On The Green Road: Cape Town Capers – A Field Report On The Rare Metals Mania Of 2010

by Jack Lifton on January 30, 2010 · 8 comments

in Event Reviews, Rare Earths

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It’s just about midnight, local time on Saturday, January 30, 2010, and I’m about to land in Cape Town in the Republic of South Africa. I’ve been traveling for 24 hours from my home base in Detroit. On Monday I will be speaking in Cape Town at Mining Indaba 2010, Africa’s annual mining congress and probably the world’s largest such gathering.

I was asked by the organizers of the meeting, Summit Business Media, to talk on “Pan-African Rare Metals.”  I’m not going to try and identify where in Africa the rare metals are, or even talk about who the Pan-African players are; instead, I will define for the attendees, which of all of the metals are the rare metals and which of them are the technology metals upon which the world’s green future, if there is to be one, depends. As you know, I don’t think that there is much if any distinction between the two categories any longer.

2010 is already shaping up as the year of rare metals. The interest among investors, individual and institutional, that has put and held the rare earth metals on the front pages of the mainstream media is still very high, as it should be, but now investors have become intrigued and I think more than a bit confused by the adjective “rare,” because many of them think that any rare metal is a rare earth. This genuinely ignorant opinion is even held by some junior miners who are offering themselves as “rare earth plays.” I urge you to discard any prospectus that includes as a rare earth, any metal other than those that have an atomic number of 57-71, inclusive, or which is yttrium or scandium. My personal favorites for metals most often cited as rare earth metals, but that aren’t, are tantalum, niobium, and germanium. My friend and colleague in punditry, Dr. Gareth Hatch, has recently discussed this subject in an article at the RareMetalBlog titled “Credibility 101 – Or What The Rare Earth Elements Are NOT.”

There are too many rare earth juniors now competing for financing, but those who believe that the earth’s natural resources are infinite will say smugly that the dynamic functioning of the free market to correct supply/demand imbalances is shown to work, by the fact that more than 100 junior miners have announced over 150 different rare earth mining plays in the last year or so alone! These are just the private ventures that have gone public as IPOs, or have changed the direction of their existing listed entity, to take into account rare earth “discoveries” or acquisitions.

The market theorists are wrong. Demand has not increased supply. In mining, the best that you can say about such a mushrooming of specialized ventures, is that the possibility of additional supply has increased, and if any new production comes on line before existing production declines then the supply will increase. The probability of an actual supply increase is dependent on at least a dozen major variables, none of which have to do with the share price of the junior miner being analyzed.

On April 7, 2010, in Los Angeles, California, I will be examining how the probability of commercial success of a mining venture should be evaluated. I will have a workshop that day as the first session of the Rare Metals Summit, a conference produced by Infocast, on the global supply chain for rare metals. I will work from a proposed metric for evaluating the probability of commercial success of a mining venture, which I have devised along with Dr. Hatch, who will also be present. After introducing the proposed metric, a panel of experts will then critique it.

Rare earth metals are critical technology metals, but the growing number of conferences isn’t adding to our knowledge of rare earth properties and end uses. Instead, they mostly serve as a network location for wannabe rare earth juniors to meet institutional and individual investors, who the wannabes hope will soon be parted from their money to cover office, travel, and, most of all, conference expenses. The supply of rare earths during the next decade, can only be maintained and increased by those who are already producing rare earths, or those who have produced them before and can reactivate their mines, or those who have been developing good properties for many years already.

The main obstacle to increasing the supply of rare earths outside of China will be today’s almost complete lack of rare earth refining, alloying, and fabricating capacity outside of China. This is a supply and value chain issue, and investors must be made to understand it before it can be addressed.

The endless announcements of the discovery or rediscovery of ore bodies of the rare earths are not important at the moment. Private capital and government need to define the problem of rare earth supply deficit, and to understand and address all of the issues necessary to ameliorate the problem.

As I said last year, the rare earth supply crisis of 2009 was just the tip of the iceberg for those who want to expand the benefits of technology to the whole world. Mining opportunities, the starting point, always, of our global supply chain for rare metals, are the result of the operations of nature that occurred hundreds of millions and even billions of years ago. The earth’s supply of concentrations of all metals, but most urgently the rare technology metals, that are accessible by our infrastructure and technology is finite. Time is a-wasting, and one of these days it could run out as we talk, rather than act, on the rare metal supply issue.

The Mining Indaba conference starts tomorrow – actually later today to be accurate – so please check back for more Cape Town capers as I see them out here On the Green Road.

[updated 02/01/10 to correct the name of Summit Business Media].

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1 geoff alford January 30, 2010 at 9:36 pm

Dear Jack,

As you so rightly say “The main obstacle to increasing the supply of rare earths outside of China will be today’s almost complete lack of rare earth refining, alloying, and fabricating capacity outside of China. This is a supply and value chain issue, and investors must be made to understand it before it can be addressed.”

Do you have any comments on Lynas’ (Mt Weld) decision to send raw material to Malaysia for processing.

Also, I am concerned that REE are undervalued in a strategic sense and that this generation may be selling its future without clear understanding of what are the implications.

Regards,

Geoff Alford

2 John Petersen January 31, 2010 at 2:09 am

Your laser tight focus on the difference between (1) an identified natural resource of unknown quality and quantity, and (2) a mine that can produce minerals in commercial quantities for sale into a competent supply chain is refreshing. For our entire history, North America has planned for plenty and while we all use the word shortage when we complain about higher prices, the suggestion that more than enough of something might not be available at any price is foreign to us, if not viscerally offensive.

The biggest risks to the green road are resource constraints and the foolish allocation of limited resources to feel-good solutions that are actually quite wasteful. My favorite example is using advanced batteries to replace fuel tanks, thereby wasting scarce resources in order to conserve more plentiful ones. But there are other examples that are almost as egregious.

Have a great time on the trip.

3 Cedric Lark January 31, 2010 at 7:25 am

Dear Jack,

Educating people to properly evaluate the rare earth scenario, as you continually try to do, has so far to go. In the UK the Financial Times, our most prestigious and influential broadsheet, has just devoted a full page to the subject of obscure metals and rare earths under its Analysis format, seemingly written by a journalist rather than by someone with proven prior knowledge of the subject . The result is a reasonable statement of the background to the current debate but a total misreading of what has to be done and why. The writer has failed to comprehend that mines such as Mountain Pass can’t just be re-opened so as to take up where they previously stopped, and failed to realise that there is a complex refining process, also dominated by China, before mined material is useable. Worse still, he concludes that because the US government once built up a tin stockpile, which later proved to be unnecessary and had to be unwound, there is a danger that governments may make the same mistake again in relation to minerals/rare earths needed in far smaller quantities. To miss such an opportunity to put the subject in its proper perspective is seriously concerning and probably negative in its overall impact. If only the writer (Javier Blas) had talked to you first!

4 Tek January 31, 2010 at 10:36 am

Hello Jack,
We’ll be looking forward to comments and articles from you and Gareth following this conference. A variety of extractive industries, including REEs, has recently brought South Africa to the forefont, so your conference should serve as an international platform for discussions which are sure to ensue over the coming months and years.
One line of discussion on RMB with Dr. Hatch and others has been the prediction and effects of rising REE prices. Recently prices have been making dramatic jumps, the latest being Friday’s 19.44% jump in Samarium Oxide, I recall. My lay knowledge of these markets continues to point to the need for these prices. The price increases we’re seeing may be temporary, and could fall as quickly as they rise. Dr. Gareth wrote,
“However, there are so many other variables to consider, such as the location of the mine, local infrastructure required, specific metallurgy required to extract etc. etc. In addition, as ore prices can go up, so they can go down, and thus the overall viability of a project really has to be tied to overall usage trends, I think, and not so much on short term pricing trends.”
I agree with this, and his subsequent comments on Friday’s reports about the China /US Taiwan arms deal ruckus. Nevertheless, it appears to me that the overall trend for usage in conjunction with the market uncertainties virtually mandate some significant price augmentations.
We have also heard from the Chinese that their possible reductions in production are also tied to their need to “clean up” their environmental issues that are beginning to become a burden. Furthermore, neither they, nor their processers seem to want to continue the extremetly low pricing scenario they have used to corner the market. They have cornered a tiger, and now it threatens to eat them, or at least bite them.
I’m suggesting that rising prices are necessary to get North American industrial financing interested, to not only secure our own supplies and production, but also to relieve the situation that China has put itself in. In a sense, both nations have pursued policies that have disadvantaged themselves, over a commodity set which could well have been a boon for both.
Your venue is not far from one company’s proposed mine to be reopened, and I am sure you will encounter a number of other issues in your discssions which will focus on labor and training issues, taxes, and general concern of what these extractive industries could, or should, mean to the benefit of South Africa and its citizens. I think you will likely hear some comment about export duties, not unlike the 25% export tax China now imposes, which will also increase the prices.
Good Luck, and I’ll be looking forward to the reports.

Tek

5 James Kelley January 31, 2010 at 3:44 pm

Hi, Jack.

I’ve been reading your articles on Seeking Alpha, as well as your comments on John Petersen’s articles, for some time now and greatly appreciate you breaking down for us less scientifically endowed the often arcane subject matter of the earth’s natural resources and how our handling of them affects the world markets. Thank you.

Along with the energy storage sector, one of my other chief investment interests is in the lighting industry. I’ve been able to apply a lot of what I’ve learned from John’s articles to my approach toward investing in the lighting industry because I find there to be many parallels. They are both industries that the modern world relies heavily upon; they are both industries in flux due to the world’s growing concerns about limited resources (your area of expertise); and they are both areas that offer investors great investment opportunities due in large part to the introduction of new technologies (along with, again, the greater interest in diminishing commodities).

I was hoping you might could comment on how the earth’s metals and other elements might come into play in the lighting industry now that incandescents are being banned in most of the industrialized world. I haven’t been able to locate such a discussion anywhere on the internet, though I think it would be invaluable to investors.

The primary players are LEDs; florescent lights (CFLs); the fading demand for incandescent bulbs; to a lesser extent, halogens; and a new player that threatens to shake up the race, ESLs (electron stimulated luminescence) developed by a company called Vu1. Like batteries for cars, the biggest expense for a light bulb is the power module which defines the bulbs’ technologies. Do you know anything about the materials that go into these different lighting technologies (specifically, the bulbs) and how access to these resources may play a role in the long term viability of their use? Any light you can shed on this would be greatly appreciated.

6 Edmund Brooke January 31, 2010 at 5:17 pm

Your point, ‘The main obstacle to increasing the supply of rare earths outside of China will be today’s almost complete lack of rare earth refining, alloying, and fabricating capacity outside of China. This is a supply and value chain issue, and investors must be made to understand it before it can be addressed.’

As I understand it, rare earths sent to China for processing, will come under the same umbrella as if they were products mined in China.

If so, there is no short cut there.

7 Tek January 31, 2010 at 8:23 pm

Edmund,

There have been discussions about the fact that refining and purifying facilities are indeed the crux of the issue. One of the meetings starting tomorrow, the 2nd Strategic Materials Conference, will likely be addressing this issue as well as the entire supply chain. Dr Hatch has indicated that reports from various sources indicate the newest plans and techniques will be more far more efficient and economic than anything the Chinese are doing. Whether they can be constructed more rapidly than so far predicted, remains unknown. Regardless, it will take time and a considerable amount of money to develop these facilities, and inducing money from either institutional investment or federal sources will almost certainly be necessary as Jack has often pointed out. But they must be developed or, like you said, they’ll all fall under the same Chinese umbrella, and that situation is simply not tenable from either a security or economic standpoint.
It appears that all the other countries directly impacted by this current situation are taking steps to secure their own sources and develop their own process facilities, but for some time to come, China will continue to be the primary source for all processing.
At least one company , Great Western Minerals, has indicated that they might construct a smaller pilot facility to work out the metallurgy on their various properties, in an effort to establish a supply chain for their two current existing purifying and production facilities. Molycorp has a source and a refinery, but not yet any other downstream facilities, though they are currently working on partnerships. Avalon has indicated it has developed some new techniques, so it may also be considering entering the processing field.

8 Jack Lifton February 1, 2010 at 1:13 am

Cedric,

I’m sorry to report that you are right about the shortcomings of the FT report. The reporter contacted me, and I told him when I could be available to speak, but I never heard back from him. His story’s perspective was limited. He is unfortuneately for us typical of analytical or investigative journalists who failing to have or to want to have a perspective of their own simply report that of whomever they have interviewed no matter how limited or wrong the interviewee’s perspective may be.

In order to keep my perspective as open as possible Itry not to be beholden to any one company’s point of view nor am I selling any particular metal. Perspecive is the key to objectivity

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