Chinese Institutional Investors Look At Rare Metals Overseas

by Jack Lifton on September 8, 2010 · 11 comments

in China, Metals & Minerals, Rare Earths

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I’m in Shanghai today; I was in Beijing yesterday, I will be in Tokyo tomorrow and Hong Kong next week. I am teaching a course on rare metals that I put together for CLSA, Asia’s pre-eminent brokerage form. CLSA’s clients are my students. I do not presume to give investment advice to the likes of China Asset Management, China Investment Corporation, Manulife TEDA Fund Management Co.,Ltd, or Harvest Fund Management Co., Ltd; however, I do explain the details of the new asset class of rare, technology, and minor metals, in which they have an interest. I also explain how the rare metals market fundamentals and future use trends are related to, and different from, those of the older and obsolescent categories of base and precious metals.

There is no doubt that Chinas’s growth rate cannot be sustained by its domestic production of natural resources.This is painfully obvious to Chinese corporate procurement officers. It is only now becoming apparent to Chinese domestic institutional investors. As just one outstanding example, I note that China consumed 6 million tons of copper last year out of the world total production of around 16 million tons. Importing 5 million tons of copper cost the Chinese economy some 40 billion dollars. Thank goodness, Chinese bankers tell me, for the export market for finished goods and services.

I emphasize in my ‘course’ that if China’s growth rate were to continue at 8%, then its demand for all metals, current at 53-56% of all metals produced in the world, could shortly rise to a level where the existing productive capacity of the world’s metals economy cannot increase any further, due to capital, equipment, and skilled personnel limitations of availability. When this point is reached, the first result will be an intense commodity price inflation the likes of which the world has never seen. This would of course in the long run be demand-destructive, and prices would ultimately crash in a world-commodities, price-led recession, but the economic and political danger of such a series of events is sobering and a little frightening,

China recognizes this possibility much better than Western economies do, still mired in recession due to the credit bubble. China fears most of all a commodity price inflation, and a renminbi appreciation, either or both of which could damage its economy or slow or even stop its growth.

China’s rare earth production industry, the world’s largest by far, is now being downsized in management. It is being given access, under the new supervising management – of which I have already written – to all the capital it needs for a rational restructuring. This is in preparation for a great leap forward to a domestic productive capacity, which will enable the industry to meet the goals set in this and the next five-year plan, for raw materials for alternative energy production and use.

In the meantime, over the next 10 years, a window of opportunity has arisen for non-Chinese producers of rare earths, if they can move fast enough, to supply the Chinese, Japanese, Korean, and (soon) Indian manufacturing industries with rare earth raw materials and metals.

China has enough light rare earth resources to supply itself indefinitely. What China worries about is its supply, current the only one in production, of heavy rare earths. I cannot over-emphasize the importance of the non-Chinese heavy rare earth supply industry to China’s and then the world’s green alternative energy industries.

In summary: There is room right now for some supply of light rare earths outside of China. There is also a demand for the heavy rare earths beyond China’s productive capacity and this demand may be permanent.

The economics of rare earth mining are difficult and challenging. If the goal of a mining company is just to produce unseparated concentrates, it will most likely fail as a freestanding economic enterprise, unless its overheads are distributed in the balance sheet of a larger independently funded entity. This is how Baotou functions in China, for example. The rare earth entity has the advantage of the parent iron mining company’s distributed overheads. I believe that no where else in the world could such a large rare earth production point be successful, without the financial support of the larger company’s absorption of overheads.

I am preaching to the Chinese rare earth and rare metals supply industries, that they must now seek out natural resources everywhere and that it isn’t necessary to own them outright. Producing rare earths, for example in South Africa, with Chinese investment short of ownership, creates a supply for which there is no local domestic demand. Thus it is an exportable supply. This means that deals can be struck where initial investments of money and technology for refining are repaid in kind, in metals that can be exported to the investor’s home markets.

Governments that wake up to foreign investments that create wealth, will rebuild their economies in part on this basis.

America’s needs for light rare earths will be oversupplied by Molycorp as will Australia’s by Lynas in a massive way. For the heavy rare earths, America’s needs can be meet and exceeded  by Ucore Rare Metals and Rare Element Resources. The needs of China, Japan, Korea and India for heavy rare earths can be met by the Canadian and African operations of Great Western Minerals Group, the Canadian operations of Avalon Rare Metals or Quest Rare Minerals, and the southern African operations of Frontier Rare Earths and Tantalus Rare Earths.

It’s time to circle the wagons and switch to fast forward in non-Chinese rare earth production. The window for light rare earths will close by the mid to late teens. The window for heavy rare earths is now open and unlikely to close.

I’ll be in Tokyo for the next two days and will report from there on Japan’s needs and plans for rare earth security of supply.

Disclosure: I own stock in Ucore Rare Metals, Rare Element Resources, Great Western Minerals Group, Quest Rare Minerals & Tantalus Rare Earths.

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1 CuriousCat1 September 8, 2010 at 11:37 pm

Hi Jack

I am a bit surprise that you now seem to think that companies like Ucore and Quest can be successful. Did you change your mind regarding the metallurgy of extracting REE from Uranium ore? I thought you said something like “it was never fully demonstrated”. Are you now more optimistic that such a metallurgy can be done economically? Plus I thought Rare Element Resources was a light REE deposit. Did they found some HREE? I have been following your posts for one year now and I would like to thank you for enlightening me. And also thank you for your dedication in trying to bring back to life our industrial base.

2 daniel collins September 9, 2010 at 10:52 am

Good article Jack-
Wish I had known you were in Shanghai, I live a a few hours south in Ningbo.
Chinese Rare Earth stocks such as Baotou have been exploding. The story on the massive gap between supply and demand is well known. What story I think that has not been told is how changing Chinese market dynamics here alone is bound to cause a spike in rare earth pricing. As the Chinese economy exploded intense compeition was the only rule. It was company against company, province against province, this led to China being the lowest cost producer and not acting like a monoploy supplier despite dominating global production. They could not control all of these companies. Now however, they are downsizing from 90 rare earth companies into 20 companies and setting up a pricing mechanism under 2 companies. This change alone, despite the supply/demand gap is bound to create increased prices.

3 Jack Lifton September 9, 2010 at 11:22 am

Daniel,

You are exactly right about what killed the rare earth prices, intense internal Chinese competition.

I am in Tokyo until Tuesday night and I then fly to Hong Kong where I will be speaking at the CLSA Asia Forum.I leave Hong Kong for the USA on Friday.

4 my69z September 11, 2010 at 2:58 pm

Curious, the uranium and HREE are 2 different stories at Ucore.

One side of Bokan Mountian is uranium,,,,the other is the REE’s….they’re 2 completly seperate issues as of today & so far very little Thorium in their HREE mix and a proven USGS metallurgy,,,,although of course being re-worked today with modern techs/approaches.

Ucore is imo, a true sleeper in the HREE arena….very rarely mentioned in articles, etc…

Good for guys like me. :)

UcoreRareMetals.com

GLTUA !!

5 Gareth Hatch September 12, 2010 at 7:14 pm

my69z: what, specifically, do you mean by the term “proven USGS metallurgy?”

6 my69z September 12, 2010 at 8:29 pm

Gareth….go to Sept. 3rd 2009….ucoreraremetals.com

* Independent Review of USBM Metallurgical Study Confirms 96% Separation of Bokan HREE to be NI 43-101 Compliant
Date: September 3, 2009

* This USBM funded metallurgical study, particularly in view of its NI 43-101 compliance, is a unique and valuable asset to Bokan-Dotson Ridge and greatly expedites the feasibility cycle for one of the few prospective heavy rare earth deposits outside of the currently producing south China clays.”
———————

A recent comment by Mr. Lifton on Aug.18th 2010….

” In other news, I recently just returned from the Bokan Mountain project in Alaska, owned by Ucore Rare Metals (TSX.V:UCU). If I had both the capital and the stamina I would buy Bear Lodge and Bokan Mountain and produce from them the entire range of rare earth elements (‘lights’ and ‘heavies’) in amounts that would satisfy US demand in total. With the surplus I would export to Asia the heavy rare earths that the Chinese, Japanese, and the Koreans need today and increasingly will need in the future. I would construct two separation plants, one at each location, and one refining plant to serve both. ”
——————
Sept. 2nd 2010…..Ucore pr : ” “We welcome the involvement of the USGS at Bokan,” said Jim McKenzie, President and CEO of Ucore. “Not only will their expertise help us to identify and assess the unusual chemical, mineralogical, and structural aspects of this complex project area, their work will also highlight the significance of Bokan’s unusual concentrations of HREE’s, to various US policy makers. Scientific studies by the USGS have been, and will continue to be, of great benefit as we integrate their studies with our exploration data and move toward defining a resource at Bokan.”

I’d suggest to anyone to start at least around 2009 and read the pr’s,,etc…

A HREE sleeper…..imo. ( lol )

Glta the honest investors !!

7 Gareth Hatch September 12, 2010 at 9:44 pm

my69z: the USBM report does not contain proven metallurgy for the deposit at Bokan Mountain. What it does contain are the results of tests to recover yttrium, and while an effective process for doing so may be indicative of promising methods of recovering other heavy rare earths, the entire metallurgy required for this deposit is far from complete or proven, and not yet in the public domain.

8 my69z September 13, 2010 at 12:06 am

Gareth,,,,very short answer due to time…….September 3, 2009 …” Additionally, the USBM metallurgical separation methodologies correlate to the recovery of light rare earth elements (LREE’s) also present in the Bokan samples. ”

“The discovery of usable metallurgical formulas can consume a significant portion of the development cycle of a REE mine, and can be an elusive objective. This USBM funded metallurgical study, particularly in view of its NI 43-101 compliance, is a unique and valuable asset to Bokan-Dotson Ridge and greatly expedites the feasibility cycle for one of the few prospective heavy rare earth deposits outside of the currently producing south China clays.”

Since u can’t cherry pick lights from heavies…..to me,,this is saying the past Govt study was successful in recovering both LREE n HREE…hence ” usable metallurgical formula “….but they only publically focus on the HREE’s.

So re-work it with todays tech and go from there…..like they’re doin….and the cool thing is,,,,even though that’s an older govt. formula….it would qualify under todays standards for compliance.

Glta !!

9 Gareth Hatch September 13, 2010 at 1:29 am

my69z: you need to read the original 1996 USBM report by Green & Harbuck [available for download via http://www.barnswood.com/tmr/wp/downloads/GreenHarbuckUSBM1996.pdf ]. The focus was on yttrium, with some work on cerium and lanthanum. This is a far cry from “saying the past Govt study was successful in recovering both LREE n HREE…” – this study does NOT say this.

10 Gareth Hatch September 13, 2010 at 1:43 am

One specific note on the USBM report:

Green & Harbuck indicated that yttrium and to a certain extent, cerium and lanthanum could be recovered effectively via the culmination of the processes that they tried. However, they went on to say [on page 8 of the report] that “[A]s emphasized throughout this paper, the main thrust if [sic] the research was yttrium recovery; however, as is evident in tables 7 and 8, the raffinate from the yttrium circuit could be passed through a 20 pct DEHPA, 0.24M OPAP circuit to selecrively [sic] recover cerium. The recovery of other select metals from the leach liquor would require further research”.

Note the last sentence. There is no indication in this report that the metallurgy for the other REEs [light or heavy] had been settled or completed at the time of that report – quite the contrary. The continued mis-use of this report to support erroneous hypotheses, particularly by denizens of certain stock-related message boards, is misleading and unethical.

I look forward to Ucore defining a 43-101-compliant mineral resource, detailing the required metallurgy and putting both sets of information into the public domain soon, so that we can finally move past the now-infamous Green & Harbuck report.

11 my69z September 13, 2010 at 6:09 am

Gareth,,,,take that unethical fight to those people & good luck…i have never made a comment on REE’s til finding this place.

” look forward to Ucore defining a 43-101-compliant mineral resource, detailing the required metallurgy and putting both sets of information into the public domain soon,”

July 15, 2010 : Additionally, Collison and Associates has been retained for scoping and pre-feasibility work on the prospective heavy rare earth mine at Bokan, as well as the planning of progressive underground exploration. ”

“Considered by many to be the nearest heavy rare earth facility to production on U.S. soil, our objective for Bokan will be to transition from the delivery of an NI 43-101 compliant Inferred Resource this year to production pre-feasibility immediately thereafter”, continued McKenzie.

Moving straight to PFS….& i’am sure they feel their process will make the cut for the PFS……just like Avalon did…..

Avalon Nov 19, 2009 : Hydrometallurgical process flowsheet development sufficient for a prefeasibility study is expected to be completed early in the new year. ”

Glta !!!

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