I recently updated the list of projects on the TMR Advanced Rare-Earth Projects Index, to reflect five new rare-earth mineral-resource estimates that were announced recently. I also made some other updates. The specifics:

• Southern Crown Resources Ltd. (ASX:SWR) announced a JORC-compliant mineral-resource estimate for its Xiluvo project in Mozambique, on November 10, 2011. According to the associated press release, 1.1 Mt of the resource is at the Indicated level @ 2.03 wt% TREO (at a cut-off grade of 1.00 wt%).

• MBAC Fertilizer Corp. (TSX:MBC, OTCQX:MBCFF) announced an NI-43-101-compliant mineral-resource estimate for its Araxá project in Brazil, on December 6, 2011. According to the associated press release, 2.7 Mt of the resource is at the Inferred level @ 8.39 wt% TREO (at a cut-off grade of 6.0 wt%).

• Search Minerals Inc. (TSX.V:SMY) announced an NI-43-101-compliant mineral-resource estimate for its Foxtrot project in Canada, on December 20, 2011. According to the associated press release, 3.4 Mt of the resource is at the Indicated level @ 1.07 wt% TREO and 5.9 Mt is at the Inferred level @ 0.96 wt% TREO (both at a cut-off grade of 0.015% Dy2O3).

• Australian American Mining Corporation Ltd. (ASX:AIW) announced an NI-43-101-compliant mineral-resource estimate for its La Paz project in the USA, on December 21, 2011. According to the associated press release, 16.2 Mt of the resource is at the Indicated level @ 0.04 wt% TREO and 112.0 Mt is at the Inferred level @ 0.04 wt% TREO (both at a cut-off grade of 0.03 wt%).

• DNI Metals Inc. (TSX.V:DNI, F:DG7) announced an NI-43-101-compliant mineral-resource estimate for its Buckton project in Canada, on January 16, 2012. According to the associated press release, 250.1 Mt of the resource is at the Inferred level @ 0.03 wt% TREO (at a cut-off grade of US$7.50 / t mineral resource).

• I have also updated the pricing used in the Index data, to reflect the average monthly prices for December 2011 and the moving three-year average price for separated rare-earth oxides.

FYI, TMR is now tracking a total of 406 rare-earth projects under development associated with 251 different companies in 36 different countries.

You can access the updated details via the Index page.

On December 27, 2011 the Chinese Ministry of Commerce announced the first round of allocations of rare-earth export quotas for 2012, to individual companies operating in China. The total export quotas allocated during this first round come to 24,904 t of rare earths. Before we get into more specifics with the numbers, it is important to note that this announcement was unusual for three reasons:

1. The Ministry issued separate quota allocations for light (LRE) and medium / heavy (M/HRE) rare earth products, and not just for rare earths as a whole. We’ve been anticipating this change for some time, based on industry chatter from within China, but 2012 marks the first time, to my knowledge, that these separate allocations have been rolled out;
2. Also for the first time (again, to my knowledge), the Ministry clearly telegraphed the intended TOTAL export quota for the entire year, prior to making the usual follow up allocation announcement next summer; and
3. The Ministry separated individual companies into two groups – the first group received confirmed quota allocations, while the second received only provisional allocations. Companies were placed into one of these groups based on their progress towards implementing new pollution control regulations, with the latter group only getting their allocated quotas if they meet the various requirements by July 2012. Companies who fail to meet the new requirements, will have their quotas re-allocated to other companies.

In the announcement from the Ministry, it was stated that the first round of quota allocations (totaling 24,904 t) will represent 80% of the quota allocations for 2012, which indicates that the total for the coming year will be 31,130 t of rare earths, slightly higher than last year. Here’s how the two groups of allocations break down:

Let’s now break this down further – first, here are the companies that received confirmed quota allocations, divided into sub-lists for Chinese and Chinese / non-Chinese joint-venture (JV) companies. The two sub-lists are sorted from highest-to-lowest total allocation:

* Part of China Minmetals Group, which was allocated a confirmed total of 2,457 t.

Next, are the companies that received quota allocations that are provisional on them meeting the new pollution-control standards, again divided into sub-lists for Chinese and Chinese / non-Chinese JV companies. The two sub-lists are sorted from highest-to-lowest total allocation:

** Part of Baogang Group, which was allocated a provisional total of 3,450 t.

Finally, here is a comparison of the quota allocations for the past three years (compare to the projected total of 31,130 t of quota for 2012):

It can be seen that a significant majority of the Chinese / non-Chinese JV companies were placed into the provisional category, including both of the rare-earth enterprises operated by Rhodia (Baotou Rhodia Rare Earth Company and Liyang Rhodia Rare Earth New Materials Company) and one of the enterprises operated by Neo Material Technologies (Zibo Jiahua Advanced Material Resources Company).

As usual, in addition to the numbers, the Ministry also published its algorithm for assigning specific quotas to individual companies, out of the total allowed. This year, it was based on both the total volume (50%) and the total value (50%) of exported rare-earth sales for each company, in the last three years, compared to the industry as a whole.

Also as usual, a significant section of the media (both mainstream and industry-specific) got this story all wrong, incorrectly focusing on the difference between total quotas allocated and announced at the end of 2010 for 2011 (14,508 t), and the confirmed quota allocations noted above (10,546 t). The valid comparison has to be between whole-year allocations. We probably need to stop thinking about these quota allocations as being specific to six months of a given year only. The Chinese Ministry of Commerce has specified the details for 80% of 2012′s quota, and has indicated the total value of the quotas as a whole. We can expect an announcement in the summer of 2012 giving the details of which companies were allocated the remaining 20% of quotas, and whether or not the companies allocated provisional quotas, received them, or if instead they were reallocated to other companies, and which those companies might be.

There are still some unknowns about the recent quota announcement, which will be important to clarify in the near term. We need to see if any additional rare-earth product types have been added to the list that are counted for quota purposes. I’m also keen to confirm that the term “light rare earth” in the context of this announcement, refer to products based on lanthanum, cerium, neodymium, praseodymium and samarium, with the term “medium / heavy rare earth” referring to the rest.

A comment on the allocation of confirmed vs. provisional quotas: unlike a number of industry conspiracy theorists out there, I do not believe that the exclusion of the Baogang Group of companies (and others) from the confirmed quota category, until they complete efforts to clean up their environmental act, is some sort of smoke screen or ruse. Neither do I believe that any aspect (with perhaps one exception) of the announcement, was some sort of response to the approaching on-streaming of Mount Weld in Australia and Mountain Pass in the USA. It seems clear to me, based on discussions with industry insiders, that China continues to march to the beat of its own drum, and while potential new sources of supply from outside of China are of course on the radar in China, they do not drive internal policy.

That said, I will say that it seems curious to me, given the collapse in actual rare-earth exports from China in 2011 compared to the quotas allocated, that the total quotas planned for 2012 are actually higher than for 2011. We know that the significant price increases for these materials were the key factor in the demand destruction (temporarily or otherwise) seen in 2011 (with lanthanum- and cerium-based products seeing the largest declines in demand). It is possible that the authorities in China see prices falling much further than the recent decreases that we’ve seen, to such low levels that the demand for exports will return to 2009 / 2010 levels, which would “fill out” the 2012 quota allocations.

The questions in my mind then, are these: is the higher-than-2011 total quota level for 2012 simply an action taken passively in the face of anticipated price decreases (partially due to anticipated competition from Mount Weld and Mountain Pass towards the end of 2012)? Or is it in fact an indication that the authorities intend to actually step in and to intervene – forcing prices lower than their current levels, in a bid to get exports back up to the 30-31,000 tpa level? The answer remains to be seen…

One final note: although it is highly unusual for the Chinese Ministry of Commerce to make the allocation of quotas provisional on meeting certain regulations, it is actually not unprecedented. Last year, 62 t of quota were provisionally allocated to one company, Pingyuan Sanxie Rare Earth Smelting Company, on the proviso that its recent (at the time) infrastructure improvements were inspected and approved by a local regulatory agency in March 2011. The provisional nature of this quota allocation is the reason why you might see slightly different total quotas allocation numbers for 2011 – mine, above, includes the 62 t – many others do not.

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.

I have just updated the list of projects on the TMR Advanced Rare-Earth Projects Index, to reflect a new rare-earth mineral resource estimate that was announced recently. I also made some other updates. The specifics:

• Rare Earth Metals Inc. (TSX.V:RA, OTCQX:RAREF) announced an NI-43-101-compliant mineral-resource estimate for its Two Tom project in Canada, on December 13, 2011. According to the associated press release, 40.635 Mt of the resource is at the Inferred level @ 1.18 wt% TREO (at a cut-off grade of 0.6 wt%).

• I have also updated the pricing used in the Index data, to reflect the average monthly prices for November 2011 and the moving three-year average price for separated rare-earth oxides.

• Tasman Metals Ltd. (TSX.V:TSM, AMEX:TAS) is now listed on the NYSE Amex Exchange.

• Matamec Explorations Inc (TSX.V:MAT, OCTQX:MRHEF) is now trading on the OTCQX. In addition, the Matamec project previously referred to as Zeus / Kipawa, is now referred to simply as Kipawa.

• Reference to Korea Resources Corp., with regard to the Wigu Hill project owned by Montero Mining & Exploration Ltd. (TSX.V:MON) has been removed, since the extent of involvement at present is a non-binding Memorandum of Understanding.

Since the last update, three other companies have announced new NI-43-101- or JORC-compliant mineral-resource estimates for their respective projects: AusAmerican Mining Corporation NL (ASX:AIW) with their La Paz project in the USA, MBAC Fertilizer Corp. (TSX:MBC, OTCQX:MBCFF) with their Araxa project in Brazil and Southern Crown Resources Limited (ASX:SWR) with their Xiluvo project in Mozambique. I am in the process of verifying the associated data for these announcements and will report on them in the near future.

FYI, TMR is now tracking a total of 400 rare-earth projects under development associated with 246 different companies in 35 different countries.

You can access the updated details via the Index page.

Last week I received some criticism via email, from executives at some of the companies that I did NOT mention in my most recently published TMR article, “Decoupling The Rare-Earth Junior-Mining Market From Emphasis On Molycorp And Lynas.” Each apparently assumed that absence of evidence was evidence of absence. Let me try to set the record straight by expanding the narrow coverage, which I purposefully chose in that article.

There are a number of potential new producers of LIGHT rare earths that I like the look of. I note that most blogger-commentators assume, wrongly, that by merely going into production at any level, Molycorp Inc. (NYSE:MCP) or Lynas Corporation Ltd. (ASX:LYC) will close the window of competition for the non-Chinese supply of rare earths. This is simply not true. There is absolutely no chance that the future rare-earth-demand market will simply replace one monopoly with another.

Last week it was my intention to publish an article speculating primarily and specifically on the survival of the heavy-rare-earth-themed junior miners beyond 2015. I assumed that my audience would understand that I was not writing about the future market for the supply of the light rare earths, but that I was writing specifically about the future market for the supply of the heavy rare earths. It seems that even within the rare-earth world, a lot of people do not understand that a monolithic rare-earth market, per se, does not exist, other than in the fertile minds of share-price promoters, and that there are individual active markets for just some of the rare earths, and just small, research-focused markets for the rest of them.

The most important of the light rare earths are in my opinion lanthanum (La) and neodymium (Nd). Low-cost producers of either or both of them, with low break-even points and high value-added entry points into the supply chain will be suppliers of these two materials in and after 2015, especially if these characteristics are combined with excellent marketing.

China has been operating without any serious competition now for more than a decade. Outside of China, in the short-to-medium term I see only four new producers capable of joining Molycorp (a well-established, existing producer looking to expand its operations) in making the cut, in some combination, in the La and Nd markets. Each appears to be a well-managed entity with good grades and significant deposits of light rare earths. These new companies should each be foremost in the minds of the business development and marketing staffs of Molycorp and of each other, because I consider each of them to be a potentially formidable competitor. Those four new producers are:

1. Lynas Corporation Ltd.
2. Arafura Resources Ltd. (ASX:ARU)
3. Frontier Rare Earths Ltd. (TSX:FRO)
4. Rare Element Resources Ltd. (TSX.V:RES)

I have followed these four companies quite closely. However I don’t have any direct knowledge of Lynas’ operations. I have met with and had extensive discussions with Lynas’ Matthew James and Eric Noyrez on different occasions, and I was very impressed by their respective knowledge.

During my visit to Australia in June 2011, my colleague Gareth and I were invited to visit the site of Arafura’s Nolans Project site. We toured the future mine site and its drilling camp guided by the operations manager, and I found him and his geological staff and workers to be outstanding. I have not had the chance to meet Arafura’s technical or senior management.

I first visited Frontier’s well-situated Zandkopsdrift project, right after the 2010 Mining Indaba, in Cape Town. I was privy to its original marketing to the institutional investment world, and I was compensated for some services rendered at the time.  I said at that time, and I repeat it now, that the Frontier offering prospectus was the best document of its kind I ever saw. Frontier’s senior management is top notch, administratively and financially. I have not met the company’s technical or operating management.

I have also visited Rare Element Resources’ Bear Lodge project, well-situated in Wyoming, and I have had extensive contact with its senior administrative and technical management and  staffs at both the mine-development site and at its administrative HQ. All are professionally of the highest caliber. I am currently a business-development consultant to Rare Element Resources.

I believe that if its Malaysian political issues are resolved, then Lynas will be the first NEW large scale, built from the ground up, producer of the light rare earths outside of China, since the Chinese achieved absolute dominance in the market in the 1990s. Lynas has top-flight technical and marketing management, and its Malaysian plants were designed by Rhodia, which is certainly one of world’s pre-eminent and ongoing centers of expertise, in the separation and purification of the rare-earth elements by solvent-extraction operations.

It is my belief that Chinese actions with regard to markets, both foreign and domestic, for anything (commodity, manufactured good, or service) with economic consequences, are driven by the state, in furtherance of well-planned industrial policies. Such polices, continually measured by performance to objective, are intended to raise China’s standard of living as uniformly as possible in the short term, and as widely as possible in the long term.

This means that if it is Chinese policy to switch its economy from one that is export-driven to one that is consumer-driven, and if its primary restraints are to control simultaneously both inflation and the value of its national currency with regard to the convertible currencies, then it is most likely today reacting to the fact that it is overproducing the light rare earths and under producing the heavy rare earths. The current five-year plan, which runs through 2015, calls for the elimination of corruption and environmental damage in the rare-earths mining industry. This is being accomplished in stages that encompass the consolidation of the industry followed by a strict internal control of production (licensing regime) and finally, I believe, by the potential creation of a transparent trading and futures market for the rare earths within China.

Exports of rare earths as raw materials will continue only so long as they are produced, for any reason, in excess of domestic needs. The result of the restructuring of the industry is to be the absolute control of the supply of the rare earths, so as to insure that they have as much value added as possible within China no matter what their ultimate destination. I believe that at the present time, or certainly by 2015, the heavy rare earths, terbium (Tb) and dysprosium (Dy), are essentially to be no longer exported in any form other than as contained in finished goods. I also believe that the light rare earths will be produced within China only to the extent needed by the market within China by 2020.

There will thus arise opportunities for any rare-earth-containing product desired to be produced outside of China, to have its rare-earth content be supplied from outside of China. This demand will arise solely in the event that the total supply chain for rare-earth-containing products exists outside of China. Today such a total supply chain, except for the first step, the mining, exists only in Japan.

Total supply-chain construction, for the above reasons, is now underway in Korea (utilizing non-Korean mining)  and in the EU financed by private enterprise, as it has also been financed in Japan. If the financiers and industrialists of the USA do not now immediately design, finalize, and implement total supply-chain re-construction, the USA will cease to be in the rare-earth-containing, end-use-product supply business. Of course the USA could remain a source of raw materials, if the criteria listed above for individual business survival are met by an American company.

I believe that along with Molycorp, the four predominantly light-rare-earth producers that I noted above, will all be in business at the beginning of 2015, and well under way, and in some cases will have either ramped up production or will be in the process of doing so.

The continued long-term survival of any and all of them, will depend on staying in business long enough to get to the point where their relatively small amounts of heavy rare earths will add substantial revenues to their balance sheet. In each case, this will require at least 20 ktpa of production. A combined 100 ktpa of production from these five producers would add around 14 ktpa of Nd to the global supply in 2015, and around 400 tpa of Dy.

I believe that the global demand for rare-earth permanent magnets will continue to grow at today’s rate of 10% pa. Therefore four years from now, in 2015, the demand will have grown by nearly 50%.

I do not believe that all four of the new companies I have discussed above will have reached a production rate of 20 ktpa by 2015, and I do not believe that any of them will recover more than 80% of their contained rare earths. Therefore this makes me believe that, if the Chinese do NOT increase their overall production of light rare earths from its present level, then Nd could be in short supply in 2015, and even if the Chinese should increase their current production rate of light rare earths, I do not believe that they can do so for the heavy rare earths. The result is that Dy production will be more seriously in deficit in 2015 than I believe it already is now.

This means that I think Nd oxide prices will bottom at $100/kg or more, although I think they are too high today, and that I think that Dy prices will continue to be strong.

All of this depends on the adoption of a rational marketing scheme by the non-Chinese rare-earth industry. The demand for Nd by the OEM automotive and alternate-energy industries is price sensitive, due to competition. “China Incorporated” is presenting an unprecedented challenge to both industries, because it will surely supply its own domestic industries before it even worries about export, and China Inc. will not put its domestic industries in a non-competitive position under ANY circumstances.

Non-Chinese end users that produce within China are already in a dilemma. They feel secure that in their Chinese operations they have security of supply based on the large numbers of Chinese workers they directly employ. Most think also that even if China directs the growth of its economy towards increasing domestic consumption they will still benefit financially. Therefore they are trying to source critical and strategic metals for their non-Chinese operations separately and outside of China.

But the end users will NOT pay any price. They must remain competitive in world markets in order not only to survive in their non-Chinese markets, but also to prevent Chinese excess production from undercutting them in the export (from China) markets. Keep in mind that China will not switch from an export-driven to a domestic-consumption-driven economy in one day. The transition will be gradual, and the Chinese will always want to be able to “dump” excess production offshore.

Note well that the heavy-rare-earth production-themed companies that I discussed last week, which survive, will all produce Nd and La along with Dy, Tb and yttrium (Y). The aggregate additional supply of this Nd and La will help keep the prices for those light rare earths in check, and it is trivially obvious that magnet producers and end users will have little choice in the matter, if the Dy producers insist on their taking Nd from them as well, in order to guarantee their supply of Dy or Tb.

The various rare-earth markets are interdependent in a complex way that depends on their end uses. Greedy stock promoters are no match for the forces of the market. “Announcements” are not solutions to problems of supply. Production levels are the only “announcements” anybody in the industrial world cares about. No assured production means no guaranteed demand.

There is not a global “rare-earths market.” There are local, regional, markets for individual rare earths in separated. highly refined forms such as chemicals for manufacturing fluid cracking catalysts, and metals for producing alloys to manufacture rare-earth permanent magnets, or nickel-metal-hydride battery electrodes.

Even if your thinking is that the markets are totally globalized, you will still have to reconcile your belief with the fact that rare-earth prices within China are substantially lower than they are outside of China. China solves the arbitrage problem (buying low and selling high) by strictly limiting export volumes (otherwise they would all flow to the region of higher price, right?). In addition, China strictly limits the imports of rare earths in any form. I have personally been involved with attempts to import both ore and scrap rare-earth permanent magnets into China for processing. Both projects were initiated by Chinese companies looking for supplies for the Chinese market. Both projects were denied licenses by the Chinese government. This experience is why I question those who say that their markets will include mainland China. I do not believe that Chinese companies will be allowed to pay above Chinese market prices. for natural resources that can be produced in China.

A small number of the total number of rare earths, perhaps five of the 16 naturally occurring rare earths, are critical in their uses. There are no economic substitutes for them giving the same or similar performance. Everyone reading this article will I hope, have previously gone through my colleague Gareth’s definitive Critical Rare Earths Report, available from the TMR web site.

I predict that very few of the specialty-metal junior miners that could produce the particular heavy rare earths demanded by the current- and near-term market, will ever get into actual production, and of those, only the ones developing deposits containing commercially recoverable heavy rare earths will survive. Commercial in this sense means that they will be able to produce heavy rare earths at the lowest cost and at less than the total market demand.  Keep in mind that ore concentrates are nearly the least valuable forms of the rare-earth supply chain (the raw un-concentrated ore being the least valuable).

The ore concentrate must be “cracked,” i.e., its metal values must be separated chemically from the minerals, and immediately within the cracking process or just after it the nuisance metals, such as radioactive thorium and uranium, must be removed or left in the tailings (residue). The resulting pregnant leach solution (PLS) must then be separated into the individual rare earths and these must be in as pure a form as possible.

The purified individual rare-earth chemicals so produced. must then be reduced electrochemically or metallothermically to pure individual metals.

The metals will then be made into alloys, and the alloys into products such as rare earth permanent magnets, and nickel metal hydride battery electrodes.

Some of the purified chemical forms will be processed directly into, for example, fluid-cracking catalysts, without going through the metallic form at all.

The ONLY WAY rare earths become of value, industrially, is by passing through the above supply chain until they have been transformed into a finished useful form. The exact makeup of these useful forms is dictated by the end user. The supplier at every level of the supply chain must conform to, and target, the end users’ requirement. This is why the stockpile discussion is so premature. The real question is: “What is to be stockpiled?” That question can only be answered by a close study of  individual companies and industries and their specific demands.

The rare-earth part of the junior-mining sector has been for at least the last four years viewed in isolation by mining and financial analysts wearing blinkers.  A myopic vision of this small sector of the natural-resources market, which has vastly overemphasized its importance, has thus been developed and continues to be maintained.  A fantasy of growing and infinite demand and inelastic prices (prices not driven by simple supply and demand) increasing without limit, has placed the most emphasis on those rare-earth juniors who say that they will produce in the near term, from single mines, as much material as the Chinese are now producing from a combination of dozens of mines and refineries constructed and put into operation over a thirty-year period. As one analyst has put it “only the grade and total weight matter” in non-Chinese rare-earth production. Nothing could be farther from the truth.

The decades and thousands of man-years it has taken the Chinese to achieve their current capacities and capabilities are simply ignored by “investor analysts” who wouldn’t and don’t know the difference between neodymium and salami to start with and think that “the” solvent exchange is on Bay Street in Toronto near the Toronto Stock Exchange.

One of the positive results of the recent apparent correction (i.e. drop) in rare-earth stated prices is that this has exposed just how foolish the stock market has been in valuing a tiny metals market.  There was never any rational way that the prices for anything could simply increase by a factor 10 in just a few months and hold there and then go up again.  Rare earths have been treated as if they are vaccines when there is a plague among us. No price was considered too high for these “critical” substances. In fact they are critical mostly to lifestyle not life itself, and certainly not to the strength of the US, or any other, military, but rather to the efficiency of its defense technologies.

I asked myself when the current mania began, that if rare earths are so important, then why did the financiers and industrialists in the USA, in particular, actively push the Chinese into the position of being the sole source of them when ALL of the major discoveries of and advances in the use of the rare earths over the last 30 years have been made in the USA?

The answer to this question is economics. Economics is also the reason that the prices of the rare earths are rapidly correcting as Chinese intentions become clearer.

China has grown into a world-class economic power through the extraordinary creation of a huge sustained rate of growth of its GDP, based on the marshaling of its national resources of people, resources, and capital into the largest single-goal-directed economic entity in mankind’s history. The single goal of the Chinese Communist Party, the sole political entity in China, is to raise the standard of living of all Chinese people as much as possible, by any means possible, in the shortest period of time. In China, the political system to achieve this is known as “socialism with Chinese characteristics” and the chosen economic system to achieve this goal as “capitalism with Chinese characteristics.”

I think that the misunderstanding of “capitalism with Chinese characteristics” by the socialist-capitalists of the West is manifested most clearly in the idea that the goal of Chinese state economic planning is and must be individual “profit”, in exactly the same sense as is the goal of private capitalism outside of China.  Individual profit is allowed at the moment so that wealth can be created rapidly in the service of the goal of the state.

China has been very lucky to have had a foundational  leader to unify the country, albeit ruthlessly and brutally, who was followed in short order  by a brilliant economic leader such as few countries have ever had.  In a way this is exactly the opposite of the experience of the former Soviet Union, which embarked under Stalin on a dead-end course to state bankruptcy with a goal of nineteenth-century empire building, almost completely overthrowing the ideas of  the Soviet Union’s foundational leader. The Western democracies without even so much as an industrial plan, such as the USA, look economically precarious to the central economic planners of China, who themselves are dismissed as nothing more than the latest iteration of Soviet central planning. China is not following the Soviet model of the path to communism, but China learned from the Soviet failure, and it learned well.

China, since the reforms of Deng Xiaoping,  has created and nurtured until now an export-driven economy, which has allowed the Chinese to rapidly accumulate large amounts of reserve currencies (principally US dollars and Euros) representing the surplus of the payments they have received from their largest trading partners. China’s currency has not been allowed to become “convertible” in the free market. Its value vis a vis the reserve currencies, is set only by the Chinese government and not by the market. The Chinese store of assets anchored by its hard-currency reserves is the most powerful weapon in the history of economic nationalism.

It now seems that the Chinese have become aware that the growth of their manufacturing economy is slowing, so that if a high “floor” rate of growth is to be maintained, then it is the time for some structural adjustments.  China has stated as official policy that it now wants to transform itself into a mixed economy, led ultimately by domestic consumption. This means that the types and amounts of resources now allocated to export, will have to be reviewed to see what amounts of them will have to be redirected to support the growth of the domestic consumer economy.

To bring its particular sub-sector of the domestic natural-resource market into conformity with the new program direction, rare-earth mining has had first of all a cap placed on output and then, just now, an output licensing system put in place so that supply could be accurately measures and prices accurately “discovered.” In this way,  the legal market could become the total market, with taxes calculated and collected on all production, as well as facilitating accurate measurement of supply for state-planning purposes. Just this week it was been announced that of 80 applications for rar-earth production operating licenses received since the reforms began earlier this decade, the Chinese government has selected just 15 that conform to the NEW environmental standards. Production from unlicensed sources will now be a serious felony and the total of the amounts purchased either for use internally or for export will be checked to make sure it matches LICENSED output.

This has resulted in a price correction that has been described as the deflation of a bubble. In fact the prices were earlier driven up by Chinese speculators and illegal miners trying to offload inventory, before it became worthless or dangerous, because it wouldn’t have a necessary license to enable it to be sold in the legal market. The new regulation scheme will stabilize prices, since supply will be able to for the first time to be matched to demand.

We will also now see a clear differentiation in supply and demand between the light rare-earth elements (LREEs), and the heavy rare-earth elements (HREEs). HREE production is, at best, flat in China, currently the sole producer, even as demand proceeds to grow. This can only result in firm current pricing and a steady increase in prices over the years to come for the HREEs.  Since non-Chinee HREE production will, at best, grow slowly, if even at all, it is likely that HREE supply will not meet demand anytime in this decade.

This is a far cry from the situation in the LREEs where China is operating at less than one-half of mining capacity ,and possibly at even a lower level of utilization in refining capacity, and there is at the same time a strong possibility that Lynas (ASX:LYC, OTCQX:LYSDY) or Molycorp (NYSE:MCP) or both will come into large-scale production by 2014. This situation will simply maintain the probability of oversupply of the LREEs in the near to mid term. This should stabilize and hold down the prices of the LREEs, as speculation is discouraged internally by new Chinese moves.

Finally it is obvious that the overwhelming market for the rare earths as raw materials is Southeast Asia, primarily China (60%) and Japan (30%), totaling 90% of the world market. It is incredibly naïve to maintain that as large a production as is predicted for even just Molycorp, could be absorbed by the US market unless you assume the total collapse of the Chinese and Japanese export markets for REEs. The only way that Molycorp could sell its total planned production would be by marketing into China and Japan. This will place Molycorp, at least in China, in direct competition with a mature Chinese mining sector, with much lower costs across the board than have ever been previously achieved, in practice, outside of China. Lynas faces the same marketing problem, but its mix of REEs is perhaps better suited to the world market place. In order to sell anything into China, any supplier must conform to strict Chinese import rules, regarding radiation and other contamination levels. This makes a non-Chinese rare-earth supply chain even more important to potential large-scale and therefore lowest-cost producers, but it is not the mining costs that are determinative – it is the lowest overall cost to the sale point of your rare-earth product that is important.

First to pass the post is also going to be a very important benchmark for the success of a large LREE venture. If Lynas should succeed in getting the go-ahead from the Malaysian government soon, then it will rapidly thereafter begin producing large quantities of LREEs and some HREEs also from its Australian ores. This fact is a key reason why Molycorp is attempting to accelerate its target date for actual production, from newly mined material. Both Lynas and Molycorp have large fixed costs of operation. Any inability to sell all that they can produce may be fatal to their survival in the face of a market that is not as large as it is held out to be. In fact they are of course competitors with each other. If either is to survive, this will be if and only if, the Chinese do not choose to again ramp up LREE production, targeted for the export market.

Governments may well buy small quantities of critical metals for security purposes, but the government of Australia needs hardly any such material and the actual needs of the US military are small.  If there is a revival of the total REE supply chain in the USA then a stockpile to protect the INDUSTRIAL supply chain could be enough reason for private industry to fund a Molycorp or a Lynas.

The key stockpilers of the REEs as rare materials over the next decade are likely to be the nations and industries with the most pressing needs for them. Those would include China, Japan, Korea, India, the EU, and last, and presently least important, the USA.

Stockpiling may be used as a reason to capitalize security of supply. In other words stockpilers will pay more to ensure domestic supply.

With regard to HREEs, based on the information that I have about the deposits, management, markets and politics to be served by the potential rare-earth mines that can produce HREEs, I have reduced my interest in the space to the following. I may have missed a good one or included a bad one, but I think that the survivors in 2015 must be in my list today:

• Avalon Rare Metals (TSX:AVL, AMEX:AVL)
• Great Western Minerals Group (TSX.V:GWG, OTCBB:GWMGF)
• Matamec Explorations (TSX.V:MAT, PK:MTCEF)
• Quest Rare Minerals (TSX.V:QRM, AMEX:QRM)
• Rare Element Resources (TSX.V:RES, AMEX:REE)
• Tasman Metals (TSX.V:TSM, PK:TASXF, F:T61)
• Ucore Rare Metals (TSX.V:UCU, OTCQX:UURAF)

I believe that REEs can be produced as secondary values / byproducts at the lowest costs, by:

• AMR Minerals
• Alkane Resources (ASX:ALK, OTCQX:ANLKY)
• Orbite Aluminae (TSX.ORT.A)
• Rare Earth Metals (TSX.V:RA)

Low-thorium deposits are highly desirable for LREEs and, of course, HREEs but they are few and far between. Owners of such deposits include:

• Rare Earth Metals (TSX.V:RA)
• Tasman Metals

Recycling from industrial process and end-of-life scrap plus REE slags and residues, can provide a limited but significant and immediate supply of products at the lowest cost. This is because the energy and cost of mining and separating them from each other in gross is built into the scrap as intrinsic value.

In 1976, China exported for the entire year the dollar value of its current (2011) daily exports! But, what exactly does China export? Two things: Labor content and the least quality to make a product competitive. What exactly does China import? Two things: Intellectual property (often as in the case of the American OEM automotive industry at NO COST) and raw materials.

Let’s focus on raw materials.

The best investment possible is to supply a growing demand for a material that is scarce to begin with. The LREEs are not rare nor even hard to get at; they are just currently too expensive to produce against the Chinese supply chain. On the other hand, the HREEs are scarce even in China, and also even in China their production costs are high due to the low grades that are worked.

Thus, it turns out that deposits containing the highest ratios of HREEs to total REEs, where they can be worked so as to produce a product that is saleable competitively with the Chinese production costs, can be sold into China itself as well as into Japan.

In the case of the HREEs, it is even possible to try to undercut Chinese prices to gain market share. If the production is price competitive, or even a little higher than that of China, then capitalizing the security of supply or national security issues can level the price differential at least for a critical quantity.

The idea that it is the highest-grade, largest-volume deposit that is most likely to have commercial success is I believe, confused and naïve in the extreme; it equates market capitalization & share-price maintenance, promotion and manipulation with the probability of actual commercial, competitive, production in the real world markets.

Disclosure: Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG). He is a non-executive director of AMR Minerals. He does ongoing paid consulting for Ucore Rare Metals Inc. (TSX.V:UCU), Rare Earth Metals Inc. (TSX.V:RA), Rare Element Resources Ltd. (TSX:RES) and for Tasman Metals Ltd. (TSX.V:TSM).

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.

On Wednesday of this week, the National Center for Policy Analysis (NCPA) hosted its Rare Earths, Critical Metals, Energy & National Security Conference, close to Capitol Hill in Washington, DC. Very much aimed at the DC crowd, the event was billed as an attempt to “raise awareness of how current public policies lead to dependence on China for the U.S. supply of rare earths, and thus undermine our national security.” The announcement from the NCPA on the event went on to say that “[a]s key policy makers, executive branch analysts and think tanks experts, conference participants will play a key role in shaping U.S. resource policies.”

I was a participant in the first panel of the day titled “The Rare Earths: Supply, Shortfall, Strategy“, moderated by NCPA’s Sterling Burnett. Joining me on the panel were Jeff Green, President of J A Green & Company, a DC-based government relations firm, and Thomas Tanon of T² & Associates, an energy and technology industry consulting services firm.  We each gave an overview of our perspectives on the rare earths, with my own presentation focused primarily on defining the rare earths, and reviewing the sources of current and potential future supply. There were some good questions from the audience.

The second panel, titled “Specialty Metals: Assessing Strategic Need” was moderated by Dan McGroarty, President of the American Resources Policy Network. Joining him were Kent Hughes Butts, Professor of Political Military Strategy at the US Army War College, Dan Cordier, the rare-earths specialist at the US Geological Survey (USGS), and Michael Steuer from the US Defense Logistics Agency. This panel covered the topics of stockpiling for national defense needs, and assessments of those needs by various government agencies.

There were some lively questions during this panel session. One note of interest that came out of it, was that the recently passed law that governs the National Defense Stockpile (which does not as yet include rare earths), requires that the President of the United States, and only the President, be authorized to release materials from the Stockpile. This effectively means that once materials go into the Stockpile, it is very difficult to get them out again. Doesn’t exactly seem like a practical approach to me…

I raised the point with this panel, of the relative ease of “solving” the so-called rare-earths problem, compared to other metals, by virtue of the fact that most of the potential new sources of supply of rare earths are primary sources – i.e. they will not necessarily rely on the economics of other metals in order to be produced. Even if they are contained in polymetallic deposits, generally (though not always), the economics of the rare earths will dominate. This is not the case with many of the other rare metals that are critical to hi-tech applications; most if not all of these are actually by-products of base-metals production, such as indium from tin and zinc production, gallium from aluminum production, and so on.

There is a danger that people (especially of the type with short attention spans, such as politicians in Washington, DC) will come to believe that solving the rare-earths supply problem is the same as solving the rare-metals supply problem, when this is clearly not the case. It will be much more difficult to resolve issues for the co-produced rare metals, given the dominance of base-metal economics in such cases. I don’t get the sense that this is really being addressed by the various agencies in Washington.

We then had a presentation from David Diamond, a policy analyst with the US Department of Energy (DOE), and a co-author of the Critical Materials Strategy Report that was published at the end of last year. Dr. Diamond presented a summary of the report’s findings, which we’ve discussed elsewhere on the TMR Web site before, and part of which was incorporated into the Critical Rare Earths Report that TMR published in the summer. He mentioned that the DOE was in the final stages of updating that report, and that the next version would be published in the near future. I look forward to seeing the results of that work.

The conference then adjourned for lunch, where we were later joined by three members of Congress (click on the photos above), who each spoke in turn on a variety of issues concerning rare earths. First up was Senator Lisa Murkowski (R-AK), who focused on the importance of mining to the US economy, and the problem of dependence on foreign sources of minerals. She also took the opportunity to criticize the Environmental Protection Agency (EPA) on a number of issues. Senator Murkowski discussed her Critical Minerals Policy Act, which she introduced earlier this year along 9 Democratic and 10 Republican co-sponsors. She said that

“The legislation requires that USGS generate a list of minerals critical to the U.S. economy, outlines a comprehensive set of policies that will bolster the production of those critical minerals, expands manufacturing, and promotes recycling and alternatives – all while maintaining strong environmental standards.”

Once she concluded her remarks, Senator Murkowski took quite a number of questions on the topics she had covered, before leaving.

Next up was Congressman Doug Lamborn (R-CO), who discussed the legislation that he introduced earlier this year, titled the National Strategic and Critical Minerals Policy Act of 2011, touting it as a “common-sense solution that will provide for our common defense”. Among other things, this bill would require that the Secretary of the Interior evaluate factors impacting domestic mineral development; it also directs the Department of the Interior to

“assemble a report within six months and require[s] them to include a specific inventory of the rare earth element potential on federal lands, and identify impediments or restrictions on the exploration or development of rare earth elements, and provide recommendations to lift the impediments or restrictions while maintaining environmental safeguards.”

Rep. Lamborn was then followed by Congressman Mike Coffman (R-CO), who is well-known for having introduced the Rare Earths Supply-Chain Technology and Resources Transformation Act of 2011 earlier this year – also known as the RESTART Act. Rep. Coffman discussed his perspective that China’s stated industrial policy was mercantilist in nature, with the goal of expanding China’s industrial base at the expense of other countries, including the USA. Rep. Coffman said that he saw rare earths as being a part of the overall issue, and that his main concern was that China was an unreliable trading partner, which was prepared to leverage rare earths for political goals.

I asked Rep. Coffman if he would agree with me that a root cause of our current dependence on China was a major disconnect in the supply chain between end-user companies who pursued a “lowest cost at any cost” profit motive, at the expense of the upstream part of the supply chain and all the while ignoring any potential national security concerns. Rep. Coffman did not acknowledge this point; instead he chose to blame the situation solely on China’s non-free market policies. I suppose in retrospective, that it was perhaps a little much to expect a Republican Congressman to criticize the virtues of American capitalism, at an event hosted by a conservative think tank…

Rep. Coffman was asked if non-US companies could fill the gap in the supply chain. He responded by saying that his key issue was the reliability of trading partners; if companies in friendly countries brought rare-earth production online, this, he said, would “lower the temperature on the issue in Congress” and would “lessen the need for invasive policies from Congress”. This shouldn’t be surprising; even the specialty-metals clauses of the defense-procurement regulations, have exemptions from some strict sourcing requirements, for companies based in a number of countries friendly to the USA.

Both Congressmen commented further on the issues of permitting in the USA, and how overly restrictive permitting practices, and environmental regulations, were reducing the ability of the country to get projects up and running.

The final session of the day was another panel chaired by Dr. Burnett, this time titled “The Value Chain: Industry’s View on Critical Metals Supply“. On the panel were Peter Dent, with Electron Energy Corporation, a US rare-earth magnet manufacturer, Michael Berry of Discovery Investments and publisher of Morning Notes, and Anthony Young, an analyst at Dahlman Rose. Mr. Dent and Dr. Berry gave presentations on their respective viewpoints on this issue at hand. Mr. Dent noted that companies are beginning to switch production to China in order to access materials. Mr. Berry made the interesting comment that the USA should not be relying on Canada to get them through the current issues; China was more than a little interested in investing in Canadian companies, and so the US should be prepared to put its own infrastructure in place. He said that China’s policies on rare earths were just the tip of the iceberg of a much larger strategy.

Mr. Young made a comment on the volatility of share prices, and how news such as the announcement that the DOE would not be giving Molycorp a loan guarantee, caused prices to swing dramatically. I put it to the panel, and Mr. Young in particular, that the bigger issue for this market was the sometimes outlandish valuations made by analysts of the stocks in this sector, with those valuations seeming to have little connection with reality. Mr. Young responded by saying that this was a relatively new sector, with it being difficult to predict production costs and potential product prices, and that his own valuations reflected this. He commented that he had valued Molycorp, for example, at something like $70 / share, before revising it down to $40 / share. Note that this is in contrast to the actual valuation that Dahlman Rose set in May 2011, of $125 / share for Molycorp. Needless to say, I was not exactly convinced by the response. If analysts have such unreliable data, as Mr. Young suggested, then perhaps they shouldn’t be publishing valuations at all…

The panel session closed, and the meeting was brought to a conclusion by NCPA’s Richard Walker. Overall, it was useful to meet new Washington, DC types, and to re-connect with other contacts in the strategic-materials sector and US government at the event.