Decoupling The Rare-Earth Junior-Mining Market From Emphasis On Molycorp And Lynas

by Jack Lifton on November 26, 2011 · 57 comments

in China, Rare Earths

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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).

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1 Gordon Clarke November 26, 2011 at 10:45 pm

Jack; Another one of your erudite articles. Thank you. I have, like I am sure others, been drawn into the Lynas/Molycorp rhetoric. I have been concerned about, but steadfastly loyal to one of my investments in one of the seven companies mentioned above. My loyalty has been further reinforced from your writing. The pending GQD agreement (JV) I am told is on track but nonetheless taking time. Guess which company I own. From my research of GQD I see that they are ceramic knife producers (on Alibaba). I have to assume that they have also imported HRE metals and alloys from LCM in the past and will continue to do so through the JV arrangement. I also have an intuitive feeling that GWTI (Troy Michigan) will play an increasing roll in the GWMG model.

2 David Lowe November 27, 2011 at 1:40 am

Jack once again ignores Stans Energy, a company that will be in production in 2012 with HREE’s. That’s 2012, Jack. And yet your list is for companies currently with nothing but moose pastures (Quest? Seriously?) to produce in 2015, three years later.

Incredible. You will look like a fool when Stans Energy (a) releases their resource estimate before the end of 2011 and (b) is in production in 2012 with HREE’s.

3 Gareth Hatch November 27, 2011 at 1:55 am

@David Lowe: can you point us to a public domain, NI-43-101-compliant Technical Report, that provides the details behind your statement above concerning the initiation of production in 2012, as well as an assessment of the economics associated with the project?

4 john November 27, 2011 at 2:09 am

You don’t have any comment about Tantalus R E… Please could you me your thoughts of the product, cost and investment potential of this co.

5 JT Meade November 27, 2011 at 2:11 am

Gareth, SVID LOWE, I don’t know if this is valid, but it claims to be a NI-43-101 on the Stans property:
http://www.stansenergy.com/43-101%20kyzyluraan_update_AUG18R.pdf

6 Gareth Hatch November 27, 2011 at 2:19 am

@JT Meade: that’s an old report, which contains no information pertaining to the 2012 production date mentioned by David Lowe, or any details of the economics.

7 Max12345 November 27, 2011 at 2:23 am

Jack: Many thanks for your piece above. Above you say…”Any inability to sell all that they (Lynas and Molycorp) 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”

What do you think would be the benefits and what do you think would be the drawbacks for China to destroy (or not to destroy) the new Western producers by “ramping up their LREE production targeted for the export market”?

One thing which the Chinese have demonstrated beyond the shadow of a doubt (apart from their “political socialism” and “economic capitalism” which however 900 million of their rural population is NOT benefitting from very much) (and the natives are getting restless as more and more of their land is grabbed by greedy local politicians) is their totally self-serving state-mercantilism. Not that the Western countries were ever any better with their “highly democratic and equitable neo-liberalism” but the Chinese have been (much) more clever recently at looking out for number one.

So any insights regarding what the Chinese stand to gain and what they might stand to lose by doing precisely what you have suggested they COULD do, would be useful in trying to understand whether some of the Western LREE producers coming on stream have any real chance at all.

The last concern of the Chinese will be whether some Western companies succeed or fail unless they themselves would stand to lose something either economically or politically.

Thanks for any light you can shed on the above considerations and regards.

8 Igo November 27, 2011 at 3:33 am

Pretty is not a bad article and detailed. But still it is a forecast! I think the realities are very different. And who will stay in the company of “living” is impossible to predict with 100% certainty. The chief at that time in this small market of China. And in the near future the market will be held hostage to China’s behavior. And now some of the companies did not say that it can begin production tomorrow, it will certainly be an outsider. Now I think the most important new technologies that could znachiteno udeshivit production of rare earth metals, but their appearance may make the market more predictable and may rasshiret it. As an example, can result in extraction of rare earth metals in the manufacture of phosphate fertilizer, coal preparation, aluminum (red mud), etc. ie complex processing of ores.

9 Rolf Westgard November 27, 2011 at 7:41 am

Thank you, Jack, for continuing to educate us on this important subject.

10 Joe Daves November 27, 2011 at 10:15 am

Great commentary Jack. What are your thoughts on Dacha? Based on just released financials, seems to be a real bargain … earned 0.94/share on sales during the last six months … $121M inventory … trading at 0.53/share with market cap of $52M fully diluted. Even factoring in further declines in prices, appears exceptionally cheap. Am I missing something?

11 David Kyagulanyi November 27, 2011 at 11:17 am

Thanks Jack for your article which has authority and practical business sense written all over it. I believe in your conclusions. I am also wondering if it really is going to be long before scientists outside of China learn to cost effectively crack the REOs and produce REmetals. The Chinese seem to be challenging the whole world and sooner than later some person (or persons as is usually the case) is going to get a breakthrough. And I am glad you included Orbite Aluminae in your assessment. Because I believe Orbite is a real global game-changer. As a Ugandan, I am eagerly awaiting Orbite’s PEA.

12 Aat Oskam November 27, 2011 at 11:44 am

Jack,
again a firm stanse and fine article, thank you.
But don’t you underestimate the EU a bit (Yes, at this moment of Eurocrises even the Chinese export to the EU comes to a halt, but this will pass) imho? The GDP is triple the Chinese and as big as the US plus India together. Lynas has 40 % of their first 11k sold to EU companies in German (Siemens, BAF) and France (Rhodia). Even AraFura has a LOI with Thyssen-Krupp of Germany.
Your thoughts please?

13 fran November 27, 2011 at 12:06 pm

the article supports several truisms of commodity life —

fewer than 10 % of junior miners will be successful enterprises. this select group will solve the mining economics to successfully solve supply/demand imbalances.

to determine these few, it’s best to follow the money flows from the BIG $$ users to promising mining cndidate pretenders. where and when $$ become contrational [financially or politically ] firm, take heed.

know well the composition, skills, investment actions of MGT and BOARD/DIRS.

other selection, used solely,result in pure gambling. adjust expectations accordingly

14 chihawk- Paul San Antonio November 27, 2011 at 12:07 pm

Jack,
Until we see the Chinese per capita wealth and earnings improve, a solid middle class developing, and we see greater domestic consumption as well as a greater return on government investment I cannot conclude socialism with Chinese characteristics is any different than other command economies in history. It is big and modernizing, but there is more required to earn your excessive praise IMO. For now I see inflation and growth based on excessive loans by a command economy banking system.

I believe on an inflation adjusted basis the Chinese population on these metrics are still far below the Soviet Union at it’s height. And when we look at the details of the Chinese banking system the seeds of future failure seem apparent. It is premature to judge many of these issues, especially in this global economic environment. But I find the following naive, overstating, and below your usual insights into China:

You wrote: “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.”

I disagree with the word sustained (since it seems to require government aide); I see the resources of the people inefficiently used since the middle class is still very small; and I think the unity you suggests ignores underlying social unrest and seems most supported by political rhetoric and totalitarian efforts.

My view is the single goal of the Chinese Communists is to consolidate power and to pacify the masses in the process like all oligarchies in history. I would appreciate any examples of how the Chinese Communists have chosen the people’s standard of living over their own power. I continue to see the same politically tied oligarchy formation in China that marked the rise of the Soviet Union.

15 Michael Coey November 27, 2011 at 1:06 pm

‘…..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?’
This is a statement I would characterize as confused and naïve. It makes one wonder about some of the other opinions expressed in an interesting blog.

16 bz1516 November 27, 2011 at 2:08 pm

Great article, Jack. Just wondering about that list of 15 environmentally acceptable processors. Looks like mostly HREE processors. don’t see any familiar names on it like Baotou or Minmetals. My question is if this is a regional list mostly from Jiangxi or if Inner Mongolia is also included?

17 fran November 27, 2011 at 2:38 pm

AFTER READING MANY COMMENTS —

our knowledge base of china’s history and current events is shallow at best. as is the application use and source of development of that use of REEs.

joe daves [dacha ]– do you understand the business model? especially that for cash flow needed to sustain/grow the enterprise?

18 Joe Daves November 27, 2011 at 3:49 pm

Fran, I understand Dacha buys and sell heavy REEs and profits from the margin. The company raised cash at higher stock prices to establish initial inventory, I think mostly from Chinese sources. None of that is transparent. I don’t understand how Dacha earns 0.94/share in the latest six months (I think over 0.30 in the previous period) while the share price languishes at around 0.50. It seems too good to be true. Maybe it is. Looking at the message boards, I see a few vague suggestions the company must be cheating but nothing specific.

19 Robert Olson November 27, 2011 at 4:27 pm

Jack and Gareth, I am a constant attentive reader and always take warning from your sage advice.

Kindest regards.

Could I add what many might consider simple ideas?

Sorry if I take a simple approach to the REE maze?

1. If China and Japan manufacturers currently utilize 90 percent of all the REEs, I follow announcements indicative of which companies “get the money” from the “big boys”.

2. China is a bit of a “black box” to the “outside world”, so in part I am relegated to the Japanese funding of REE projects, and to some extent what Germany’s Siemens and South Korean companies are doing?

3. My bias here in Australia is the reality of “good ole boy” network and cooperation?

4. “Show me the money” is the bottom line for “winners” in the crowded Non-Chinese REE space.

5. Jack or Gareth, could you “show us the money” regarding your “favored REE junior miner” lists?

6. Direct investment by Japan government/Japanese companies-end users or Japanese trading companies?

7. Direct investment by Chinese government entities/Chinese tightly held governmental companies/Chinese “surrogates” (Is Conglin Yue via Baotau Anchang a Chinese surrogate?)

8. Direct investment by Korean government/Korean Companies?

9. Direct investment by EU major companies like Siemens?

10. Direct investment by India/India companies?

11. Another thought? How did John D Rockefeller amass his for fortune in the Oil Industry? Oil refining or Oil drilling?

12. Jack and Gareth, e.g., in Australia just how many “refiners” do you guys envision? And how many “drillers” feeding their “crude ore” into the limited number of refiners?

13. Why do you suppose Lynas and Molycorp have set up the capabilities to refine all 17 REEs, both LREE and HREE, when as you say both have prodominantly LREEs?

14. Yes, “follow the money” by the biggies is my humble suggestion?

15. Without “biggie support” many “promising REE miner companies” will either be consolidative targets, lower profit center selling “crude product” to the few Refiners, or just left as a pile of rocks?

Kind regards.

20 fran November 27, 2011 at 7:03 pm

joe daves–

can you get the business to grow sufficient cash to grow share holder value at 10-20% anually, pay growing business expenses, buy expanding inventory, etc? a business needs expanding cash flow. how does Dacha do this? issue dilutive shares? sell off its inventory in a maket with china or someone ele in control of price? where is their leverage?

please illustrate a growing, profitable business together wiith conditions for success

21 David Lowe November 27, 2011 at 7:20 pm

Gareth,

As I said in my post, the estimate resource is coming before the end of the year. To completely ignore Stans is foolish.

22 herman November 27, 2011 at 10:07 pm

I met Jack Lifton in the Detroit Michigan area. He was losing his butt in the casinos. He told me he didn’t have to worry as he got paid to make up stories promoting certain companies and bashing other companies. Now I think I know what he meant.

23 Jack Lifton November 27, 2011 at 10:50 pm

Herman,

I’ve done a lot of things, but I have never placed a bet in a casino in Detroit. I cannot remembrr ever doing so anywhere on earth, but when I was young and as dumb then as you are now I may have done so.

The REE market is a casino, so I admit to making a few bets there.

Jack

24 Robert Olson November 28, 2011 at 12:03 am

Jack and Gareth:

Precisely:

For example:

Who are the “big boy” countries/companies backing Avalon and Great Western Mining Group to date?

Who are going to fund full development-mining and manufacturing for Avalon and/or Great Western Mining?

Kind regards

25 Poncho462 November 28, 2011 at 12:15 am

David Lowe…Kutessay II possesses a published Treo% by weight of 0.26%. Presumably this is accurate. That’s what is posted here on the TMR site under metrics/indices. Compared to Norra Karr at 0.54% and Bokan Mtn at 0.75%, that’s not very impressive, and they are not high up in the Treo percentages at all. Combine that with refurbishing and rebuilding a Soviet era benefication and separation facility with low initial cost but inefficient operation, coupled with huge tonnage requirements for ore mining and processing, and you probably do not come up with a low cost producer. Add to that the risk of potential political instability and corruption, and the outlook is pretty bleak compared to the various companies indicated by Jack to be likely survivors.

The Soviet Union operated Kutessay II under an economic model that does not seem to translate into profitable operation. The Soviet model called for production without much consideration for cost, which eventually resulted in their bankruptcy and dissolution as a political entity. The Management of Stans will have to perform very well indeed to operate the re-constituted mine and plant in a profitable manner, and business survival requires profit at some point in the venture. I cannot speak for Jack, but that’s the way it seems to me.

Think about it this way…Whenever production occurs, Stans will have to mine and process about 400 tons of ore to produce one ton of TREO. Steenkampskraal in South Africa, with a Treo of 11.65% will have to mine and process less than 10 tons of ore to produce the same one ton of TREO. That’s a 40+ to one mining/processing ratio in GWMG’s favor, and we won’t even talk about the planned latest tech, Chinese expertise, separation facility that Great Western Minerals Group is JV’ing with GQD, and also planned for completion by the end of 2012, which is quite reasonable considering the small capacity required. Given that, who do you think will be the lowest cost producer and survivor?

26 Jack Lifton November 28, 2011 at 1:05 am

Poncho462

I’m in agreement with your comments. The sole metric for the Soviet economy was the absolute production level of a commodity. Each five year plan called for more production than the preceding one. The Soviet system was bankrupt early on, but it kept going by robbing Peter to pay Paul.A Russian colleague told me that the Red Army sent trains of chemical reagents and mechanical parts accross vast distances to supply the Kutessay plants. No one counted COSTS. The Soviet Union collapsed economically in 1989. Kutessay was closed in 1992. These were not unrelated events.

Jack Lifton

27 Gareth Hatch November 28, 2011 at 1:15 am

@David Lowe: since you’re talking in the future tense about an updated resource estimate (which was not what I asked about), I presume that there is no NI-43-101-compliant report of the type I mentioned, currently in the public domain, detailing the production schedule that you mentioned, and the economics of production?

Before anyone gets the wrong idea here, especially you, Mr. Lowe – I have nothing against Stans; it’s just that for projects owned by public companies, I simply prefer to make assessments based on public-domain information that in the case of Toronto-based companies, has been placed in the SEDAR database for perusal, and which preferably complies with the JORC or NI-43-101 guidelines (and I’m not just talking about resource estimates). That’s the whole point of having such guidelines in place – so that independent third parties a.k.a. Qualified Persons, can vouch for company-originated information.

@Robert Olson: will try to get to your questions soon.

28 Anon November 28, 2011 at 9:58 am

Hi Jack,

Thanks for the article, I always find your insights to be interesting; however, I have to take issue with some of your choices on your “2015 survivors” list.

There are several factors that I believe investors must consider when looking at early stage HREE projects that I feel you’re overlooking. The most important items in my opinion are: quality of the ore, management experience, funding, and logistics. Several of your selections are fatally flawed in at least one of these areas.

To start, Avalon Rare Metal has good management and excellent HREE potential, but the logistics are just awful. There’s no infrastructure (roads, power, rail, etc.) to support a successful operation, and getting it in there to such a remote operation is a huge task that should not be discounted by investors. Some readers might recall that Avalon was involved in a plane crash a few months ago where both pilots were killed and several Avalon employees were hurt. Proof of just how remote this operation really is. While Quest has similar issues, they are much closer to established infrastructure, and getting a road access in is more likely than not.

Great Western may achieve “First Mover” status in the next few months, but there are major issues with their cash flow and there’s logistical and political issues moving ore from there African mine to LCM. I’m not convinced that they will get a REE processing plant up and running anytime soon. It’s workable, but rather messy in my opinion. They will need to raise a lot more $ and ultimately dilute there shareholders.

Tasman looks interesting, but realistic expectations won’t have them producing anything until after 2015 at best.

I believe that Lynas will kill off Molycorp in the long run. Molycorp is mostly running on PR Hype and investors are getting wise to the BS. But another company that will do very well in both LREE and HREE’s will be Arafura Resources. I’m surprised that Arafura did not make your list because it has excellent infrastructure and management, and it has backing from the Australian government, with a proven reserve that can be processed at a lower cost than Molycorp can deliver and it will be a strong competitor to Lynas. While Arafura’s BFS was delayed, I believe that their timing will be good especially in light of Lyna’s issues with the Malaysian goverment. Arafura will be on track for late 2014 and will have multiple revenue streams. Why did you not include them?

I also think that Ucore is a good bet on the HREE side largely because it has strong backing by Alaska’s local government and it’s very rich in Dy.
Alkane Resources is also a very good investment as well, and it’s a bargin at its current price.

I’m also surprised that you did not include Neo Materials in your analysis considering their size and ability to supply the market.

I welcome your feedback.

29 Jack Lifton November 28, 2011 at 10:25 am

Anon,

Arafura will continue to survive and become a serious competitor to Molycorp, but I don’t see it as an HREE producer, which is the narrow sector addressed in the category in which Arafura would go just before Avalon (alphabeticall) if it were going to be an HREE producer.

Neo is today just a nascent junior miner with its Pitinga project. It is America’s only operating (in China) producer of high purity forms of RE metals and of RE magnet alloys.

The AMR I am referring to is an Anatolian deposit in development by a Turkish mining company that has sited the company in Toronto.

Thanks for reading,

Jack

30 Veryrare November 28, 2011 at 11:14 am

Jack says the Earth is round.
Most everyone believes its flat.

Jack, you have a problem.

:-)

31 Anon November 28, 2011 at 11:57 am

Hi Jack,

Thank you for your reply. I know Arafura is primarily an LREE play, I thought to mention them because you brought up the LREE space as only being a competition between Molycorp and Lynas in your article. I don’t think your analysis of the LREE space is truly accurate without including Arafura in your equation.

Also, regarding Avalon, I forgot to mention that I have read in several places that Avalon’s HREE resources are going to be mined via tunnels–in an area prone to flooding–just another issue for investors to consider before jumping in. In contrast, Quest’s mining method is all surface-based, much easier to recover than Avalon’s method.

32 Bill Davis November 28, 2011 at 12:58 pm

Jack:
Should the paragraph I’ve abstracted from the subject article maybe have been stated “…..driven up by Chinese speculators even in the face of illegal miners dumping their inventories …….”
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.
Bill Davis
I hold AVL and though their HREE resource is significant, I think their separation process development can become even more valuable . I would appreciate your thoughts on their refining process development, Jack.

33 Robert Olson November 28, 2011 at 1:43 pm

REE mining and manufacturing development is costly? $500,000,000 (five hundred million USD)?

As small investors may I suggest watching witch of the REE miners are getting the financial life blood from the “biggie countries/companies” ?

Only so many times that big time investors will put their hundreds of millions of dollars of capital at risk?

Case in Point: Japan and Molycorp deal announced today: URL attached:

http://www.marketwatch.com/story/molycorp-daido-steel-mitsubishi-corporation-announce-joint-venture-to-manufacture-sintered-ndfeb-rare-earth-magnets-2011-11-28

http://www.reuters.com/finance/stocks/MCP/key-developments

Gareth and Jack: Please do a tabulation of your “most favored” REE miners, and “show us the money” that the “biggies” have spent on them!

Without “biggie support” many “promising REE miner companies” will either be consolidative targets, lower profit center selling “crude product” to the few Refiners, or just left as a pile of rocks?

As disclosure: my current holdings include: Molycorp, Lynas, Northern Minerals, Alkane, Great Western Mining Group.

34 Kris November 28, 2011 at 2:39 pm

Anon,

GWG has a financing problem? I thought they just raised money easily considering the current market climate. And on top of that you start promoting Arafura? What happened last week with Arafura regarding financing? Postponed…. Interesting you see financing problems with GWG and you don’t mention this when you talk about Arafura.

I have nothing against Arafura; unlike many others who tout their favorites here and on RMB I really couldn’t care less about competitors of my holdings and I certainly don’t feel the need to bash them. I wonder why people do that here and on RMB?

Kris

35 fran November 28, 2011 at 5:39 pm

kris–

bashing may be the sign of an uneasy/ desperate/ but hopeful investor. the need to re-enforce one’s decison; refusing to admit to participation in a craps shoot.

36 MaxkilMachina November 28, 2011 at 5:59 pm

Jack and Gareth,

What do you think of Molycorp’s recent news of a joint venture with Daido Steel and Mitsubishi Corporation? Is the joint venture internal for Mitsubishi? Do you think they can compete with Hitachi Metals? Where are they going to get their dysprosium from if they start manufacturing by 2013?

37 Anon November 29, 2011 at 11:25 am

Hi Kris,

Just to set the record straight, I’m not bashing any companies, rather I’m just voicing my opinion and sharing information. The REE space is very fluid and investors need to stay nimble and react accordingly based on the available information at any particular moment. Please disregard everything I have to say if you don’t agree with it.

Regarding GWG recent capital raise, I would recommend that you take a closer look at GWG’s cash flow and their future needs. If you’re comfortable with it, then move forward with it. I believe that they will need a lot more capital to make their mine-to-magnet strategy viable, and ultimately they will dilute their shareholders. Having said that, I would consider buying GWG if it drops to a more attractive level.

If you have not had the chance, I would recommend reading the comment thread on GWG from this Jack’s article on TMR’s site:

http://www.barnswood.com/tmr/wp/2011/07/great-western-minerals-group-brings-non-chinese-rare-earths-sector-to-a-turning-point/

Regarding Arafura, they withdrew their offering because of general market conditions. Timing is everything, and it was the right decision at this time, in my opinion.

38 Sebastian November 29, 2011 at 1:42 pm

I think Jack Lifton should mention Dacha (DSM.V) as a safe way to invest in HREE.
These are the reasons:

1. Not a mining or refining company (no mining risk).
2. They simply just sit on a stockpile that consist mainly of Terbium and Dysprosium (the most scarce HREE´s according to several reports) that they have bought at lowers prices, some years ago.
3. The stockpile is outside China (S.Korea).
4. The market does´nt know to separate LREE from HREE, thats why Dacha trades at
a 60-70% discount to FD NAV.
5. The company has no debt.
6. The company has an active share buyback-program.
7. This is an oppertunity to invest in HREE right now, and not in a mine that will start several years from now, if ever.
8. The discount is not acceptable, so management will probably be forced to liquidate the stockpile and hand it out to shareholders, if the situation does´nt improve.

39 fran November 29, 2011 at 3:09 pm

DACHA —

liquidation would be an act of mercy

40 Esteban November 30, 2011 at 4:30 am

The more I learn about Rare Earths the more I care about chinese industry capabilities and chinese government intentions and the less I do about non chinese mining projects. This article is a clear explanation of the reasons and the expected policies of the chinese government.

No matter what moves, findings, or joint ventures with magnet companies Molycorp announces, the problem of Dy supply is not solved and it appears that it is not going to be in the near future. Regardless of what all those mining companies achieve in the future, they just could not give our industry the hope and confidence that we needed now to stick to HREE based technology for Offshore wind turbines. If investing in Rare Earths is going to the casino, sticking to heavy rare earth technology is playing the russian roulette.

In the wind turbine industry we can make strategic changes on the generator design to get rid of Dy but in the best of cases this could only provide competitive advantages against non-chinese manufacturers: there is no more efficient and more reliable wind turbine than a Permanent Magnet Generator-based and chinese manufacturers seem to be the only ones to have a secured supply of Dy. In addition, it is a matter of time China decides magnets and generators are “unfinished products” too (as they have done with REE and will with magnet alloys next year) so they will not only have a secured supply: they will have the exclusive of PMG technology.
When chinese wind turbine manufacturers come to the Offshore market against our old-school geared turbines or our direct driven generators with Statue of Liberty-sized amounts of copper, they will just crush it… unless we can at least provide a really competitive price compared to theirs.

So that is the scenario that I find interesting now rather than commenting if Molycorp has done this or Lynas has done that: will China have enough HREE output to satisfy its own demand in the upcoming years? If so, what could be the chinese domestic prices of REE once they become somewhat stable?

41 MaxkilMachina November 30, 2011 at 12:03 pm

Estaban -> China gets their HREE from ionic clays in South China. If the projected internal demand continue, then China only has around 2015-2016 before they run out of HREE.

The projected internal demand is based on their 5 year plan to use more green technology such as wind power.

42 Jack Lifton November 30, 2011 at 12:53 pm

Maxkilmachina,

The southern China “ionic clays” are not being exhausted. What is “peaking” is the production rate from them. They are very low grade overall, just a fraction of a percent, so the amounts of reagents needed just to process them are enormous. Environmental and practical issues such as damming and flooding highlands and then draining them through man made lined channels and pipes to man made lined ponds for evaporation are, in the best circumstances, enormous operations. Those who think the prices of the HREES from China will ever go down should reflect carefully on what I just said.

China and the high tech world need new sources of terbium, dysprosium, and erbium, among others, that can be recovered less expensively and in higher volumes.

Among the rare earths the key elements are dysprosium and terbium. China recognized this early on and has been conserving them for years.

Jon Hykawy, the Chief analyst for byron Capital Markets in Toronto, predicted yesterday in San Francisco that new non-Chinese dysprosium and terbium production would lower the price of dysprosium to $300/kg by 2020. I am not as sanquine as Jon about the build up of non Chinese production, so I’m still predicting $2000/kg dysprosium in that time frame, but not much after that.

Thanks very much for reading and commenting,

Jack Lifton

43 Kris December 1, 2011 at 3:11 am

Hi Anon,

This is for you: http://www.raremetalblog.com/2011/12/a-word-about-metallurgy-and-ree-economics.html

I am invested in GWG for 18 months now. Believe me, I know everything and more there is to know about their strategy and I’m very comfortable with the company. Yesterday I was positively surprised with the growth in gross margin and revenue considering the economic climate in 2011. Makes me even more comfortable!

Good luck with your holdings. I’m all for succes of Western REE mines so GWG can buy their REEs as cheap as possible after 2016. Watch this space carefully cause you’ll be surprised who’s going to co-operate with each other in the next five years…

Kris

44 Gerald Schmidek December 2, 2011 at 12:23 am

You are going to look awfully foolish IMO, in 2012 when Stans Energy is
the first to produce HREE’s outside of China.

Tick tock, you credibility is headed for a crash for not even mentioning
them in all your articles.

45 Gerald Schmidek December 2, 2011 at 12:31 am

I see from your response to David Lowe, you can’t read a JORC estimate. What a joke. JORC is the Asian standard, ask Lynas.

Keep pumping GWG, got to pump it good to keep the SP up with all
the people exercising cheap warrants, eh.

46 Positroll December 2, 2011 at 5:42 am

“The southern China “ionic clays” are not being exhausted. What is “peaking” is the production rate from them.”
Mr. Lifton, are you talking about the 2015-2016 timeframe here as indicated by MaxkilMachina ? Then I’d agree. OTOH, if we are looking out to 10-15 years from now, thinks might be different:
“In addition, in 2006, the Chinese authorities reported that continued exploitation of China’s REE at the rates prevalent in the early part of the
decade would lead to their exhaustion within 15-20 years.”
S. p. 9 of this Dacha report: http://ca.hotstocked.com/docs/dacha_strategic_metals_inc/annual_information_form/dac813aif/index.html
Do you disagree with Dacha / the cited “Chinese authorities”, whoever they may be?

47 kman December 2, 2011 at 8:07 am

Gerald Schmidek
The Russians produced HREE at Stans mine and Stans just might do this in 2012 but the point Jack is makiing is that mining at Kuttessay was not ever economically sustainable, due to its ultra low grade. Remember it will take over 400 MT of ore just to produce 1 MT of REO. That is among the worst ORE/REO rates out there. I could probably mine HREES from my back yard if I kept throwing money at it. The better mines have ratios approaching 10:1. Profitability is the only metric. Low cost mining and low cost processing gets you there.

48 tbown December 2, 2011 at 9:31 am

Kris,
I am a GW holder as well. Are at any level concerned about the lack of a signed JV with GQD? Are you a regular poster at any other boards? TIA

49 Anon December 2, 2011 at 9:49 am

Kris,

I think GWG will do well in the long run and I support their path. I was a GWG investor going back 2 years ago, and I did very well by the investment. I would consider buying GWG again if the share price came down to more attractive levels. My concern is that the company is way over extended and it’s likely to hit a wall soon, and they will require more cash to meet its goals. I believe that they will need to come back to the market to raise cash and dilute their shareholders. It’s just an educated guess on my part and my gut reaction is telling me to wait and watch at this moment. If I’m wrong, then I missed a good entry point, but I can live with that.

50 Gareth Hatch December 2, 2011 at 10:23 am

@Gerald Schmidek: I would agree with you that someone here is having difficulty reading, since above I said “and I’m not just talking about resource estimates”. But thanks for playing.

P.S. The JORC Code is Australian, not Asian.

51 kman December 2, 2011 at 8:20 pm

Kris
Actually GWG has about $40 MM + in backing now. 17 from the recent equity raise and 24 from the warrants which expire in less than a year. Even if the warrants don’t get fully exercised that translates into a reduction of o/s shares and the ability to equity raise to a point far less than the current fully diluted o/s number. either way it’s as good as money in the bank. So close to production any equity raise would be a cinch but more likely would be other debt instruments like debentures, govt grants or loan guarantees, or the off take agreements.

52 Sebastian December 5, 2011 at 1:44 pm

Jack. I would like to ask you about the Chinese government considering to build HREE stockpiles. Have you heard anything new regarding if they are going to make practise of that thought?

53 Tiptree December 10, 2011 at 4:59 pm

You are a PR man who very profesisonally bashes LYNAS and MCP while boosting your employers (while adding a few other companies to make it seem more legit).

You’re doing your job.

It’s tough to find a knowledgeable analyst in this arena who is not in bed with some company or other.

Back in October, when Jubak wrote too long pieces on REs/MCP, I breathed a sigh of relief, simply because he was not yet invested, he was just thinking out loud. And I trust him.

54 Stephan B. Feibish January 4, 2012 at 5:34 am

This is the moment of truth. 12 rounds. For the HREE heavyweight championship of the world. In the far corner, the challenger, in the white & crimson trunks, the “Grade is King ” kid from New Mexico. In the near corner, in the maize and blue, Jack “no dice” Lifton, LIFTON, LIFTON!! The fight begins. OMG, it’s a tag team. Some octogenarian has just tagged the New Mexico kid. (The guy who hasn’t responded to my offer to make him the “original” encyclopedia.biz entry)

Thanks for the article Jack.

I wish these REE companies would all pair up with a large company.
One of the reasons I purchased Ivanhoe Mines way back when was they were partnered with Rio Tinto. That and the fact that Ulan Bator was ringed by a bunch of freezing, starving people in tents. You wouldn’t want to be the politician turning down that deal.

55 steve birkholz April 25, 2012 at 7:29 pm

Jack good article. what is your opinion of Orbite Aluminae’s potential for solvent extraction of rare earths from their laterite deposits? thanks steveb

56 poetslife November 24, 2012 at 3:04 pm

What about the DOD need to maintain a reliable REE supply in case of war? Some domestic industries are kept alive by the DOD for just this reason. Does this apply to Molycorp?

57 Tim Ainsworth December 6, 2012 at 5:45 am

Thnx Jack,
Another sobering read.
Guess I’d summarise it as “Best Business Plan Wins” or best business plan for the “new” old realities of RE’s wins.
Like the way that Lynas, thru all the delays and hassles, has stuck to it’s basic business plan conceived when prices were much lower than current. Suffered a fair bit of dilution but minimal debt to service. Will be fascinating to watch the Lynas and Moly OpEx/Revenue numbers unfold over the next 12 months as we hopefully also get a better picture of demand recovery and China’s intentions.
Cheers

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