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Jeff Wright: Auto Demand Drives Antimony Market Growth
Source: Sally Lowder of The Critical Metals Report (10/18/11)
For Jeff Wright, metals and mining analyst at Global Hunter Securities, "Sb" spells success. That is the symbol for antimony, a metal with an interesting past and a bright future. In this exclusive interview with The Critical Metals Report, Wright outlines the structure of the antimony market and offers advice on the volatile rare earth element sector.
Jeff Wright: Antimony is one of the minor metals, not technically a REE. It is used for a number of industrial applications. It once was used in cathode ray tubes for televisions. It's still used in lead acid batteries and to harden the lead in the points of bullets. But its dominant use now is in fire retardants, which is a growth area. Fire retardants aren't just used in firefighter's suits and insulation these days. Right now, antimony's more interesting industrial uses involve lighter manufacturing.
Picture an automobile: Composite plastics are used throughout to eliminate metal. However metal has a higher flashpoint than your average composite plastic, meaning it's more fire resistant. So, how do you enhance your polyvinyl chloride (PVC) or PT plastics to be more fire resistant? You inject antimony into the mixture to get a more fire-retardant plastic, suitable for mass industrial use.
TCMR: That application seems to have far-reaching implications, particularly as we see automobile manufacturing expanding in developing nations. Is this a growth area for antimony?
JW: Exactly, especially in the BRIC thesis of an emerging middle class in Brazil, Russia, India and China. Not everybody will have a car, but more automobiles will be increasingly in use. You will also have more lead acid batteries, which use antimony.
TCMR: And in North America, the push is to create vehicles that are lighter, faster and more fuel-efficient.
JW: Precisely, and that will require antimony. In addition to growing demand, you have to look at the antimony supply. Approximately 80%-85% is produced in China. The situation is very similar to REEs, where you have dwindling supply with a less-than-transparent view of the available supply. Antimony's price has accelerated from about US$3/lb. to a peak of about US$8/lb., and over the last few months has retreated slightly to between US$6 and US$7/lb.
TCMR: What is the supply situation, globally and domestically?
JW: While small, the antimony supply in North America is fairly stable. If anything, it's growing incrementally based on the recommencement of operations in Mexico. A Chinese-owned Beaver Brook mine in Canada returned to production in 2008. There is no current production of pure antimony in the U.S.
On a global scale, antimony deposits in Mexico, Bolivia and South Africa were taken offline due to a number of reasons: lack of infrastructure, low antimony prices and resource nationalization in Bolivia. This created a lack of supply in the market, making it possible for China to dominate over the past five-plus years.
Hunan Non Ferrous has a large mine called the Twinkling Star. While there's not a lot of information, China clearly has reduced antimony exports, and it's believed that the Twinkling Star supply has diminished and will produce a lower-grade of antimony going forward.
TCMR: Is antimony traded on an international exchange?
JW: There is no public medium where you could buy antimony futures or hedge against antimony exposure, either as a producer or as an end user. It's all done on long-term contracts or purchase agreements based on the spot price.
TCMR: How can investors become involved in antimony and take advantage of the increasing demand?
JW: By investing in equities with antimony exposure. It's pretty straightforward. One U.S. company, U.S. Antimony Corp. (UAMY:PTCB), based in Thompson Falls, Montana, is involved. Primarily, U.S. Antimony buys antimony-laden concentrate from a number of sources such as Teck Resources Inc. (TCK:NYSE; TCK.A:TSX), which doesn't have the capacity to process its concentrate with high values of antimony.
Antimony, in most cases, is a byproduct metal, typically of gold or silver. In North America, it's primarily a silver byproduct. The silver producers can't process and separate the antimony out, but they need to get rid of it. If they show up with too much antimony in their concentrate, the smelter will charge a penalty. So, they ship it to U.S. Antimony, which processes it.
TCMR: So, U.S. Antimony is an easier way for the Teck Resources of the world to offload antimony rather than trying to process it themselves.
JW: Exactly. They don't want to invest the time, the capital or the effort for a smaller market. Considering the volume of concentrate that a company like Teck Resources would process, the amount of concentrate carrying antimony is relatively small. They can outsource that, and a company like U.S. Antimony can make that its sole mission.
TCMR: Are there no other public companies solely focused on antimony in North America?
TCMR: What about private companies?
JW: There are private companies, predominantly in China.
TCMR: U.S. Antimony has had a very impressive growth profile, particularly since April. What happened in April that caused the stock to double?
JW: Rather than a particular event, I think it was market recognition of the shortage of antimony supply and the realization that U.S. Antimony controls projects in Mexico. Its Los Juarez Project, in particular, has high antimony values and could be brought back into production. The existing infrastructure is in place, in Mexico and Montana, for U.S. Antimony to process the ore into a concentrate and then process the concentrate into physical antimony.
TCMR: Unlike other juniors in the resource space, this stock hasn't seen a downturn in recent weeks. It's been on par since September, trading for about US$3.
JW: It has come back rather strongly. I think that's predicated on expectation of a very strong third quarter and growth going into 2012.
TCMR: U.S. Antimony has had some great success in the last year, more than quadrupling its market cap, from US$0.50 per share to US$3.
JW: Actually, more than five times. It has done quite a good job in the capital markets. The question is: Will it be able to keep it up? Its growth profile is very attractive at this point. It's just a matter of continuing to execute, bringing new production online where there is a supply deficit and meeting a true need in the marketplace.
TCMR: How long has U.S. Antimony been around?
JW: Since 1969. Historically, it has predominantly been a processing company. It's now moving into production. That's the real differentiator over the past 12 months.
TCMR: I guess that's where we'll see the blue sky, thanks to its Los Juarez project in Mexico you mentioned.
JW: Yes. It owns the Los Juarez project in Mexico, and supply agreements are in place with three other smaller scale projects in Mexico that produced antimony and silver and pure antimony in the past.
While that is the reward, there's also the operational risk. U.S. Antimony could take longer to get to market than it anticipates. Speaking with management and doing the research, my feeling is that it should be able to get to a run rate of 1,500–2,000 t/yr. (tons per year) by the end of 2012. That would be a significant ramp up and depends on plenty of demand for its product in the marketplace. There certainly are end users in North America who would be in place immediately.
TCMR: Let's move on to rare earths. We've seen a lot of share price destruction in the REE space lately. According to the analysts and the experts, the long-term demand picture for REEs isn't changing. Rare earths remain critical for the electronics and avionics industries that will be very important in the U.S., Canada and beyond as they expand their manufacturing and mining capabilities outside of China. Which REE companies do you cover, Jeff?
JW: I cover Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A). It has the Bear Lodge project in eastern Wyoming. I also cover Tasman Metals Ltd. (TSM:TSX.V; TASXF:OTCPK; T61:Fkft), which has the Norra Kärr rare earth project in southern Sweden.
The real differentiator for both of these companies is that their projects are in favorable mining jurisdictions. Wyoming is like a mining camp. While permitting is thorough, it's very transparent. If you do things right, you'll get your permits.
TCMR: Where does Rare Element stand in the permitting process?
JW: Right now, Rare Element is at the prefeasibility study stage. It will be releasing its prefeasibility report in Q112. It has begun the permitting process, but it's not close to being permitted. It has been working on its metallurgy, and is doing a bulk sample of the oxide deposit this fall. It's also expanding the resource and identifying higher-grade zones that could be brought into production. I estimate Rare Element will be in production in 2015–2016.
The other advantage, and one of the primary reasons I really like Rare Element over other REE companies, is its proximity to existing infrastructure. In eastern Wyoming, Bear Lodge is only about 10 km. from Interstate 90. That's a considerable advantage when you're looking at capex (capital expense) and projects that can actually go into production. The project's estimated capital needs are in the US$100–US$150 million (M) range.
Rare Element is focused on the light rare earths—neodymium, praseodymium, dysprosium. If you want exposure to the heavy rare earths, I particularly like Tasman Metals. Tasman isn't the biggest project, but it's in a good mining camp. Sweden has a long history as a favorable jurisdiction for responsible mining.
TCMR: I think Sweden's mining history isn't well known among North American investors.
JW: Sweden has a very large iron ore industry, as well as gold and even uranium mining in the 1950s. To permit and develop an REE mine is not a giant leap of faith in Sweden. The Norra Kärr project is southwest of Stockholm.
TCMR: That would indicate that it has the infrastructure and the labor pool to bring the project to production.
JW: Exactly. A highway runs right up to the project. It's within 20 km. of a deep-water port for exporting the concentrates. Power, water and an educated workforce are in place.
TCMR: What is the timeline on this project?
JW: Right now, Tasman is expanding the resource to get it over to 100 million tons (Mts.) It is also looking for a higher-grade zone, and should complete a scoping study in Q411. Once again, it's not the highest-grade project, but it's a project that would have a lower capex. Not every logistical element would need to be constructed from ground zero.
TCMR: In most REE project development there is some uranium or thorium or a combination of both that is a natural byproduct of the processing of these ores. Is that the case with Norra Kärr?
JW: No, there is de minimis uranium, and no steps will be needed to mitigate.
TCMR: Your coverage list includes the lights and the heavies. What is your view on Molycorp Minerals' (MCP:NYSE) Mountain Pass deposit, and its path to production?
JW: I haven't fully evaluated Mountain Pass, but it's similar to Bear Lodge in terms of minerals. My understanding is Mountain Pass is much larger in size, scale and the ability to expand. The key differentiator is that Mountain Pass is further advanced than Bear Lodge.
TCMR: A lot of people believe that permitting and putting a mine into production in California will be a more difficult scenario than doing the same in Wyoming.
JW: That is true. Permitting in California is a significant challenge. In a lot of ways, the one differentiator for REE permitting is that it supports the green energy complex in a way that gold or silver mining do not. Without rare earths, you can't make the magnets that go into industrial wind turbines. You don't have the ready ability, although there are some substitutes, to make the magnetic motors for hybrid vehicles.
If I were an environmentalist looking to oppose a project, I would pick a gold mine over an REE mine. There are REE substitutes out there, but they're not widespread. Their use isn't going to happen overnight, and it's a little late in the game to think it's going to happen on a mass scale. They really are locked into neodymium. There is no way you can get around that one.
TCMR: And the focus in electronics manufacturing is lighter, thinner and stronger. We consumers love that.
JW: Those are the key characteristics. You need REEs to achieve the magnetic strength. You can make magnets out of other metals, but to have a compact, powerful magnet, you need neodymium and praseodymium. If you're willing to compromise on size and weight, there are substitutes, but that's a completely different product.
TCMR: Do you have any advice for people who bought five or six stocks across some of the LREE and HREE spectrums, only to see a lot of price depreciation?
JW: Investing in companies involved in rare earths is not a one- or a two-quarter investment scenario. This is a much longer investment thesis. If you believe in the fundamentals and the true imbalance of supply and demand predicated on a diminishing Chinese supply, over time additional supply will come into the REE market. In my mind, the winners will be the less capital-intensive projects in mining-friendly jurisdictions with a clearer or a shorter permitting timeline.
TCMR: Do you see consolidation in this space?
JW: The more speculative players with earlier-stage projects or projects that have higher capex or more difficult permitting are probably not viable in the long term. I don't see them going away, but I don't see them really advancing, being able to raise capital or get attention.
We're in a true differentiation phase, where you see who has a project that could become a mine vs. who has an REE deposit. We went through the phase of considerable price appreciation for any small junior company that could come up with an REE project. Now we're seeing which of those guys can actually advance their project to a feasibility stage and proceed quickly into development.
For the average investor, the downside risk is that this is not a short timeline thesis. This is a much longer, protracted process that will have numerous ups and downs. This level of volatility is not for every investor. That's the honest truth.
TCMR: Thank you so much for your time and insights.
Jeff Wright joined Global Hunter Securities with more than 15 years of capital markets experience, most recently as a managing director and head of the natural-resource practice at Shoreline Pacific LLC. Previously, he was vice president at Montgomery & Co. and was a leader on the team that launched a capital markets business in a historically mergers and acquisitions-focused investment bank. Mr. Wright was formerly a vice president at Robertson Stephens in the equity financial products group. He received his MBA from the University of Southern California and his bachelor of arts degree in political science from North Carolina State University.
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1) Sally Lowder of The Critical Metals Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Rare Element Resources and Tasman Metals Ltd.
3) Jeff Wright: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: Global Hunter Securities, LLC acted as Placement Agent for an offering of securities for Rare Element Resources Ltd. in the past 12 months. Global Hunter Securities, LLC received compensation for investment banking services from Rare Element Resources Ltd. in the past 12 months.
Also refer to https://ghsecurities.bluematrix.com/sellside/Disclosures.action for price charts, as well as specific disclosures for covered companies.