The Mining Report: Jack, as we move into the age of technology metals, what is the current state of the rare earths sector inside and outside of China?
Jack Lifton: The rare earth elements (REE) are not rare in the common sense of the word. It's that they're rarely produced because of production costs. Rare earths typically are present in small proportions to what is otherwise being mined; they are almost universally byproducts. This presents a very high cost picture for developing an REE "mine."
Processing REEs is another impediment to their development. The traditional processing technique for separating REEs from each other and purifying them hasn't evolved very much over the last century. It's gotten a little easier, but it remains very slow and very expensive.
The idea of building a very expensive mine coupled with a very expensive separation plant has put an economic burden on the development of rare earth sources, at least outside of China, in the last 10 years. Very little thought went into the REE boom that began around 2007 when Molycorp Inc. (MCP:NYSE) was purchased from its original owners by a group that was determined to break the Chinese monopoly. Nobody asked what was the point. What were we going to produce that was in short supply? The excitement of the venture took over.
In 2011, the Chinese ministry put out a notice saying that it was considering a halt of HREE exports. Suddenly, the sky was falling. China was going to stop exporting HREEs. That will kill our industry, destroy our military and life as we know it. What actually happened was that the Chinese ministry in charge of setting goals for industries backed off. It didn't stop exports, but it did tighten up the export controls and reduced the quotas.
At the time, no one talked about which REEs were involved. That was convenient for the junior miners because there were only two projects coming into operation outside China: Lynas Corp. (LYC:ASX) in Australia and Molycorp in California. Both are LREE projects. The projects make sense only if China's light rare earths (LREEs) production or its ability to sell LREEs was to be impaired.
You have to understand that the Chinese don't think about North America, Australia or Europe as competitors in the REE sector. In August, I attended a meeting in China where the chairman of Baotou Steel Rare Earth, whose Baosteel division produces LREEs in Inner Mongolia, declared his company the world's largest LREE producer and the largest vertically integrated company in the REE sector. In effect, he was saying, we produce so much of this stuff we don't even know what to do with it. Molycorp and Lynas were never mentioned.
He announced Baotou would produce a minimum of 30,000 tons (30 Kt) of surplus cerium this year. I understand that because you have to produce all of the rare earths to get any of them, but my question was why? The answer was the 15% of Baotou's deposit that's neodymium and praseodymium, the magnet metals. That is really what Baotou is after. The Chinese just keep producing and stockpiling the other stuff to get at the critical magnet material they need.
No matter how you figure it, there isn't enough of the magnet metals to meet actual demand, never mind projected demand. China isn't producing enough neodymium and praseodymium to meet its own internal demand. One way to augment production is to start producing LREEs, which are 85% stuff you don't need, to increase the production of the 15% you do need. That seemed to be what the Baotou chairman was saying. I came back thinking that the last business I want to be in is one that depends on a revenue stream from LREEs, which are being produced in surplus in China.
TMR: Is there still demand for HREEs outside China?
JL: Yes, of course. The point is China is still the only HREE producer because of the cost structure. Heavy rare earths occur almost everywhere in the world in extremely low-grade deposits. In China, for example, HREEs come from the so-called ionic adsorption clays, which are just a few hundred parts per million. Now luckily for the Chinese, mining ionic adsorption clays is not nearly as expensive as underground or even surface mining of hard rock material.
For example, if I have 50 parts per million of dysprosium in ionic adsorption clays, I need to process 1 million tons (1 Mt) of clay to get 50 tons of dysprosium. By comparison, if I move 1 Mt of rock at Mountain Pass, California, I will produce 50–80 Kt of REEs. In China, I'm going to get 50 tons of dysprosium. The Chinese do this on an immense scale, producing as much as 15 Kt of these materials, of which only 8 Kt to 10 Kt tons are the REE-related element yttrium. The Chinese are washing millions and millions of tons of clay.
China is the only place that produces HREEs from ionic adsorption clays. That happened as dysprosium-modified magnets became extremely useful and necessary.
TMR: Is that due to demand for permanent magnets for electric cars?
JL: Right. Magnets used in extreme environments of hot and cold need to be modified with dysprosium and terbium so that they don't permanently lose their magnetization when they go through a heat cycle.
Quite frankly, if these elements had been found anywhere else in the world, they probably wouldn't have been developed. The world is fortunate that they were found in such a low labor cost, but highly developed country.
Ionic adsorption clays exist in Vietnam, Thailand, Cambodia, Indonesia, Malaysia. They haven't been developed there for many reasons. Some are ethical reasons. Ionic adsorption clay mining is extremely dirty environmentally and very difficult to contain.
A significant source of this material was discovered in Thailand right under a resort area a couple of years ago. The Thai government said it didn't give a damn what anybody thought, nobody was going to start ionic adsorption clay processing next to the swimming pool in a country where tourism is the number one revenue source.
The Vietnamese have a wide variety of rare earth sources, hard rock, as well as ionic adsorption clay, but dealing with the country has been impossible so far.
TMR: You've mentioned that the cost of processing may be going down. Will that make HREE mining outside of China more practical?
JL: Yes and no. Yes, if somebody creates a central processing facility. Outside of China, I've been counseling people not to commit to building a solvent extraction plant until they've looked at the other technologies that are available. The impediment is that none of the other technologies has been operated at scale. However, pilot plants are underway in North America and Europe for at least two non-solvent extraction technologies.
TMR: What are some companies that could take advantage of these new processing technologies?
JL: U.S. companies that could take advantage of a central processing plant and benefit from relatively low mine development costs would be Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) in Australia, Rare Element Resources Ltd. (RES:TSX; REE:NYSE.MKT) in Wyoming and Texas Rare Earth Resources Corp. (TRER:OTCQX) in Texas. These projects all are themed to HREE production from hard rock or, in the case of Rare Element Resources, have unusually high HREE content in an otherwise LREE deposit.
Sweden's Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE) has an unusually good HREE-themed hard rock deposit.
In Australia, Northern Minerals Ltd. (NTU:ASX) has a deposit of xenotime, the most desirable HREE.
In Africa, Namibia Rare Earths Inc. (NRE:TSX, NMREF:OTCQX) may be the lowest cost mine of all to bring to production.
The problem with all of these projects is that developing the mine is just step one. Once you do the metallurgy and extract the values you want, you end up with a mixed concentrate. At this point, the only thing you can do with an HREE mixed concentrate is sell it to China or line up to try and get tolling at an acceptable cost from Solvay SA (SOLB:NYSE; SOLB:BRU) or, perhaps, Shin-Etsu Chemical Co. Ltd. (4063: TYO).
With today's general commodity price decline, we're seeing unusual declines in the prices of the HREEs, in China at least. The price a Chinese producer gets from a Chinese customer has stayed artificially low. Even though the production of REE permanent magnets has gone up significantly, the price of dysprosium has gone down. For the first time in my adult life I've begun to wonder if the conspiracy theorists might not be on to something.
Hitachi Metals Ltd. (5468:TKY; HMTLF:OTCPK) owns 600 patents—sort of a monopoly—for modern REE permanent magnets. Twenty percent of Chinese magnet companies are licensees of Hitachi. If General Motors is buying an REE permanent motor in China, it's most likely made by a Chinese company using a Hitachi license. This is starting to decline as Hitachi's patents expire.
The Chinese are coming out roaring in this business. They want direct business all over the world.
TMR: Is there any hope for extra-Chinese companies if they can utilize shared processing at lower costs?
JL: If these materials are critical for our military and our lifestyle, somebody will have to capitalize security and independence. Geography is destiny in geology. The Chinese have these materials. They don't have to pay to develop mines or develop new ways to separate the material.
The only thing that's impeding China is its own internal inflation, its cost of labor and chemicals, its skilled labor. These are going up all of the time. Now, China is looking for REE sources elsewhere in the world.
Isn't this the ideal situation in a capitalist system? We have somebody who wants something we've got. Why aren't we developing it?
TMR: Australia is in China's backyard. Northern Minerals conducted a bench scale test in 2013, using both high-gradient magnetic separation and whole ore floatation circuitry. Could that company take advantage of new techniques to supply demand?
JL: Northern Minerals has a very large Chinese investor who offered to put in enough money to complete the development, if he could take over the company. Management turned him down. CEO George Bauk told me he thinks he can raise the money in Australia without selling out and becoming a foreign-owned company. He's very optimistic.
TMR: Are there other companies in Australia that you are watching?
JL: Alkane Resources Ltd. (ANLKY:OTCQX; ALK:ASX) is producing and selling gold. It has an offtake for its REEs. Alkane is moving along, going into production.
TMR: Any closing thoughts?
JL: In the West, our cowboy capitalism is looking for new ways to apply existing technology to REE separation. A genuine change in how REEs are processed may be the salvation of the non-Chinese industry. It costs a bundle to build a mine and processing plant—amounts of money the market cannot support because there isn't enough profit to be made to repay the debt. It's way too late to raise that amount of equity.
Lynas and Molycorp did raise those amounts of equity. They built REE separation plants and developed their mines and neither one of them is making any money, because they chose to focus on light rare earth separation.
I'm advising the industry to look at processing together because even if all the names I mentioned in this interview were to reach their target production, there still wouldn't be enough material to meet existing demand. If you built a central processing plant in North America and that cost were taken off the business model, that might help convince investors to fund one or all of them. We need all of them.
TMR: Thanks for your time and your insights.
Jack Lifton is an independent consultant and commentator, focusing on market fundamentals and future end-use trends of the rare metals. He specializes in sourcing nonferrous strategic metals and due diligence studies of businesses in that space. He has more than 50 years of experience in the global OEM automotive, heavy equipment, electrical and electronic, mining, smelting and refining industries. Lifton is also an author at InvestorIntel.
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1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) Jack Lifton: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid as business operations consultant by the following companies mentioned in this interview: Ucore Rare Metals Inc., Rare Element Resources Ltd., Texas Rare Earth Resources Corp. (where he is a non-executive Director) and Tasman Metals Ltd. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over what companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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