The television commentator and former Jesuit, John McLaughlin, used to make me laugh when he would tell a panelist of an opposing political view: “Once again you’ve stumbled upon the truth, even though you don’t know how you got there.”

The New York Times recently reported the facts of a story entitled, “China to Invest Billions in Electric and Hybrid Cars,” but failed to stumble upon the truth. So let me do that for the Times and for your benefit, dear readers:

China, as part of its national plan, a goal centrally set by those in overall charge of its economy, announced yesterday that its motor vehicle industry will be required to build one million electric and hybrid motor vehicles in the next few years. I believe that this means that the industry will be required to reach a production rate of one million electrifed motor vehicles, the size of passenger cars, per year.

This is part of an overall plan to marshal and deploy China’s natural resources and its resources of intellectual property for the benefit of its own people, first. How much more logical can it get than that as a reason to conserve precious natural resources such as the rare earths?

The New York Times points out in the above story:

“The announcement, analysts say, is another example of how China seeks to marshal resources and tackle industries and new markets. The plan also underlines what China describes as its growing commitment to combating pollution and reducing carbon emissions.”

When I was in Beijing in the first week of August, three weeks ago, one of the other (I was a speaker at the plenary session) speakers at the Chinese Society for Rare Earths 6th Annual Rare Earths’ Summit, stated that a goal of the next two five-year plans, to be completed in 2020, was to have 330 GW of wind-turbine-generated electricity installed by that time. The speaker pointed out that this would take 59,000 metric tonnes of neodymium, calculated as 28% of the rare earth permanent magnet alloy, neodymium-iron-boron, since each 1.5 MW wind turbine generator will require one tonne of rare earth permanent magnet alloy.

The same speaker who was from the Chinese rare earth permanent magnet manufacturing industry didn’t mention how much of the heavy rare earths would be required for the project. I will estimate that at most it would be one thousand tons of terbium and three thousand tons of dysprosium.

In any case the total requirements for these new (not replacement) uses for neodymium, would be the total production for three years at the most recently achieved high production rate of neodymium, and as much as five years of terbium and two to three years of dysprosium.

If the neodymium demand is to be met, and this means that China, AS THE SPEAKER SAID, decides to use only rare earth permanent magnets for its wind turbine electric generator program, then it would require that three years’ production of the contained neodymium, at the rate it was mined in China in 2008, among all the rare earths mines there, be reserved for Chinese domestic magnet and wind equipment manufacturers and be targeted for the Chinese domestic market!

I think that it is crystal clear, that China is not reducing the production of rare earths on a long term basis and is not reducing their export on a short term basis. It is in fact pausing to:

• physically clean up the rare earth mining sector;
• eliminate illegal mining and smuggling of this precious green resource;
• consolidate the rare earth mining industry under the largest state-owned base metal producers of iron, copper, and aluminum, to prepare to ramp up the Chinese domestic production of rare earths both to meet and to guarantee the success of its long-term green strategy.

This is called long term strategic planning for those in Washington and on Wall Street who don’t understand why the Chinese are ‘depriving us’ of this vital resource. This process is also called ‘conservation of domestic resources’, by the way.

As to electric and hybrid cars, they require neodymium, dysprosium, and terbium for the magnets in the rare earth permanent magnet electric motors – both that drive them and that power their accessories. Some or all may also use lanthanum in nickel metal hydride batteries, as all hybrids made today currently do. A. In any case, whether or not the Chinese electrified cars use NiMH batteries, they are being designed to use rare earth permanent magnet electric motors. A million such vehicles will probably require just one million kg (1,000 metric tonnes) a year. Oh, did I mention that they will need also 10-20 tonnes of terbium and up to 50 tonnes of dysprosium. All of this new demand will be added demand not replacement demand, by the way.

I have no doubt that China will remain the world’s largest producer of the rare earths indefinitely. In the near term, perhaps over the next 5-10 years, China will need to import the ‘light’ rare earths lanthanum and neodymium, to make up any shortfalls created by its proposed quantum leap in demand in the face of the temporary reduction of production, for environmental and reorganization reasons. If the non-Chinese light rare earth miners get their acts together in time so that they can produce light rare earths at a lower cost than their Chinese competitors are able to do, then both Molycorp and Lynas have a good chance of success even in the long term.

The real issue for the future of rare earth utilization and therefore of mining, is the continued growth of the use and need for the heavy rare earths, terbium and dysprosium.

These ‘heavy rare earths’ are believed by the Chinese to be in short supply domestically. China today is the world’s only producer of heavy rare earths, mostly from southern Chinese deposits known as ‘ionic clays’, although significant quantities are also produced from the Bayanobo region (even though they report in Bayanobo only in small quantities) due to the overall massive amounts of rare earths mined there. Nonetheless, China believes that its own domestic supply of the heavy rare earths has between 5 and 30 years remaining at present levels of use.

This means that the real supply opportunity in the non-Chinese rare earth mining sector, is for those deposits that have above average proportions of heavy rare earths, to be brought into production as quickly as possible.

It is a horse race among those non-Chinese juniors with commercially (i.e. economically) recoverable heavy rare earths.

They are:

Canada

1. Great Western Minerals Group
2. Avalon Rare Metals
3. Quest Rare Minerals

(Note: some of my colleagues have urged me to add other Canadian juniors to this list, such as Matamec Exploration, but I know little about that company and will reserve my judgement on them for a future time, when I have had time to study Matamec Exploration and to visit its site.)

USA

1. Ucore Rare Metals
2. Rare Element Resources (a light rare earth deposit but with significant europium only)

Republic of South Africa

1. Rareco (in conjunction with Great Western Minerals Group)
2. Frontier Rare Earths (private at this time)

The success or failure of any of the above, will depend on the quality of their deposits, the efficiency of their extractive metallurgy, the ability of the global rare earth refining industry to service them, and the growth of the Chinese, Japanese, Korean, and Indian domestic markets.

Disclosure: I own shares in Great Western Minerals Group, and I am a paid consultant in business development to Ucore Rare Metals and to Frontier Rare Earths.

I am in Beijing, where I am attending and have spoken at the 2010 China Rare Earth Summit, part of the 6th International Conference on Rare Earth Development and Application, run by the Chinese Society of Rare Earths. I was honored to be one of only three American guest speakers. The other two were America’s most well known academic experts on rare earths, Professor Karl Gschneidner of the Ames Laboratory at Iowa State University and Professor William J. Evans of the University of California – Irvine.

The conference has 300 attendees who are a comprehensive group, representing the academic, business, and governmental sectors of the Chinese rare earth research (academic and business), development, mining, refining, and end use manufacturing industries.

I was asked to speak about ‘The American Perspective of the Rare Earth Supply Issue.’ My presentation and commentary will be posted shortly here on the Technology Metals Research web site for review.

Although most of the nearly 100 speakers in the 6 technical tracks, and most of the 222 papers listed on the program were highly technical, interspersed among them were some that were purely descriptive of mines, processes, and important sectors dependent on the rare earth metals such as permanent magnets, batteries, phosphors, wind energy generation, and other clean-tech/green-tech applications.

My colleagues Dudley Kingsnorth of IMCOA and Judith Chegwidden of Roskill Information Services, were also both invited guest speakers and Ms. Chegwidden was the moderator of the introductory session at which I spoke. Their respective presentations might be available online in the near future.

I am here in China to find out what the Chinese rare earth industry is doing and where it is going. I have a scientific background, and was once a researcher myself. I also worked with rare earths in product development for phosphors and batteries, so I was interested in and able to understand most, if not all, of many of the technical papers I heard. THe biggest surprises though, came from the survey papers on clean-tech/green-tech applications of the rare earths.

It is obvious from the vantage of the rare earths’ sector in China, that China is simply racing ahead of the rest of the world in volume production, as well as development of state-of-the-art clean tech and green tech products.

For example, it was pointed out that China built and installed 13 gigawatts of wind turbine electricity generating capacity last year, using rare earth permanent magnets for efficiency and low maintenance. The astounding prediction was made that by 2020, China will install 330 gigawatts more wind power capacity, with each 1.5 megawatt generator require one metric ton of neodymium-iron-boron magnet alloys, which, if they contains 34 weight % neodymium, would mean that the Chinese wind power industry would need a further 70,000 t of neodymium, approximately 3 1/2 times the 2008 production of that metal – all as new added material – between now and 2018-19.

I plan to write much more on this topic during the next few weeks, but I believe that the trend is clear. China will be the driver for, and the home of, the most demand in the world for the rare earth metals from now on.

There wasn’t much talk about Molycorp in China, other than to hope that if it gets into production, Chinese customers will have an opportunity to buy its products. The only non-Chinese rare earth mining venture present was Great Western Minerals Group. Its chairman gave a talk on his ‘mine to market’ strategy, and he told me he was there both because he was invited, and in order to continue negotiations for a strategic alliance with a Chinese refiner, on an African project the goal of which is to supply Great Western’s UK alloy plant, Less Common Metals, with feedstock metals for its operations from GW’s South African venture at Steenkampskraal.

Japanese companies and academics were well represented and there were even French and Russian miners and refiners. I was disappointed that there were so few Americans, and as for the American media I saw only public radio’s Marketplace (who interviewed me) and the New York Times’ Asia correspondent.

If the rare earth supply issue is so important to America’s security, why then do so few Americans and almost no American media come to the world’s premier rare earth informational event? It is most likely because China is the center of the world rare earth industry, in all of its aspects.

The Chinese and Japanese magnet industries both need heavy rare earths. They may even need light, imported, non-Chinese, rare earths sometime before 2015, but I think it is clear that after 2015 they will both need heavy rare earths from outside of China. Japan may actually need both types of rare earths from the outside by 2015, if Chinese demand should exceed or meet its domestic supply capability by then, which is probable, so that China no longer is willing to export rare earths.

If all roads lead to Rome then certainly the home of all metals is now China.

Disclosure: I have a LONG position in Great Western Minerals Group stock.

The immediate consequences of total import reliance
DETROIT, Nov 8, 2009 — U.S. Senator Charles (Chuck) Schumer (D-NY) is up in arms about the fact that a wind power “farm” to be erected in Texas, would be made up of components entirely constructed in China, and would create in the USA only the temporary jobs needed to erect them and a few permanent jobs to maintain them – while providing work for more than a thousand Chinese. He is questioning why such a project should receive public money. I am amazed to find myself in total agreement with the Senator. The projects should not receive any public money, but this will entail, for the present, that they not be built. If the USA is to embark “On The Green Road” it must first establish a balance between environmental activism and economic necessity.

The real question to be addressed is why are the components being made in China? Can we do anything to cause them to be made in the USA?

The companies that mine rare earth metals in China are not public nor are they audited by independent third parties. There is no way of telling if they make a profit or what their cost structures are. Therefore, the prices for the rare earth metals are set and the price “discovery mechanisms” for the rare earths, are simply the prices for the metals “set” by the producers or the trading companies that export the metals from China. Is this why we cannot get rare earth mines financed in the West? How can we determine the long term value of their products? What is the value to be added for strategic necessity or criticality? Is there a green value to be added to the rare earths?

The hot air over the Texas wind farm is instructive if the larger issues are examined.

For any and all wind turbine generators designed to use rare earth based permanent magnets, with a handful of minor exceptions it is today necessary to have the magnets made in the People’s Republic of China (PRC). The growth of modern manufacturing technology and engineering in China, just since 1989, along with the – for the time being – lower cost of skilled labor in the PRC, also makes it economically beneficial to produce all of the components of permanent magnet type wind turbine generators in the PRC! One of Europe’s major producers of electric generators, Siemens, has, in fact, already begun construction of a world class wind turbine generator manufacturing facility in Inner Mongolia for the express purpose of serving the Chinese domestic market. America’s General Electric has been subcontracting the construction of any and all wind energy components, using rare earth based permanent magnets, to its partner companies in the PRC for most of the twenty-first century.

These are the current consequences of the non-production of any but trivial amounts of the rare earths outside of China, combined with the economic thinking of America’s business and government elites; the former want to maximize profit at any cost, the latter want revenue from the taxes on those profits. The economic future of the United States as an industrial manufacturing economy producing goods for both the domestic and export economies (one of only two ways to create wealth – the other being the production of natural resources to supply the industrial economy) does not seem to be of any interest to America’s business or government leaders.

In the 12th century Mongol military geniuses Kublai and Genghis Khan conquered China. When the new Mongol emperor turned his attention to the large island nation near China’s coast known then, dimly, to Europeans as Cipango, and now as Japan, he ordered an invasion fleet be constructed to ferry his Mongol warriors to an easy conquest. But, as the Japanese tell the story, the gods intervened and a “divine wind,” a kamikaze in the Japanese language was sent by the gods to blow the Mongol ships back to China, and it scattered and destroyed the Khan’s ships and drowned his soldiers. Japan was saved from the Mongols.

Ironically, miracles based on wind are turning out quite differently today. Now the wind from Inner Mongolia, today a Chinese province that produces essentially all of the world’s rare earths, is blowing strongly towards and across Japan – so strongly. in fact. that it has had noticeable effects as far away as the American “Lone Star” state, Texas.

Please take a moment to read the story in the Sunday, November 8, 2009 edition of the New York Times, which is entitled “Schumer Seeks to Block Stimulus Funds for Chinese Backed Texas Wind Farm.” Senator Schumer, a multiply elected senior (and therefore powerful) member of the United States Senate, has noticed that going green in America, through the erection of wind turbines to generate electricity sustainably without the need to burn fossil fuels, can and may well in fact create jobs – green jobs, I guess, but the majority of those jobs are to be created in the People’s Republic of China. Ironically, most of the jobs created or “maintained” in China by the proposed wind farm in Texas, will be in Mongolia – talk about a divine wind.

In my article “The Rare Earth Crisis of 2009 – Part 1” [available for free download to subscribers - just fill out the form in the top right of this page] as if the rare earth story was unique. In thinking further about this topic, I have come to realize that the looming “crisis” is only symbolized by and, due to some perhaps precipitous Chinese “trial balloon” announcements, actualized by the current situation in which the Chinese have a monopoly on the “production” of rare earths. This is in addition to their refining, the production of metals and their alloys, and the production of end-use products critically dependent on the properties of the rare earths. Keep in mind that the Chinese today monopolize the entire supply chain for the rare earth metals. Note well that this means that they also control the benefits accruing from the value chain, for the production of rare earth based technologies. Controlling the value chain means that the added money value of the mining, refining, fabricating, and assembly of components and devices based on the rare earths, translates into jobs for Chinese workers, directly in China. This is called “wealth creation”, for those of you who think that consuming is the paramount economic activity.

Chinese businessmen with whom I have spoken, typically evince disbelief when I tell them that Americans, especially the business leaders, do not understand the core value of maintaining high employment in China as a driver for many so-called “mysterious” or “sinister” Chinese actions in the natural resource acquisition and utilization fields. They think that I am crazy when I tell them that American business and government leaders mistake the value that the Chinese put on full employment, for the productivity gains that in America allow a manufacturing company to contain costs and maintain prices. They, the Chinese, think it is obvious that they put as great a value on employment, as the so-called free market economies put on “profitability.”

Institutional investors have been so far reluctant to finance the development of rare earth mining in the non-Chinese world, because they and the governments under which they function are myopic.

If you examine the costs of putting a mine, any mine, into production you will find that for the hard-rock mining of metals it typically takes 5-7 years before any revenue can begin to flow from the mine. Even this relatively short time – in mining terms – requires that infrastructure be present or cheap and fast to build. Before mining starts, there must be adequate supplies of skilled and unskilled labor, water, electricity, and heavy transportation.

As if the very long wait for the return on investment for hard rock mining wasn’t enough, there is also the question of calculating whether or not there could even be a profitable return, or any return at all! This involves being able to predict both the price and the demand for the metal(s) to be mined, at the time in the future when production and delivery begin and during the life thereafter of the mine. The twenty-first century has been anomalous for mining promotion finance. The “new” economy of cheap money and high risk was a bonanza for mining stock promoters. All they had to do was incorporate a buzz-word into their prospectuses and someone would underwrite an office in Toronto or Vancouver as well as small mining camp and some drilling and chemical analysis. Thereafter announcements of the findings of high grade pebbles were clothed as findings of potentially large ore bodies. and money continued to be raised for offices, overhead, and public relations by junior miners always telling investors that they were in negotiation with a “major” miner to develop the property.

Institutional investors do not have the luxury of infinite time to value mining opportunities, and so they tend to be conservative. They have a difficult time separating the wheat from the chaff or the noise from the information.

Institutional investors interested in mining are not financial engineers. They have mostly missed the importance of the supply and value chains as a metric for the long term valuation of mining opportunities. Nowhere is this truer than in the rare earth space.

Rare earth mining did not begin in the USA, but it reached its first high point here at Mountain Pass, California, where in the early 1980s production levels of contained rare earths in concentrates reached more than 20,000 metric tons per year. This is a level that has not yet been surpassed by any one mine working from a single ore body. Yet, due to the rise of Chinese predominance in rare earth production today – which I have discussed elsewhere in great detail – the Mountain Pass operations of Molycorp today function solely by separating and refining above ground concentrates produced last in 2002, when low pricing from China forced the shutdown of rare earth mining operations.

While Mountain Pass was fighting to hold on to market share against intense Chinese competition over the last twenty-five years, the supply chain for end use products based on the properties of rare earth metals, simply abandoned the United States and removed itself mostly to China with a small amount going to Japan. China’s strategy was simple: if you wanted a secure supply of the rare earths for your product(s) then all you needed to do was to locate in, or re-locate to, China where your raw materials could be obtained, obtained for less, and your products produced by lower cost labor. This process worked so well that it can be viewed now as a paradigm, a model, for the Chinese process of improving a country’s domestic economy. One could say that the Chinese system is today “corner the natural resources and the world will come to you for its needs. Then you can cherry-pick what technologies and production you need domestically, and then, and only then, sell some of those raw materials to obtain the technologies and the manufacturing engineering. When you are secure and self sufficient simply cut off the supplies other than for exports you can spare.”

America has vast resources of rare earths, as does Canada. Ironically, China is now worried about running out of the heavy rare earths for its own domestic needs within 30 years -imagine that, an economy that worries about more than the share price, an economy that has a national long term strategy! Chinese and Japanese companies are now looking at these North American resources for the benefits of the economies of their home countries. They can only do this so long as North America does not any longer have a domestic supply chain to refine, produce metals and alloys, produce components, and assemble those components into end use products. North America has today remaining from its only recently complete rare earth supply and value chains, just two manufacturers of rare earth permanent magnets. Both buy the high purity rare earth metal, samarium, from Chinese suppliers, and both import cobalt from overseas. The main use of the products of these two suppliers is in critical military applications.

There is a movement in the US Congress called RESTART for the purpose of restarting the North American rare earth production and utilization industry as a closed loop supply and value chain. The Defense Appropriations Act for Fiscal Year 2010 requires that an immediate (due April 2010) assessment of the rare earth supply and demand situation be prepared for the Secretary of Defense. This is a very good start, but we must now devise a financial strategy, for private equity to allow an investment in a rare earth mining project to take into account the total end-use-product value, to determine the value of the mining project. This requires what the mining analyst John Kaiser calls strategic logic, as well as economic logic. And that requires government action in the form of guarantees or off-takes from mines not yet in production. Until such action is undertaken the wind from China will only get stronger.

[Part 1 of of "The Rare Earth Crisis of 2009" is available for free to subscribers - just fill out the form at the top right of this page to obtain your free copy].

According to a report earlier this week, China may have 100 GW of wind power capacity by 2020, more than three times the 30 GW the government set as a target 18 months ago. If China commits to producing this capacity by 2020, it will place this goal in its next two five-year plans as part of the official statement of the goals for the Chinese utility industry. If this happens, then China’s recent takeover of the Australian rare earth mining industry makes perfect sense.  The Chinese, you see, like to make long term plans not only for economic goals but also for implementing the necessary steps in the value chain to achieve them.

To make the most efficient, lightest weight, lowest service wind turbine generator of electricity, takes one metric ton (t) of the rare earth metal neodymium, per megawatt of generating capacity. This to to build the neodymium-iron-boron permanent magnet necessary for the generator to function.

The current production of neodymium is around 20,000 t per year, and all of it is produced in China.

The world’s demand for neodymium for current uses is now in balance with production.

If none of the world’s current demand becomes obsolete, and in fact, if it grows, then where is 100,000  t of neodymium going to come from, for China’s projected 100 gigawatts of new wind generated electricity, if China opts for 100% neodymium-iron-boron permanent magnet type electric generators?

The answer is simple: Australia.

The two large rare earth mining operations now in the process of being acquired by Chinese companies, Lynas and Arafura, are said to be capable each of producing 20,000 t of total rare earths per year; it is also said that one of them, Lynas, has higher than to be expected neodymium content in its ore body element distribution.

One problem that had dogged investors in Lynas recently, was that if it were brought into full production there might be a surplus of neodymium, thus paradoxically driving its price and the value of Lynas future production down.

That problem may now be solved. The new Chinese wind power plan would be able to take 100% of the Australian production of Lynas of neodymium for ten years of full production. Thus the current neodymium market would not be impacted.

Is this why the Bank of China is so eager to extend a 250 million dollar guarantee to ensure that Lynas rare earth refinery gets built? Probably it is.

Based on current and projected Chinese domestic production and current and projected use of neodymium for non-Chinese wind power, batteries, electric motors and generators for vehicles, vehicle accessories, and military use, I predict that the price of neodymium will rise sharply throughout the second decade of the 21st century.

The only possible non-Chinese, or non-Chinese owned, sources for neodymium for the open market now are the Americans, privately owned Molycorp Minerals and privately owned Thorium Energy, and the Canadians, publicly traded Great Western Minerals Group and publicly traded Avalon Rare Metals.

For now it is still possible to buy shares of Australia’s Arafura and Lynas. There is no indication of any immediate plan by their new Chinese owners to take them private, but they might just do that not too far down the road. If the run up of neodymium has then begun, those who were long term investors at that point will be in very good shape.

Don’t say I didn’t tell you about this early on.

During May 4-7, 2009 in the windy city of Chicago, there will be held a conference entitled “Wind Power 2009.” I have some comments to make and I am issuing a simple challenge to the organizers and participants in this conference. Investors in mining pay special attention.

My comment is this: Are you, the wind power industry, buying the permanent magnets for manufacturing the lightest weight most reliable, and low service needs, electric generators, which are turned by the force of the wind, from American companies, employing American workers in the United States? I believe that the large magnets for the generators you have already used, and are planning to buy and use, are made in the People’s Republic of China (PRC) ; I further believe that these magnets are of the neodymium iron boron type, which can only be made from the rare earth metal “neodymium,” which today is only produced in the PRC.

If it is the case that you are having these magnets made in the PRC, and that you intend to increase your purchases of them as you build more wind turbines, then I would like to know how you plan to address the fact that the supply of all of the rare earths, including neodymium, from the PRC, is being reduced each year by the Chinese as China’s domestic demand for rare earth metals increases steadily, This demand is in fact expected to exceed China’s production levels by 2013 at the latest, at which point there could be no rare earth metals available for export or for use in products made in China to be exported.

I would like to also know why your industry does not support the production (by financing it) of rare earth metals, including neodymium, by the reopening of the world’s largest single-point rare earth element (REE) mine, that of Molycorp Minerals’ Mountain Pass mine in San Bernardino, County, California? I would also like to know why your industry does not invest in developing North America’s largest so-far undeveloped rare earth ore body in the Lemhi Pass District of Idaho and Montana, owned by Thorium Energy, or the two proven substantial rare earth deposits in Canada at Hoidas Lake, Saskatchewan, (owned by Great Western Minerals Group) and at Thor Lake, NWT (owned by Avalon Rare Metals). The total investment in all of these REE mining operations taken together, to bring them to a total yearly production of as much as 40,000 metric tons per year of REEs (more than twice the current use of REEs by all American industries and the military combined) would be around $750 million, of which two thirds would be spent within the USA creating jobs and ensuring the continuation of industries such as yours, without the possibility of interruption of their critical REE supplies by either the growth of southeast Asia’s demand for REEs, or by an unfriendly action to cut off exports for political reasons. Developing domestic sources of these critical raw materials would create wealth, not simply distribute what we have to workers in Southeast Asia.

The power of the wind from your combined voices will not produce a single gram of neodymium towards the one metric ton per megawatt of production capacity that you need for each new installation. Only the logical development and prioritization of your value chain, beginning with mining your critical natural resources in the United States and Canada, can make your proposed green solution to the production of electricity without burning fossil fuels anything more than pissing in the wind.

We cannot have energy security and independence, without first having secure production of natural resources to insure the independence and security of our manufacturing industry and military.

It has been estimated that to build the latest and most efficient one megawatt (MW) capacity wind turbine-powered electric generator, requires one metric ton (t) of the rare earth metal neodymium for use in a permanent magnet made from the alloy neodymium-iron-boron (Nd-Fe-B). The total amount of neodymium produced annually in the USA is at most 600 t, and all of it is used already to build Nd-Fe-B magnets for various applications. The current US installed capacity for electricity generation is 1,000 GW (1000 MW), of which 0.6%, 6 GW, is generated from wind turbines. The global annual production of neodymium, essentially all of which is mined in China, is today at an all time historical high of 26,500 t.

There is no significant neodymium production surplus.

Therefore the neodymium would have to be obtained from new production and such production would have to be over and above the total projected demand for 2014 already estimated at 38,000 t, 50% greater than today’s production and demand.

The only possible sources for this extra production would be:

1. Lynas (Mount Weld, Australia)
2. Arafura Resources (Nolan’s Bore, Australia)
3. Molycorp (Mountain Pass, California)
4. Great Western Minerals Group (Hoidas Lake, Saskatchewan, Canada)
5. Avalon Rare Metals (Thor Lake, Northwest Territories, Canada)
6. Thorium Energy (Lemhi Pass, Idaho)

Not a single one of the above mining ventures has yet produced a single gram of commercial rare earth metal, although numbers 1 and 2 above are claimed to be “ready to go,” and 3 above was until 2000 a producing mine, which in 1994, for example, was the world’s largest single point rare earth mining and refining operation, with an annual total production of 20,000 t.

Companies number 4,5, and 6 above are all in the process of validating resources and reserves and developing refining processes.

Various factors have recently brought the physical operations of all of the above companies to a halt, so that at the present time there is no foreseeable alternative to Chinese sourcing for rare earth metals at any date certain in the near term.

China does not have any known plans to divert any of its present or near term neodymium production to foreign manufacturers, for the production of large scale permanent magnets for American wind turbine electricity generation.

Therefore American wind turbine electric power generation must be on hold unless it is to be accomplished using outmoded, outdated, and therefore very inefficient and expensive iron based magnet technology.

There is no point in getting excited about building the structural components for wind power electricity generation in Michigan or anywhere else, if the turbine generators cannot be built due to natural resource limitations.

Perhaps the brilliant minds of Wall Street and Washington should revisit their knee-jerk opposition to American mining, before they make plans for renewable energy sources.

KENWOOD, Calif., January 5, 2009 – The Gold Report – Jack Lifton, a consultant, author and public speaker with more than 45 years of experience in sourcing and recycling minor metals (including the rare earths), shares his views on the current balancing act between technologies production and available natural resources. Mr. Lifton identifies these dwindling resources and the mining companies in which to invest, as he warns of the devastating effect production cuts will have on our everyday lives in “the age of technology metals.”

The Gold Report: Jack, you’ve been speaking a lot at conferences about technology metals and rare earth metals. Can you give us some insights into your theories?

Jack Lifton: I’ve been at about seven or eight conferences around the world this year talking about my theme, which is that (notwithstanding the quality of a technology) all production of technologies is strictly regulated by the amount of the particular natural resources available. And we have very quietly, but obviously, transformed our civilization into the age of technology metals.

We’re not dependent on just technology metals, however. Without rare earth metals, we can no longer make a powerful small motor, a nickel metal hydride battery, a Prius automobile or even lasers. We can’t make cutting tools, military armor, or ammunition without tungsten. We can’t make high-efficiency cooling systems for our power plants no matter what their fuel source—oil, gas, coal, wind, solar or nuclear—without molybdenum. Either we’re running out of oil or we’re running out of rare earth. We’re always running out of something, and that is not the issue. The issue is how much can human civilization produce of something in a given year.

TGR: What’s the difference between a minor metal and a rare earth metal?

JL: Rare earths are a particular group of metals that are from Atomic #57 to 71 and, with the addition of the metals scandium and yttrium, there’s a total of 17 metals designated rare earth. Minor metals were, until recently, considered to have only minor uses. I don’t call them minor; I refer to them as the technology metals.

TGR: So if we look at what’s happening with the economy, knowing that we’re in a recession, which are the minor metals that will still be required going forward?

JL: That’s a good question and I break them down into two groups—by-product metals and primary minor metals. Some of the most important of the so-called minor metals are only found as by-products of base metals. For example, the base metal zinc is our only source in the world of germanium, cadmium and indium metals. The base metal copper is a source of 75% of the world’s molybdenum and rhenium. Copper is also the source of 95% of the world’s tellurium and selenium; and the base metal aluminum is the only source of the metal gallium.

And when they reduce the production of base metals, they also reduce the production of molybdenum, rhenium, selenium, and tellurium. So what? Well, you can’t make a jet engine or a rocket engine without rhenium. First Solar Corporation in Ohio makes cadmium telluride thin film photovoltaic cells; the cadmium comes from zinc, and the tellurium comes from copper. Therefore, the reduction in base metals production has also reduced the production of the key minor technology metals used for solar—and there is no substitute. So right this minute we’re in the situation of running on inventory, which is not large, and recycling is almost non-existent for these materials because their uses are dissipated.

TGR: If we’re running on inventory right now and there’s no possibility of substitute or recycling, why haven’t the prices skyrocketed already?

JL: They’re actually holding pretty well. None of these metals is exchange traded. You can’t get prices for them by looking in the Wall Street Journal. So you need to take a look at the current pricing of tellurium, selenium, gallium and germanium and watch those prices. The reporting on those prices is spotty. So what I’m saying is don’t watch the actual daily pricing reports. Watch the trends. In a period when base metal production is going down, it means minor metal production is also going down, by-product metal, and we’re headed for a crisis here because there isn’t very much and the materials we make from them tend to be ordered on a much longer term.

TGR: As an investor then, the play here is to invest in equity companies that are producing base metals. Would that be correct?

JL: Correct. That’s correct.

TGR: Are there certain of these by-product minor metals that are more critical?

JL: I predicted at a recent conference that copper would hit perhaps as much as $10 a pound by 2011. Everybody said, oh, you’re crazy. But I’ll tell you who didn’t tell me I was crazy—all the men who were on those panels. One of them said to me, you know what’s wrong with your prediction? I said what? He said you’re way low—we know that there are critical technologies that are now based on derivatives of copper.

And these industries are going to get a lot of publicity in the next few years because they’re making cooling systems for power plants or batteries or photo cells, and they won’t be able to get material. I mentioned the Prius a minute ago. Are you aware that every Prius has 64 pounds of copper on board? There are a million of them on the road. That’s 32,000 tons of copper just in the Prius. Do you think you can make a car without copper? Our government has decided to continue the production of cars in Detroit. Every one of them eats more than a ton of steel, almost 100 pounds of copper, magnesium, aluminum. And if that comes from existing inventories, how long will those inventories last?

TGR: Can’t you get the copper from recycling?

JL: Yes, but if you’re going to get it from recycling instead of new production, you’d have to open some smelters. We don’t have that kind of capacity.

TGR: If we’re recycling copper, then we still don’t have these by-product minor metals.

JL: That is correct because they’ve been extracted when they were produced the first time. No new copper smelter or lead smelter has been approved in the United States for years, maybe decades. It takes three years to do the paperwork for a copper smelter, and most copper companies with existing smelters are quite satisfied; they’re not even starting the idea of a recycle. We have in America a dozen smelters for recycling battery lead that produce more than 20,000 tons a year each, more than 20,000. Anyway, the total recycled lead in America each year is over a million tons. Now you don’t hear about that, do you?

TGR: No.

JL: The Prius uses a nickel metal hydride battery based on the rare earth metal lanthanum. The world’s production of lanthanum is almost 100% in the People’s Republic of China. In America, we have at least two mines, that I’m aware of, that can produce lanthanum. Toyota’s been stockpiling lanthanum for some time, it’s been quietly investing; and last week it announced that it had bought a Japanese trading company that specialized in rare earth metals. Through that company, Toyota is now making an investment in a Vietnamese rare earth mine.

TGR: I read that.

JL: Toyota’s research center for North America is right near me. So I see these guys in the drug store and meetings and ask why they are investing in Vietnam. They say the Vietnam government has assured them it wants this kind of mining to happen, and they need the material. They also said they’re very, very concerned about the Chinese cutting off the world from rare earths, which they’ve said they’re going to do. They’re raising the export tax, they’re reducing allocation, and there’s a prediction that Chinese domestic demand for rare earths will equal Chinese production in 2013, which means no more export.

Toyota knows it needs a safe, reliable source of rare earth metal. Now why don’t they come to the U.S., which in 1994 was the world’s largest producer of rare earths? Because it feels the regulatory environment here and the political environment is so anti-mining that there’s no point to it. In the U.S., we have a company called Molycorp, which was owned by Chevron until two months ago when it was sold to a group consisting of Resource Capital of Denver and Goldman Sachs, the financier, in New York.

In 1994, Molycorp’s mine in Mountain Pass, California, was producing 100% of the United States’ needs of rare earths and 34% of the world’s. It was shut down in ’94 because the Chinese came roaring into the market with low prices and put them out of business. Beyond that, there’s only one other rare earth source in North America—a private company called Thorium Energy, which has deposits of rare earths and the metal thorium in Lemhi Pass, Idaho. Thorium is looking to finance it or sell it to a developer. That’s it for North American rare earth sourcing.

Toyota has been so aggressive in sourcing the rare earth metals (lanthanum, in particular), no other car company in the world outside of Japan has an opportunity to go with the nickel metal hydride battery for use in a hybrid car. It’s not about how much there is—it’s about how much is produced. And the amount produced is now insufficient to satisfy the Chinese domestic market and Toyota alone. Japan’s demand for rare earths this year in the summer was projected to be 40,000 tons of total rare earths; however, China has allocated only 38,000 tons for the entire world this year.

As for Ford, I thought it was committed to the lithium battery. I was very, very surprised to find that it’s committed to the nickel metal hydride battery and that the lithium battery is something in the distant future. Now lithium is found as a primary material but it’s found in the mineral spodumine, which is used primarily in the glass industry. It’s very expensive to extract lithium from this mineral for use in batteries. Since 1994, brine mines have been the largest source of lithium for batteries. The largest group of brine mines in the world is in South America.

TGR: We’ve talked a lot about the car industry here, specifically in the battery arena.

JL: There’s another rare earth metal that’s critically important to our society—neodymium. In 1984, General Motors and Sumitomo developed the neodymium iron boron alloy for permanent magnets, which is the basis of all modern electric motors because it allows you to make a very small electric motor with the highest possible power density. Neodymium total world production is less than 20,000 tons. That may sound like a lot to you, but it’s tiny. And the fact is it’s recently been projected that a single wind turbine electric generator producing 1 megawatt of electricity requires one ton of neodymium.

TGR: One ton?

JL: One ton. Now the U.S. installed capacity for electric power production is 1,000 gigawatts, which is 1 million megawatts. So, to replace America’s capacity with wind would require 1 million tons of neodymium. At current world production, that would take around 50 years—if there were no other uses for neodymium. Clearly this isn’t going to happen.

We can produce only so much of any material in a given year. Last year marked the highest production of base metals in history. We produced 39 million tons of aluminum, 16 million tons of copper and 1.3 billion tons of steel. Unfortunately, there’s not much in the way of by-products from iron, but copper and aluminum production account for almost all of the minor metals—gallium, molybdenum, rhenium, selenium and tellurium. If the world economy declines and we don’t reach those peaks again, then we’ve already peaked in the production of those metals. The uses are mainly dissipative. We lose them. It becomes uneconomical to recover them by recycling, so we’re going to have to get along in a world where we use less, which means any industry planning on increasing production based on those metals is in big trouble. One of them clearly is solar.

TGR: Because we’re putting on our investor hats, it sounds like in order to move forward with the whole thing on hybrid cars, solar. . .a whole variety of technology, either we need to invest in China or in base metal production.

JL: Correct.

TGR: Do you foresee a situation in which a Prius is going to cost some ungodly amount because the rare metals used in the car are exponentially expensive?

JL: That’s what Toyota is worried about. The world production of cars this year was supposed to be 70 million units, so now it’s going to be 60 million due to the downturn. But the projection for 2015 is 125 million cars built, including 20 million just from China—which, by 2015, will not be only the world’s largest producer of automobiles but the largest producer in the history of automobiles.

China’s developing huge industries utilizing these materials, which it currently controls like rare earth metals. And as those industries build, we’re seeing the export of these metals sharply reduced. Can we really live without magnets for small motors? Just remove everything that’s got a small motor in it (a cell phone, Blackberry, etc.), and you’ll see why we really need the rare earth metals from China.

I happen to know the Japanese trading companies have approached SQM (NYSE:SQM)(Santiago Stock Exchange: SQM-B, SQM-A)(Sociedad Química y Minera de Chile S.A.) in Chile to talk about locking up some lithium supplies because they are concerned that Japanese car companies will need lithium. If you could name one American trading company that’s ever bothered to think about that, I’d be shocked. The people I know in Chile told me that, about a year ago, Japanese delegations started showing up talking about exotic metals for the first time. Japanese and Chinese companies have already bought into Chilean mining operations. But aren’t you guys mainly interested in gold?

TGR: Oh, no. We do precious metals, base metals. In fact, we think some of the more interesting plays are going to be in rare earth. We have been hearing more about the mineral tantalum? What is it used for?

JL: Tantalum is one of the most important metals used to make capacitors—a fundamental component to many of the electronics we use daily. It is found in our cellular telephones, iPods and computers. You are probably aware of the fact that the Australian company, Talison Minerals, the world’s largest producer of tantalum raw material, has shut down production.

TGR: Right. That’s where the question was going—what is the impact of that?

JL: The impact is dramatic. Talison, historically, produced up to 63% of the world’s tantalum raw material. Where will the makers of capacitors get their raw materials from?

TGR: If there’s a demand for tantalum, why is it shutting down?

JL: First off, the tantalum industry is unique in its lack of transparency with respect to the supply of raw materials. I feel that the shutdown of Talison’s mine is a decision that is more strategic than one relating to the demand for tantalum. There are limited alternate sources for tantalum raw materials, which puts Talison in a strong negotiating position if there is a real or perceived disruption in the supply of raw materials. And right now, it’s in a price negotiation.

TGR: In a price negotiation with whom?

JL: The processors of the tantalum raw materials. Processors, such as Cabot Corporation (NYSE:CBT) and H.C. Starck have long-term contracts with Talison at fixed prices. Talison supplies them with concentrate, and they produce tantalum metal and powder from which electronics are made. Talison knows that if processors do not purchase material from them, the alternative is to purchase material from central Africa. The major companies are reluctant to do this due to the growing publicity of the fact that much of the material is mined illegally and proceeds are used to fund the ongoing civil wars. The material is even referred to in the industry as ‘blood tantalum.’

TGR: So there are no suppliers in more politically stable areas, such as Europe or North America?

JL: Not any major suppliers. Talison is betting that, due to this fact, they can continue to sign long-term contracts with processors at prices much higher than the metal’s spot price. I believe they probably will until a new deposit of significant size is developed.

TGR: We understand that Commerce Resources Corp. (TSX.V:CCE) (PK SHEETS:CMRZF) is developing a tantalum project. Are you familiar with them?

JL: Yes I am. Commerce Resources is not producing, but they’re close. They are at the stage of pre-feasibility and developing a very large project in British Columbia, Canada. I believe that of those companies exploring and developing new deposits, Commerce is well positioned. They are financially strong and have been involved in the tantalum industry for years. Putting their deposit into production and offering competitive rates, they will capture the attention of processors and capacitor manufacturers who have long been looking for alternate sources of raw materials. This is a common theme for exotic metals, such as tantalum.

TGR: So you agree that some of the more interesting plays are going to be in rare earths?

JL: Yes, I agree with that. I think that the minor metals are going to lead the recovery in base metals.