the lowest cost. This is because the energy and cost of originALLY mining and separating them from each other in gross is built into the scrap as intrinsic value.

    In 1976, China exported for the entire year the dollar value of its current (2011) daily exports! But, what exactly does China export? Two things: Labor content and the least quality to make a product competitive. What exactly does China import? Two things: Intellectual property (often as in the case of the American OEM automotive industry at NO COST) and raw materials.

    Let’s focus on raw materials.

    The best investment possible is to supply a growing demand for a material that is scarce to begin with. The LREEs are not rare nor even hard to get at; they are just currently too expensive to produce against the Chinese supply chain. On the other hand, the HREEs are scarce even in China, and also even in China their production costs are high due to the low grades that are worked.

    Thus, it turns out that deposits containing the highest ratios of HREEs to total REEs, where they can be worked so as to produce a product that is saleable competitively with the Chinese production costs, can be sold into China itself as well as into Japan.

    In the case of the HREEs, it is even possible to try to undercut Chinese prices to gain market share. If the production is price competitive, or even a little higher than that of China, then capitalizing the security of supply or national security issues can level the price differential at least for a critical quantity.

    The idea that it is the highest-grade, largest-volume deposit that is most likely to have commercial success is I believe, confused and naïve in the extreme; it equates market capitalization & share-price maintenance, promotion and manipulation with the probability of actual commercial, competitive, production in the real world markets.

     


    Disclosure: I am long OTCQX:GWMGF.
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Comments (5)
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  • Mike Holt
    , contributor
    Comments (1538) | Send Message
     
    Jack, has your perspective of the rare earths space changed over the years? Or are you just reminding us, as before, that it is myopic to focus on the potential profitability of the rare earth mining companies on a standalone basis, rather than the strategic importance of establishing a complete rare earth supply chain?

     

    I suspect the latter, yet as I read this article, the sense of urgency you expressed in your Oct 15, 2009 article in The Jack Lifton Report titled "The Rare Earth Crisis of 2009 -- Part 1 seemed to be lacking, possibly even replaced with a sense that the attention that has since been directed toward this industry was misguided. Can you clarify whether you have altered your stance in any way?

     

    To help put this question in perspective, here are excerpts from your earlier article and the article above regarding common topics:

     

    Then:
    "The need for the REEs in strategic and critical civilian and military manufacturing is growing, and China is cutting back on its exports of REEs to secure its own supplies of these strategic and critical metals. So with this in mind -- why are private capital and the Federal government state not placing a priority on reviving rare earth production and processing in the USA, even as they throw hundreds of billions of dollars at green technologies which will not be efficient, or even, in some cases, functional without rare earth based components? Why doesn't the US military seem concerned with its dependence on a competitive power for the critical and strategic materials required for so many of its highest tech weapons and weapons' platforms?

     

    There is no explanation other than sheer lethargy for the lack of state action; if it's not really broke, why fix it seems to be the rationale for non-action. Military procurement officers will tell you that so far there has been no problem sourcing the relatively small amounts of REEs needed for military production, so, they say, why "create an issue where there has been no problem?" It is not just the American military that ignores long term strategic planning for even critical materials, short term thinking is, in fact, the norm in American private industry."

     

    Now:
    "One of the positive results of the recent apparent correction (i.e. drop) in rare-earth stated prices is that this has exposed just how foolish the stock market has been in valuing a tiny metals market. There was never any rational way that the prices for anything could simply increase by a factor 10 in just a few months and hold there and then go up again. Rare earths have been treated as if they are vaccines when there is a plague among us. No price was considered too high for these “critical” substances. In fact they are critical mostly to lifestyle not life itself, and certainly not to the strength of the US, or any other, military, but rather to the efficiency of its defense technologies.

     

    I asked myself when the current mania began, that if rare earths are so important, then why did the financiers and industrialists in the USA, in particular, actively push the Chinese into the position of being the sole source of them when ALL of the major discoveries of and advances in the use of the rare earths over the last 30 years have been made in the USA?"

     

    Then:
    The only hope for the further availability of the rare earths outside of China after 2015 is a collaborative effort by the rare earth mining, refining, metal and alloy production and fabrication, and end use profit manufacturing industries to build a complete rare earth supply chain.

     

    Now:
    I predict that very few of the specialty-metal junior miners that could produce the particular heavy rare earths demanded by the current- and near-term market, will ever get into actual production, and of those, only the ones developing deposits containing commercially recoverable heavy rare earths will survive. Commercial in this sense means that they will be able to produce heavy rare earths at the lowest cost and at less than the total market demand. Keep in mind that ore concentrates are nearly the least valuable forms of the rare-earth supply chain (the raw un-concentrated ore being the least valuable).

     

    The rare-earth part of the junior-mining sector has been for at least the last four years viewed in isolation by mining and financial analysts wearing blinkers. A myopic vision of this small sector of the natural-resources market, which has vastly overemphasized its importance, has thus been developed and continues to be maintained. A fantasy of growing and infinite demand and inelastic prices (prices not driven by simple supply and demand) increasing without limit, has placed the most emphasis on those rare-earth juniors who say that they will produce in the near term, from single mines, as much material as the Chinese are now producing from a combination of dozens of mines and refineries constructed and put into operation over a thirty-year period.

     

    Then:
    The rare earth supply crisis is a symptom of a greater dilemma. It is time for collaborative action right now, before it is too late.

     

    Now:
    Finally it is obvious that the overwhelming market for the rare earths as raw materials is Southeast Asia, primarily China (60%) and Japan (30%), totaling 90% of the world market. It is incredibly naïve to maintain that as large a production as is predicted for even just Molycorp, could be absorbed by the US market unless you assume the total collapse of the Chinese and Japanese export markets for REEs. The only way that Molycorp could sell its total planned production would be by marketing into China and Japan. This will place Molycorp, at least in China, in direct competition with a mature Chinese mining sector, with much lower costs across the board than have ever been previously achieved, in practice, outside of China. Lynas faces the same marketing problem, but its mix of REEs is perhaps better suited to the world market place. In order to sell anything into China, any supplier must conform to strict Chinese import rules, regarding radiation and other contamination levels. [This makes the development of rare earth mines outside of China seem almost futile, but you then go on to say, the following:] This makes a non-Chinese rare-earth supply chain even more important to potential large-scale and therefore lowest-cost producers, but it is not the mining costs that are determinative – it is the lowest overall cost to the sale point of your rare-earth product that is important.

     

    Thanks in advance. As always, I appreciate your sharing of insights and judgment derived from your years of experience related to critical technology metals.
    6 Dec 2011, 10:29 PM Reply Like
  • Jack Lifton
    , contributor
    Comments (418) | Send Message
     
    Author’s reply » Mr. Holt,

     

    As I began to work closely with that segment of the junior mining industry involved with the rare earths I noted that the total supply chain issue though critical was basically just ignored. Over the last two years I have seen very little appreciation for the complexity of the supply chain issue and a huge irrelevant amount of attention paid to speculations on ore concentrate production levels and the extraction of the metal values from that concentrate into a process leach solution. I think this is because it is at that point, common to most metal mining, that the common wisdom of geologists stops. A rare earths' industry in America, if there is to be one, will require sophisticated technical management as well as financial managers who understand that profitable daily operation is not the same thing as share price appreciation. I have lost interest in the hucksters and promoters. I am looking only for rational business opportunities that can meet delivery schedules on time and to specification.

     

    It would be nice if companies that announced large increases in production were actually in production from newly mined and continuously produced resources, but perhaps I am asking too much.

     

    I learn through experience.

     

    I do appreciate your study of then and now.

     

    Thanks,

     

    Jack Lifton
    7 Dec 2011, 08:49 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1538) | Send Message
     
    Amen. I think you and others with a lot of knowledge and experience in this space have succeeded in drawing needed attention to the importance of developing a supply chain that is not so heavily dependent upon China. If only that interest could be met with realistic opportunities to achieve that objective, rather than get rich quick schemes -- in which getting rich applies to everyone except long-term investors seeking to allocate capital to where it is needed.

     

    Of course, investors need to be realistic as well. The most important thing I learned from attending the Rare Earths Boot Camp that you and Garth sponsored is that, when it comes to the rare earths, the entire process from discovery to manufacturing final products is dependent upon apparent nuances that many are not aware of, much less understand. Again, this is why your insights are so widely respected and greatly appreciated. Many, many thanks.
    8 Dec 2011, 10:53 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1538) | Send Message
     
    Jack, this link to a research report just published by PriceWaterhouseCoopers titled "Minerals and Metals Scarcity in Manufacturing: the Ticking Time Bomb" sheds additional light on the concerns that you have raised regarding the need to develop the entire critical metals supply chain, not just a more secure supply of critical metals -- although that is also, well, critical.

     

    http://pwc.to/sjLP9V

     

    Most of the 2012 Investment Outlooks that I have encountered make no mention of the risks associated with our reliance on less than secure sources of rare earths and rare earth based products further downstream. However, as Yogi Berra might have wisely informed us, the risks everyone should watch out for are the risks that nobody is watching out for.
    21 Dec 2011, 12:00 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1538) | Send Message
     
    Maybe Deloitte will publish an updated report describing theTop Ten Mining Trends for 2012, but in the meantime, this report describing the Top Ten Mining Trends for 2011 may shed some additional insight.

     

    http://bit.ly/tHEu3Q

     

    As China's demand for an increasing share of the world's commodities increases, their purchasing power allows them to exercise greater influence over global prices. Combined with the heavy role that their government plays in their economy, this presents a growing threat to non-Chinese companies trying to compete on a playing field that is not level, and may not even be correctly described as a playing field.

     

    However, unreasonably lengthy permitting processes etc. in the US and other roadblocks to the development of new resources outside China further stacks the odds against non-Chinese mining companies attempting to remain competitive. This, in itself, deserves much more concern than it receives. Perhaps it would get more attention if there was a greater recognition of the implications that this has for companies in other industries that rely upon the mining industry to produce the materials they need to provide the economic growth, jobs, national security -- and stock market gains -- that do tend to capture more of our attention.
    21 Dec 2011, 12:58 PM Reply Like
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