Earlier today I got word that the US Department of Energy (DOE) has released an update to its Critical Materials Strategy, which was first published as a report in December 2011 2010. This document has helped to shape a fair amount of the debate on rare earths in particular, and critical & strategic materials in general, in the past 12 months.

You can download a copy of the report from here.

I’m still digesting the contents of the report; I can tell you that the DOE still considers the five rare earths dysprosium, neodymium, terbium, europium and yttrium to be critical in the short and medium term; indium is judged to now be near-critical in the near term, compared to being categorized as critical in the 2010 report.

New sections include one that covers the use of rare earths in fluid cracking catalysts, and how the petrochemical refining industry reacted to escalating prices of materials in 2011.

More to follow once we’ve had a chance to read through the report more thoroughly.

Update (01/17/12): the URLs for the report have been updated, since the original links no longer work.

I’ve received a number of emails today from people wanting to hear my thoughts on a news release from Northeastern University published earlier today, pertaining to a new magnetic material that researchers at the University have apparently discovered.

According to the announcement, the “super-strong magnetic material” may “revolutionize the production of magnets found in computers, mobile phones, electric cars and wind-powered generators“. According to one of the co-authors of the study, “[s]tate-of-the-art electric motors and generators contain highly coercive magnets that are based on rare-earth elements, but we have developed a new material with similar properties without those exotic elements“.

The material is apparently based on a compound of manganese (Mn) and gallium (Ga), with Northeastern claiming that the material “can be synthesized on the nanoscale to produce a coercive field that rivals materials containing rare-earth elements, which are considerably more expensive to process and mine“.

The message boards are abuzz with this announcement, apparently with many people (i.e. retail investors in the rare-earth sector) now worried that this material is the death knell for permanent magnets based on the rare earths neodymium / praseodymium (Nd / Pr), and thus the hopes and dreams for untold riches from these commodities…

Take a deep breath, folks.  Being a materials scientist by training, I am naturally a big fan of ongoing research & development work on new engineering materials, and I will read with interest more details on this research, in a forthcoming edition of Applied Physics Letters. I am much less of a fan of the now well-worn path of hype disguised as scientific (and more importantly engineering) breakthroughs, which this announcement represents.  Here’s why:

• While Mn is cheap as chips, Ga is at present 2-3 times more expensive than Nd / Pr;

• The production of Ga is approximately 200 tpa – of which perhaps 100 tpa comes from recycling – and it is presently all spoken for. Compare this to the more than 20-25 ktpa of Nd + Pr available each year, and the prospects for multiples of this production rate in the near future, from new sources of supply.

• All new Ga is produced as a byproduct of aluminum and zinc production. The supply dynamics of these two metals alone will determine future availability of Ga – not its potential use in a permanent-magnet material.

• Given the painfully long road to commercialization for other materials that rely on similar processing routes, it is highly unlikely that synthesis “at the nanoscale” will be less expensive than mining and processing rare earths any time soon.

• Finally, while we’re at it – a “highly coercive” magnet material, is not the same thing as a “super-strong” magnetic material. The former refers to the ability of a material to resist being demagnetized; the latter to the ability of the magnet to do work.

by Brian Sylvester – The Critical Metals Report – published: Nov 22, 2011

Brian Sylvester: Gareth Hatch, co-founder of Technology Metals Research LLC, gives us the lay of the land in the rare earth sector. Many variables are shaping this developing market, and from calculating global demand to anticipating individual project costs, data makes the difference in determining viable investments. Gareth Hatch gets down to the nitty gritty in this Critical Metals exclusive, and comes up with some promising projects in the works.

The Critical Metals Report: Gareth, Greenland’s natural resource minister said that beginning in 2012, his country will take bids to develop its rare earth element (REE) deposits. What do you make of that?

Gareth Hatch: It was a little surprising, frankly. Of course it very much depends on the existing relationships in place between the private-sector companies and the government there, and how they intend to exploit those resources, but I might be a little concerned if I were one of the private companies and the government had not approached me first, before making this announcement.

TCMR: Are you talking about companies like Hudson Resources Inc. (HUD:TSX.V)?

GH: Possibly, yes. Of course we don’t know who has talked with whom. Hudson has its Sarfartoq project in the southwest. Greenland Minerals & Energy Ltd. (GGG:ASX) has its large Kvanefjeld deposit in the south, and a handful of others have projects, too. They have invested a lot of time, effort and money into their projects.

TCMR: Molycorp Inc.’s (NYSE:MCP) CEO, Mark Smith, asserts that the 30 thousand ton (kt) REE export quota issued by Chinese authorities for 2011 is equivalent to only 21 kt rare earth oxides (REOs). Considering that ferroalloys are included in the list of compounds covered by the quota, it seems like an even tighter quota than was expected.

GH: Including this new category of materials likely does reduce the equivalent REO to 21–22 kt, but in 2010, without ferroalloys, the equivalent was 22–24 kt. We have to compare the right sets of numbers. I agree that there has been a decline, even if it is not as dramatic as going from 30–21 kt. Whichever way you look at it, it is still less than the demand for rare earth oxides, although of course there are significant quantities of rare earths being exported out of China illegally.

TCMR: Electric vehicles are a key end-use for rare earths, particularly in permanent magnets. Is the recent, highly publicized combustion of Chevrolet’s Volt a threat to the sector?

GH: I don’t think so. If there were systemic safety issues that threatened the rollout of these vehicles, and subsequent market penetration, then there might be some concern about demand. But I think it’s unlikely. On the other hand, from a material usage point of view, if there really is a problem caused by Li-ion batteries, then this could be an opportunity: Prius-class hybrid vehicles use nickel-metal hydride batteries, which contain fair quantities of rare earths. Either way, I don’t see the industry being derailed.

TCMR: In Critical Rare Earths, you say that the world will break even on supply and demand for neodymium oxide by 2013, but not until 2015 for europium oxide. Meanwhile, Byron Capital says there will be 5 kt of annual oversupply of neodymium oxide by 2013, and 309 tons of extra europium oxide by 2015. Whom do investors believe?

GH: There are several differences between our numbers. Byron is predicting lower demand than the U.S. Department of Energy (DOE), whose projection numbers I used in my report. With respect to europium specifically, Byron includes some potential ionic-clay deposits outside of China in its projections. I suppose that one or two of these might exist. Byron assumes that they do and that they can be brought online faster than other sources of supply, which will generally come from hard-rock deposits; I did not factor hypothetical ionic-clay deposits into my calculations.

TCMR: Byron assumes there will be less demand for neodymium and europium because, if they are too expensive, end users find alternatives. In some cases, that has already happened.

GH: The DOE numbers were based on projections completed in the latter half of last year, and prices didn’t peak until this past summer. When the DOE updates its data, it will likely factor in current prices and potential effects on demand. If we look at downstream end uses, the price of raw materials directly affects the price of permanent magnets, for example, and motor engineers are already starting to choose designs that use fewer magnets, because the cost savings outweigh the additional manufacturing challenges of such designs. Thus, I can see current demand projections being quite different from where they were a year ago. Byron likely has a more up-to-date set of assumptions. We are waiting to see what updated figures the DOE puts out before the end of this year, and based on that, I would imagine that in the first half of next year we would revise our surplus/deficit projections accordingly.

TCMR: What numbers are rare earth companies using to project supply and demand?

GH: Most junior mining companies use the data that Dudley Kingsnorth puts out from Industrial Minerals Company of Australia (IMCOA). He typically updates his information two or three times a year. Mr. Kingsnorth recently reduced his demand projection for 2015 from about 190–170 kt of total rare earths. Other companies, most notably Lynas Corp. (PINK:LYSCF) and Molycorp, combine IMCOA’s numbers with their own research, but get roughly similar projections.

TCMR: You also said the grade and distribution of the critical REE (CREE) neodymium has the greatest influence on the rankings by grade, of CREEs present within specific mineral resources. Does that mean the higher the grade of neodymium present, the more likely a deposit is to be developed?

GH: Not necessarily. By mass, you would expect to see more neodymium than any of the other rare earths (i.e. europium, terbium, dysprosium and yttrium) simply because it is a light REE (LREE) and LREEs are more abundant; the other four are heavy REEs (HREEs) and generally occur in much lower quantities than neodymium. That said, there is increasing demand for neodymium-based permanent magnets, and thus neodymium (and praseodymium) and its usage in magnets will be a key factor in the potential development of early-stage projects. However, other factors must be considered, such as first-mover advantage and infrastructure. Some would argue that these are more important than the grade present of a particular element. You don’t have to have a top-five CREE distribution or grade to have a potentially successful project.

TCMR: In terms of the in-situ quantity of individual CREEs, what are the top-five deposits?

GH: If you look at the breakdown of in-situ tonnage of each of the five CREEs, for neodymium, the Kvanefjeld project in Greenland and the Nechalacho project at Thor Lake, owned by Avalon Rare Metals Inc. (AMEX:AVL), ranks highest. They both have well over an estimated 800 kt of neodymium within their respective mineral resources. You’ve also got the relatively new resource estimates for the Montviel project in Quebec from GéoMégA Resources Inc. (GMA:TSX.V) and the Eldor Project owned by Commerce Resources Corp. (CCE:TSX.V; D7H:Fkft; CMRZF:OTCQX). The fifth-ranked deposit by quantity of neodymium would be Strange Lake, owned by Quest Rare Minerals Ltd. (AMEX:QRM).

It’s important to bear in mind the maturity levels for each of the projects in this sector in terms of their mineral-resource estimates. Many of the early-stage exploration projects have Inferred resource estimates only, in contrast to, for example, Avalon’s Nechalacho deposit, which in addition to having a portion of its mineral resources at the Indicated level (which gives a higher degree of confidence in that part of the estimate than data at the Inferred level), is also one of the very few projects out there with an actual mineral-reserve estimate (i.e. a portion of the mineral resource has been independently determined to be economically viable). That gives you a particularly high level of confidence in the overall in-situ quantity data for a development project like that, versus those at a much earlier stage. If you look at europium, terbium and dysprosium, Nechalacho has the most of each in the ground, based on those resource estimates. You have Montviel and Eldor for europium, too. Mount Weld in Australia, owned by Lynas, has quite a bit of europium and terbium and Kvanefjeld again shows up on the list, for europium.

Other names that show up as you go down the line: the Norra Karr project from Tasman Metals Ltd. (TSM:TSX.V; TASXF:OTCPK; T61:Fkft) in Sweden would be one. Norra Karr features quite a bit of terbium and dysprosium, as does Alkane Resources Ltd.’s (ALK:ASX) Dubbo Zirconia Project in Australia. They make the top five for quantity of in-situ dysprosium and yttrium. Some of the same names show up repeatedly, reflecting the overall size and maturity of their rare earth estimates.

TCMR: What were your impressions when you recently visited Tasman Metals’ Norra Karr project? Can it supply European manufacturers with the rare earths that they need?

GH: Well, one has to remember that these materials are fungible, so you can use them anywhere, not just in one geographic region, but certainly, shipping costs do apply. What struck me about Norra Karr was that it’s maybe 400 meters from a major highway that comes southwest from Stockholm. From an infrastructure and accessibility point of view, it doesn’t get much better than that.

TCMR: Is the company planning to produce oxides or concentrate?

GH: The current plans go as far as the concentrate stage. Like a number of other rare-earth projects currently under exploration and development, Norra Karr contains zirconium silicate minerals, so Tasman will have to demonstrate that it can handle what are thought of by some, to be difficult minerals to process.

HREE concentrates are typically going to be separated via different processing circuits than the other concentrates potentially produced at such deposits; so the company may go elsewhere to get its concentrates separated; Tasman is keeping its options open. The company may not necessarily do the separation in-house.

TCMR: Isn’t that where the most value is?

GH: It is. Tasman won’t necessarily sell its concentrates; there are potential opportunities to do tolling or to maintain value and ownership in other ways. The key concept behind Innovation Metals Corp., the company that I recently co-founded with Patrick Wong, is the creation of centralized separation facilities for just this type of scenario—to provide services to companies that have concentrates, particularly HREE concentrates. The companies could toll those materials for a nominal fee, while retaining ownership of the separated materials afterward, all without having to invest extensive capital in big and expensive separation facilities of their own.

TCMR: Like a base-metal smelter.

GH: Yes; this tolling concept is a fairly well known concept in other industries. The key technical challenge of course, is whether you can take in concentrate feedstock from multiple sources. We think we can do that.

TCMR: What struck you when you visited Quest’s Strange Lake deposit in northern Quebec?

GH: Quest has a really nice deposit up there; a number of knowledgeable geologists walked us through the details on our visit. Quest also has a very professional organization and is well resourced. The challenge of course, is that Strange Lake is tucked away in a part of Canada that would require significant new infrastructure, to be able to properly service it and to get materials in and out.

When we were there, the company was just finishing up exploration and was starting the process of “handing over the reins” to the engineering people. Quest is now finishing up its prefeasibility study. The company has also recently added a director to its board with mining project experience. Quest is looking to expand and looking to put the right people in place to make this project a reality, if it can get the next stage funded.

TCMR: Quest President and CEO Peter Cashin has been talking about not only shipping concentrate, but separating the rare earths into oxides. What are your thoughts on the probability of that?

GH: These companies have to make a decision: at what point should they sell: at the concentrate stage or after producing oxides? If they can find the capital to build separation facilities and produce oxides and they have workable processes, then they will of course consider separating concentrates into oxides. Currently there aren’t many alternatives; no one processes commercially significant quantities of heavy rare earths outside of China, which is where a company like Innovation Metals comes in. If Quest doesn’t get into separating oxides, it has to figure out how to maximize its revenues from its concentrates.

TCMR: What other projects have you visited?

GH: I have visited Avalon’s Nechalacho project in the Northwest Territories, which is in the advanced stages of development. The company is currently looking to hire a number of additional production and engineering folks. I have always been impressed with the Avalon management team’s handling of technical development, especially its interactions with the First Nations people who live in that area.

TCMR: Nechalacho has some impact benefit agreements worked out with the local First Nations. However, there could be some issues as people learn about the environmental risks associated with rare earth mining. Do you think that Avalon’s exceptional relationship with First Nations will mitigate that?

GH: The plan for Nechalacho is to mine underground. Visually and physically, underground mining has less impact on the surface, though of course every project has supporting facilities above ground.

TCMR: But there will be tailings, right? And often these deposits have elements like uranium or thorium, which are radioactive. I’m not sure if Nechalacho has these, but it’s common.

GH: Certainly some groups are likely to be concerned about the effects, sure, but that’s not unique to Nechalacho. As I said, I have always been impressed with Avalon’s corporate and social responsibility initiatives; I think that the company has a genuine desire to do the right thing, and yes—it has very good relations with the local people—exemplary, in fact.

We need education on this. Environmental protection is extremely important, but some companies are actually prepared to invest in the technology and careful planning that can be used to reduce and to mitigate environmental impact. The industry as a whole needs to get that story out there. It is also important that consumers realize where the magnets in their cars and hard drives, the phosphors in their computer screens come from— ultimately from minerals that you have to get out of the ground. That is not an excuse to rape and pillage the land, and some companies in the industry are better than others in doing their bit. But this is not just a rare earth issue; it’s a mining issue in general.

TCMR: Among the projects you named, what’s a rough estimate of the average cost of development?

GH: At a minimum you’re talking in the low hundreds of millions of dollars. Larger projects with higher production rates or HREE-rich deposits tend to run from half a billion to over a billion. Projections for the Kvanefjeld project in Greenland, for example, are over $2.3 billion (B). There is quite a range for different types of projects in different stages of development. Of course, if a project has already completed a prefeasibility study, the current cost estimates should be closer to the actual final costs, than those in a scoping study or other earlier-stage estimates.

TCMR: Are any projects going to be developed for under $200 million (M)?

GH: The Tasman folks have said that Norra Karr is looking at $200M for getting to the concentrate stage. Its relatively low number for a HREE project is influenced by the presence of existing infrastructure. Smaller projects, like the Bokan-Dotson deposit in Alaska owned by Ucore Rare Metals Inc. (PINK:UURAF), and the Zeus/Kipawa project in Quebec owned by Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX ), are fairly modest from a production rate point of view. Assuming these companies can sort their metallurgy and flow sheets out, my understanding is that current estimates for Bokan-Dotson are around $175M for development, and for Zeus / Kipawa, probably closer to $300-350M.

TCMR: Much like Tasman Metals, Matamec is also close to infrastructure and located in a mining-friendly area.

GH: I had the chance to take a trip out to Matamec, and it was pretty close to power lines and logging roads and not far from paved ones. It was a short hop from North Bay, and Quebec is by all accounts a mining-friendly jurisdiction.

TCMR: What are some promising projects in Africa?

GH: One is the Steenkampskraal mine in South Africa, which I visited earlier this year, and is owned by Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX). It is a former thorium mine with historical estimates of very rich REE grades. It is currently being refurbished. Also in South Africa is Zandkopsdrift, the project owned by Frontier Rare Earths Ltd. (FRO:TSX), which has Indicated and Inferred mineral-resource estimates. It is going through the scoping study for Zandkopsdrift right now, more usually known these days as the preliminary economic assessment (PEA). Montero Mining and Exploration Ltd. (MON:TSX.V) recently published an Inferred mineral-resource estimate for its Wigu Hill project in Tanzania. The other project that some folks will be familiar with is Kangankunde, in Malawi, currently owned by Lynas. Those four have the most public-domain data available on their exploration activities, out of all of the REE exploration projects currently underway in Africa.

TCMR: Frontier and Montero both have deals with Korea Resources Corp. (KORES). Do you think that that gives them an advantage?

GH: It depends on the scope and scale of KORES’ involvement, but in terms of financing and support, there is a potential distinction in the investor’s mind between them and other companies at similar stages of development. Some see it as offering increased confidence that the company will have access to funds and other resources. On the other hand, there is potential concern from the supply chain that once such resources are developed, they won’t be available on the market, so the deals would have little direct benefit to non-Korean end users. I think it’s too early to say, but it is clear that non-private-sector actors are looking to establish long-term relationships with the owners of potential sources of supply, on behalf of end-user companies in their respective countries.

TCMR: Why do you think KORES chose those two deposits?

GH: Their mineral-resource estimates show that they have good grades (over 2%) of LREE materials, contained in minerals that should be fairly straightforward to process. Do remember that LREEs are still required for a wide range of applications; I think that this simple fact gets lost in the stampede of interest in HREE projects sometimes.

TCMR: What is the production timeline for Frontier’s and Montero’s projects?

GH: Montero has just recently defined its resource, so I would be surprised if the company was throwing around production dates yet. Frontier is estimating that its Zandkopsdrift project will enter production in about 2014. Some investors would probably stick their neck out and use such dates, but for me, the scoping study/PEA stages are perhaps a little early for decent estimates.

TCMR: Is there anything you’d like to leave our readers with?

GH: They need to realize that the investor’s point of view is very different from that of the supply chain. Investors are looking to grow their investments through dividends and increased share prices, while supply-chain folks are looking for production—they need metals and other finished goods. They really don’t care which projects succeed in the stock market, so long as some do. They are also not going to wait forever for projects to come onstream, in the face of escalating prices; they will do what they need to, whether that is engineering re-design work, or reducing the per-unit quantities of materials that they need. Therefore, investors need to keep a close eye on demand estimates. The conversation about Byron’s numbers versus mine was a good illustration of that. The supply chain ultimately dictates demand, and understanding the individual rare earths, each with their own demand profiles, will give some clues about where the supply chain is going, and thus the potential future market as a whole.

TCMR: Are you saying there isn’t room for all of these projects to be developed?

GH: TMR is tracking well over 390 different rare earth projects at present; I can’t see more than 8-10 coming onstream in the next 5-7 years. My colleague Jack Lifton recently got some heat for saying something similar recently, but it should be pretty obvious that that’s the nature of the beast. Projects already well past exploration and into the development and engineering stage, and beyond, clearly have first-mover advantage. As demand grows, other projects might become viable.

TCMR: Thank you, Gareth; it’s been a pleasure.

DISCLOSURE:
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: Quest Rare Minerals, Matamec Explorations Inc., Ucore Rare Metals Inc., Commerce Resources Corp., Tasman Metals Inc., Montero Mining and Exploration Inc. and Frontier Rare Earths Ltd.
3) Gareth Hatch: I personally and/or my family own shares of the following companies mentioned in this interview: Innovation Metals Corp. I personally and/or my family am paid by the following companies mentioned in this interview: Innovation Metals Corp.

Yesterday I listened to a conference call hosted by Molycorp Inc. (NYSE:MCP), to discuss the company’s Q3 2011 financial performance. The call covered the expected ground, going over the financials and milestones that the company achieved in this last period. No surprises there; Mark Smith, the company’s CEO, pointed out the record revenues that the company earned in this period, which of course is great news for Molycorp shareholders.

As the call proceeded, Mr. Smith started to review what he called the company’s “multi-pronged heavy rare-earth strategy” for the mid- and long term. My ears pricked up at this point, to see if he would confirm some important information about the heavy rare earths at Mountain Pass that I had heard about for the first time earlier this week, from someone else at Molycorp. Unfortunately he did not; later in this article I will share with you what I heard earlier in the week anyway, and let you come to your own conclusion.

Mr. Smith described four different parts to the Molycorp’s heavy rare-earth plan. These include recycling, increasing the efficient use of heavy rare earths in key applications, and deploying new cracking technologies at Mountain Pass, to enable both bastnaesite and monazite ores to be processed at the facility. In the past, Mr. Smith noted, only bastnaesite was processed, with the monazite present in the ore body going into the tailings basin. Mr. Smith noted that with this capability, the new cracking facility would be capable of processing mineral concentrates from other rare-earth resources as well, and in response to a question from an analyst, named this capability as the most important part of the overall plan.

Mr. Smith also mentioned the recently announced strategy from Molycorp, to look at additional properties known to Molycorp, which contain minerals with significant heavy-rare-earth element (HREE) content. While he gave no further detail on the make-up or location of these projects beyond that which has been previously provided, given his statement about the cracking facility at Mountain Pass, one could reasonably surmise that such deposits are likely to be dominated by monazite, since there is usually very little HREE content in bastnaesite minerals.

Molycorp has consistently stayed “on-message” with its statements that it will be producing 10 rare earths in “commercially significant quantities”, from the Mountain Pass ore body. This was re-iterated once again in the company’s October 2011 presentation, titled “Rare Earth Resurgence: Molycorp’s Plan to Increase Global Diversity in Rare Earths Through Technology Innovation” and available on its Web site. In this presentation the 10 “significant REEs” are listed as lanthanum (La), cerium (Ce), praseodymium (Pr), neodymium (Nd), samarium (Sm), europium (Eu), gadolinium (Gd), terbium (Tb), dysprosium (Dy), and yttrium (Y). I’ve re-ordered the list shown on the Molycorp slide, to reflect ascending atomic number. The slide includes a statement below the list which says that “Molycorp intends to produce all 10 of these rare earth elements commercially”.

Later in the slide deck, in a separate section titled “Project Phoenix Update”, is a chart which shows which rare earths and metals Molycorp plans to produce during Phases 1 & 2 of their new production capabilities. The list includes oxide equivalents of Ce, La, Nd-Pr (together known as didymium), as well as La metal and “other”. The first four items on the list total around 99% of production, if I read the chart right; looking at the REE distribution in the Mountain Pass ore body, that makes sense, since it matches the average content of those items in the ore body.

One might infer from my last two paragraphs above that, although the REEs Sm-Eu-Gd-Tb-Dy-Y are a small proportion of the Mountain Pass ore body, that they will still be processed into finished products in the near future, just like their more dominant Ce-La-Nd-Pr counterparts.

A reasonable inference, but, it turns out, an erroneous one.

I’ve wondered for a long time now, just how Molycorp intended to produce these “other” REEs in “commercially significant quantities”, given the small quantities present in the ore body. Surely it wouldn’t make sense, I thought, to build HREE separation circuits, given the significant costs associated with such a capability, for such a small quantity. I know others have wondered the same thing, how such capabilities could be accounted for in the $781 million budget for Project Phoenix.

Well finally, all appears to have become clear, following some comments that I heard this week from a Molycorp official other than Mr. Smith.  The first comment concerned the fact that the quantities of Dy and other HREEs to be produced from Mountain Pass remain to be determined, in part because there is still work to be done to quantify the distribution and quantity of Dy and the other HREEs present in the Mountain Pass ore body.

The official then mentioned that the separation of MREOs / HREOs (i.e. oxides of Sm-Eu-Gd plus the remaining HREOs) would likely form part of a “Phase 3″ for Project Phoenix, and that until then, any MREE / HREE-rich concentrates produced in the new cracking facility, would likely be stored as concentrates, for future disposition. When I asked if the official could confirm that the costs for such a Phase 3 MREE / HREE separation facility, were NOT included in the $781 million budget for Project Phoenix, he indicated that they probably weren’t. Therefore, if I understood this official correctly, it appears that Molycorp has no plans at this time, to produce separated MREOs / HREOs at Mountain Pass, during the first two phases of Project Phoenix.

Now technically, to my knowledge Molycorp has never actually explicitly said that they would produce separated MREOs / HREOs as part of the ramp up to 40,000 t of product, but the company’s assertion that it will produce such elements in “commercially significant quantities”, made in the same “breath” as reference to the others that we know are going to be produced, certainly implied otherwise, and obviously could well have given many in the market the wrong impression, if what the aforementioned official said, is accurate…

One other comment on the call yesterday caught my attention, because I believe it is also misleading. This relates to the assertion that the 30,000 t of rare-earth export quota issued by the Chinese authorities for 2011, is actually equivalent to only 21,000 t of REOs, because of the inclusion of ferroalloys on the list of compounds covered by the quotas. This was the same assertion made by Molycorp in a New York Times article at the end of July 2011.

The article stated:

“Everybody seems to be relaxed because the year-on-year number for 2011 versus 2010 is basically the same amount of materials, roughly 30,000 tons of export quotas,” Molycorp Inc. CEO Mark Smith said in an interview. “The discrepancy is created because China continues to add more products that are covered by the quotas, but we never seem to want to take that into account.”

So far, so good.

Doing an apples-to-apples comparison, Smith says, China’s export quota is really closer to around 20,000 tons. Meanwhile, he predicts the global demand to be much higher.

And here’s the problem – that was NOT an “apples-to-apples comparison”. Apples-to-apples would be directly comparing the 20-22,000 t REO equivalent in 2011 with the 22-24,000 t REO equivalent in 2010 that IMCOA and others estimated on the same basis – the difference being accounted for by the inclusion of ferroalloys this year. The same applies to previous years too, of course.

In the original NYT article, the comparison was instead made between the 30,000 t figure for 2010, and the equivalent of a figure of 21,000 t for 2011. The same (in my mind flawed) logic is contained in the summary comments on the conference call yesterday. In the absence of the fuller comparison described above, using this 21,000 t figure in this way is in my mind potentially misleading, and should be discouraged.

Anyway – that’s it for now. Check out the TMR Web site again soon for more comments and perspective on the rare-earths sector.

UPDATE #1 (11/13/11): Since posting the original piece above, we’ve received unsolicited feedback from recent visitors to the Mountain Pass project, who were apparently told that MREE/HREE-containing concentrates from Phase 1 & 2 processes, would be stockpiled for further processing at some indeterminate point in the future.

Rare Element Resources (RER) (AMEX.REE) today issued a press release that makes very good reading for the American civilian and military industrial manufacturing sector. The company now joins Ucore Rare Metals (Ucore) (TSX.V:UCU) as having a high potential for producing the critical rare earths, dysprosium (Dy), terbium (Tb), europium (Eu), and neodymium (Nd) in commercial quantities. Additionally RER could produce samarium (Sm), gadolinium (Gd), and yttrium (Y) in notable and certainly commercial quantities, thus joining Ucore in that capacity too.

So now there are two potential domestic American heavy rare-earth element (HREE) producers, which I think are viable and have high probabilities of commercial success.

The sole free-market criterion for measuring the value of a company is profitability. “Junior” mining companies are mineral-exploration ventures organized to explore for, and verify, valuable deposits of minerals that can be either developed by the junior or sold by it to a mining company for development as a profitable venture. Profitability in the junior-mining space almost always means the difference between the sale price for the deposit and the cost of getting to the next saleable point.

Thus junior miners are speculative ventures, which, in a fair and balanced world, would be rated as much by their management experience and marketing skills as by the economic value of their deposits.

Unfortunately this is not the case. The measure of success (metric) used in the junior mining world is the previous experience of the particular promoters involved in successful past promotions, especially in gold, the forever fad and, most recently, uranium.

Human nature is to create fads and measure the worth of individuals by their adherence to the particular “narrative” of the latest fad. For the last three years, the promotional aspect of the stock markets based in Vancouver, Toronto, Sydney, Perth, Frankfurt, London and New York have been suucessfully promoting a rare-earth boomlet. Various pundits and money managers have spun stories of the importance of the rare-earth elements (REEs) beyond any recognizable common-sense logic, in order to lower the bar for entry to the rare-earth junior-mining corral.

Some REEs are indeed very important for the maintenance of the mass production of the miniaturized electronic devices, which the younger members of society (and many others) seems to believe have always existed, and have always been available cheaply and abundantly.

The conversion of our technological society’s electric motors and generators to smaller and more powerful versions using rare-earth permanent magnets (REPMs) continues unabated. REPMs, particularly of the neodymium-iron-boron (Nd-Fe-B) type, dominate the market in terms of value, for permanent magnets for all uses.

Interestingly enough, of the small percentage of rare-earth-based magnets, powders and alloys imported into the USA, most is used by high-tech civilian industry, such as that for medical imaging devices. Only a smaller amount of the total is used for significant military devices. For example, just a tiny amount of the REE Sm is imported into the USA, for direct conversion here into samarium cobalt (Sm-Co) alloys for REPMs used extensively for the US military.

I doubt that more than 500 tonnes in total of magnet alloy as raw materials are imported into the USA each year for magnet fabrication, and of that amount, I seriously doubt that more than 100 tonnes is used exclusively for military production.

Over 90% of the world’s REPMs are made in Asia (60% in China and 30% in Japan). The alloys from which they are made are produced almost entirely  in China, from REEs produced domestically there.

Anyone in the USA who is planning to manufacture REPMs from domestically (USA) produced REEs is facing the situation that:

• No rare-earth ores have been mined in North America in the 21st century;

• No American company, using American-developed technology, has produced pure REEs in the USA in the 21st century (do note that I’m referring to metals here, not oxides);

• No American company has made Nd-Fe-B magnets from the individual REEs in the USA since at least 2004. Electron Energy  in Lancaster, Pennsylvania has however been making Sm-Co-based REPMs and alloys for decades. The company has, I believe, recently entered into an off-take with Great Western Minerals Group (GWMG) (TSX.V:GWG) for rare-earth metals to be produced by the latter company’s Less Common Metals subsidiary, which will eventually use feedstock for GWMG’s future mining and refining operations in South Africa;

• Only a small overall tonnage of REPMs are currently produced in the USA, from a rare-earth-metal base, and, critically;

• All of the commercially available Dy used to modify the heat cycle sensitivity of REPMs, which is critical in their largest end-use, “under the hood” applications in the OEM automotive industry, as well as in their military use, is and always has been produced in China.

Just two of the US junior-mining ventures currently in development, Ucore in Alaska and RER in Wyoming, are likely to produce Dy in significant quantities in time for the American military and industrial complexes to free themselves of Chinese monopolizing of the rare-earth space in general, and of the HREEs in particular, before the possible discontinuing of the export of Dy by China by 2015.

America needs between 5,000 and 10,000 tpa of lanthanum (La) (90%) and cerium (Ce) (10%) in order for the fluid cracking catalyst (FCC) manufacturing industry to remain based mainly in the USA. America also needs 4,000 tpa of Nd at most,  to manufacture all of the REPMs used in every application in the USA today, rather than import most of them from China and Japan – this estimate may even be too high -and America needs between 400-1,200 tpa of Dy to modify those magnets so that they can be repeatedly exposed to heating and cooling cycles (such as “under the hood”) and retain their original properties. Also, if America has 100 tpa of domestically produced Tb, it could dominate the world of non-incandescent lighting if it so desired.

Some of the above high-tonnage production is simply not possible in the USA. For critical applications, investors should look first to those who can in fact produce Dy and Tb and, of course, La and Nd.

All of the emphasis so far has been on La, Ce and Nd, but only one of those, Nd, is really a critical metal that I believe is even now in short supply.

The important critical heavy rare-earth metals for America are now Dy and Tb because they are not produced in the USA, but are necessary for the high tech devices of which America is the largest per-capita consumer.

The smart play, is clearly to support those who can produce the most critical of the rare earths, by also buying all of the La, Ce and Nd that they can produce. Rare Element Resources and Ucore Rare Metals should be the choice for end users of magnet materials and of lighting materials and of fluid cracking catalyst materials, because by buying out the production of these two companies in total, American companies can be assured of independence from Chinese decisions on allocation.

I also urge American civilian and military industry to support vertical integration in the REPM and the phosphor industries. America has all of the technology to transform rare-earth-ore conentrates, the first item in the rare-earth end-use product supply chain, into finished magnets and CFLs. Yet we have simply abandoned these industrial steps, all of them, actually, for momentary cheaper prices.

Since neither Ucore nor RER could provide individually or even together enough La and Nd for the American FCC industry, or a revived domestic magnet manufacturing industry, the smart play for end-user procurement is to form a buying group, and to enter into off-take agreements for the entire outputs of these two companies and to divide up the critical materials among themselves

Additional LA, Ce and Nd needed by American industry can be purchased from Molycorp (NYSE:MCP), which can then dedicate the balance of its enormous production of light rare earths to rich overseas markets such as Japan, Korea, India and China itself.

I urge the management of RER and Ucore to determine their actual cost of production of all of the rare-earth metals individually, and then to offer them to a procurement operation at a known level of profit and a predictable cost for the buyer.

The two mining companies should be very profitable, and the end users will continue to be able to utilize rare earths in their products. They will thus compete with Chinese industries that will continue to have easy access to raw materials the prices of which are now climbing within, China along with labor, regulatory, health, and safety costs.

It is obvious that if Molycorp’s projections are accurate, then it will be producing at lower costs than the Chinese. At that point Molycorp can sell its output to the world’s largest growing consumer of its products, China, as well as to Japan, which today sources from China exclusively.

If American self-sufficiency is important, to insure that our civilian and military manufacturing industries retain their market share and can grow, then those sectors of our economy must strike bargains with and buy from Rare Element Resources and Ucore Rare Metals to ensure their own prosperity, as well as that of you and me.

I urge industry, both civilian and military, to grow a pair, work together, and get the ball(s) rolling before America becomes an industrial backwater.

Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG). He is also a consultant to Rare Element Resources (AMEX:REE) and to Ucore Rare Metals (TSX.V:UCU).

The “horse race” theme that I devised two years ago, with the winner to be the first to produce heavy rare-earth oxides (HREOs) outside of China, is now in the final lap. The smart money is on the smart management of Great Western Minerals Group (GWMG).

GWMG has brought the entire rare-earth junior mining sector outside of China to a turning point, as evidenced by its recent press release. Today is the last day of the hype-based, rare-earth-junior-mining-stock promotional “boomlet”.

In November 2009 at the Hard Assets Conference in San Francisco, I predicted that there was a “horse race” underway to be the first company outside of China to produce HREOs commercially. I also predicted that the winner would be GWMG, because they were the only one at that time, to have taken the first steps to vertical integration, which I think is critical for REO wannabes in the REO business world, as I see and understand it, and have understood it for nearly 5 decades.

At the time I was immediately threatened with no less than three independent legal actions, due to my selections for entrants in the “horse race.” One of the presumptive litigants apparently had a board member present when I made the prediction, and he asked his CEO to sue me for not mentioning their company. The other two were mentioned in the “horse race” but not to win, place, or show. All three had in common that they did not have significant, commercial levels of HREOs in their ore bodies under development, which are critical for the production of, among other things, high-performance  rare-earth permanent magnets. I was threatened by the CEOs of the two that I said would place out of the money, with lawsuits for defamation, for “disparaging their companies.”

I myself attended the University of Detroit School of Law some 40 years ago, so I informed the men who called to threaten me, that I welcomed their actions. I said that I would of course be calling the chairman of a certain well-known investment bank as a witness, to explain why his company dropped out of both of the ventures that were threatening to sue me. “Let’s add that bank to the defamation suit as a party defendant,” I told them.

Unsurprisingly I didn’t hear further from either one.

The proximate cause of the lawsuit threats I just mentioned was that the “horse race” talk was filmed illegally by an attendee, and it went out over the Internet (the rights to the presentation were actually owned jointly by me and Summit Media, the sponsor of the Hard Assets Conferences). One of the aforementioned CEOs told me that this publication of the video was a slander to a third party, or a libel.

Those who threatened to sue me were rather unprofessional. They thought that they could frighten me into silence, or into retracting my prediction from fear, but obviously they were wrong.

The race to be the first to produce commercial quantities of REOs outside of China has entered a new phase today.

I predict again that GWMG will be the first ever junior rare-earth miner outside of China, to become a profitable producer of commercial quantities of heavy rare earth forms, beyond separated purified HREOs.

I note that GWMG’s new partner is an experienced processor, which has been providing GWMG’s Less Common Metals (LCM) subsidiary with pure rare-earth metals, for manufacturing into rare-earth permanent magnet alloys, and other compounds, for LCM’s customers. I further note that among those customers is now to be Japan’s Aichi Steel, a manufacturer of rare-earth permanent magnets so large, as to be able to take all of GWMG’s projected production of relevant rare earths from Steenkampskraal.

Therefore I predict that GWMG will be the target for discussion of a joint venture or even an acquisition, by many good juniors with HREOs in their ore bodies. They will all basically propose that the GWMG rare-earth separation plant be expanded, to accommodate their ores on a partnership basis. This is because the most added values available to rare earths that can be added by a mining company, are done by moving downstream towards the production of pure metals. Up to that point in the value chain, we are speaking of mining engineering and chemical metallurgical engineering. When one reaches the next stage, that of producing magnet alloys and magnets, one has reached the provenance of skilled specialists in materials and physics. Such skill sets are not bought; they are earned with Darwinian ruthlessness, in the real world of high-tech product development and manufacturing.

GW’s primary skill set within its core competency, has now been stated or shown to encompass:

• Mining;

• Ore concentration (mechanically);

• Extraction of metal values;

• Separation of the rare earths from each other and from the radioactive constituents of the ore body;

• The legal and safe disposition of the radioactive residues;

• The production of pure rare-earth metals from the purified chemical forms; and

• The production of specialty alloys of neodymium (Nd), samarium (Sm) and dysprosium (Dy) for use in the production of high quality rare-earth permanent magnets.

I sincerely congratulate Gary Billingsley, the Executive Chairman of GWMG and Jim Engdahl, GWMG’s CEO, for their perseverance in the face of great odds. The first time I ever heard of the “mine-to-market” strategy was when Gary Billingsley told me about it perhaps 2 – 3 years ago. I thought it was a winner then, and I think it’s a winner now. After that time though, GWMG struggled to navigate in the flood of hype and promotion, aided and abetted by pundits and self-appointed experts, who believed that bigger was better, and that since, in their alternate universe, the demand for the rare earths would grow infinitely, then rare-earth mining would be most profitable to those who could mine the most material.

In fact there is no rare-earths market at all; there are markets for some of the rare earths individually, but the cost structure for any rare earth is a function of what it costs to separate and purify it from all of the other rare earths and associated metals. This is a uniquely different problem from that of any other metal.

Few outside of China, have mastered the skills required to produce an entity such as pure Nd or pure Dy chemical compounds. Fewer still, anywhere, have the ability to make pure metals from these compounds, and only a very few have the education, experience, and time-proven skills to produce rare-earth magnet alloys. Although all of this expertise was originated in the West, it is today almost all resident in China or Japan.

If the West wishes to inure its supplies of rare earth metals and alloys independently of production from China, then it can encourage through private-equity business models, such as that of GWMG, or national governments can subsidize such models.

Now that the fog of hype and promotion is clearing a little I urge investors to take note of these facts:

• There is not now, nor will there ever be an open (unlimited) demand for rare earths. Current speculation on this demand is just that, speculation. Ignore it unless it references hard data-in particular data about Chinese and Japanese demand!

• Any planned or projected production levels must be capable of being made profitably, at whatever point in the supply and value chains the mine intends to sell its product. This means that there must be a buyer (or buyers) for all of the production at the lowest profitable selling price.

• At that point the mine must be the low-cost producer if it is operating in the free market, and if it is to be competitive in that market.

• Each step in the supply chain requires a different skill set from managers and engineers than the one preceding it. Such skill sets get rarer as one goes further along the value chain towards the end product. College degrees are nice, successful experience is necessary. In particular, there is today no private jobbing of rare-earth separation outside of China, so no one is going to be able to restart the rare-earth supply chain anywhere, until there comes into existence a rare-earth separation and refining industry with proven capability and demonstrated capacity.

• Marketing is a skill that must be present from the beginning. It is one of the first steps not the last.

• Rare-earth ore concentrates can be produced as byproducts of otherwise profitable operations, such as iron-ore and uranium mining.

• In the above cases it is possible for a miner to be a low-cost producer of rare-earth ore concentrates, and to match much larger, dedicated rare-earth mines in the costs at that point on a per kg basis.

• Rare-earth separation plants can be built with a flow-through capacity of 2,500 tpa year for under $25 million. The scale up is not linear. A 10 ktpa plant cannot automatically be assumed to cost $100 million; it may be much more due to increased process control requirements. Note well, that the largest rare-earth solvent-exchange facility ever built, is in China, and has a yearly flow-through capacity of less than 10 ktpa. Scaling up to this level and beyond has never yet been done, and the impediments are so far unknown and are thought to be challenging.

• Thus it is possible that a relatively small, light-rare-earth mine with predominantly weathered, or easily accessible ores for which the metallurgy is well-known, such as bastnaesite, could make a profit at a much lower level of production than a larger mine, even at the separated REO stage, because of its lower startup and overhead costs.

• It is also possible that a small mine with significant HREOs could be profitable, even if it can only sell the HREOs, and perhaps Nd oxide.

• The market will buy what it needs at the lowest not the highest price.

• Boutique-metals mines based on niobium, tantalum, zirconium, and titanium, for example, individually or in combination, may be able to become profitable because of the now-higher and sustained prices of any or all of certain rare earths that are critical, such as Nd, Dy, terbium, europium and yttrium.

When future bond-rating agencies rate the producing rare-earth mines from the middle of this decade forward, for the purpose of fixing the interest rate on that corporations bonds, they will look at profitability and the ability of management to sustain profitability. Those are their only metrics.

I’m sure that GWMG will be highly rated.

Once again I congratulate the management of GWMG for a job well done. I hope that GWMG is producing metals and alloys vertically within 18 months from now.

Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).

A couple of days ago, Seagate Technology PLC (NASDAQ:STX) reported its financial results for its fiscal fourth quarter and year-end 2011. Seagate is one of the world’s leading manufacturers of computer hard drives, and according to the company, in its last fiscal year it shipped over 199 million units worldwide. These shipments generated $11 billion in revenues and net income of $511 million, with a gross margin of 19.6%.

While these numbers are pretty impressive, they would have been otherwise unremarkable to the denizens of the upstream rare-earths sector, if it weren’t for some comments made by Seagate’s CEO, Stephen Luczo, on a conference call with analysts this past Wednesday. According to Barron’s, Mr. Luczo said that

The cost of many upstream materials, especially rare earth elements, which have increased significantly, these cost are expected to adversely impact gross margins by at least 200 basis points. In regards to the increase in cost of upstream materials, Seagate has historically been able to observe these cost increases and insulate our customers. However, the recent increase in the cost of rare-earth elements, combined with the pre-existing upward trend of other commodities, far exceeds our ability to offset cost reductions.

This is just about the first time that I’ve seen a prominent end user within the technology supply chain, actually publicly quantify the effects that increased rare-earth prices have had on their margins. Some commentators have claimed that rising dysprosium (Dy) prices have caused these loss of margins, but this is not so (though not a million miles off the mark).  Let’s take a look at what IS the likely root cause here.

First, let’s ask ourselves a question: just how, exactly, are rare earths used in computer hard drives? The answer is that they are found in two sub-assemblies that contain rare-earth permanent magnets (REPMs), which are critical to the functionality of the hard drive – specifically:

• The spindle motor – this is the sub-assembly that causes the platens within the hard drive, on which the data is stored, to spin at high speeds to enable access;
• The voice-coil actuator – this is another sub-assembly within the hard drive, that moves the read / write head(s) to the correct position.

Both motors and actuators operate on the principle of converting electrical energy into motion, through the manipulation of magnetic fields associated with coils and with permanent magnets. In the case of the spindle motor, the motion is rotary; with the voice-coil actuator, the motion is from side to side. Both sub-assemblies are controlled by sophisticated electronics, which coordinate all movement of sub-assemblies within the hard drive.

As I said, each sub-assembly contains REPMs – however, the magnets in each sub-assembly are distinctly different from each other. Those in the spindle motor are usually so-called polymer-bonded permanent magnets, based on an isotropic (the properties are the same in all directions) compound that principally contains neodymium, iron and boron (the so-called Nd-Fe-B composition).

Compression-molded, polymer-bonded Nd-Fe-B permanent magnets, used in spindle motors. Source: TDK.

These polymer-bonded magnets are made by mixing the Nd-Fe-B powder with a special binder, which allows the magnets to be pressed easily and precisely to a final shape, with little-to-no additional machining required. More specifically, the typical polymer-bonded magnet used in spindle motors is made by magnet manufacturers using powders produced by the Magnequench division of Neo Material Technologies Inc. (TSX:NEM). Magnequench produces a range of different powders for a variety of applications; variations on its MQP powder family, some with additions of cobalt (Co), and occasionally niobium, will be used for these magnets. For those who like to get into the technical nitty gritty, typical magnetic properties of these materials are B_r = 6.5 – 7.5 kG (650 – 740 mT); H_ci = 5 – 9 kOe (415 – 715 kAm^-1;) and BH_max = 8.5 – 11 MGOe (70 – 90 kJm^-3).

You might have noticed that I have yet to mention Dy here. Virtually every man and his dog in the rare-earths sector will tell you that all Nd-Fe-B magnets need Dy as an additive to make them work at higher temperatures. And I’m here to tell you that every man and his dog would be wrong.

Dy is not used in the aforementioned magnet materials found in hard-drive spindle-motor magnets. Instead, improvements in performance of these materials at higher temperatures, come from increasing the Curie temperature of the materials by those additions of Co, which substitutes for some of the Fe present. The Curie temperature is the point at which the magnet will lose all of its magnetism. And since we’re dispelling half-truths here, let’s dispense with another one; again, contrary to popular belief, Dy does NOT raise the Curie temperature of the magnets to which it is added (at least not to any significant degree). Instead, Dy improves the higher temperature characteristics of a magnet, by producing a compound that is more resistant to being demagnetized. A byproduct of this is an increased ability to resist the effects of increased temperature.

The downside to adding Dy to a REPM, however, is that while it increases the resistance to demagnetization, it actually decreases the magnetic output of the magnet, or the so-called residual induction of the magnet. So there is a trade-off in the use of Dy. This is why the second set of magnets in the computer hard drive, those to be found in the voice-coil actuator, generally contain no Dy either. The typical computer hard drive does not use any components that contain heavy rare earths, such as Dy.

Voice-coil actuator magnets (the curved components) - the scale is in cm. Source: TDK.

Because the voice-coil actuator sees very little temperature variation beyond the ambient room temperature, there is no need to add Dy to the permanent magnets used in this sub-assembly. Unlike the spindle motor, the voice-coil actuator uses anisotropic (has a preferred intrinsic orientation) sintered Nd-Fe-B permanent magnets, i.e. they are produced without a binder. The magnet material grade used for these magnets is selected to maximize the residual induction of the magnet, which in turn gives greater sensitivity to the overall functionality of the voice-coil actuator, i.e. to move the read/write heads to precisely the right place at the right time.  Again, for the techies, the typical magnetic properties of these sintered materials are B_r = 14.2 kG (1420 mT); H_ci = 14 kOe (1120 kAm^-1); and BH_max = 50 MGOe (400 kJm^-3).

In some material grades we may see a small amount of the Nd substituted with praseodymium (Pr). This is primarily to allow for the use of didymium (a mixture of Nd and Pr) in the magnet manufacturing process, reducing the price a little. However, anything more than 20-25% substitution and the performance of the Nd-Fe-B-based magnet will degrade – Pr can NOT be used as a full substitute for Nd, for this reason.

Since the escalating price of Dy has nothing to do with the reduction on gross margins for Seagate, and by implication other hard-disk drive manufacturers (since these hard drives don’t contain any Dy), what is causing this effect? The answer of course, lies in the rising costs of the other rare earths present – i.e. Nd, and possibly Pr. More specifically, however, the timing of Seagate’s remarks would perhaps indicate that they are procuring most of their magnets (at least the sintered magnets for the voice-coil actuators) from Chinese magnet manufacturers.

How do we know this? Take a look at the following charts, showing the spot prices of oxides of Pr and Nd over the past 13 months, for both exported and non-exported materials originating in China:

Average spot prices for praseodymium oxide over the past 13 months.Source: Technology Metals Research, metal-pages.com.

Average spot prices for neodymium oxide over the past 13 months.Source: Technology Metals Research, metal-pages.com.

The usual tales of woe concerning price increases for rare earths, center on the export prices for these materials. As we can see from these two charts, the imposition of ever-increasing export quota surcharges by the Chinese traders, caused a significant divergence of pricing between internal and export product. The less-reported detail to this, however, is that for these and other light rare earths, the price in China remained effectively flat until around January or February of 2011. At that point, the price of these materials started to increase, and soon even the Chinese REPM manufacturers began to feel the pain, as did their customers.

Such price increases would have manifested in the associated downstream products after some period of delay. If Seagate has not previously reported challenges with their margins, caused by rare-earth prices, then it is reasonable to assume that they have only recently started to feel the effects, which would strongly indicate that they are sourcing their sintered magnets from China. The cost of the magnet powders for the polymer-bonded spindle-motor magnets has also increased, but it is less clear from where Seagate buys the magnets made from these powders, since Magnequench powder is used by a variety of magnet manufacturers around the world.

In case you’re interested, even though there is pretty much no Dy in computer hard drives, here is a chart showing the recent prices for Dy oxide:

Average spot prices for dysprosium oxide over the past 13 months.Source: Technology Metals Research, metal-pages.com.

Here we can see that the effects of the quota surcharges, while still significant, have not caused as strong a decoupling of the prices associated with internal and exported product. Interestingly, for part of June, the internal price in China appeared to be higher than that of exported materials, though that has since changed.

Finally, it’s an interesting exercise to do a rough calculation to see the quantity of rare earths used in computer hard drives each year. If we focus on the sintered magnets alone, given the fact that such magnets typically weigh around 6 g, and there are two magnets per assembly, and given the fact that Seagate shipped 199 million units in their last fiscal year, that amounts to 199,000,000 x 6 x 2 = approximately 2,388 t of sintered Nd-Fe-B magnets last year. Those magnets would contain approximately 715 t of Nd metal, equivalent to the amount of Nd in 845 t of Nd₂O₃. Recent data-storage industry figures estimate Seagate’s share of the market to be somewhere around 28%, so a rough estimate of total rare-earth usage in sintered magnets for the hard-disk drive industry, would be over 3,000 t of  Nd₂O₃ equivalent, each year. That would account for as much as 12-15% of the currently annual global supply of  Nd₂O₃, a pretty significant fraction – and that’s not even taking into account the Nd content of the spindle motors!

The hard-disk drive industry is therefore an important end-use market for rare-earth materials, and the components which contain them. Both ends of the overall supply chain would do well to keep a closer eye on each other…

Update ( 07/23/11):

As part of a response to a comment below, here is the price chart for samarium oxide:

Average spot prices for samarium oxide over the past 13 months.Source: Technology Metals Research, metal-pages.com.

I note that the Sunday New York Times last weekend, had an article in its business section with the title, “Japan’s Economic Gloom Runs Deeper This Time.” Of particular interest to those of us following the rare-earth-supply issue is the following paragraph in the article (emphasis is mine):

“…since the collapse of the bubble economy of the 1980s …the Nikkei 225 stock index is still three-quarters off its peak. And the economy has been hit by blow after blow, from sagging property prices to mounting debts and intensifying competition from China.”

Nowhere is China’s current stranglehold on the supply of rare earths more deeply felt than in Japan, and nowhere else, I repeat, nowhere else, is obtaining an alternate supply more important than in Japan.

The reason for this is that Japan’s rare-earth permanent-magnet (REPM) industry is considered to be the best on earth. Its largest REPM maker, Hitachi Metals, in fact still holds more active patents in the technology than anyone else in the world.

Japan is very protective of its REPM industry. If a Japanese manufacturer uses a REPM made by Hitachi Metals or which is covered by a Hitachi Metals patent license, then that magnet must have been made in Japan, under the terms of the patent licenses that Hitachi Metals manages.

The Chinese REPM industry, now the world’s largest, and twice the size of Japan’s by volume, considers this system to be a form of Japanese protectionism, and it wants to break into the Japanese market, the world’s largest after China, itself.

I believe that this competition more than any other external factor, is what is driving the current Chinese agenda on limiting the exportation of the rare earths as raw materials. Chinese magnet makers would like to make the magnets for Japanese end users to incorporate into permanent-magnet motors and permanent-magnet generators as well as into speaker magnets. Japanese manufacturers know that if this were to happen, then it would only be a matter of time before China pressured Japanese manufacturers to move all of their subcomponent operations to China in the same manner as they did to American manufacturers and continue to do.

Japan cannot afford the luxury of lower domestic costs disguising the transfer of an industry, its jobs, and its future developments in technology to another country. The Japanese economy simply cannot afford to take such a gamble, and the Japanese look at what happened to the American rare-earth supply chain as an object lesson in sheer short-sighted greed.

I find it intriguing that American investors who know or should know the above facts, even so still believe that a company like Hitachi Metals which is way ahead of any American company in terms of the manufacturing technology for REPMs, would agree to compete with itself, by letting a raw-material supplier become a new Hitachi Metals licensee. I think it is as unlikely that Hitachi would do this with an American supplier, as that it would with a Chinese raw-material supplier. I do believe that Hitachi Metals would like to re-enter the US REPM market by manufacturing in the USA, with American raw materials. Structured carefully as to ownership and control, this would give Hitachi Metals a definite competitive advantage when dealing with the US Defense Department, which now has prohibitions against buying certain types of rare-earth-based magnets, which are made in Japan (and elsewhere).

Japan is a particularly resource-poor country. Its military ruling elite dominated the populace for centuries by, among other things, controlling the production and use of metals such as iron and copper (as bronze). A razor-sharp samurai sword wielded by a man in iron chain mail and bronze armor, was the most effective means of controlling the Japanese peasants until Western “traders” brought firearms, and large quantities of both fabricated and fabricated metals to Japan in the mid-nineteenth century.

Japan’s attempt to create a self-sufficient natural-resource supply by force of arms, failed precisely because its principal enemy had an unlimited (from the Japanese perspective) supply of natural resources, especially of energy and metals. Japan will never again give up any advantage based on natural resources.

Japan won’t give up nuclear-generated electricity for dependence on imported coal and oil, nor will it give up independent technological prowess. Japanese private industry is actively seeking independence in natural resources, and this is evidenced by the activity not only of Hitachi Metals and Toyota, among many others, but also of the giant Japanese trading companies seeking to buy and operate sources of iron, copper, and the rare earths, as well as indium, gallium, and many other technology metals.

The rare earths are a critical component of Japan’s competitive stature in the world of technology.

China isn’t the only game on the planet, and, by the way, South Korea has begun its own quest for technology metals too.

I guess that there’s no need now to worry about the future supply of the rare-earth metals. Earlier today the Wall Street Journal reported, in an article entitled “Rare Earths Grow Less Rare“, that Goldman Sachs says that although supplies will remain tight in 2011 and 2012 and prices will remain high, we can be assured (by Goldman Sachs analysts) that the rare earth supply shortage situation will end in 2013 as new supplies come on stream from outside of China.

I sincerely wonder if this is even good nonsense.

With the exception of the fluid cracking catalyst manufacturing industry, which uses chemical compounds of the rare earths produced early in the rare-earth refining process, the overwhelming majority of end users of the rare earths use and require high-purity metals and alloys of the rare earths for their products.

The only three companies today producing significant quantities outside of China, of high-purity metals or alloys, or both, are:

1. Molycorp, via the recently acquired operations in Estonia (from Silmet) and Arizona (from Santoku America);
2. Great Western Mineral Group, via its wholly owned UK subsidiary, Less Common Metals, Ltd.; and
3. Japan’s Santoku, based in Kobe, Japan.

The feed stock for all of these operations, other than the Estonian one, comes from China. The high-purity-metals and -alloys capacity of all three combined, is less than 5% of the world’s total demand.

A number of junior-mining ventures have announced that they will be producing “rare earths” in 2011-15. The mining analysts do not seem to know or recognize that the production of rare earths is not a well-defined phrase. Mines produce ore concentrates. Most so-called “metal” mines then chemically extract the metal values, as chemical compounds, from the mechanically produced ore concentrates. Different metal miners then traditionally do their own thing, so to speak, with the chemical solutions containing the extracted metals.

Copper miners, for example, typically refine their ore concentrates to the metallic state. The quality (grade) of the copper metal produced is determined by the extent and capability of the processing undertaken by the miner. Even those miners of copper who produce high-purity copper “cathodes” by electro-refining are not normally the producers of the final use products, such as wire rod, sheet, and plate. These are produced, for example in the case of electrical conducting wire, by a specialized industry (for example, a ‘wire’ industry), which itself sells only fabricated copper forms to manufacturers who make such devices as electric motors and generators and wiring harnesses for motor vehicles. I can’t think of a vertically integrated manufacturer,for example, of electric motors, i.e. one that mines copper, refines and purifies it, fabricates industrial forms, and builds electric motors. If a reader knows of one please let me know.

The reason that there are no vertically integrated manufacturers of electric motors is the complexity, the engineering and management skills, and the capital costs that would be required. Traditionally end users of fabricated forms of metals want multiple suppliers to keep the costs down and also want the security of assured supply to be at a maximum.

Analogously, lead miners may smelt the ores they mine and concentrate and produce ingots but they do not make battery alloys, battery plates, or batteries.

Iron miners do not generally produce steel, and even the ones who do that, such as China’s immense Bao Steel, do not produce automobiles, dishwashers, or household tools.

The first rare-earth products that will be produced outside of China will be mechanically concentrated ores, the lowest value sellable product in the supply chain. It will then be necessary, in all cases, to chemically extract the mixed rare earths from the ore concentrates, and by chemical processing isolate the mixed rare earths from any other metals that may be present in the ore. The result will be isolated (but still mixed together) rare earths, either in chemical solution or as chemical solids, typically carbonates, These forms at this early stage of refining are also a selling point in the value chain.

The next step, historically first done commercially in the USA by Molycorp, is to treat the mixed rare earths in chemical form in a solvent exchange “separation plant.” This is an expensive facility to build, as it can easily involve hundreds of repetitive steps taking up to a month to finish a single batch of material, and although batches can be run almost continuously the size of the plant must reflect the optimum large batch size for producing enough volume to make a profit, by selling the resulting commercially pure separated chemical compounds.

Molycorp has said that it plans to ultimately produce up to 50,000 tpa of rare earths, which means, if this means rare-earth metals, its separation plant must be delivering 140 tpd of product and must be processing 4,175 t at any one time. If this is to be done in one separation plant, it will be the largest one in the world. I don’t think that Molycorp will be unable to do this; I only question the amount of time that it will take to construct, prove out, and operate a plant of this size. By the way, if Molycorp is speaking of the production of metals, then the throughput of chemicals will be some 250 tpd with a load of 7,500 t just of product in the system. That’s 15 million pounds of material being processed at any one time.

In any case, whatever the output of the Molycorp separation plant, it will need to be of very high quality (purity) in order to minimize the cost and time required for the next step, the ultra-purification of the rare earths by the method of ion-exchange. The separated, commercially pure rare-earth compounds that are the output of the separation plant are sellable at a higher price than that to be realized either from the ore concentrate or from the sale of the mixed chemically extracted rare earth compounds that were fed into the separation plant.The ultra-purified forms from the ion exchange process are of much higher value yet.

Note that at any step in the purification process, all of the rare earths have to be separated from each other in order to purify them. This means that economically, the very small amounts of the higher atomic-numbered “heavy” rare earths in any deposit, cannot be produced economically, unless as many of the other rare earths present with the “heavies”can also be sold, not just recovered.

This is the dilemma of the deposits of the rare earths that show relatively high values for the heavy rare earths. They cannot possibly be profitably produced just by producing and selling only the heavy rare earths, because their processing will be too expensive to compete for markets for their simultaneously produced light rare earths when up against lower-cost light-rare-earth-producing behemoths such as Molycorp, Lynas, or Bao.

A straightforward solution would be for an end user to buy the critical heavy rare earths, and all of its needs for the light rare earths, from the heavy-rare-earth producer. This might necessitate paying more than the market price for the light rare earths, but it would secure the supply of the critical heavy rare earths, for example, for under the hood applications of rare-earth permanent magnets by an automaker.

In any case, before we make the most important rare-earth product, magnets, we must first be able to make pure metals and pure alloys. The processes for these require tight controls of temperature and pressure and expensive equipment operated by skilled workers.

Rare-earth metals can be produced by reducing a chemical form such as a chloride with high-purity magnesium, calcium, or lithium. They can also be prepared by electrochemical reduction of molten ionic salts of the rare earths. The analyst community writes about these processes as if they are easy to do because others, such as the Chinese, have done them and are doing them, so how hard can it be? I have actually heard it said that if the Chinese can do it then anyone can do it. This is racist sentiment, and is simply not true.

The production of high-purity metals is as much an art as it is science and engineering. It requires diligent attention to operational details and mis-steps that can contaminate, and thus ruin the end product. Continuity of engineering, a practice denigrated by American capitalists, is key to any such project. One learns how to purify metals by doing it, not by reading manuals.

However, that having been said, let’s say that it is now several years from now and we have non-Chinese production of high-purity rare-earth metals. These are very sellable at significant margins over production cost, and, in my opinion, represent the best first selling point in the supply chain for a vertically integrated (from the mine onwards) rare-earth producer. It will not be easy for a miner to become a producer of high-purity rare-earth metals. This challenge will separate the men from the boys immediately.

To make rare-earth permanent magnets, which are the most profitable selling point that any rare-earth vertically integrated producer could hope to reach, requires the skills to make high-purity fabricated forms of neodymium-iron-boron and samarium-cobalt alloys. The knowledge of how to add various other enabling elements such as dysprosium will also be required. Such knowledge today requires access to proprietary information about complex physical and chemical processes that have been developed through man years of research and development and trial and error. These skills CANNOT be learned from a manual or by reading patents.

I am reluctant to believe that junior miners with only, at best, limited knowledge of the chemistry and metallurgy of the rare earths, will even be able to produce separated commercially pure chemical compounds. Yet I am told by analysts that all one has to do is find a rare-earth deposit and the end-use product, the rare-earth permanent magnet, can not only be produced but can be produced easily by the junior miner. Oh, and all of these skills, I am further informed, will be learned and mastered in just a couple of years.

What I think is that of the more than 220 listed rare-earth junior miners outside of China that my colleague Gareth is tracking as of April 2011, there will now be a cull. If rare-earth pricing requires that one must produce high-purity metals to provide a minimum return on the needed investment to develop a mine, then perhaps a dozen of these ventures will survive even until 2013. If it is necessary to produce alloys from which rare-earth permanent magnets can be formed, in order for a rare-earth miner to be profitable, then only at most half a dozen will survive and then only if they can produce the alloys in-house.

There is a caveat. A miner producing rare earths as a byproduct of a profitable operation, such as iron-ore mining or gold mining can, of course, be a profitable rare-earth-ore-concentrate seller, because his overheads are covered by the primary production. I know of one such venture, not yet listed, currently in operation, and I am looking at another two later this summer. I call these boutique metals operations, and, of course, they do not need to produce rare earths to be profitable.

Note that even the above caveat has a caveat. A rare-earth refiner who needs feedstock, such as we are hearing is the case with some of the Chinese rare-earth separation plants, needs a steady high-volume flow to “load”his plant. He cannot be changing the feed chemistry in his process arbitrarily at any time. The minimum requirement will be to load the plant for a process cycle. This means that the refiner needs to only source from fairly large operations, and this minimum size is going to be an issue of long-term capital outlays with a low probability of a competitive return on the investment. For those who will not do their own separation and further refining,  it is a horse race to see which if any of the ore concentrators/chemical extractors can be first to a very limited market.

I do not think that the world demand for high-purity rare-earth metals and alloys, for use outside of China, will be met by non-Chinese production by 2013, because until there is a high rate of production of commercially pure separated rare-earth chemical compounds, there will simply not be enough feedstock to gamble on continuous large-scale production of these high-tech materials, by those who have never before done such high volume processing of such complex materials.

The problem is thus the potential of an export reduction or total cutoff of rare earths contained in finished goods, which is not the case at the moment. This potential Chinese action is a critical issue for the Japanese rare-earth permanent-magnet and battery-alloy manufacturing industry. It is not an issue in the USA or Europe, where neither product type is produced, or has been produced, except in very limited volumes,in more than a decade. It will only be an issue in the USA and Europe, if China cuts off the export of rare earths contained in finished goods such as batteries, lasers, and rare-earth permanent magnets.

I think that Goldman Sach’s analysts are wrong, because they do not understand manufacturing, chemical, or mining engineering, and they do not understand the makeup of the “rare-earths” market; most of all, because they underestimate the power and growing technical and financial skills of China, Inc.

The survivors of the coming rare-earth junior-mining cull will be the earliest to production of commercially useful forms of the rare earths, the high-purity chemicals, metals, and alloys. There will be no large-scale sustained production of any of these forms outside of China, the metals and alloys in particular, for several years yet.

As for the production of high volumes of rare-earth permanent magnets with tightly held specifications, by those not now producing them, I think it will be more than 5 years before we see a new competitor to China and Japan in this category, if ever…

Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).

A couple of weeks ago the US Department of Energy (DOE) announced a Request for Information (RFI) on rare-earth metals and other materials used in the energy sector. This follows on from a similar solicitation made last year, that culminated in the publication of the DOE’s Critical Materials Strategy in December 2010.

The DOE says that this second RFI will be used to update the Critical Materials Strategy, and will also cover areas not considered in the original document, such as fluid-cracking catalyst materials for the petroleum refining industry.

The DOE is soliciting information in eight categories:

1. Critical Material Content
2. Supply Chain and Market Projections
3. Financing and Purchasing Transactions
4. Research, Education and Training
5. Energy Technology Transitions and Emerging Technologies
6. Recycling Opportunities
7. Mine and Processing Plant Permitting
8. Additional Information

The deadline for RFI submissions is May 24, 2011 and submissions from the public are welcomed. You can get more information from the DOE Web site.