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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Rare Earth Metals Supply Hysteria

Commodities / Metals & Mining Dec 18, 2010 - 05:23 AM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleChina's domination of the rare earth industry has led to very real fears about the future supply of these strategic metals that are used in all things technological—from electric car batteries, laptops and cell phones all the way to smart bombs. As one of the foremost experts in rare earth elements (REEs), Bill understands the implications of future supply shortfalls. In this exclusive interview with The Gold Report, the head of Vancouver-based Medallion Resources Ltd., explains the supply bottleneck and how his company is working to solve it.

The Gold Report: Dr. Bird, I'd like to start our conversation with a review of recent developments in the rare earth element space. In 2010, we've seen enormous interest from investors, politicians and pundits; however, up until about 18 months ago, "rare earths" was a relatively unknown term. There's been huge growth in some of the junior companies exploring for rare earths, with new companies popping up almost weekly. Why has supply dominated REE conversations among resource investors in the past year?

Bill Bird: The interest in rare earth elements has been growing steadily for at least 50–60 years; but for a long time, the rare earth industry was very isolated. It was not transparent, so not very many people knew about it. I credit the investment world's interest in the industry to a couple of the investment newsletter writers who researched the industry and discovered supply and demand issues were developing. They actually advised investors to get involved in the industry. Dines Letter Writer Jim Dines and Kaiser Bottom-Fish Report Writer John Kaiser are probably the most prominent of these newsletter writers. They've done an excellent job of educating the investing public. Their work is very dramatic, making a serious impact on the investment community; that has spread to several other sectors, including government. Several governments are now actively investigating this industry and attempting to find new supply sources.

TGR: Why are we seeing such panic about rare earth supply?

BB: During the past 60 years, China has discovered and started to cheaply produce a lot of REEs for export. It's been able to do this to the point that the country, literally, out-competed everybody else and shut down the REE-mining industry in the rest of the world. Both production and exploration projects ceased when they couldn't compete with China. By 2000, China was in the dominant position—not in any sinister attempt to take over the world, it was just good business.

Also by 2000, it became obvious that a lot of the money could be generated in the REE business by adding value to the raw materials and building industrial products that actually use these things. China started a program wherein it not only mined and produced these rare earth elements but also manufactured the finished goods. So, not only does the country produce 97% of the world's REEs but also uses approximately 70% of that material to build products domestically. Thus, China came to dominate the entire industry.

TGR: A monopoly. Can you discuss the scope of products that use rare earths?

BB: It's a wide range of products—virtually every electronic product we use from cell phones to coffeemakers uses some form of rare element product. In most cases, it's built into the electronics or the motors that run these appliances. A motor made with a rare earth magnet is much more powerful than that made with a plain iron magnet. Anything that requires a small, powerful motor must use REEs.

TGR: I've heard there are military applications, as well. Is that true?

BB: That's absolutely true, and this is where governments get involved in these kinds of things. It's very difficult to figure out how much, and for what purpose, these REEs are used because military products are secret; but, in addition to all the electronics uses, we hear everything from night vision goggles to so-called smart bombs requires REEs. This is one of the reasons there is so much concern about having the world's supply in the hands of just one country.

TGR: Why doesn't China continue producing enough supply for domestic use, as well as export? That way, it could also profit from selling to foreign countries? Is all this focus on developing and producing REE assets outside of China just hype?

BB: I believe China is most interested in supplying its domestic needs first, hence the export quotas. However, because there's such a wide range of products that use rare earth elements, its domestic REE-product industry is growing rapidly. China's doing everything it can to bring new investment into the country and develop new industries to use this material; for example, it will sell REEs to local industries at a much cheaper price than it sells the same material to sources outside of China. In that sense, it's trying to do everything it can to increase the country's internal need. A news release last week announced that another Japanese company had moved its magnet-producing industry to China to take advantage of these cheaper prices and more certain supplies. This is what the Chinese are trying to do; it's just good business. China's adding value; I can't really blame the country for that.

The end result, however, might be that it uses up all its supply and there won't be enough left over for industries outside of China—this is definitely the biggest basis for supply concern. It will create a short-term supply problem, there's no question about that. In this case, it doesn't matter whether we're talking about lanthanum and cerium or neodymium, dysprosium, light rare earth elements (LREEs) or heavy (HREEs). Until the supply issues balance out, they'll be in short supply in the short term. This has created a psychological factor that will further drive up the price. This year alone, prices have risen about 72%.

TGR: Do you believe REE prices will continue to rise because the supply issue won't get any better until other suppliers emerge?

BB: Yes, that's true. The question is: What does 'short term' or 'near term' mean? Is it one year or five years? I'd say at least five years because it will take that long for some of the non-Chinese sources to get into production.

TGR: We know of two deposits that exist outside of China that are near production—Molycorp Inc.'s (NYSE:MCP) Mountain Pass deposit in California and Lynas Corporation's (ASX:LYC) Mount Weld deposit in Australia. What is the potential for these deposits to come into production in the next 5–10 years?

BB: Both are very good properties, which I believe are closest to production outside of China. Mountain Pass had supplied the world with REEs for about 50 years. It is a very large deposit and has a lot of proven ore. This material's ready to mine, the engineers have mapped it out and the mine is ready to go.

However, the company has some start-up issues. The mine closed down in the early 2000s because it couldn't compete with the low prices in China. It has to restart now and that takes some time. Molycorp likely must reapply for operation permits from the state of California and the federal government, as well as some local permits where it operates. The company also decided to build an entirely new mill that will likely be a cleaner operation, more environmentally friendly and easier to permit. I attended a conference a few weeks ago where one of the company's representatives said it would be two years before it goes into production (fall 2012).

Mount Weld is a far more complicated deposit with more complicated mineralogy than Mountain Pass. Lynas is still working out its metallurgical problems, which is why I think it may have taken so long to get into production. The company has been speaking about production for the last five years but has never quite pulled it off. I think this is due to the difficult mineralogy and the metallurgy that comes with that mineralogy. It could be another two to three years before it makes progress.

TGR: There are two types of rare earths—light (LREE) and heavy (HREE). China's REE supply is primarily LREEs, as are the Mountain Pass and Mount Weld deposits. Is that correct?

BB: That's true but the Mount Weld property actually has a higher component of heavies. Mountain Pass' heavies are virtually nonexistent. China doesn't have a good supply of heavies either. At this point, nowhere in the world has a good supply of heavies that could be a definite future source.

A lot of possible projects are moving forward but none has ever been in production. Never has there been a dedicated, operational HREE mine anywhere in the world, with the exception of the poorly understood, government-controlled South China Clays property in China. There's no roadmap as to how this is going to proceed. And the supply issue is much more critical for HREEs than LREEs.

TGR: Are there any known HREE deposits owned by publicly held companies in which investors can participate?

BB: There are a few but all of these projects are still in the exploration stage, which means there's no complete feasibility study that shows a roadmap to profitability. The work and research to build the feasibility studies for these deposits is in progress. Some of the deposits are more advanced than are others, and some of the publicly held Canadian juniors have very exciting deposits. Quest Rare Minerals Ltd. (TSX.V:QRM) has a very interesting property at Strange Lake in northern Quebec. Avalon Rare Metals Inc. (TSX:AVL; OTCQX:AVARF) has the attractive Nechalacho Deposit in the Northwest Territories. Both of these projects have considerably more heavies than Mountain Pass or the main deposits in China.

Another Canadian company that has a good HREE property is Ucore Rare Metals Inc. (TSX.V:UCU; OTCQX:UURAF). Its Bokan Mountain property in Alaska has a very interesting high-grade, heavy-REE mineralogy. It's a somewhat different situation because it will have to be mined as a higher-cost underground operation.

TGR: Quest and Avalon have deposits in NE Quebec and the Northwest Territories, respectively. Ucore's deposit is closer to infrastructure and shipping.

BB: That's certainly a major consideration and Ucore's Bokan Mountain is in a better situation there. In any mining venture—it doesn't matter if it's gold or rare earth elements—the most important factor is the cost of production. One of the serious components of cost is the local infrastructure. There is no infrastructure presently of any consequence around either Quest's or Avalon's deposits. All of this will have to be built and it will add a considerable amount of cost to the projects.

A Canadian company, Rare Element Resources Ltd. (TSX.V:RES; NYSE.A:REE), has a huge advantage over the others because its Bear Lodge project is in northeast Wyoming. It has rail, road and electrical power virtually to its door. Its infrastructure is infinitely better, so the cost of production at Rare Element's property will be much lower. On the other hand, the company doesn't have the same heavies' component as Quest, Avalon and Ucore. Rare Element's ore is not going to be quite as valuable.

TGR: Besides infrastructure, what other criteria should investors consider when investing in the REE space?

BB: The most important factors are the lowest possible production costs and the highest-value ore. One of the key factors these days is the size of the deposit—the larger the deposit, the lower the cost. A third factor is the complexity of the metallurgy. A complex metallurgy is going to cost far more than simple metallurgy. Some of these HREE properties have very complex metallurgy, so the cost is going to be very high. Environmental and social costs are also very important. Companies have to be on good terms with the local government and residents; they don't want to make an environmental mess, as the cleanup would end up costing significantly more. Of course, if a local or environmental group opposes a mine, the company may not be able to operate at all.

TGR: Are there any companies with REE deposits outside of North America and Asia?

BB: There are some interesting projects coming along in Greenland, but they are very early exploration stage. There are a lot of problems in Greenland beyond infrastructure—its social and environmental problems are different and even more difficult than those in Canada. Hudson Resources Inc. (TSX.V:HUD) has a property in Greenland, as does the Australian company, Greenland Minerals & Energy Ltd. (ASX:GGG).

There are also other Australian properties. Alkane Resources' (ASX:ALK) Dubbo Zirconia Project will produce a rare earth element byproduct. A recent press release by a Russian organization said Russia has a greater resource of rare earth elements than China. At this point, most of them are undeveloped; a lot of work has to be done there, but Russia has huge REE resources. In the future, I'm sure these resources will have a serious impact but, for those properties, that's 10–20 years down the road.

TGR: You head up the Canadian-listed company, Medallion Resources Ltd. (TSX.V:MDL). Please provide some insight into Medallion's properties and its plans for those assets.

BB: Medallion offers the investment community one of the best technical teams available in the industry right now. My associates and I have exceptional REE experience; we use this knowledge of the market and geology to find the best possible properties available. Also, one of our major thrusts is to find new and better REE sources than those being investigated by the rest of the exploration industry. We're very concerned about costs, and one of the best ways to beat costs is to have a very large deposit with a simple metallurgy. The number-one model for that kind of deposit in the REE business is the South China Clays model. The South China Clays deposit type is very large and it requires a certain kind of geography. It has to be in a monsoon climate that produces a laterite type of soil.

TGR: Do you have one of these assets in your land package?

BB: Not at this point, but we're closing in on one. One of the advantages of this type of property is the very inexpensive metallurgy. After the intense monsoon weather breaks down the original minerals and frees the REEs, the resulting weathered clays soak up the loosely held REEs allowing for easy extraction at a very cheap price—much cheaper than trying to unravel the complex metallurgy with which Lynas, Avalon and Quest are dealing. It is a very important part of our business model to find inexpensive production properties.

Another problem the REE industry is facing right now is the time required to get new properties into production. We are zeroing in on a property that we feel will be able to short-circuit that production schedule and be in production in less than five years. Most of the projects around the world are going to take more than five years to get into production. We feel we've got a project that could be in production much sooner than that.

TGR: That'll be interesting to watch. What about Medallion's existing assets?

BB: Over the last year, we scanned all available Canadian REE properties for those that fit our criteria of a very large tonnage and simple metallurgy. Our first choice was the Eden Lake project in Manitoba. We spent the past summer sampling a specific kind of mineralization that occurs in the deposit that could lead to very large tonnage and relatively simple metallurgy. We have samples at the assayer now; numbers should be returned to us before the end of the year. At that time, we'll have our first decision point for that property.

Our other property in southern Labrador is a significant land package in the Red Wine intrusive complex. The Red Wine complex has a considerable amount of the mineral eudialyte, which is known around the world to be a potential source of heavy rare earth elements. The rock that carries this material in the Red Wine complex is right at the surface. It's a large area, which would be easy to mine and would give us a relatively low-cost operation.

TGR: Do you believe interest in the REE space will continue next year as various companies frantically try to advance projects?

BB: Absolutely, I think 2011 will continue with the same general framework. There's going to be a great deal of concern about supply sources, projects getting into production and exploration for HREE properties around the world. No significant benchmark will be reached in 2011 to change any of that. The next benchmark will be either Lynas or Molycorp going into production, and that won't happen until at least 2012.

TGR: Do you have any parting thoughts for our readers, Dr. Bird?

BB: Yes, there has been some discussion as to whether or not these two companies—Molycorp and Lynas—can satiate the market. That isn't going to happen; there won't be enough production from either one of those mines to supply all the world's needs. We're going to require more properties and more projects outside China going into production than just those two.

Molycorp has signed agreements to send half its production to Japan and to guarantee supplies to the giant Japanese trading company Sumitomo. Lynas also has promised significant production to Japan and Europe. These two companies may have their entire production presold before they get into production. And China is not relenting—it just raised its export taxes for neodymium by 25%.

TGR: That doesn't even consider the REE supplies required for the growing mass-production consumer industries or new technologies.

BB: That's true. Significant new inventions have come out, but they're awaiting conversion to consumer goods. My favorite is magnetic refrigeration and heating. Companies are developing air conditioners that use magnets. The equipment, which uses one-tenth the power of a standard air-conditioning unit, has fewer moving parts so it also requires much less maintenance.

TGR: With all the emerging economies in the world today, there's almost an insatiable desire for goods that improve the standard of living.

BB: Absolutely. Every office building in North America or Europe will require one of these air-conditioning units because energy is getting very expensive. If you can save half the energy by putting in a new kind of air-conditioning unit, people are going to do it.

There are also smaller versions of the magnetic refrigeration unit that power a standard home refrigerator. They're about the size of a soda can. Again, much less maintenance and much less power is required. Once these kinds of inventions are being mass-produced for consumers, the supply issue for the rare earth elements will be even greater.

TGR: This has been a fascinating conversation. Thank you, Dr. Bird.

Dr. William H. Bird holds a PhD in geology from the Colorado School of Mines is a registered professional geologist with more than 40 years of mining and corporate experience. He possesses a strong combination of business credentials and mineral-industry expertise. His practical and theoretical understanding of geology (most notably rare earth elements), mineralogy and metallurgy is recognized as exceptional. Since his early career as a mineralogy professor, Dr. Bird has pursued his long-standing interest in rare earth elements and their mineral occurrences around the world. In 2005, he became chief executive of Rare Element Resources, which owns the prominent Bear Lodge REE and gold property. Dr. Bird left Rare Element Resources at the end of 2007 to devote his energy and expertise to Medallion Resources, where he is working to build a top-tier rare earth exploration and development company.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.

The GOLD Report is Copyright © 2010 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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