Source: Zig Lambo of The Metals Report (1/22/13)
Geologist Alex Knox followed rare earths before they were Wall Street's darlings, and continues to do so, having seen stormy weather in this industry before. Demand for rare earths remains; it's just a question of who can supply them first-and at what cost? In this interview with The Metals Report, Knox tells investors what questions they need to ask management and highlights companies that are progressing toward production.
The Metals Report: Your last interview with us took place in July. Have there been any real significant industry developments in the last six months that investors should be aware of?
Alex Knox: There are, actually. The tenor of the rare earth element (NYSEMKT:REE) space has changed quite dramatically in the last six or seven months.
TMR: What are the biggest factors that have influenced the business?
AK: The general lack of ability to raise financing has severely affected the junior companies, especially those that didn't have a deposit or had a deposit at a preliminary economic assessment (PEA) stage. Investors have seemed to have lost interest, and certainly there is far less news about exploration for new deposits or developing deposits that hadn't reached a PEA stage by last summer.
The focus has shifted from exploration to development. Because of the drop in prices for the commodities themselves since that time, costs have become extremely important, and that includes the costs of doing a feasibility or a prefeasibility study as well as production costs.
TMR: What has been the cause in the drop in prices for the elements during this time period?
AK: I'm no economist, but the lack of projected world growth plays a part. It was expected that these commodities were going to be needed in significant additional quantities, and the lack of growth has slowed demand. China, though it's not in recession by any stretch, has slowed down its development.
TMR: China is now talking about tightening up its environmental regulations. Is that going to have a significant effect on either REE supply or prices?
AK: I think it's going to. China is still in the driver's seat, especially on the heavy rare earth element (HREE) side, it has said for years that it was going to try to reduce its output in order to conserve its low-cost sources of production of HREEs. Certainly, any spark that's been left in the REE market is on the HREE side. We've all heard of the impending production of Lynas Corp. (LYC:ASX) and Molycorp Inc. (MCP:NYSE), which, along with a few others, are probably going to satiate the light rare earth (LREE) market with the development of additional production. But because there is still no significant production of HREEs in the Western world and many of these deposits, half a dozen at least, have reached at least the post-PEA stage and are approaching a production decision, there is still a place for HREEs, despite the drop in prices and consumer attempts at HREE substitution or recycling.
TMR: Is the number of survivors in the industry going to be curtailed drastically?
AK: That was always going to be the case. Two years ago, when over 200 companies were exploring for REEs, the sensible companies were aiming to be low-cost producers. And when prices start to drop, the low-cost producer of any commodity, especially HREEs, is going to be the last one standing, and will be available to a) acquire additional sources of production from the failed producers or b) stay in production and wait for times to get better in this business. As long as we've been in this business, we know that prices fluctuate dramatically over the years. So investors have always been looking for the company that could either reach production and distribution first, and/or the company that had the lowest production costs so that when the free market price started to fall, this company would be able to hang in there the longest.
TMR: What's the ballpark range of capital expenditure needed to put a REE mine into production?
AK: Again, specific numbers are not my bailiwick; I'm an exploration geologist. But proximity to infrastructure is a big cost factor. If you have to transport your chemicals, raw materials and construction materials a long distance and then transport your product a long distance back to be sold, that's obviously going to be more expensive.
The second factor is metallurgy. You have to take these REE elements, break down the minerals that they occur in, get them into solution and then be able to precipitate them in a form that will allow them to be separated into individual elements so that they can be sold at a maximum profit. If your minerals are hard to break down, require expensive acid treatments or even an acid manufacturing plant at your site, which costs hundreds of millions of dollars, these are going to carry price tags that many companies can't cover.
Another important cost factor is the cost associated with anomalous radioactivity. These deposits tend to accumulate uranium and thorium. That's just the nature of the beast. The key question is, are these radioelements occurring within the minerals that contain the REEs, or are they in subsidiary minerals, such as thorite? The common REE mineral that contains significant radioactivity is monazite, which is commonly found in certain LREE deposits. If you have monazite or other REE minerals that contain the radioelements, then these will have to be disposed of later on, as opposed to on site. That's going to be extremely expensive. If, on the other hand, the REEs are in a separate mineral, they can be left behind and put back in the tailings, which carries a significantly lower cost for the producer.
TMR: What companies are furthest along that you see at this point?
AK: The group that I see moving along certainly includes Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX). It has signed an agreement with a Japanese company, Toyota Tsusho Group (TYHOF:OTCPK). Its metallurgy is relatively simple by REE standards. One problem with it is it has significant amounts of zirconium in its deposit, which it is not presently planning on extracting. That's a source of value that it is perhaps missing. The company could try to extract it at a later period. It sits in a fairly logistically convenient area. It is in Southern Quebec, so it is not in a remote area.
Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE) is another. It has a similar type deposit to Matamec, though it sits in Sweden. Its logistics are excellent. Its sources of power are good. Its metallurgy is similar to Matamec, and it is plugging along to develop ways of lowering its costs by reducing its consumption of acid.
These deposits are relatively low grade but because of their favorable metallurgy and logistical advantages, they are certainly up and coming now and working toward full feasibility studies.
Quest Rare Minerals Ltd. (QRM:TSX; QRM:NYSE.MKT) in Northern Quebec has a slightly higher-grade deposit, but it is logistically challenged. I'm sure the markets are looking forward to hearing how low cost its metallurgical scheme is going to be, given that all of the materials necessary to make the acid that its present process requires are going to have to be trucked into the middle of New Quebec. It's not going to be inexpensive, but its slightly higher grades may be able to offset the costs.
Those are the three in the HREE space that are showing signs of development. They're not stalled. Many companies have a PEA outstanding and are not making significant progress in taking the next step.
TMR: Have any of these three companies you discussed assessed production ramp-up costs?
AK: All of them have a PEA outstanding, and all of them are working at trying to reduce their costs. A number of REE companies that are moving toward production are discussing ways of significantly reducing their extraction costs because they're in discussion with Orbite Aluminae Inc. (ORT:TSX; EORBF:OTXQX). Orbite Aluminae has developed a process by which a rock can be put into solution and its component elements extracted in a fashion that does not consume any acid. It instead consumes energy in order to make these transformations. This is a huge cost advantage. A couple of companies that I know of are seriously involved in discussions with Orbite to use this technology. These companies have signed nondisclosure agreements with Orbite and are of the feeling that the Orbite process used in whole or in part will be able to significantly reduce their capital costs and, hence, give them a strong competitive advantage over other companies.
Also, Orbite claims that it has been able to extract very small quantities of extremely valuable elements like gallium and scandium from its ores that it is principally producing for aluminum, as well as the complete spectrum of REEs. All REE deposits tend to be a bit of a little treasure trove, and sometimes carry significant quantities of other valuable elements in either small, moderate or even large proportions, such as niobium, tantalum, zirconium, hafnium and beryllium. If the Orbite process is useful in extracting these other elements, you could imagine that the increased revenue would decrease the operating cost per pound of extracting the REEs and would be another significant economic advantage. At least in the preliminary stages, the Orbite process looks like it's going to be able to do this. It looks like the Orbite process may be a significant contributor to revenue. [Editor's Note: Alex Knox provides consulting services to Orbite Aluminae Inc.]
TMR: When you talk about acid, is this mainly a sulfuric that they use?
AK: Most REE companies and certainly Matamec, Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX), Quest and Tasman have developed their processes by using some form of a sulfuric acid bake in some part of the process. The Orbite process uses hydrochloric acid. The hydrochloric acid is not consumed, but the process that it has developed recycles the acid. So rather than using hundreds of pounds of sulfuric acid per ton of rock that is consumed and, hence, has to be replaced, potentially the Orbite process will use hydrochloric acid and consume no acid. So the cost savings are obvious and considerable, if it works for your particular deposit.
TMR: Do you have any updates on other companies?
AK: Yes; Namibia Rare Earths Inc. (NRE:TSX, NMREF:OTCQX) just completed a drilling program and all the core samples are with its engineering consultant, Mintek in South Africa. We don't yet know what the results are. But it has fascinating amounts of HREEs. While a typical REE deposit is considered heavy if its distribution has 30 or 40% HREEs, the results of some of the exploration done by Namibia show that it has 70, 80 or even 90% HREEs. So it is not going to have to market those LREEs that are presently going to be in at least equilibrium or oversupply. It will produce nothing but the HREEs that everybody needs. I find that story personally and geologically exciting. I suspect that the REEs could be in a form that could be easily extractable. But, again, we're waiting on the results of its ongoing exploration. I still think that's a fascinating story.
Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) has developed a large deposit of REEs, extremely large in the Indicated category. Commerce might like to get a partner. It is a skilled fundraiser and explorer, but it may not want to become a producer. That requires different skills from management and the staff. It has ongoing plans to continue to do definition drilling on its deposit and bring the resources to higher categories. It did take a large, many-ton bulk sample in the summertime, which it is going to use to develop its metallurgical spreadsheet. [Editor's Note: Alex Knox provides consulting services to Commerce Resources Corp.]
In addition, Tantalus Rare Earths AG (TAE:FSE; TAE:XETRA) in Madagascar has interesting deposits that it's touting as very lost cost.
TMR: You discussed Avalon in your last interview. Is anything going on with that company?
AK: Avalon has a bit of a tougher nut to crack in that its mineralogy, especially on the REE side, is not as favorable as some of the other companies we've discussed. Avalon is seriously rethinking its options in how to process its ore. It originally planned to take the ore and process it down on the Gulf Coast, but it is considering other options. It has to reduce its costs in order to get this to work. It is working fulltime on refining its metallurgy and finding ways to significantly lower the processing costs.
TMR: There has been quite a bit of press about Molycorp's project at Mountain Pass. What is the impact going to be from this increased production?
AK: It's going to make it tougher for anybody who is an LREE-focused project to find a niche in the market. If it is going to produce more and Lynas is already in production, that's a lot of potential LREE supply. We all thought the demand curve was going to go up to the right forever; at least that was the conventional wisdom. It may be now very difficult to enter the LREE space without significant cost advantages over these established producers. Remember, Molycorp was a producer until the 1990s and early 2000s. It had a lot of its infrastructure in place. Of course, Lynas is already built and if it can ever get past its Malaysian problems, will be in production with significant quantities of REEs produced.
TMR: What is your general assessment and your forecast as to what's going to happen in the REE space?
AK: From the investor side, you have to look very critically and ask very tough questions if you're considering a company that's going to produce LREEs. They are going to be able to find their way into the market through a relationship with a consumer or significant cost advantages.
On the heavy side, this is going to be a fascinating year, because we're going to get a real shakeout. The market is open to significant production on the HREE side because there is no significant production outside of China. A number of these companies are forecasting that they'll have either detailed prefeasibility studies or full feasibility studies done by year-end. We'll also see if the Orbite process is going to be what it's touted to be, as companies are able to utilize its process. If it works, this could be a significant cost reduction that could propel them into a leadership role in the REE space.
Investors really have to focus on the cost side. How is the company doing on its costs of production? What are its recoveries like? That's an area that can be improved in theory dramatically. How are the companies doing in extracting the valuable byproduct credits that they all have? How effectively are they going to be able to utilize this additional source of revenue to keep their costs down and be the company that crosses the finish line first? The small benefit that's added by a small tweak in your metallurgical system or being able to utilize a different metallurgical system entirely could make or break a project. The one who picks the winner is still going to have a significant amount of upside potential to their investment.
REEs are a whole new ballgame, and potential producers are feeling their way along. Nobody has ever extracted REEs from a eudialyte-type deposit like Tasman or Matamec has. The only deposit type that has any previous history of production is monazite, which has been extracted from mineral sands and provided a meager amount of REEs that were produced from the 1950s onward. This is brand new territory. Innovation and cost efficiency are going to be what separates the adults from the infants in this industry. I still think there's a significant amount of money to be made by investors in REEs, even though they may not be the shining commodity they were a few years ago.
TMR: We greatly appreciate your time today, Alex, and the updates on interesting developments on the horizon for later in the year.
AK: Thanks a lot.
Geologist Alex Knox has been involved in the mineral exploration industry since 1970. He served in the mineral exploration division at Unocal Canada Ltd., the exploration arm of Molycorp, where he was involved in the discovery of the Kipawa deposit in western Quebec. Knox has explored for uranium, gold, rare earths, niobium, diamonds, slate and limestone in Canada, the U.S., Mongolia, Bolivia, Peru and Argentina. Highlights include Matamec's Kipawa deposit, Commerce Resources' Eldor and Blue River properties and Quantum Rare Metal's Elk Creek deposit. Knox is on the REE Advisory Board of three publically traded Canadian junior mineral exploration companies.
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1) Zig Lambo of The Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Metals Report: Tasman Metals Ltd., Quest Rare Minerals Ltd., Orbite Aluminae Inc., Namibia Rare Earths Inc. and Commerce Resources Corp. Interviews are edited for clarity.
3) Alex Knox: I personally and/or my family own shares of the following companies mentioned in this interview: Matamec Explorations Inc., Namibia Rare Earths Inc. and Orbite Aluminae Inc. I personally and/or my family am paid by the following companies mentioned in this interview: I consult for Orbite Aluminae Inc. and Commerce Resources Corp. I was not paid by Streetwise Reports for participating in this interview.
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