Jason Burack and Kevin Kerr: Six REE Metals to Watch
Source: Brian Sylvester of The Critical Metals Report (8/16/11)
Rare earth elements have made possible improvements in everything from smart phones and plasma televisions to clean energy technology. In this exclusive interview with The Critical Metals Report, Jason Burack, independent investor and cofounder of Wall St. for Main St., and Kevin Kerr, commodities trader and president of Kerr Trading, share the names of the rare earth element companies to watch as the market grows.
The Critical Metals Report: The rare earth element ( REE ) space is the most complicated space in the mining and metals sector. Mining these elements is complex, often involving permitting and infrastructure issues. Once mined, separating REEs to high manufacturer purity levels is even more complex. Then selling the isolated REEs often involves highly specialized marketing. Why should an investor place money in the REE space?
Jason Burack: REEs have an amazing amount of innovation upside right now. Because of the innovations coming down the pipeline, the market has the potential to exhibit an annual double-digit growth rate, which offers far more upside than most other commodity sectors. It's an amazing growth opportunity for investors because the REEs are going to play an important role in making high-end technologies efficient and also in supporting new innovations. In new high-end technologies, REEs are the secret sauce.
Kevin Kerr: These are the metals of the future. There are applications with these metals that we can't even conceive of yet. It's very exciting to be involved in these elements. I think part of the benefit of REE mines is that they are limited. There are few players out there that really have all those elements and are innovating. The ones that do have all the pieces in place offer good opportunities for investors. There's always risk with anything new, but the risk/reward balance is very good in this sector.
TCMR: Can you comment on some of the recent innovations?
KK: For years, REEs were just wasting away; they were not really considered a good investment until engineers realized they were vital to some of the things we use every day-everything from specialized glass to green energy technologies and special batteries to super magnets. The list goes on, including developing technologies like water purification systems, which I believe Molycorp Minerals ( MCP ) is exploring. Prices have exploded.
JB: The primary use for REEs for a long time was the europium in color TV sets. Molycorp, which was supplying much of this demand, had decades' worth of used tailings sitting around doing nothing. The Chinese saw the potential of this market and spent a lot of time and money to build out uses for the other REEs mined alongside the europium.
TCMR: The United States and Mexico have filed a Memorandum of Understanding with the World Trade Organization over China's protectionism regarding REEs. China controls about 95% of the world's REE supply today. The Chinese government increased tariffs and reduced exports, while cracking down on illegal miners. This will further limit the supply and tighten their grip on prices. Do you think the U.S. and Mexico are going to get anywhere by filing complaints against China? Or are we just going to have to wait for another supply of REEs to come to market?
JB: I would prefer a free market solution to government intervention, but REEs are not a free market right now. China has a monopoly on supply and processing, but the government seems to be willing to reduce control. What China cares most about is the high-end value chain products because they saw what oil processing and related innovations did for the U.S. economy. China cares most about the higher value-added product jobs. That is why they are limiting export. They want the manufacturers to come to them.
As a result, you are going to see these other deposits, like Mountain Pass, coming back online. You are going to see Lynas Corporation's (ASX:LYC) Mount Weld and Great Western Minerals Group Ltd. (TSX.V:GWG; OTCQX:GWMGF) come online. The supply problems, at least in the light rare earth elements (LREEs), will start to resolve themselves over the next couple years. The problem with the heavy rare earth elements (HREEs) is in supply. China is going to guard their higher-end jobs because they want that value-added industry.
KK: China certainly has a monopoly on HREEs. The question is how long will it take to build the next HREE processing facility outside of China? The answer is a long time, mainly because of environmental and regional problems. Also, who's going to partner up to build this facility? The red tape, whether it's in the EU or the U.S. or Mexico, is far more extensive than it is in China. They are years and years ahead of us in the game of producing HREEs.
TCMR: Kevin, you've spent 23 years as a commodity trader. What does that experience tell you about the REE space? And what's the path for investors to make money here?
KK: This is one of the opportunities that a trader will see only once in a lifetime. A lot of people say, "This is just a bubble." I don't agree. I've seen many contracts and future markets come and go, but with REEs, it's different. These are vital commodities that we are all using every day. We don't want to lose our ultra-light cell phones and go back to the Gordon Gekko-style phones with the big battery. These things are only going to be more in demand, especially as the world population grows.
Investors can see it as a monumental opportunity. There's certainly risk, and that's important to stress. Anytime you're trading in something new, you have to look out for those risks. But ultimately these markets are going to be some of the leaders in the 21st century.
JB: Because of the innovation upside as more people switch to newer smart phones and to alternative energy technologies, as the military becomes more efficient with less manpower and more unmanned vehicles, REEs play an important role. And the REEs market can grow a lot per year as the pie gets bigger with new innovations.
TCMR: You suggest in your Dragon Metals Report that three metals reign supreme among REEs. What are those and what are their primary uses?
JB: Well, if I was rewriting the Dragon Metals Report today I would actually expand the three to six: three lights and three heavies. The number-one LREE is neodymium, which is used in the neodymium-iron-boron magnet, a permanent magnet technology. Neodymium-iron-boron magnet technology has allowed for miniaturization of a lot of high-end electronics. It has literally made everything smaller, thinner and lighter. Consumers just love the fact that their iPad is so thin now. People talk about the operating systems and the processing speeds and all their applications, and they love them. They wouldn't have any of this without the neodymium-iron-boron magnets.
The next two are lanthanum and cerium. Lanthanum will have a humongous industrial demand increase in petroleum refining. Oil and REEs are linked in this aspect. You will see a humongous increase as lanthanum is used very heavily in the refining process to crack heavy sour crude oil. The other one is cerium, which is used in car catalytic converters. Also, you're going to see Molycorp bring on this XSORBX water filter, which combines cerium and nanotechnology. It's the only filter that's capable of removing pathogens and pharmaceuticals that the modern municipal water filtration systems cannot remove.
The heavies tend to be more prevalent on the Department of Energy's Critical Metals Strategy list, so they have even better supply/demand fundamentals than the lights. Dysprosium is used in a trace amount in the neodymium-iron-boron magnet, but the magnet wouldn't be as good as it is without the dysprosium in it. Dysprosium is not very common in terms of the percentage amounts in most REE deposits. It's the most critical on the entire Department of Energy's Critical Metals Strategy list because it's rare and it's very important to clean energy. The other couple of heavies that people should learn the names of are terbium and europium. Terbium is used in compact fluorescent light bulbs as well as in smart phones. Europium is going into smart phones too.
TCMR: In many cases REE production in China has caused vast environmental degradation. Some Chinese farmers can't safely plant crops near the mine sites, and drinking water in these areas can sometimes be deadly. Nonetheless, Molycorp plans to mine 20,000 tons per year of REEs in California, which is not considered a "mine friendly" state. What makes you think Mountain Pass will be permitted?
JB: Molycorp is using innovative technologies in their processing facilities now. Yes, California does have environmental concerns, but California wants to transition to clean energy and the state has been subsidizing that. Molycorp has to demonstrate that it can operate in an environmentally responsible way and that they can do it at scale. The company has the capital and the know-how to be able to do it. It's already a previously mined ore body with decades of data, so that's an advantage. The infrastructure is there.
There is new technology to process the REEs safely and do all the refining. It's going to cost a little bit more money up front, but Molycorp management is saying their production costs are going to be even lower than China's costs. It'll be an impressive feat if Molycorp management actually delivers on these promises.
TCMR: It's possible that these companies spending hundreds of millions of dollars to bring their mines into production and build the facilities to properly separate those metals from one another could be jeopardized if China opens the tap, floods the market with heavies. How are companies going to deal with that?
JB: We don't have a free REE market. Governments will probably buy REEs for a secure supply to protect REE miners bringing production online. In fact, Japan, the U.S. and the EU have all recommended that their governments start stockpiling a safe and secure REE supply to protect themselves from the Chinese monopolizing the industry.
KK: This is a real concern. China could dump pretty much anything on the market, and they do once in a while. They're shrewd traders. No one can say for sure what they will do, but the stockpiling that's gone on will have some effect as well.
TCMR: In early August, we witnessed a massive selloff of REE names. On August 8, names like Quest Rare Minerals Ltd. (TSX.V:QRM; NYSE.A:QRM) and Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) fell at more than 10% and 13% respectively. Are these so cheap now that it's time to fill your boots?
JB: If I was building a model REE portfolio and I had to concentrate the majority of my money into three companies, they would be Neo Material Technologies ( NEM ) , Molycorp and Great Western Minerals. Then I would sprinkle some of the other top juniors like Quest, Avalon, Tasman Metals Ltd. (TSX.V:TSM; OTCPK:TASXF; Fkft:T61) , Stans Energy Corp. (TSX.V:HRE) or Ucore Rare Metals Inc. (TSX.V:UCU; OTCQX:UURAF) . Lynas and Rare Element Resources Ltd. (TSX:RES; NYSE.A:REE) , which might have some more heavies in the deposit, are wait and sees.
Investors really need to be discriminatory with their capital. If they are going to put a model REEs portfolio together, I think the heavy concentration should be in Neo Material Technologies, which is already profitable. They don't have to worry about the prices of the supply, and they make a value-added product so their profit margins are safer. Molycorp has the funding in place already, and it already knows its ore body. I think Molycorp and Great Western Minerals Group Ltd. are going to end up consolidating the sector with some of these other juniors.
TCMR: You've said "for this industry to flourish over the longer term it will have to consolidate." What are consolidators going to be looking for in companies that are just below them on the food chain?
KK: The race is on to figure out who's going to team up and create the next HREE processing facility outside of China. Everyone is looking for who has the cash, who has the supplies and the infrastructure. We've already seen some consolidation in the last nine months, and we're going to see a lot more.
JB: If I was looking to consolidate the industry, I'd stick with my vertical integration strategy, focus on those making the higher value-added products. There aren't a lot of people around that have the technical know-how to do it. And there aren't a lot of these facilities in the world. Only a handful of facilities exist outside of China. I think one of them in France just sold for a big amount of money. Great Western Minerals has a couple of them and so does Neo Materials Technologies.
So, if I was looking to acquire and consolidate the space, I think Molycorp is going to end up being the control stock here, like PotashCorp (TSX:POT; NYSE:POT) has become in the fertilizer industry. I think Molycorp will go after Ucore for some of the heavy deposits and then the processing facilities like Stans Energy. Then maybe they'll go after some other processing companies or do a joint venture with Neo Material Technologies further up the value chain.
TCMR: Ucore was just given "priority permitting assistance" from the U.S. Department of Agriculture. What does that mean for the stock?
JB: Ucore is going to be a big winner. I project the supply crisis in LREEs will be solved by the 2014-2015 timeframe depending on what true demand turns out to be. Then only the heavies will be in true supply deficit/crisis mode. For a company like Molycorp, which is going to be a lower cost producer, that's going to be fine. Some of these other juniors that are planning on bringing production online from 2015 to 2017, primarily with light and very little heavies, are going to see a lot of trouble. Ucore has an infrastructure advantage, so they can be online and producing probably before 2015, probably the end of 2013 if everything goes according to plan.
TCMR: What about Ucore's Bokan Mountain in terms of its HREE versus LREE content? Is this the kind of play that might suit a Molycorp?
JB: Yes, Bokan has higher heavies than lights compared to some of the other deposits. The infrastructure advantage is so good that the capital expenditure (capex) to get Bokan Mountain back into production is going to be minimal compared to some of these other mining projects.
TCMR: Molycorp, Lynas and Great Western are projected to be the first REE miners to reach production. But what are some companies that you think could surprise you and our readers?
JB: Commerce Resources Corp. (TSX.V:CCE; Fkft:D7H; OTCQX:CMRZF) and Medallion Resources Ltd. (TSX.V:MDL; OTCQX:MLLOF) could surprise along with Greenland Minerals & Energy Ltd. ( GGG ) .
Greenland is a developing country. Most of the country's revenue is coming from fishing and it is just starting to develop natural resource plays. If it is done environmentally responsibly, I think there will be less red tape in Greenland. And the deposit in Greenland is absolutely massive. The question is about the infrastructure because it's a developing country.
In general, though, I wouldn't risk putting a lot of capital into the plays below the cuff, the top two tiers of companies I suggested in my model REE portfolio, because the supply issues are going to solve themselves, especially in the lights, by 2014 or 2015.
TCMR: Kevin, what are you hearing about Stans Energy in Estonia and about the feasibility study on the Kutessay II project in the fourth quarter?
KK: It depends on who you talk to and when you talk to them about Stans. The concerns are legitimate about how much control Russia has over Stans and what they want, what the facility's condition is, et cetera. I'm holding my judgment until I see it for myself. They are certainly one to be watched.
JB: The positives include a tremendous infrastructure advantage. Stans has the processing facility there; it just needs to be renovated, so the capex is not going to be absolutely massive. The company can probably keep the capex below a couple hundred million bucks. That's a big advantage. And, it also has a technical advantage because the people who used to work at the facility still live around there. The company also has an innovation deal with a renowned Russian laboratory that specializes in REEs to separate them and innovate with them.
On the negative side, the company's total grade of the ore body is low. That means the margin for error is very low on the mining side. Stans will have to make up for it on the processing side. And then you have the geopolitical risk on top of that. Investors are going to have to weigh these risks and rewards to determine if they are comfortable with Stans.
TCMR: Are you following any other companies that you think investors should be interested in?
JB: I think the most undervalued one right now is Great Western Minerals. It just announced a breakthrough deal with an already established and successful Chinese REE processor to team up to build another REE processing facility in South Africa closer to its Steenkampskraal Mine. Great Western Minerals is the only non-Chinese future REE miner to announce such a deal. It adds a lot of credibility to the company.
TCMR: How can people get your Dragon Metals Report and find out more about you both?
KK: We actually have our own website, dragonmetalsreport.com, where people can pick up the report and watch a video interview. They'll be able to see samples of the report before they purchase it.
TCMR: Do you have some parting thoughts on the REE space before we let you go?
KK: I really believe this is a once-in-a-lifetime trader's opportunity. I've never seen a market that has so much innovation potential that we can't even conceive of yet. I probably won't see a market like it again in my lifetime.
TCMR: Thank you for your insights.
Kevin Kerr has had over two decades of intensive industry and trading experience as a floor trader and broker as well as an OTC derivatives broker in New York and London. He travels the globe in search of resource opportunities and is the author of A Maniac Commodity Trader's Guide to Making a Fortune: A Not-So Crazy Road Map to Riches, which was published by John Wiley and Sons. Kevin has appeared on Cavuto on Fox, Kudlow & Co. on CNBC, The Daily Show on the Comedy Channel, Fox Business News, NBC, ABC, CNN, and many more. He has acted as an analyst and trading advisor for publications at prestigious publishers like Weiss Research, Dow Jones Newswire, and Agora Financial. Kevin's website, www.kerrtrade.com , offers visitors his blog and video blog, media page and events schedule, and political and economic commentary.
Jason Burack is an investor, entrepreneur, financial historian, Austrian School economist, and contrarian. Jason co-founded the startup financial education company Wall St for Main St, LLC, to try to help the people of Main Street by teaching them the knowledge, skills, research methods, and investing expertise of Wall Street. You can also find Jason's work at his blog website at www.jasonburack.com
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1) Brian Sylvester of The Critical 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 Critical Metals Report: Commerce Resources Corp., Medallion Resources Ltd., Tasman Metals Ltd., Stans Energy Corp., Ucore Rare Metals Inc., Rare Element Resources Ltd., Quest Rare Minerals Ltd.
3) Jason Burack: I personally and/or my family own shares of the following companies mentioned in this interview: Molycorp, Great Western Minerals, Ucore. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) Kevin Kerr: 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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