The Critical Metals Report: With so many players entering the rare earth elements race, you've said it's gone from the Kentucky Derby to something akin to the Gypsy Horse Fair. How can investors make sense of it?
Chris Ecclestone: Well, the next phase after the Gypsy Horse Fair is the glue factory. There are more than 300 rare earth companies listed on the Toronto Stock Exchange. Even 200 would be too many. This space should really have 30 public companies, with probably five in production in the next five or six years, while the rest fiddle around exploring. I think there will be a rush of these companies tacking "Gold" onto the end of their names and saying, "Hey, look! We're a gold story now." All the better, too, because the space is overcrowded with non-serious people with very mediocre properties.
The amount of capital that was sucked into the vast number of rare earth stocks that have gone nowhere has detracted from the few that are serious players and that are going to get into production. The legitimate companies have been rather capital-starved in recent times because of the bad odor that has surrounded the rare earth space.
TCMR: Which companies are among the handful that you do like?
CE: Molycorp Inc. (MCP:NYSE) is doing all the right things. Vertical integration is key. Molycorp was able to use what was probably an overvaluation in its stock price to acquire Silmet and Neo Materials. Those were very clever deals.
Another good example is Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX). I like the Steenkampskraal Mine in South Africa a lot. The mine is not in production right now, but Great Western has been processing for years with its wholly owned subsidiaries, Less Common Metals Ltd. and Great Western Technologies Inc.
People say that Frontier Rare Earths Ltd. (FRO:TSX) is likely to get into production. All that really depends on getting a partner. Frontier looks OK from that point of view.
Then you have companies in Australia involved in xenotime, which is a rare earth phosphate mineral that's used for coating jet engines due to its heat-resistant element. There's a whole magnet culture in rare earths, but there are a lot of other rare earth applications other than magnets. Magnets are not the only way forward. There's a list of products that are made from the whole group. Seventeen elements make up the rare earth suite.
TCMR: With rare earths generating less investor interest compared to 2011, some of those companies have started to promote their secondary projects, for example tantalum or niobium properties. How does this work, and what do investors need to be aware of in evaluating these projects?
CE: Some of these companies actually start off as tantalum stories. In fact, the tantalum or niobium property may have once been its main property, which is obvious if you look at the grades. It's similar to some uranium producers that located a small amount of rare earths and said, "Oh, we're not uranium now. We're rare earths because uranium is in the dumpster."
But tantalum has an interesting dynamic. The problem is: Is it going to be economic to mine these really low-grade deposits? Is having a really big resource at a really low-grade a compelling property?
The niobium market is totally dominated by two mines, one of which is the Niobec mine in Québec, which is owned by IAMGOLD Corp. (IMG:TSX; IAG:NYSE). Between IAMGOLD and CBMM's Araxa mine, they've got a little more than 90% of the market, which they've kept really well serviced. The end users feel pretty comfortable about the way it's managed. Nobody is going to upset the apple cart by promoting other niobium properties.
TCMR: With rare elements on the backburner, you're looking more closely at other critical metals and minerals, such as tungsten, fluorspar and antimony. Starting at the top, what does an investor need to know about tungsten?
CE: Look for companies with past-producing properties. Tungsten mines can last for 50, 60, or even 80 years. Malaga Inc.'s (MLG:TSX) Pasto Bueno mine in Peru has been operating since the turn of the century. With tungsten, it's better to go with the tried and true.
TCMR: Ammonium paratungstate, which is the raw material from which tungsten is separated, was priced at about $450/ton (t) this time last year. What's it trading at now?
CE: It's come off, but it hasn't come off that much. It's under $400/t at the moment. Industrial demand may be sort of sloppy, but it's still a great price—enough to justify production of some of these old mines that have been closed down.
TCMR: You mentioned Malaga and its tungsten mine in Peru. In February, it increased its Proven and Probable reserves by 16% and its Measured and Indicated resource by 140%. What sort of advantage is it to have a growing tungsten-producing mine outside of China?
CE: There's always an advantage to having a growing resource. It also pleases the Canadian retail crowd, who want to see a forward-moving resource. The mineralization just goes on and on forever. That's really the nature of the tungsten deposit. Malaga has quite dramatic expansion plans that could double or triple the amount of production. I think the market's there for that at the moment. But that inflow of extra production is liable to choke off the demand for some of the more expensive projects out there.
TCMR: Basically, Malaga supports the industry to a point where there's excess supply.
CE: I'm not sure we're going to see excess supply for a few years yet. It's a fair way until we start seeing some flow out of these other companies. Largo Resources Ltd. (LGO:TSX.V) in Brazil is working over an old tungsten mine, which is particularly rich. But altogether, it's still only a single-digit percentage of global production coming from each one of these. These projects are not really making a big dent in China's dominance.
TCMR: Let's move on to fluorspar. What's the investment thesis for fluorspar?
CE: Most people have never heard of fluorspar, but rare earths, tungsten, antimony—it's all the same story. The Chinese took it out of the ground, destroyed the competition by giving it away, then stopped exporting it in large volumes. The same thing is happening with fluorspar. More and more companies are weary of moving their factories to China. The only way that they can guarantee that they don't have to do that is to find an alternative source of supply.
It doesn't matter what metal you're in, if you've got a proprietary technology, you're the end user and the processor. You better find yourself another source of production or the Chinese are going to come calling and say, "If you want to keep getting this product, you have to move your factory to Shanghai." The Japanese were effectively told they needed to move their plants and many of them did, but now everyone's a bit spooked by that.
TCMR: Are there any serious players on the fluorspar side?
CE: Definitely. Canada Fluorspar Inc. (CFI:TSX.V) has an offtake agreement with France's leading chemical company, Arkema. Before, there just wasn't the economics to do that until the Chinese started tightening the screws.
TCMR: Canada Fluorspar is developing the St. Lawrence Mine in Newfoundland and expects a preliminary economic assessment (PEA) in early 2013. The mine previously produced fluorspar. What are your thoughts on that project?
CE: It's a good development. The company can't do much better than having a "sugar daddy" through an offtake agreement.
I don't think there's that much room for a lot more players. South Africa is currently the largest producer of fluorspar. There are a few players down there, some of which are owned by Spanish or German end users. There might be room for three or four more market entrants.
TCMR: The British Geological Survey says that antimony is in critically short supply. Does that mean the price of antimony could be on a steep upward climb?
CE: It used to be ~$2,000–4,000/t for decades. But now there's a strong suspicion that the Chinese have really have blown the resource up. They haven't got anything left. That is producing panic because antimony mines are very rarely large, at least not in the West. Any replacement mines are likely going to be extremely small and may provide just 1% of global supply. Antimony appears in veins. The grade is frequently good, but the grade in the vein is sometimes 7% and the veins are never wide.
TCMR: What is antimony mostly used for?
CE: It's used in plastics as a fire retardant. The main market force behind that was the auto industry, where the need for lighter vehicles meant that more plastic needed to be used. Vehicles would essentially become like bombs if automakers used the old types of plastic. Antimony is a product that goes in the mix to provide that fire-retardant quality.
TCMR: Why should investors be interested in antimony?
CE: It's got one of the best price dynamics out there. Largely, the demand is going up, but the supply is going down. And there is no quick fix. There is no Molycorp or Lynas that's going to be on the scene to build a mega-antimony mine, because mega-antimony mines do not exist. They never have. Except for that one freakishly large mine in China, all the rest are miniscule.
TCMR: Antimony is usually produced as a byproduct. Are there any publicly traded companies producing antimony as a byproduct that you're following?
CE: Mandalay Resources Corp. (MND:TSX) would like us to believe that it's a gold company producing antimony, but I think it is more of an antimony company with a gold byproduct. Antimony often occurs with some other metal, like lead or gold. If a company can get antimony and gold together, it's hit the jackpot. Mandalay has that. It also has enormous potential to develop other antimony mines.
TCMR: About 70% of Mandalay is controlled by institutional investors. Is that cause for concern?
CE: No, it's great. I like that. The more institutional investors, the better. The market loves that come hell or high water.
TCMR: It seems to be fairly well situated, too, in that there's infrastructure around it.
CE: Yes, there are roads and railroads there. It's a really old mine; it was found in the 1860s. It just goes to show that tungsten and antimony mines can go on forever. There are some interesting things going on in reviving old antimony mines in the Maritime provinces in Canada. Nova Scotia to the heartland is where production has been in the past. Watch that area because that's where you're going to start seeing it happen again.
TCMR: Let's bookend this discussion with rare earths. How will investors know when to return to the rare earth sector? Is now the time, while things are still incredibly undervalued?
CE: I would selectively return to a couple of names. But be hyper-selective because the rest of the rare earth companies will be flapping their gums.
TCMR: Thanks for speaking with us today.
Christopher Ecclestone is a principal and mining strategist at Hallgarten & Co. in New York. He is also a director of Mediterranean Resources, a gold mining company listed on the Toronto Stock Exchange, with properties in Turkey. Prior to founding Hallgarten & Co. in 2003, he was the head of research at an economic think tank in New Jersey, which he had joined in 2001. Before moving to the U.S., he was the founder and head of research at the esteemed Argentine equity research firm, Buenos Aires Trust Co., from 1991 until 2001. Prior to his arrival in Argentina, he worked in London beginning in 1985 as a corporate finance and equities analyst and as a freelance consultant on the restructuring of the securities industry. He graduated in 1981 from the Royal Melbourne Institute of Technology.
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1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or his 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: Frontier Rare Earths Ltd. and Mandalay Resources Corp. Interviews are edited for clarity.
3) Chris Ecclestone: From time to time, Streetwise Reports LLC and its 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.