Rare Earth Juniors Have a Five-Year Window: John
Source: JT Long of
The Critical Metals Report
John Kaiser, editor of
Kaiser Research Online,
sees 2015-2020 as a critical time for rare earth projects. Any
later, he argues, and companies who have not reached production
will be out of the game. In this exclusive
Critical Metals Report
interview, he profiles promising juniors in the space with the
"full spectrum" of rare earth deposits and details how end-users
like Toyota are leapfrogging the market to secure the elements
they need most.
The Critical Metals Report:
John, a recent
Brookings Institution report
suggested that greater collaboration between U.S. and Chinese
companies would alleviate tensions over tightening rare earth
markets. Is the proposed merger between the Chinese company
Neo Material Technologies (NEM:TSX)
Molycorp Inc. (MCP:NYSE)
what the doctor ordered?
The merger between NEO Material and Molycorp combines NEO's
knowledge about producing and fabricating downstream products
from rare earths (REEs) and other specialized metals with
Molycorp's emergence as a major U.S.-based REE supplier,
especially light rare earths (LREEs). Within two years,
Molycorp's Mountain Pass project will deliver a substantial
portion of global supply. The output from Mountain Pass and
Lynas Corp.'s (
Mt. Weld project will boost global output to 170,000 tons,
knocking China off its perch as the 95% dominant supplier to a
less overwhelming position of 65%. That will alleviate some of
the anxiety underlying what the Brookings Institution calls
"mutual strategic distrust" between China and the U.S.
The Brookings paper emphasizes the need for the government to
become more accommodating about Chinese ownership of American
assets, especially if it involves capital investment. Right now
we have a one-way street where western capital invests itself in
China, ships back cheap goods to Europe and the United States,
and waits for access to the Chinese consumer to open up. Not only
would Chinese investment in America put their strategic goals
more in harmony, but it might prod American companies to invest
some of the trillion dollars they are hoarding because of the
uncertainty over how the seemingly opposed destinies of China and
America will play out.
Toyota has a pending REE deal with
Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX)
in Canada. German manufacturers are talking to
Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK;
in Sweden. Will deals like this end China's monopoly on REEs,
lower their price and encourage more manufacturers to use these
Historically, REE prices have been very low due to China's
abundant resources and its ability to produce them very cheaply.
China is aware that it could become the world's biggest polluter
when its economy eclipses that of the U.S. China is very
concerned about making sure it has the raw materials on hand to
assure its clean-energy future. The supply restrictions China
introduced a couple of years ago were part of a campaign to clean
up and consolidate its high-pollution industries. Those
restrictions resulted in spectacularly high REE prices for export
and substantially higher prices within China. Since July 2011,
the drop in demand and China's inability to control smuggling
resulted in a pullback in REE prices. To some degree, I think
China wants its monopoly to end. China's ambitions go far beyond
squeezing a few profits out of a market it controls.
All of this was a wakeup call. Companies all over the world
realized that their new technologies can no longer rely on cheap
REEs from China. Toyota's deal with Matamec, which is essentially
a 100% offtake agreement, is critical to Toyota's plans to
continue manufacturing hybrid and electric cars over the coming
What distinguishes projects such as Tasman's Norra Karr,
Matamec's Kipawa, Avalon's Nechalacho and
Quest Rare Minerals Ltd.'s (QRM:TSX; QRM:NYSE.A)
Strange Lake is that these deposits offer the full spectrum of
rare earths from lights to heavies. China's natural rare earth
abundance is skewed toward LREEs of the sort Molycorp and Lynas
are bringing onstream. China's bounty of HREEs are restricted to
a group of rapidly depleting low grade clay deposits in southern
China. While it is questionable that the world needs any more
major light rare earth mines beyond Mountain Pass and Mt. Weld in
the near term, bringing on stream heavy rare earth supply is in
the interest of everybody, including China.
What are China's goals? Is the endgame to have companies move to
China's primary goals are to make sure the country does not run
out of these critical materials. A secondary goal is to clean up
the pollution. As China becomes more of a middle-class society,
quality of life becomes a pressing issue. If the Chinese public
rallies against pollution, it could become a destabilizing
nightmare for the government.
Introducing supply quotas created a situation where end-users
outside of China had to consider moving their production capacity
there to get materials at a reasonable price. Technology
companies have moved to China, creating a serious bone of
contention related to the theft of intellectual property.
For the next two to four years, China will be in a position to
force the transfer of technology production into China, where it
can be co-opted by domestic companies and companies owned in part
by the state. These companies would in turn compete with western
companies. This is a convenient byproduct of China's long-term
If manufacturers will be able to source materials outside China,
will they move out or stay in Asia, where the market is
Companies know that it is wise to have a foothold in Asia, the
world's biggest long-term growth market. Companies already there
are likely to stay. In the case of NEO Material, I would be very
surprised if Molycorp ends up shipping REEs to China to be
processed at its facilities, as [Molycorp CEO] Mark Smith
suggested in the post-merger conference call. Molycorp's output
will first flow to facilities Neo has outside of China, such as
those in Thaliand and Germany. Neo currently holds export quotas
that are still in the "provisional" category awaiting
environmental clearance even though NEO claims to have been
exemplary in complying with new regulations. I believe the true
value of the NEO/Molycorp merger lies in the possibility that NEO
will be able to transfer its know-how outside of China, possibly
back into the United States itself. It is interesting that of the
472,000 manufacturing jobs created since 2010 in the United
States, 120,600 have come in the sub-sector called "fabricated
metal products." I do believe that once the merger has closed,
Molycorp will look at acquiring a major deposit outside of China
that will give it control over a full spectrum of rare earths.
Because NEO is also involved with the fabrication of zirconium
metal products, I would expect Molycorp to be interested in
Avalon, Quest or Tasman, whose heavy rare earth deposits will
also include a zirconium credit.
Allowing Chinese capital to invest in the U.S. would also
address the trillions of U.S. dollar reserve assets China holds.
We could see a migration of capital into the U.S., tapping into
American automation technology and rebuilding the domestic
manufacturing base. This evolving trend could put the American
economy back on an uptrend.
Will the price of oil influence where manufacturing facilities
The cost of moving goods across the Pacific and Atlantic oceans
is likely to stay high. However, we may see different pricing for
oil in the immediate vicinity of North America. We already see a
significant difference between Brent oil and West Texas
Intermediate oil. One must also keep in mind the fixed cost of
multiple port handling and cargo transfer charges, which become
more important as the production cost of Chinese goods destined
for export markets rises.
In competitive terms, making your goods in the U.S. in a
highly automated manner and shipping it to distribution centers
cuts both the cost and the risk of shipping them across the
ocean. Chinese companies are already looking at importing
automation technology to deal with their rising labor costs,
which strikes me as a recipe for domestic trouble. It would make
more sense to make this sort of investment in America where three
decades of manufacturing job losses have choked off labor
opposition to automation.
You mentioned Matamec and Tasman. Are those two companies ahead
of the pack when it comes to development? What hurdles do they
Molycorp and Lynas Corp. are the two companies in the lead with
high-grade LREE projects. Molycorp is marching along very nicely.
Lynas is hung up in Malaysia due to political opposition to how
the company wants to deal with the radioactive thorium waste from
processing REE concentrates. If these two companies come fully
onstream, they will glut the market with LREEs, primarily
lanthanum and cerium, as well as a fair amount of neodymium, the
key REE used in magnets. This will bring free-on-board prices
down and may even lower the current domestic spot price in
Next come companies with a mix of REEs, which I call
full-spectrum deposits. In this group,
Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX)
is the most advanced. It hopes to have a feasibility report on
its Nechalacho project done by the end of 2012 with permits in
place by the middle of 2013 to initiate construction.
The other companies with large projects are Quest Rare
Minerals, Tasman and Matamec, which have all done preliminary
economic assessments (PEAs). Quest has been working on a
prefeasibility study for more than a year and expects to have it
done in H2 of 2012; Tasman and Matamec are just starting
prefeasibility work. However, if Matamec's deal with Toyota goes
to the next step, Toyota will define feasibility, which need not
be as rigorous as an independent "bankable" feasibility study. If
Toyota is satisfied the metallurgy works and the costs are in
line with what it would want to pay for rare earth oxides in the
market, it could make a production decision for Kipawa much
sooner than would be the case for an independent company.
Matamec's PEA targets production for Q216. Do you think that is
I think it is plausible, assuming Toyota is satisfied with the
flow sheet. Toyota wants to mine the Kipawa deposit very
aggressively. Matamec is confident that over time, it will find
additional mineralization and will be able to stretch production
beyond the current 11-year forecast.
Remember, Toyota wants a 100% offtake deal. That would make
all the REES from Kipawa available to one major manufacturer. The
rest of the world will have to look to to Avalon, Quest and
It looks like Avalon is scheduled to go into production in late
2015. What about Tasman and Quest?
At best, I would expect them to break ground in mid-2016,
followed by commercial production in 2017, assuming everything
goes smoothly. Although Tasman is a year behind Quest, the
location of Norra Karr in southern Sweden close to infrastructure
will shorten the development timeline.
You mentioned that a lot of REE companies may not survive the
next five years. How many will be left when the dust settles?
In 1992 in the junior mining sector, nobody was paying attention
to diamonds. Then Lac de Gras was discovered. Within four years,
there were 200 diamond exploration companies. Twenty years later,
there are six junior companies still in the game. The REE junior
space will be similar, but in a shorter timeframe.
The period from 2015 to 2020 is critical for REE production
coming onstream, which means if a company's project is not at an
advanced stage right now and does not have a full spectrum of
REEs-heavy and light-that company is not in the game anymore. It
is too late for grassroots exploration for REEs. I regard half a
dozen companies as serious contenders. End users must make
decisions during the next 12-18 months about which projects they
will back financially in order to secure their needs in
2015-2020. This does not mean exploration juniors should give up
trying to make new rare earth discoveries. But they must accept
that their discoveries will not be considered for production
earlier than 2020. Meanwhile, they will have to endure market
uncertainty about future rare earth demand. Some observers
believe that the current shortages are causing permanent demand
destruction that will result in a supply glut in 2015-2020 that
renders the current crop of advanced projects future economic
failures. Others believe the demand destruction is temporary.
Demand will rebound and achieve new heights once it becomes clear
that non-Chinese supply is coming on stream.
I belong in the second camp. Toyota's new Prius C line is a
hybrid priced below $20,000 whose sales pitch is not its "green
status" but rather its fuel efficiency of 46-53 mpg. It is the
hottest selling small car in decades. During the next decade, the
streets will be ruled by conventional hybrids that use rare
earth-based permanent magnets and the nickel-metal-hydride
batteries that use the rare earth lanthanum.
So even if many of the rare earth projects do not make it into
the 2015-2020 production round, the current REE boom is creating
a future inventory for the world to draw on if these various
clean technologies do take off and continue to require
significant amounts of REEs.
Graphite seems to be the newest "it" mineral. What are the most
positive projects out there?
China is the dominant producer, with about 65% of the graphite
supply. But its best deposits are heading toward depletion.
Because of the boom in the price of large-flake graphite prices,
a lot of deposits, in Canada for example, are being revisited. Of
these projects, you need a large enough flake with minimal
Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX)
has resurrected the Bissett Creek deposit in Ontario.
Flinders Resources Ltd. (FDR:TSX.V)
has resurrected a project in Sweden. Northern Graphite and
Flinders are the most advanced public projects, though a number
of advanced and operating private graphite projects are being
readied to go public by IPO or reverse takeover.
The rest are grassroots projects or ones where graphite was
intersected by past drilling campaigns seeking base metal
discoveries. They were never delineated because they were
failures. Early-stage graphite projects have better potential for
attracting market attention than early-stage rare earth projects
because they are simpler to develop and the big market demand is
still down the road.
Unlike the REE sector, where each project requires a custom
chemical plant, we will probably see a boom in mergers and
acquisitions in the graphite space. Graphite projects do not
command billion-dollar valuations; their small size and the
comparatively low unit cost of graphite limit individual projects
to net present value-based valuations below $200 million (
). The long-term supply will have to come from multiple
operations, not a handful of world-class mines. Once companies
drill their targets and demonstrate deposits of 20-30 million
tons of 5-10% of the right sort of graphite, bigger companies
will buy them up.
When would Northern Graphite reach production?
Northern Graphite hopes to publish a feasibility study in Q212.
The permitting process is not complicated, so it could be in
production by the end of 2013.
Flinders was in production at one point; this is really a case
of refurbishing the mill and putting it back into production.
What are the prospects for non-Chinese companies developing
A number of smaller operations are attracting attention.
Sojitz Tungsten Resources Inc. (2768:JSX)
bought out Primary Metals' Panasqueira deposit in Portugal in
2007 and now uses it as a supply for tool-making.
Woulfe Mining (WOF:TSX.V)
acquired Sangdong, the historic Korean tungsten deposit. Woulfe
just did a deal with International Metalworking, which is
controlled by Warren Buffett's empire. International Metalworking
invested directly in the mine and will develop a processing plant
to upgrade the concentrates to ammonium paratungstate (
), which is the primary form of tungsten used by
This is another example of end-users not waiting for the
market to solve their problem. Instead, they are tracking down
the juniors and putting up the capital directly.
North American Tungsten Corporation Ltd. (NTC:TSX)
has the Cantung Project in Canada. Its production is on and off
and really needs the current tungsten price to be profitable.
I am also watching
EMC Metals Corp. (EMC:TSX)
. Its Springer deposit in Nevada is a mill that needs $30M more
to come fully onstream. Ironically, Springer was created in the
late 70s by General Electric when China jerked the tungsten price
higher. Once the Chinese realized GE could produce its own
tungsten, they let the price come down and GE mothballed the
mine. Now, EMC would like to bring it back into production as an
American tungsten source.
Is that viable?
It is if the tungsten price stays above $300/MTU. If the price
sinks below $300/MTU, the mine would start to lose money.
For the past year, the price has been parked in the range of
$400-450/million tons per unit (
) for ammonium paratungstate (
) tungsten. Over the previous 15-20 years, the high had been
$300/MTU, which is looking more like a base price these days.
That is the level above which non-Chinese projects are economic
Incidentally, in 2011 total world tungsten production was
valued at $3.7 billion (
), compared to $1B for graphite and roughly the same amount for
Is developing alternative sources to Chinese critical metal
resources a better solution to the supply problem than the World
Trade Organization's (WTO) lawsuits? Or should both go forward on
When dealing with raw materials, it is always wise to have
production coming from a variety of geographically distinct
locations. Anytime you depend on a single-source supplier, you
are setting yourself up for a malicious or accidental supply
disruption. The latter could be a catastrophe that shuts down a
key mine or a civil insurrection that makes the country incapable
of producing anything.
If the WTO were massively successful-in other words, if China
were to turn the taps back on-it would still be
counterproductive, because China retains the ability to shut down
its mines at any point. The WTO's action is more a pressure
tactic and is largely irrelevant to reducing supply
If the U.S. economy continues to improve, how will that affect
It would help, because part of the tension is due to the trade
imbalance. China knows it cannot rely on an export-based economy
forever. It needs to develop a domestic economy.
After the crash, China bit the bullet and invested more than
$600B in infrastructure development. It was counting on the U.S.
to have emerged from the recession by now. Ongoing weakness in
the U.S. economy increases the opposition to the import of
low-priced Chinese goods.
None of this would be important if the American economy-in
particular manufacturing-were growing again. Just as we need to
rebalance global sources of raw materials, we need to rebalance
manufacturing. Chinese capital investment in U.S. manufacturing
capacity expansion would go a long way toward reducing the
tension between the two countries.
John thanks for talking with us.
, a mining analyst with 25-plus years of experience, produces
Kaiser Research Online. After graduating from the University of
British Columbia in 1982, he joined Continental Carlisle
Douglas as a research assistant. Six years later, he moved to
Pacific International Securities as research director, and also
became a registered investment adviser. He moved to the U.S.
with his family in 1994.
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1) JT Long 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
The Critical Metals Report:
Matamec Explorations Inc., Tasman Metals Ltd., Quest Rare
Minerals Ltd. and Northern Graphite Corporation.
3) John Kaiser: I personally and/or my family own shares of the
following companies mentioned in this interview: Matamec
Explorations Inc., Quest Rare Minerals Ltd., Tasman Metals Ltd.,
Flinders Resources Ltd., EMC Metals Corp. I personally and/or my
family am paid by the following companies mentioned in this
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