(IBTimes) -
Rare Earth Junior Miners Should Applaud China: Michael
Silver
Source: Sally Lowder of
The Critical Metals Report
(5/22/12)
http://www.theaureport.com/pub/na/13413
In a sector where the playing field is not always level,
Michael Silver, chairman and CEO of rare earth supplier American
Elements, makes a case for more cooperation. With China's quotas
creating a marked price differential for critical metals, Silver
insists that junior miners finally have an opportunity to develop
the U.S. resource and manufacturing sectors. Silver shares his
vision of a fair market-and his favorite junior miners-in this
exclusive
Critical Metals Report
interview.
The Critical Metals Report:
American Elements occupies a specialized niche in the minor
metals and rare earth elements (
REE
) sector. Tell us about your business.
Michael Silver:
American Elements was formed approximately 22 years ago. We
supply essentially all metals on the periodic table and in every
form that nature and current technology allow. In fact, we are
the world's largest catalog for these materials. In the materials
world, only one-eighth of the periodic table's metals are
commercially produced as common metals in common forms. American
Elements works with the remaining seven-eighths. For example, we
produce a common metal such as copper, but at ultra-high purity
or as a nanoparticle. We produce REEs in natural or synthetic
form because they are in the "advanced materials" category. The
same would apply to other critical metals such as REEs,
refractory metals such as hafnium, scandium and the metalloids,
such as germanium, indium and gallium.
TCMR:
Which sector is your biggest customer?
MS:
That is difficult to answer. There is virtually no industrial
manufacturer we do not touch: General Electric, Siemens,
Honeywell and DuPont all buy materials from us on a large scale.
We supply every national lab in the U.S., as well as national
labs in Europe, Japan, India, Brazil and Singapore. Hundreds of
universities buy from us. We are involved at the research level
all the way to container loads of materials that go into GE
lighting, catalysts for companies such as Engelhard and W.R.
Grace or electronic applications for Siemens, Hewlett-Packard and
Intel. We also have a very large defense and military materials
division working with companies such as Raytheon in the U.S. and
BAE Systems in the U.K. To give you one example, we supply the
proprietary propellant used in every medium- and small-caliber
bullet used by the U.S. military.
TCMR:
Over the last several years, there has been great concern in the
mining industry over China's stranglehold on the REE market. Do
you see that as being problematic or are the Chinese good
partners for you in terms of acquiring the materials needed to
manufacture your end products?
MS:
I would say the mining community should be doing nothing but
applauding China. All of these junior mines are being built today
because of what China's regulations did to the price of REEs in
recent years.
Before 2009, you could not have justified starting up a new
rare earth mine. From World War II into the late '90s, there was
a duopoly in the REE industry. There was what is now
Molycorp Inc.'s (MCP:NYSE)
facility at Mountain Pass, which was owned by Unocal. Then there
was the French company, Rhône-Poulenc, now called
Rhodia Group (RHA:NYSE)
, which sold and distributed all Chinese REE production
worldwide.
When Deng Xiaoping started pushing China to engage global
capital markets in the late '90s, the Chinese began, as many
early-stage industrializing nations do, by selling natural
resources directly at prices that were about one-tenth of what
the duopoly was selling at. As a result of China's entrance in
the market, REE prices remained flat from 1998 to 2010 and traded
within a very narrow range: lanthanum oxide was $4-6/kg, cerium
oxide was $3-6/kg, neodymium traded between $18 and $22/kg.
However, around 2007 China also began using export quotas to
gain some measure of control as to who could export REEs. This
led to several other forms of export restrictions. Now, all REE
manufacturers, including American Elements' joint venture partner
in China, are basically under government control and the cost of
REEs inside China is about half of what it is outside of China.
Some now argue that what the government really cares about is
creating a price
differential
for REEs inside versus outside of China, rather than the price
itself.
REEs are not, and may never be, a tradable investment
commodity. They are a business-to-business raw material used to
produce end-use goods that have incredibly high value, such as
cars and smart-phones. That is what makes them so important.
Instead of caring about the REE mines themselves, which may
generate hundreds of thousands of jobs in the U.S., we should
consider the success of our makers of cars, smart phones, wind
turbines, fluorescent lights and all the products reliant on REEs
that generate
millions
of jobs. A nation cannot develop these industries if, at the end
of the day, production costs are too high. The Chinese have a
wonderful opportunity, in that they presently can produce all
those goods at a lower price than the rest of the world, assuming
such a price differential can be maintained. And that creates the
real potential for other global manufacturers of these goods.
As to those looking to invest in the many junior mines going
public these days, investors need to realize that China will
always be in the position to flood the market with REEs any time
it wants, as it did in 1998. China's almost unlimited supply of
REEs will not change. The situation is analogous to the Middle
East's position with oil. The 10,000-pound gorilla always
dictates pricing. Of course, China dumping rare earths at this
point is a highly unlikely event.
The junior mines certainly have an opportunity, but they sit
on a somewhat shaky foundation because of China's supply
dominance. Some junior mines will do well no matter what, some
will have to play their cards right to succeed, others will
struggle.
TCMR:
Are you nervous about your ability to procure what your customers
need, given that China is now your primary supplier?
MS:
We operate on a day-to-day basis. We stay aware of the politics
and deal with them as they come up. The world has changed on us
now three times. We worked with the duopoly of Molycorp and
Rhodia. Over the last 12 years, we were happy to be a direct
supplier from China. Today, getting materials out of China means
dealing directly with the government. Now, the junior mines are
creating opportunities for American Elements because they provide
us with additional sources. As a company, we are OK either way.
We just have to understand how to make certain our customers can
operate unhampered by frictions within the supply chain. I have
found that companies are willing to pay what they need to for
materials if they feel everybody else is paying the same price.
Where China might take prices is not the issue.
The bigger concern is this potential price differential, how
it might impact future global research and which countries will
benefit from new high-technology development. Already, we're
seeing major companies outside of China, in the U.S., Japan and
Europe, devoting significant research dollars to finding ways to
avoid using rare earths in their products. This is not good for
anyone, particularly the Chinese. Similarly, the mere perception
that any new product development will ultimately result in
creating jobs only in China will have a chilling effect on
government funding to develop of these industries outside of
China.
TCMR:
But there is huge pent-up demand for these products in developing
nations, and in the BRIC nations (Brazil, Russia, India, China).
Will the people there care where their cell phones,
air-conditioning units and fluorescent bulbs are manufactured?
Does the U.S. need to do more to see manufacturing and supply
chain capabilities return here?
MS:
That is exactly the scenario that we are dealing with. If there
is a pricing differential, mere access to the materials does not
matter. If you can buy neodymium at the old price of $20/kg in
China, but have to pay $250/kg outside of China, you cannot bring
manufacturing and jobs to your country because you lack access to
raw materials at a price that allows you to compete globally in
these high-tech markets.
You mentioned the BRIC nations. Almost all of the niobium in
the world, 97%, comes from Brazil. Virtually all of the nickel
comes from Russia or Canada. Russia certainly produces enough to
be the 10,000-pound gorilla when it comes to nickel. India
controls steel by virtue of the
ArcelorMittal S.A. (MT:NYSE)
acquisitions over the last decade. China controls REEs and a lot
of other important metals.
Therefore, the big long-term issue is the domino effect
China's approach to rare earths will have on nations that are
also trying to develop. When other developing nations realize
that they have a sovereign monopoly on a given material, they may
also try to leverage it. For example, Brazilian producers sell GE
niobium for use in its U.S. production facilities. Given the
sovereign monopoly Brazil maintains on niobium, why not encourage
GE to build its production facilities in Brazil?
TCMR:
In your view, is it a good thing to have these junior mining
companies in North America developing projects?
MS:
It could not be better. The U.S. has a great history of people
like Henry Ford, Thomas Edison and Alexander Graham Bell creating
industries. Alexander Graham Bell got the copper he needed from
the copper mines of the U.S. Southwest. Ford went to Pennsylvania
for coal and to Texas for oil. We had a huge base of the raw
materials that were essential to the innovations developed at the
beginning of the 20th century. Today, we no longer have the raw
materials to execute on our 21st-century innovations. Junior
miners can help change that.
This would not be an issue if countries with sovereign
monopolies let the world know that they will always maintain an
even playing field on raw materials prices. That only redounds to
the benefit of the country that controls the materials. It allows
every bright mind on the planet to innovate using the material
that country controls without fear that their invention will just
create jobs and wealth elsewhere. I do not believe that is an
idealistic perspective.
TCMR:
It's a capitalist perspective.
MS:
Yes, it is. I expect to pay market prices, but in an open,
transparent, competition-driven environment. I think, if the
countries that control these materials take a look, they will
realize the benefit and will make the world's inventors
comfortable that they can innovate using any material and not get
burned at the end of the day. We need to recognize how important
it is for all of humanity to be able to contribute to
technological development. Again, that may sound naïve and
idealistic, but I think it is not. The Chinese are famous for
their long-term perspective and I believe this approach is in
China's best long-term economic interest.
TCMR:
Let's move to reality and some of the projects that you find
interesting. Do you see any reason for an investor to be
concerned about buying stock in a company that has more heavy
rare earth elements (HREEs) versus light rare earth elements
(LREEs)?
MS:
I don't agree with the idea that companies that have mostly LREEs
will not do well in the long term. I see three groups of junior
mines. The first group is juniors that have large enough deposits
of LREEs like cerium and lanthanum to be good, reliable long-term
players. In this group, you have to first include Molycorp Inc.,
which has a lot of LREE in its Mountain Pass deposit, as well as
a significant percentage of neodymium. But it is Molycorp's size
and experience that really makes it valuable.
Lynas Corp. (
ASX
)
is in this group too. It controls huge deposits and, despite the
unfolding production issues in Malaysia, eventually will do a
really good job; it has a track record and great management. The
third would be
Great Western Minerals Group Ltd. (GWG:TSX.V;
GWMGF:OTCQX)
, which controls two sizeable deposits, has maintained excellent
relations in China and is very knowledgeable. Those three
companies will survive and then some.
I call the next group of companies "boutique mines." These are
the mines that are leaning heavily on the HREEs. At least three
have really excellent deposits with great value, but we will have
to see how long it takes them to come to fruition because of the
permitting process.
Ucore Rare Metals Inc. (UCU:TSX.V;
UURAF:OTCQX)
owns Bokan Mountain in Alaska. It may have a greater percentage
of dysprosium than any other deposit on the planet. It also is
near a Pacific seaport, giving cost-effective access to Japan and
China, where almost all the REEs are presently used. Its CEO, Jim
McKenzie, is smart and knows what the company has to do. Ucore
has excellent relationships in Alaska; Senator Murkowski is 100%
behind the development.
Another would be
Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A;
TASXF:OTCPK; T61:FSE)
, which owns a mine in Sweden. It is a really nice deposit,
particularly its yttrium content. Yttrium has so many important
applications. For example, you can't make a sparkplug without
yttrium. Yttrium-stabilized zirconia is in bulletproof vests and
in fuel cells, anything that requires strong ceramics or ionic
conductivity. Tasman has a huge amount of yttrium in its deposit.
The company has great management and also has a very good
relationship with the Swedish government. On the logistics side,
there are many users in Europe and there is a lot of desire for
European-based REE sources.
Another boutique name is
Hastings Rare Metals Ltd. (
ASX
)
. Its Hastings mine in Australia has a lot of HREEs; it's a very
valuable deposit.
The third group is everybody else. There has been this big
jump in the number of new entities with the strategic plan to
find an REE deposit, go public and then begin the permitting
process. Simply establishing good relationships with the local
government can positively impact the value of these stocks today.
Those stocks will, I think, do what the owners anticipate: become
more valuable as they get closer to being able to actually mine
ore. In this group, I encourage vertical integration, using the
raw material they have access to as a strategy to
cost-effectively produce the finished goods that require that
material. Thus, rather than generating a profit by selling at the
high global prices that may be established by a sovereign
monopoly, they rely on their low raw material cost to compete in
the end-use product.
TCMR:
A few of these companies are doing that.
MS:
A lot of them, actually. Hitachi just cut a deal in Australia.
Molycorp bought a wind turbine manufacturer in Boulder, Colorado,
as well as
Neo Material Technologies (
TSX
)
, which allows Molycorp to further execute on its mine-to-magnets
strategy.
TCMR:
Before we end, let's go back to American Elements. You founded
the company in 1993. How would you describe your growth path?
MS:
It has been a parabolic, logarithmic curve upward. In the last
five to six years, the company has grown tenfold. We will double
this year, as we did last year. What I had hoped is actually
happening: high-technology is coming to the fore and people are
realizing materials nobody considered important before are now
essential because we are learning to work with them. I remember
no more than five years ago my mother, who is a very successful
investor, telling me that she had to keep explaining to her
friends that I wasn't in the "rare herb" business. Now, all of
her friends are asking her which REE junior mine they should
invest in.
TCMR:
Thank you for your time.
Michael Silver
is CEO of American Elements, a global manufacturer of
engineered and advanced materials. He is an expert on rare
earths and other critical metals such as lithium, indium and
tellurium. Mr. Silver's expertise includes firsthand knowledge
of the supply chain from mine to finished goods and the
scientific applications that make these elements important. He
is considered a pioneer in the fields of nanotechnology,
materials science and alternative energy. The company has
operations in Los Angeles; Salt Lake City; Monterrey, Mexico;
Baotou, China and Manchester, U.K. In 2011, American Elements
cosponsored 74 industry and academic conferences.
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DISCLOSURE:
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:
None.
2) The following companies mentioned in the interview are
sponsors of
The Critical Metals Report:
Ucore Rare Metals Inc. and Tasman Metals Ltd. This interview was
edited for clarity.
3) Michael Silver: 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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