'We Still Believe' in Rare Earth Metals: Terence van
Source: Brian Sylvester of
The Critical Metals Report
Terence van der Hout, a research analyst with The
Gold&Discovery Fund in the Netherlands and editor of
Strategy Metals Bulletin,
says takeovers are his sweet spot. While gold juniors are very
quick to get from a discovery to a takeover, most rare earth
explorers are still early-stage ventures. For these companies, as
van der Hout tells
The Critical Metals Report
in this exclusive interview, he looks for opportunities in
emerging technologies that could tip the scales.
The Critical Metals Report:
The Gold&Discovery Fund had impressive gains of about 70% in
2009 and 2010, but was down 35% in 2011. Do you believe you fully
understand what happened to the junior miner explorers in 2011?
Did you learn enough to protect investors from another year of
Terence van der Hout:
We were overweight in rare earths, which made us a lot richer in
2009 and 2010, but hurt us a lot more in 2011. Despite crashes,
however, we still have a compound annual growth rate of 17% over
the four years that we've been in existence.
We are an investment fund and we don't take short positions by
principle. We take long equity positions in companies that we
believe will excel. But that also means that we have to accept
crashes as they occur. We still believe in rare earths. The
downturn in 2011 provided us with a buying opportunity.
About 80% of The Gold&Discovery Fund is in precious metals,
while the other 20% is spread out among other commodities, like
uranium, natural gas and rare earth elements (
). Do the gold plays act as "secure investments" in the
portfolio, while the rare earth and other commodity plays act as
the growth component?
Not necessarily, because a junior that makes a discovery is going
to add value whether it's gold, uranium or rare earth-focused.
Gold discoveries should be as much a part of our growth component
as the REE or uranium juniors. Of course, the rare earths are
subject to more cyclical market conditions than the strong
fundamentals behind the gold markets.
Rare earths are going through what is essentially the first
sector down cycle because not many companies were in the space
five years ago.
That's true. Rare earths are a very different market. Takeovers
are our sweet spot and gold juniors very quickly get from
discovery to takeover if they are good enough. The market
realizes that potential.
In the rare earths, it's somewhat of a different story.
Companies often take more than five years to get to production.
Success has a lot more work to do in the metallurgy. A lot more
expertise is required. Takeovers, even for those rare earths that
are in a fairly advanced stage now, are not imminent. Joint
ventures with downstream end users may finance junior companies
developing the deposits.
A number of companies in the rare earth sector should do well
this year because they are at a stage where they will be able to
show the world what their economics are like-and I think the
world is hungry for more information about their true value.
What are some items that could act as that trigger?
Rare earths are subject to industrial production and general
economic growth in emerging markets. China, India and Brazil need
to continue growing. We believe that this will happen despite
rising inflation in China and despite the west cautioning for a
hard landing. Obviously, China has a virtual monopoly on the rare
earth markets, but it will eventually need imported rare earths
to keep the development path from going astray.
This may also be complemented by a return to normal industrial
activity in Japan, which is one of the prime clients for heavy
rare earths in the automotive and high-tech sectors. I expect
that to gradually take place this year.
Will China need more than it can produce on its own?
There are different types of rare earths. China has plenty of the
light rare earths, which are the more common and less expensive.
However, it has few heavy rare earths. China does foresee
shortages and has plans to begin importing more heavies.
Rare earths are still not particularly well understood by
investors. What myths about them would you like to dispel?
There are misconceptions about the realities of supply and demand
surrounding rare earths. Rare earths will continue to be
indispensable in many high-tech applications. There will continue
to be shortages, despite the current global economic downturn.
That's a very important fundamental to realize. There has been a
lot of talk about recycling and alternative sources for rare
earths, which sends the message that there is no shortage of
supply. A large number of applications in rare earths can't be
substituted without a performance loss.
There are some recycling initiatives. However, the recycling
initiatives that I've seen, for example, take magnets from the
hard drives of computers that are often three years old and built
to old specifications. Those magnets come with the performance of
that time and the technology has moved on. That magnet might be
obsolete. The magnet would probably need upgrading by adding
dysprosium. If you're going to do that, you might need to re-melt
and make a new alloy to produce a new magnet. That's not
efficient or cheap. It might be cheaper in the end to just mine
the stuff from the ground.
A lot of news stories talk about alternative sources of supply
in Afghanistan, on the seabed, and even on the moon. These
stories are more in the mythical sphere.
Rare earths also have incredible innovation potential. Their
unique magnetic strength, connectivity, thermal capacity and
resistivity to corrosion make them a prime focus for innovation.
The potential of a technology discovery using these rare metals
is about as large as it gets. We just don't know what the future
demand is going to be. The chances of a new use for rare earths
are quite real because of their unique characteristics.
Is the key to adoption establishing a consistent supply at a
relatively reasonable price?
Exactly. Rare earths may run up to a few thousand dollars per
kilogram, but if only a few grams are needed to make an alloy,
it's only marginally more expensive from an end-product
perspective. Scandium, for example, is alloyed with aluminum to
get a very strong component that may replace composites for uses
in the airline industry. Currently, scandium is about a 10-20 ton
market. It's completely insignificant. But should the airline
industry take off, it could explode. That is something that other
rare metals have the potential for as well, which is quite
What are some of the REE positions that you're bullish about?
Recently, the term "critical rare earth oxides" has been
introduced, which includes a number of the heavy rare earths, as
well as neodymium. That aptly describes the type of company that
we look for.
Quest Rare Minerals Ltd. (QRM:TSX;
has a huge deposit in Québec that is endowed with a lot of heavy
rare earths. It may have infrastructure issues and large capital
expenditures (capex) to move on, but it has a lot of these
critical rare earth oxides. It could be capable of providing
several countries with a lasting supply of rare earths if it can
show that its metallurgy is good and that it can extract the rare
earths through a cost-effective method.
Quest is putting together a preliminary economic assessment (PEA)
on its Strange Lake deposit. Is a joint-venture partner likely
Joint-venture partners are cropping up on many of the more
advanced projects. On the other hand, because Quest is so large,
it may be one of the very few companies that a major could be
interested in. That would be fairly unprecedented, however.
What sort of catalyst do you think the PEA could be for the stock
It could be a major catalyst if Quest can show in the
pre-feasibility study (
), which is due in June, a reliable asset value or net present
). It could be $2 billion or a lot more-it's hard to say. It may
surprise a lot of people. Let's put it that way.
Is Quest an undervalued play relative to its peers right now? It
certainly took a beating throughout the latter half of last
Quest will probably need to supply about $1 billion in capex to
get going. That may be a bit steep at this stage in comparison to
other companies. Investors may be looking to see the other side
of the equation. What are the revenues going to look like moving
forward? What does the NPV look like? Once those unknowns are
answered, I would expect it to be more fairly valued.
What are some other REE plays you're into?
Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A;
holds a deposit that is smaller than Quest's, but has a higher
distribution of heavy rare earths in Europe. It's conveniently
close to the Molycorp Inc. (MCP:NYSE) processing facility in
Estonia. You never know what kind of interest Molycorp may have
in the future. It's convenient nonetheless.
It also lowers the capex because it would only be shipping
concentrate versus building a separation plant to refine all
these different elements.
Exactly. That will save a lot of money. Particularly since the
distribution of heavy rare earths is so good.
What sort of advantage is it for Tasman to have the only
significant REE deposit in Europe?
There is a concentration of high-tech and auto industries in
Germany and Holland, which use rare earths in various magnets and
catalytic converters. They have begun to organize into an
interest group that is looking to secure its supply of rare
earths. The Tasman deposit in Sweden represents a very obvious
source for these industry actors, in my view. Rare earths are
getting pretty politicized. Clearly, geography is becoming a very
important aspect. This industry group might just help Tasman
develop the deposit.
The Swedish government obviously recognizes its importance and
has already declared it to be a strategic national asset. Edward
Otto, an analyst with Cormark Securities in Canada, has a buy
rating with a $6 target on Tasman. Is that reasonable?
Tasman just released metallurgy results that I view as part of
its future flow sheet. The results are encouraging, but the
company has a long way to go. It hasn't come to the last phase of
delivering a heavy rare earth concentrate, which would be a
The average exceeded 90% in some cases.
Yes, but that was recoveries into a concentrate that included
zirconium, and lights and heavies into one concentrate-not
separated concentrates. That last step was not in the last
release. I think $6 is a nice target, but we'll have to see in
the PFS, which is due shortly, whether it can come up with the
separation at reasonable costs.
Can the Estonia plant separate all the heavy rare earths?
Not at this time. It initially processed almost exclusively light
rare earths. It would need to do a lot of work before it could do
anything with Tasman's ore.
A recovery in the junior mining sector seems to be underway.
Leading the way for The Gold&Discovery Fund is
Rare Element Resources Ltd. (RES:TSX;
. It was up more than 123% in January after it indicated that it
nearly doubled its REE deposit. Where does Rare Element go from
The exciting aspect of Rare Element is that it is potentially a
very low-cost producer in the U.S. where infrastructure is not
going to be an issue. Molycorp and Lynas Corporation Ltd. (
) have plans to expand their production to higher levels of light
rare earths. Rare Element is a light rare earth project as well,
which at first glance would create some doubt as to its
viability. However, Rare Element could be such a low-cost
producer that it would be interesting for either Molycorp or
Lynas, or as a standalone project.
Are there other trends that are appealing to you?
There was a recent development in the tantalum sphere, which
implies that the U.S. Dodd-Frank Act mandates users of metals to
prove they are conflict-free. A lot of tantalum is produced from
the Democratic Republic of the Congo, which is obviously a
conflict area. This act will put a lot of pressure on the supply
side for tantalum. In addition to having a sizeable rare earth
Commerce Resources Corp. (CCE:TSX.V; D7H:FSE;
has a tantalum-niobium deposit in Canada. Its PEA shows positive
What are some of the things that tantalum is used for?
Tantalum is used in consumer electronics, such as cell phones and
computers. It's useful in products that are being designed to be
small. Miniaturization is an innovative frontier that will
require a lot more tantalum.
Most of the news about Commerce is about its Eldor rare earth
project in northern Québec. Do you think it might spin out the
tantalum deposit into another company?
It would be a logical step to find a suitor for the tantalum
deposit because the company is now straddling two different
markets. Tantalum and rare earths have different expertise and
Does your fund have exposure to platinum group metals (PGMs)?
PGMs hadn't appealed to us like the true precious metals, gold
and silver, but platinum recently became very interesting. In
South Africa, where about 75% of the world's platinum production
originates, the African National Congress (ANC) recently
announced a plan to allow the South African people to benefit
more from the proceeds of the mining industry. This plan was more
positive than we expected in a mining-sense, but it included
nationalizing the platinum industry. If South Africans see
platinum as a strategic sector, it could impact price, supply or
both moving forward. It could make any non-South African platinum
producer very interesting from an investment perspective.
We've looked briefly at
Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK;
, which is based in the Yukon. It holds a fairly large deposit of
decent-grade platinum along with palladium and rhodium. It has a
PEA coming out soon. Should the ANC continue with its intentions
of nationalizing platinum, we would be very interested in
companies like Prophecy moving forward.
Do you plan on getting in before the PEA is published by Prophecy
or is the ANC issue not going to come fast enough for that?
We are going to monitor the situation. It could be days or months
before it becomes clear. If the ANC nationalization precedes the
PEA, we'll consider an investment before the PEA. If it doesn't,
we will have to wait.
In addition to the PGMs, Prophecy looks to have about 2 billion
pounds (Blb) of nickel and another 2Blb of copper. This could
give the company a significant NPV. Is the base metal component
critical to the play or are you mostly interested in the
We are interested in the platinum. We have investments in copper
and other base metal sectors already. However, the copper is a
very nice asset, which would bring down the production and cash
You mentioned you like the true precious metals, gold and silver.
What names there stand out to you?
Wildcat Silver Corp. (WS:TSX.V)
has a silver discovery in the U.S., which also contains large
amounts of manganese. Manganese is typically added to steel for
strength, but there have also been some recent innovations in the
lithium-ion battery area that has opened up the commodity to
Looking at silver, we like
Soltoro Ltd. (SOL:TSX.V)
, which has a silver discovery in Mexico. It has been very quick
to expand its resources on its El Rayo property and moved up
quickly to 78 million ounces of silver. The management is
committed to doubling this during the course of the year. It has
not drilled to any depth, which is interesting. It's gone to
about 200m depth and moved on along strike. It's found a lot of
different structures of mineralization. It may be able to find a
We're also involved with
IAMGOLD Corp. (IMG:TSX; IAG:NYSE)
, which has a large gold asset, but is also a niobium
Gold Canyon Resources Inc. (GCU:TSX.V)
, situated near the Red Lake District, has had some very nice
holes of high-grade gold along parallel structures moving up to
about a kilometer in length or more. The total resource now
defined is 3.67 million gold ounces, and proves we made a right
judgment in investing in them.
Newstrike Capital Inc. (NES:TSX.V)
has the Ana Paula gold deposit in Mexico. This is a pretty
similar high-grade, long intercept discovery that we like very
much. Its resource estimate is due in the first half of this
year. That was one of the companies that we jumped in immediately
after its discovery in January 2011 because it was very
significant. It's on strike with
Goldcorp Inc. (G:TSX; GG:NYSE)
and Torex Gold, two world-class, gold-silver deposits. There's a
very good chance that it will come up with the goods as well.
These are the kind of discovery plays that we invest in and
that we follow very closely.
Thank you for your insights.
Terence van der Hout
is a senior researcher at the Netherlands-based
Gold&Discovery Fund. The fund focuses on investing in
world-class natural resources discoveries in precious metals,
base metals and specialty metals, as well as undervalued start-up
producers. Terence also distributes
Strategy Metals Bulletin,
a free, bi-weekly commentary on developments in the world of
critical metals. To subscribe, please send an email to:
. Terence has a background in finance and holds a Master's of
Administration in political science from the University of
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1) Brian Sylvester conducted this interview. I personally and/or
my family own shares of the following companies mentioned in this
2) The following companies mentioned in the interview are
The Critical Metals Report:
Prophecy Platinum Corp., Quest Rare Minerals Ltd., Rare Element
Resources Ltd., Tasman Metals Ltd., Goldcorp Inc., Newstrike
Capital Inc., Gold Canyon Resources Inc. and Commerce Resources
3) Terence van der Hout: I personally and/or my family own shares
of the following companies mentioned in this interview: Quest
Rare Minerals Ltd. and Commerce Resources Corp. The
Gold&Discovery Fund has positions in all the companies
mentioned except for Prophecy Platinum, Molycorp, Lynas and Torex
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