Jim Powell: Meeting the Critical Metals Demand
Source: Sally Lowder of
The Critical Metals Report
Is there a clear path to meeting growing global critical metals
demand? An important first step, according to Laurentian Bank
Securities' Technology and Strategic Metals Analyst Jim Powell,
would be to establish supply sources that aren't concentrated in a
single country-particularly one that isn't inclined to share its
resources with the rest of the world. In this exclusive interview
The Critical Metals Report
, Jim points out some potential plays to look for while the
landscape is changing.
AMERICAN MANGANESE INC.
- AVALON RARE METALS INC. - COLT RESOURCES INC. - GREAT
WESTERN MINERALS GROUP LTD. - HUDSON RESOURCES INC. - LYNAS
CORPORATION - MALAGA INC. - MOLYCORP INC. - NORTH AMERICAN TUNGSTEN
CORPORATION LTD. -
QUEST RARE MINERALS LTD.
- SUMITOMO CORP. -
TASMAN METALS LTD.
The Critical Metals Report:
There's a lot of confusion about the future supply and demand
equation for critical metals, which we've defined as rare earth
elements (REEs), minor elements and strategic metals. What do you
consider the most important minerals and why?
In terms of investment options, I'd focus primarily on
electrolytic manganese metal (
and rare earths.
Why is that?
A lot of these are controlled by one supplier-China-in most
cases. The overall EMM market isn't huge, but it's large enough to
leave room for other suppliers. At this time, China supplies more
than 98% of that market.
Fluorspar is used in acids and fluorine-based chemicals, so a
lot of chemical companies need it, as do steel and aluminum
manufacturers. Fluorspar is more than 50% supplied by China.
How about graphite?
Graphite's another mineral that's also controlled largely by
China. There used to be a fair number of producers in North America
and Europe, but most of them shut down over the last 10 years as
China outpriced them in the market. Graphite is a refractory used
primarily in nuclear reactors and batteries. Actually, there's more
graphite than lithium in lithium-ion batteries.
Tungsten is somewhat underappreciated for what it does. It's
widely used in tooling, in the mining industry-even in products,
such as the Blackberry. Those little vibration elements used in the
Blackberry are made of tungsten. China currently produces in excess
of 80% of the global supply of tungsten with a handful of minor
suppliers in Canada and Russia sharing the rest.
Of course, China also dominates the supply of rare earths, which
are pretty mainstream because even though it's a very tiny market,
REEs are very critical elements. There are lots of investment
options there-almost too many.
You've mentioned batteries, manufacturing, tooling and
electronics. Where is the major demand for these elements? Is it
technology for alternative energy? Is it magnets? What's driving
A lot of it's technology-related; the bulk of the rare earths
go into technology-type applications. As I said, batteries use
graphite and a variant of electrolytic manganese-EMD, electrolytic
manganese dioxide. The current generation of batteries for cars,
such as GM's Volt, is manganese-type batteries. So, there's another
clean-tech focused use.
Industrial use is also important. Tungsten is pretty much all
industrial use, and so is fluorspar. EMM is used largely to
manufacture stainless steel and aluminum.
You said that China dominates the market for the EMM that's
used in the new batteries?
Yes, and probably the biggest issue with that is what happens
if China uses it all domestically. If it can, it will. We're seeing
that with the export quotas China has on rare earths, and that
could start with some of these other minerals as China runs out of
internal supplies. The carbonate deposits from which China mines
EMM are running low, and it might just decide not to supply the
rest of the world anymore. As a result, we have a somewhat
unreliable supplier-one that may at any time just use it internally
to satisfy its own demand.
Are you following any companies that have the potential to
create EMM supplies outside of China?
Yes. There's only one company-let's face it-that's solely
focused on it.
American Manganese Inc. (TSX.V:AMY,
is poised to become the lowest-cost EMM producer. That's
mainly due to the fact that the type of deposit AMY has is easily
leachable into acid. In addition, the company has lower-cost power
in Arizona versus competitors in China and South Africa. Those are
its main technical advantages.
You have a target price of $2.90 on that; is that
Yes. And that's what I'm sticking with, even though it's a
fair bit away from current pricing. I actually felt the target was
somewhat conservative-not aggressive at all; a relatively high
discount rate. It's just that AMY will be able to make EMM for
around $0.50/lb., whereas it currently sells in Europe for
$1.55/lb. to $1.60/lb., and around $1.80/lb. in the U.S. AMY's
production costs will be so low that the company could even make
money selling their product into China.
China's lock on rare earth supplies, worsened by its export
quota policies, has increased REE prices significantly. How will
high rare earth prices and lack of supply affect future demand?
Will manufacturers engineer alternatives to these elements?
There are ways of doing things without some of the rare
earths, but some of the heavy rare earth elements (HREEs) used in
phosphorous, for example, are harder to replace. Neodymium as a
permanent magnet is the most superior type of magnet. An
alternative is an induction motor, which is larger and less
efficient but can do the job. The Volt uses an induction motor, as
does the Tesla Motors car in California, so those are examples that
use a substitute for REEs that costs less but weighs a little bit
more and delivers lower performance. So, there are ways around
You're also seeing
Sumitomo Corp. (TKY:8053; OTCPK:SSUMF)
selling cerium, lanthanum and other products coming out of
its deal with
Molycorp Inc. (NYSE:MCP)
in Japan where customers are either designing the REEs out of
their products or learning how to use less. That's partly because
they just won't accept the high REE prices anymore, but I think a
bigger part is lack of availability. Besides, manufacturers don't
want to be tied to one supplier that could change its mind about
shipping the product at any point in time.
Are other companies positioning themselves to meet that
demand outside of China?
Yes, early on I think it will be Molycorp and
Lynas Corporation (ASX:LYC)
that help ease supply issues with many of the light rare
earth elements (LREEs). I have no doubt that both of them will
reach production within the year. It will probably bring pricing
down quite a bit on the lights, though, and probably result in an
oversupply of certain light minerals, such as cerium and lanthanum,
in the short term.
How about the heavies?
I believe that over the longer term, the heavies will still
be in demand, and that demand won't be met until larger rare earth
producers, such as
Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL;
Quest Rare Minerals Ltd. (TSX.V:QRM;
come online, which isn't until 2015-2016. So, they're still
some time away from production. In the short term, that's going to
keep the HREE prices high.
Are you watching any other companies in the HREE space?
Well, we're focused primarily on the heavies, so we do cover
Quest and Avalon and like the heavy nature of their deposits.
Another interesting one that pops to mind that we don't cover
Tasman Metals Ltd. (TSX.V:TSM; OTCPK:TASXF;
; it's in Sweden. Its advantage over others has been its good
geography, relatively low costs and the fact that you can actually
drive there in a regular car. Avalon and Quest are fairly remote,
in terms of getting in their supplies and people to mine their
deposits, and both have fairly high capital costs-in the $500
million to $1 billion range. Quest has a great open-pit deposit, so
it will be fairly low-cost once it gets to production.
But you say the company won't be producing until
That's right. Avalon is about a year ahead of Quest, in terms
of getting to production.
Back in April, you had a speculative buy on Quest with a
one-year price target of $10.80. Is that still what you're
That's still what we're looking at, even though there's been
a bit of a selloff. It's not surprising; it's just the way the
markets have been selling off. So, yes, our targets are still
current on Quest, and we continue liking it. We maintain our target
on Avalon, too-at $8.70.
Any other rare earth plays on your radar?
Hudson Resources Inc. (TSX.V:HUD)
has a deposit in Greenland that looks pretty interesting.
It's high in neodymium, which is going to be an in-demand element
for a long time because it's used to make the permanent
One of the trends in the rare earth sector is the idea of
vertical supply chains. What role will vertical supply chain
integration play in creating strategic advantages for some of these
Well, some of them, including Molycorp and
Great Western Minerals Group Ltd. (TSX.V:GWG;
, are moving from mining the minerals right through to
manufacturing the magnets or developing the operations to produce
them. I'm not a huge fan of a company buying its customers out in
order to supply itself. I find it very rare for that to work in any
My preferred way to go with vertical integration would involve
strategic partnerships between the customers and the producers, or
equity stakes. The companies doing this are going back in the
supply chain and securing a supply, and this makes a lot more sense
to me. It's probably a better way to do it, in my view, than
becoming your supplier or buying your supplier. I can't find
another industry where this actually makes sense and works
Once companies specialize in a certain segment, I don't like
them generally moving out of that segment into new areas just to
capture a little bit more margin, which is what's taking place
here. The margin in the manufacturing of the magnet is in the
And what about integrating the processing or milling into the
Right now, it would be a strategic advantage to have a
separation facility attached to a mine, and a few companies are
looking at that. Avalon has scoped it out and is working on a plan
to get there, but it's a very expensive proposition and the
knowledge isn't necessarily readily available in the Western world.
Still, to be the first mover on getting a separation facility would
probably be a good idea for Avalon and any other company that's
looking to get into that market. In the short term, it's
advantageous to get those facilities online because the companies
don't want to ship the concentrates back into China for
Once the separation facilities exist in the Western world,
though, other companies-including smaller ones that will just mine
and produce a concentrate-should be able to avoid that very large
capital investment. They shouldn't have a problem either sending or
selling the concentrate to other companies for processing.
How important is processing in the value equation? How much
more could a company make on processing its own concentrates?
The way it works now, the rare earth companies that don't
have these facilities-which now are available only in China-produce
concentrates of all of their rare earths sort of mixed together.
They then sell that to a facility that can separate it off into the
individual oxides and maybe further process that, and some of it
into metals. The difference between the concentrate sale price and
a separated sale price is about 30%-40%. In other words, a company
could realize a 30%-40% higher margin by separating it itself.
It is but the cost of building and running a separation
facility is also significant, so some of the juniors will be better
off just producing a concentrate.
With production still five years or more off for a lot of
these companies, what's Laurentian Bank Securities' strategy for
evaluating risk and investing in this sector? How do you determine
which companies are likely to do well that far out?
We start with the management. We meet with them and determine
if they know what they're doing, what their strategy is and if
their plan for five years out makes sense. We also look at whether
the elements these companies will potentially be producing will
have value in the future.
That's the juncture at which we split out companies that focus
primarily on light rare earths versus the heavies. With Molycorp's
mine coming onstream and producing lights to add to the supply
stream within the next year, we expect many of the LREEs to decline
in value. We use different long-term price targets on the different
elements just to determine where they are and where they're going
What about some of the critical metals beyond rare
Again, our evaluation considers supply and demand and where
we think costs will come in. For example, not many folks are
looking at producing EMM in the market outside of China, so
American Manganese's deposit and its low-cost power put it in a
good position to do well in that market and capture a large part of
the market share outside of China.
There's not a lot of new supply coming online in graphite, and
we haven't found many companies really engaged in working on that
yet. It's not like REEs, where several hundred companies are
working on it. However, we're aware of several smaller deposits, so
we should see more plays in this space before too long.
With fluorspar, maybe two or three public companies are focused
on it; so, as with graphite, fluorspar isn't something that's going
to flood the market all of a sudden. There are a few tungsten
producers and that market is very small, but I think the right
producer with the right grade and right cost structure could do
well in that market. And as I said, in our view, tungsten is an
What tungsten plays do you like?
There's a combination of exploration companies and producers
in the tungsten space. I cover
Colt Resources Inc. (TSX.V:GTP; OTCQX:COLTF)
, which has what looks to be a significant deposit once it proves
it out. Among the producers are
Malaga Inc. (
North American Tungsten Corporation Ltd. (
. Malaga has its Pasto Bueno tungsten mine in Northern Peru, which
has been producing for years. It's a rather small-scale operation
right now, but it is in production. North American has been
producing for some time, as well.
How far away is Colt Resources from proving out?
Well, it's doing a lot of drilling right now. The deposit is
a historic resource of about 1 million tons (Mt.), which is very
tiny, but it's at .87 grade-a relatively high grade. Visiting the
site, you can see tungsten outcropping in several areas; so, once
the company completes the step-out drilling and gets an NI 43-101
resource estimate, I think it will grow quickly into a deposit of
Any last words you'd like to leave our readers with, Jim?
What's the most important thing for them to consider when they're
looking at this space?
I think you have to look at where technologies and consumer
trends are going in order to pick these plays. If you'd picked rare
earths a year ago, you'd have done really well; but at the time,
who realized it would take off the way it did?
We've been looking at a bunch of these different sectors that
aren't in vogue right now-not popular. We've focused our research
on the fundamentals, which include controlled supply, few suppliers
outside of China and areas in which we expect to see demand
increase over the next five or six years.
Thank you very much, Jim. This has been very informative.
, P.Eng. and Certified Financial Analyst (CFA), is a technology
and strategic metals analyst with
Laurentian Bank Securities
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1) Sally Lowder of
The Critical Metals Report
conducted this interview. She personally and/or her family
own shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Critical Metals Report
: American Manganese, Quest Rare Minerals and Tasman Metals.
3) Jim Powell: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I personally
and/or my family am paid by the following companies mentioned in
this interview: None.
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