The Fight Over Rare Earths

by Admin on November 2, 2010 · 5 comments

in In The Media, Rare Earths

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By Geoff Candy – Mineweb – Published: November 2, 2010

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Geoff Candy: Welcome to this week’s edition of Mineweb.com’s Metals Weekly podcast and joining me on the line is the independent consultant to the metals and refining industry from Technology Metals Research, Jack Lifton.

Jack, there has been a great deal going on in the rare-earths space and it seems almost suddenly that people are now taking interest in it. Over the past week or so we’ve heard a couple of announcements from China saying they’re not looking to use rare earths as a bargaining tool – this isn’t something that they’re trying to do – they’re not trying to completely ban metal exports and those sorts of things. Why do you think they feel it necessary to keep making these sorts of pronouncements?

Jack Lifton: The Chinese basically don’t really understand what we’re doing – they don’t understand how our system works. We have basically said to them in the past that we want you to do this – we want you to produce rare earths for us – that was to save money – to cut costs. That has been accomplished, as you know. Now we’re saying to them why did you do this to us – I really sincerely think the Chinese are confused. However, the Chinese government is not exactly looking into this issue as if they were Oxford philosophers. They’re thinking wow; we’ve got this opportunity – by the way they have a limited opportunity and they know it. We have enough new rare earth production capacity coming on line in the next two to three years so that China will no longer – ever again be able to do something like this.

So they’re into a window of opportunity now of 24 to 36 months where they dominate the production of these materials – they dominate the refining of these materials and if they don’t use this ‘weapon’ if you want to call it that – they will never again be able to do so because more important than the production of rare earths or concentrates is the fact that there seems to be revival of the supply chain, by which I mean that the rare earth processing industry is being revived outside of China. Lynas is building a very large separation plant in Malaysia, Molycorp has a separation plant that they’re re-starting in California and you take ore concentrates in the rare earths then you extract from the concentrates – the mixed rare earths because that’s how they come – then you separate them, then you refine them individually, then you make metals, alloys, magnets, batteries, lasers, etcetera. And what the Chinese have told us for the last 10 years is they don’t want to be a raw material supplier – they consider that to be a third world situation which they take umbrage at – they don’t like it. So they said they’re going to add value to their country and they’re going to sell us finished goods.

OK, well for all the rest, other than Japan that has worked out fine. We in the West, when you buy anything containing a magnet, a battery or rare earth based component of any type, it’s usually made in China. But if it isn’t made in China, it’s made in Japan and why Japan is saying its largest export customer for rare earths either as raw materials or as semi-finished – let’s say raw materials such as high purity metals and even some alloys. But the Japanese have been resisting the conversion of their home industry to something just assembling Chinese components – because Japan values the value-added part it brings to the equation. The Chinese, however, have been pressuring Japan over the last decade to accept higher and higher along the supply and value chains, Chinese rare earth based goods – and now we come to a crisis. The crisis is that the Japanese have no further industrial manufacturing of materials base rare earths that they wish to move to China – none. So now the Chinese are making their last ditch pressure approach for Japan to move whatever they can there before this crisis disappears in a quagmire of new non-… production.

Now what I’m saying to you is this issue involves primarily China and Japan – we are actually bystanders watching this – we’re not participants, we’re spectators. But, because it’s given an opportunity to Wall Street, the city, Bay Street, etcetera to churn some stock issues, we have gone from seven or eight rare earth themed companies just 24 months ago, to 150 today listed in Perth, Toronto, Vancouver, etcetera. Actually, it’s interesting to me that I don’t know of a single rare earth exploration or development company primarily on the AIM or in London or anywhere in Europe – this is a phenomenon that is now spreading as an investment situation around the world. But the core issue here is an economic competition between China and Japan. So I guess what I’m saying is I think this is a bit over blown.

Geoff Candy: It strikes me very much as the makings almost of a bubble and there has been some comment around that. If we take what you’re saying as true – that the supply crunch is going to last about three years before more supply comes on stream – how many of those new listings are actually going to be able to survive, I would assume the lower prices that come with the increased supply.

Jack Lifton: One of the things I do on my website www.techmetalsresearch.com is I take a look at the probability of success of any of these companies – I have a metric where I determine what is probably commercial success – I’m a handicapper. Right now I believe that four or five of them will survive and the other 145 will simply vanish.

Now in the next six months you’re in for a consolidation period – other rare earth companies – now that their shares are worth more than they paid for the paper they’re printed on which is only a momentary situation in those bubbles, they’re all going to try using those shares to buy each other to consolidate. So watch for that. That’s always a late stage in a bubble – and I see it about to begin here. But in general, in the share market, this is a bubble. In the real world it’s a serious situation where the world simply cannot underwrite too many rare earth producers. There is no need for infinite amounts of rare earths. It’s not even clear if there will be a shortage in the next few years. It looks as if there is and there is actually just one commentator producing this shortage tonnage figure for the whole world. Everyone is repeating it and we don’t really know – the Chinese don’t know what their own production is, that’s why they’re consolidating and trying to figure out how much they do produce, how much they can produce and how much they should produce for their own extremely fast growing domestic demand.

The issue in the real world of actual production is that China has the largest green initiative of any country on earth – in fact in my opinion, China’s green initiative is larger than all the other countries on the planet put together. This is where we require enormous amounts of rare earths and the Chinese are fully aware of this – that’s why they’re saying we can’t just simply export. We have to first determine a priority – our priorities are domestic needs. One of the things that’s gotten them furious is that they perceive the western countries as saying you can’t do that. We have to have equal access to your raw material. And under the Chinese law, as with many nations on this planet, resources in the ground belong to the people, to the state and miners are simply licensed to produce them on behalf of the state. Yes you get to sell them, get profits but where you sell them and even what you sell them for is strictly controlled in China, by the state, and up till now, the Chinese haven’t paid much attention to the price – it’s been a free for all.

Now the government is trying to figure out what the price is and whether or not they should set some floor prices – they haven’t done this yet, they’re thinking about it – and while they’re reorganising, around here we’re running around and saying the sky is falling, we’re going to collapse monetarily, our civilisation is over and the Chinese cannot figure out what we’re talking. You know what they told me in Beijing in August – you’re so desperate for rare earths, produce them in California, you’ve got plenty of them…

Geoff Candy: It’s a very interesting situation because not only is there the misnomer of the name and people hear the term rare earths and they think maybe this is an actual rare thing in the ground whereas there is quite a lot of it out there – it’s just difficult to mine.

Jack Lifton: It’s not difficult to mine at all – it’s difficult for us to separate. The production chemistry of the rare earths is extremely difficult – but mining is trivial. It’s like all other mining – you dig a hole in the ground and you bring material up and then you separate it by gravity into the heavy minerals, regaining the things you want and the earth and the rock. That’s not hard.

Geoff Candy: What I meant to say is that it’s not difficult to mine, but it’s difficult to get those mines permitted and particularly in California it seems like there’s an issue with getting the mines on stream.

Jack Lifton: Yes that is correct. It’s not only permitting in the West which is horrendously expensive and time consuming, it’s also the fact that if your product is an ore concentrate – you separated the earth and the rock gang as it’s called, from the mineral and you now have the concentrated mineral – that’s the lowest point in the supply chain and the least value added to the metal or the mineral. But starting a mine as you know – Lynas in Malaysia has raised $500million, Molycorp in California has raised and spent $500million and neither one of them has produced anything and the thing is when you’ve got the charge – the start up costs against your ultimate product, then it means that if you just sell ore concentrate, you cannot ever make a profit which is why institutional investors, strategic long term investors shun this sector.

So these companies – Lynas and Molycorp, are each going to extract and separate the rare earths into individual chemicals, and then those chemicals would normally go to other chemical and metallurgical industry to be further processed into metals and alloys. But Molycorp has said it will do that, and it will even produce magnets and end-use product of rare earths so that they can add enough value to the material so that the final product is not ore concentrate, but magnets on which they will make a profit on their total involvement in the supply and value chain. I don’t know what Lynas is going to do, but the point is these small companies other than Lynas and Molycorp have a problem because the costs of getting production of ore concentrates can never be recovered by the sale of those concentrates – that’s simply too little money.

Geoff Candy: Just two final questions to close off with then – in terms of the metals themselves, the other kind of problem in trying to understand the sector is that there’s a number of metals involved in the overall umbrella term rare earths and some of which – there’s a lot of out of the ground and in stockpiles and others that are perhaps slightly less profuse and it’s difficult to gauge which companies are producing which minerals and how to follow it, in that sense.

Jack Lifton: Correct – it’s not difficult to gauge but it’s not easy – they don’t normally talk about this.

Geoff Candy: In terms of the companies themselves, what should you be looking for if you’re looking to go into the sector.

Jack Lifton: Today you should be looking for the company that has the least start up costs to ore concentration – the least – and you should be looking for companies the ore bodies of which have significant commercial quantities of the so-called heavy rare earths. Rather than give you a chemistry lesson I will name them for you. If a mine today – a small mine does not have the metal dysprosium – then you should not invest in it because it will never be able to compete ever with the Chinese, Lynas or Molycorp. Dysprosium is the key heavy rare earth, which is critical for manufacturing rare earth permanent magnets that can operate at high temperatures, such as under the hood of a car or in aircraft or in a spacecraft.

This is the real problem in the world – lets say of the estimated 120,000 tonnes of rare earths produced last year, 1% was dysprosium and 100% of that was produced in China. The Chinese, however, are saying they think they’re running out of that critical material and they’re looking for new sources. So far they tell us they haven’t found any new resources in China – you can identify in the world several deposits in Canada, one in Alaska and a couple in South Africa and one or two in Australia that have significant commercially recoverable amounts of this metal dysprosium. But like all rare earth mines, they have all the rare earths and no matter which rare earth mine it is, the principle product will be lanthanum, cerium and neodymium – the light rare earths. Some of them have insignificant heavy rare earths – unfortunately this seems to include Molycorp and Lynas. So each one of them needs to have additional access to deposits so they can add these heavy rare earths – dysprosium is the most important, but there is another one where dysprosium is 1% of all the rare earths produced in the world, terbium which is critical for modern non-incandescent lighting is produced at one-fifth of 1% of the total of rare earths, today and only ever produced in China.

So what the industrial end users are looking for in fact is dysprosium and terbium to marry with their neodymium so they can produce magnets and lighting, which is the principle uses for rare earths. This is the big problem and you really have to study the published information of all of these ventures to see if anybody has 1) got dysprosium and terbium in any significant quantity, and 2) whether that venture is small enough to be developed, because there is no way possible, in my opinion, that Molycorp and Lynas – each of which may ultimately need $1billion to come to market and now we have let’s say there’s a potential in Canada for the worlds largest heavy rare earth producer – that would be Avalon Rare Metals – the problem is Avalon needs more than a billion and they say this themselves, to develop their resource.

You have other Canadian companies that have significant heavy rare earths – the one that’s farthest along towards the Gulf in the Great Western Minerals Group of Saskatchewan – it’s most likely mine to produce rare earths which would have significant heavy rare earths, is in South Africa – a previously operated mine that belonged to Anglo American and went out of production in 1962 for lack of financial interests in those days, it was revived in the late 1990s and went out of business again when the Chinese dropped the price to the point where they went away.

I handicap all the stuff and I say that the Great Western deposit in South Africa will probably be the first heavy rare earth producer in the world outside of China within about 24 months. It’s a relatively small deposit and although it can supply Great Western internally, which is vertically integrated to making magnet elements, it cannot supply the world with sufficient dysprosium. For that you’re going to need Avalon or you’re going to need the Canadian company with the American deposit called Ucore Rare Metals, or you’re going to need Quest Rare Metals in Canada or Northern Uranium which has nice heavy rare earth deposit in Australia – there are just a few of these companies that I am following. I’m not following the large ones – Molycorp now has a market cap of several billion dollars.

I’m going to leave you with one thought – tell me why the market has poured billions of dollars of newly created market capitalisation into rare earth – the last 30 days will not put money into the actual development of any rare earth companies, or bringing them into production. This is share trading – this is the bubble. What we now need is long-term strategic investment in rare earths and I don’t see how all this market trading makes any difference at all.

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1 Alexander Tibor November 6, 2010 at 11:46 am

Hello Jack,

what is your Opinion about Ucore. I think they havent a seperation facility. And only with that, they will be able to be productive. I am a german guy, so apologize my bad english. Thank you for your answer.

Sincerely
Alexander

2 Tek November 7, 2010 at 11:40 am

I think your last paragraph is an accurate assessment of the current market phase: “Mine the Market:

3 Casual Observer November 13, 2010 at 1:43 pm

Jack,

Some of your views on the mechanisms of the financial markets and
free market capitalism appear to be very eccentric.

Companies issue shares to capitalize the company. If they require further capital for a specific need they make another offering to raise the money for development purposes if required. i.e. they use that money to conduct research, build mines etc.

That’s how it works Jack. What alternative method of capitalizing companies and raising money for actual development would you suggest ?

Government subsidized companies is one alternative that I have heard you hinting at. Do you really think that a government sponsored business sector is a good way to go ? Where does it end ? Who do you subsidize and who do you not subsidize ? This just leads to the government having to pick winners, corruption and cronyism.

Get real Jack. Companies are developed using the system we have. It works; as is being demonstrated now that price points of rare earths allow development.

4 Casual Observer November 13, 2010 at 1:50 pm

Jack,

Further: if market conditions appear favorable any private company can make direct investment into rare earths any time they wish.
No share trading, Just direct investment. If you think you know a winning
situation you yourself can put together a private company and develop a mine. Why not ? Then you would satisfy your own requirement for the “actual development of a rare earth company”.

5 Jack Lifton November 13, 2010 at 2:03 pm

Casual observer,

I am particularly intrigued by your statement “price points of rare earths allow development.” What price points would those be? Like most casual observers aren’t you marking the rare earths in undifferentiated ore concentrates at the same price as separated and highly refined oxides and metals, the actual articles of commerce? The value of ore concentrates is the first price point in the supply chain. If a mine today produces ore concentrates and sells them at that point it is not able to recover the capital costs in any reasonable time, if ever.

I am saying that the only way to avoid this problem is either vertical integration or government subsidies (handouts or “loan guarantees). Only the assemblers of the end products critically dependent on rare earth content are large enough and well capitalized enough to be able to integrate such money losing components as mines into their overall operations and still show a profit.

The Chinese have captured the rare earths supply market by being the lowest cost suppliers in the world. “Is Chinese mining subsidized(?)” is the same question as are all Chinese enterprises subsidized, by Harvard Business School standards.

Either non-Chinese miners get to play by the same accounting rules, or they get themselves into the business of adding enough value to get to a profit-making “price point,” or they seek out a public or private Uncle Sugar. Concentrates as a price point are no good.

Is that eccentric enough for you?

Jack Lifton

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