Morning Notes publisher Mike Berry, who co-chaired the two-day gathering, credits Cambridge House with taking an innovative approach by catering to the needs and interests of a wider-than-usual audience, including end-users and government authorities and financiers as well as junior explorers and institutional investors. As Cambridge House Chairman Joe Martin tells The Gold Report, "The manufacturing sector normally doesn't pay much attention to the supply side, and maybe it's time that those who in the past have just been buying these critical metals should take a look at where they coming from—and where they may come from."What Makes Them Critical?
The "critical metals" space isn't the exclusive domain of Block F on the periodic table. Rare earth elements (REEs) are part of it, but not all of it. The critical metals also include molybdenum, vanadium, manganese, lithium, niobium, cobalt, tantalum, tungsten, indium and others. Most of them "used to be called minor metals, "but they are not so minor anymore," says Kaiser Bottom Fishing Report Publisher John Kaiser, who was billed as symposium strategist. "These are metals required for the economic development and national defense, thus essential for industry and national security."Another point John makes about critical metals is that they "tend to be incremental but critical inputs to end products whose total value vastly exceeds their costs." In other words, their importance to various applications is one factor that makes these inputs critical."
In addition to the importance of the critical metals to their components, the insecurity of supply is another factor that makes these metals critical. This is a highly charged, complicated issue that has triggered tremendous price volatility for some of these metals and, well, critical shortages. "We have a gathering storm in the supply chain with regards to supplies of critical metals," Mike Berry says. "While rare-earths, for example, aren't necessarily rare in the earth's crust, their availability to end-users will become highly restricted over the next five to 10 years."
Among the metals of most concern for defense purposes are neodymium, samarium and yttrium.
It isn't just tanks and destroyers and smart bombs at risk. As cell phone users, automobile owners, airline passengers and in myriad other capacities, all of us stand to benefit from sorting out the critical metals issues. Lacking stable supplies of these ingredients, our ability to enjoy improvements in these conveniences will diminish—or vanish. Along with other nations struggling with slumping or stagnant economies, the U.S. finds itself on the brink of another crisis involving the availability of critical metals.
A "most disturbing fact," Mike says, is that the U.S. is "100% dependent on imports for 19 critical metals and dependent for 80% of its supply for 32 others." Although using the word "materials" rather than "metals," in the same vein, a U.S. Department of Energy Critical Materials Strategy Paper issued in December notes that China now provides 95% of the critical materials used in parts of the clean-energy sector—wind turbines, electric vehicles, solar cells and energy-efficient lighting, which the paper says collectively account for 20% of the consumption of critical materials.
According to Metals Consultant Jack Lifton, "Alternate energies for a green future are impossible to build and operate without rare metals. These include cadmium, tellurium, selenium, indium, gallium and germanium for solar; rare earths for wind power and electric cars; and uranium and thorium for nuclear generation of electricity."
Nor is clean energy technology by any means the only sector facing supply shortages. For instance, The Gold Report caught up with Mercenary Geologist Mickey Fulp at the symposium and discussed graphite, one of the materials that came up during a presentation. As it turns out, China is the most significant graphite-producing nation, providing nearly one-half what the U.S. uses annually, much of it going into the graphite electrodes that give conductivity to the mass of manganese dioxide in dry-cell batteries. According to Mickey, "A lot of past-producing graphite mines in the world have shut down because it's cheaper to get the graphite from China," With graphite, he adds, "infrastructure and transportation costs and proximity to market are very important because graphite is an industrial mineral." He says that what's expected to be in shortest supply is long flake graphite—a substance used to manufacture plates and brushes for the electrical industry.
Vanadium is another metal on the critical list for which the U.S. has no domestic supply. While Mickey isn't on the vanadium bandwagon, House Mountain Partners founder Chris Berry—who joined his father at the symposium—is a big believer in the potential of vanadium-redox batteries (VRBs) for mass energy storage. Chris says that 100% of the vanadium used in the U.S. comes from China, Russia and South Africa. "If you're a believer in mass energy storage associated with wind and solar generation, VRBs are vital. One of the knocks against clean power generation like solar and wind energy," he explains, "is that it's very uneven and can't be stored easily. VRBs are the answer" for storing energy for use during either on-peak or off-peak demand.According to John Kaiser, up to 97% of vanadium's present use is as an alloying agent to strengthen steel for rebar, car axles and jet hulls and engines. He says that industry analysts predict a potential shortage of vanadium based on steel usage alone as early as 2013, driven by the incredible consumption of steel by China and India.
Global steel demand is set to increase by about 6% over the next 5 to 10 years. If that projection pans out, and Chris's vision materializes, he suggests that supplies will be available. "A handful of juniors in North America, as well as in some other parts of the world, are actively exploring for and planning to put vanadium mines into production over the next couple of years," Chris says. "There are a number of deposits in Canada, the United States and even Brazil. They're not ready for production, but the idea is to get the metallurgy figured out, determine the cost of production and have them producing vanadium over the next two to three years."
Mickey disagrees. He points out that most vanadium deposits currently being explored also contain titanium; they are iron-titanium- vanadium deposits. "For the most part," he says, "titanium is produced from heavy mineral sands, beach sand. A big portion of that comes from the East Coast of the United States, where draglines scoop up sand and basically run it across a magnet on a conveyor—a magnetic separation process that draws out the titanium and the iron. Then they use the sand to build highways and make cement. It is much cheaper extracting titanium that way than from a hard rock mine in a remote part of the world with mining, crushing, milling, transportation of concentrates, etc. All the world's current vanadium demand is met with production from steel smelters and as by-product of uranium mining. It takes a minimum of 5–10 years to explore, permit, develop and produce from new mines. Future increase in demand is dependent on currently unproven technologies. In my opinion, there will be no standalone vanadium mines in the foreseeable future."
Supply Chain Broken
According to John Kaiser, one thing that makes rare earths particularly complicated is that the miners can crack the rocks but extracting the elements is another matter. Because rare earths are so similar to one other, extraction produces a mixed-oxide concentrate. To separate the rare earths into their individual oxides may take 50 tanks to separate light rare earths; it may take 1,000 tanks of sequential solvent extraction to properly separate then heavy ones. "This is a chemically intensive, very complex process," John says, indicating that no such processing facilities exist in the U.S. at this time. In fact, he adds, "There is no knowledge base for doing it in North America right now."
Mickey concurs—to a degree. He agrees that "without a heavy REE separation facility we're missing a key component. These facilities are very complex chemical plants, standalone entities that don't have anything to do with mining." But he says that Molycorp Inc. (NYSE:MCP) can currently separate the light rare earths. Part of the company's "mine to magnets" business plan is to close gaps in the domestic supply chain.
In December, Molycorp struck a deal with Japan's Hitachi Metals Ltd. (TKY:5468, OTCPK:HMTLF) to produce alloys and magnets in the U.S., moving Molycorp a step closer to establishing a rare-earth manufacturing chain in the U.S. Molycorp also recently announced that its expansion plan is expected to enable annual production of up to approximately 40,000 metric tons of rare earth oxide (REO) equivalent at its Mountain Pass facility by the end of 2013, and is involved in a transaction with Sumitomo Corp. (TKY:8053, OTCPK:SSUMF) that will provide Sumitomo with "substantial quantities" of several rare-earth products over the next seven years."
In terms of the heavy rare earths, Mickey says, "There is no facility in North America to process heavy REEs. In fact, there is no functioning heavy rare earth separation plant anywhere in the world outside of China."
Well-funded and debt-free, Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) may be the first to bring separation capability to North America. Avalon President and CEO Don Bubar, who was among the speakers at the Critical Metals Investment Symposium, says that his company wants to complete the facility by 2015 or 2016, get "first mover" advantage and potentially do separation processes for other metals mining companies.
Supply Risks
We can expect supply pressure on critical metals from growing demand to come from the rising deployment of innovative existing technologies, and the emergence of new technologies, too—nanotechnologies, disruptive technologies and/or future sustainable technologies (FST) to replace obsolete technologies with greener, cleaner, faster, sturdier, stronger and/or more efficient ones.
John Kaiser brings in Jevons Paradox, noting, "High prices stimulate innovation to make better, more efficient use of a product; ironically, as you make more efficient use of a critical input the total demand for it goes up. So, for all those worried about new innovations reducing use of REEs, the 400,000 ton prediction by 2040, I would say processes like the ones we are seeing now are going to create the demand to take up all the supply."
While a host of issues, such as these, surface when the security-of-supply subject comes up in critical metals conversations, though, one five-letter word dominates the discussion: C-H-I-N-A.
800-Pound Gorilla
Back in the 1980s, rock-bottom production costs and low export prices on REEs from China led to its lock on the rare earths space, to the point that China now accounts for most of the world's REE supply—between 95% and 97%. Now, though, China's cutting back on exports in the interests of addressing its domestic needs. Molycorp CEO Mark Smith says that internal demand is growing so fast that China will be consuming all of the rare earths it produces by 2012. In fact, last July China reduced its rare earth export quotas for the rest of the year by 72%. "China cut its second-half 2010 export quota by 50%, and has just issued first-half 2011 quotas that are down yet another 11.4%," says John. As he puts it, "The wakeup call for the rest of the world has happened."
Whether focused on creating strategic stockpiles for future use or simply conserving its reserves, when China shifts from producer/exporter to buyer/importer, it turns the entire market on its head. As Jack points out, "China used 55% of all of the world's metals last year. If Chinese GDP continues to grow at 10%, in 6.4 years, China will require 100% of the volume of metals produced in 2010."
And then what? From Mike's point of view, "There is much focus on China's recent announcement of export limits on rare earths, but in reality, China will shortly become an importer of rare earths and are looking to the rest of the world to begin finding and mining and refining these metals."
Looking forward to continuing education on the critical metals front, John stresses, "We really need to solve these security-of-supply problems. Otherwise these are slippery slopes to war and other unhappy developments as countries take drastic steps to make sure that their needs are taken care of."
The Investment Case
The changing China picture and the renewed focus on critical metals, coupled with exploding demand and efforts to rebuild a supply chain and technological advances—many directed toward environmental protection—contribute to a picture that suggests upside potential in critical metals markets.
Last summer, John observed that prices for some high-demand metals derived from REE deposits continued to reach new heights, almost daily. About the same time, Molycorp's IPO filing indicated that prices for rare-earth oxides, which had plummeted about 50% during the global economic crisis, climbed an average of about 70% since October 2009. More recently, John says, price increases have been significant for tungsten, rare earths, tin, antimony and others all have seen significant price increases. "China is in the process of creating a cartel—they call it now the unified pricing system. They want to see higher process for rare earths. The high prices are now the new reality."
Valuations of some of the companies in the critical metals space, likewise, have soared. Look at Rare Element Resources Ltd. (TSX.V:RES; NYSE.A:REE), for example—which doesn't even anticipate initial production from its Bear Lodge Project in Wyoming until 2015. Last summer, an investor could have picked up its shares for less than $2 each. In mid-October, it was CAD$7.65 and on February 4 it closed at CAD$13.88.
Along with Molycorp, which will be in production in 2012, Mickey considers Rare Element Resources most likely the next company to have a mine in the light rare earth element space in North America. At this time, the property has 17.5 million tons of about 3.5%, dominated by light—but he says that the key to Rare Earth Elements is they also have significant metals that Molycorp doesn't: significant dysprosium, a higher grade of europium and significant terbium."
Sector consolidation might also bode well for investors. The supply chain dynamic seems to make combinations and integrations a strong possibility in the case of the critical metals, and as John points out, the sector is not only dominated by small players but the sector itself is very small.
Our symposium sources pretty much agree that there's a bubble in the critical metals space. "Yes, we're in a bubble," Mickey says. "But I think this bubble has a long way to go." He opines that most of the rare earths stocks are valued "way above the fundamental metrics that would be supported by current market capitalizations, so there is extreme downside risk—but the upside is still tremendous over the next two to five years."
Now Is the Time
As Cambridge House's Joe Martin suggests, the junior resource sector has a track record for seizing opportunities, securing the necessary financing, and demonstrating solutions. "These junior explorers are very reactive to market conditions and commodity changes, and if a commodity is in demand, they're out in the field, looking at properties and projects around the world to meet that demand." He fully expects the sector to help overcome the security-of-supply problems in the critical metals space.
With China's shifting exporter-to-importer status imminent, "This year the sector goes critical," John Kaiser says, "because serious money has to come in and fast-track the major projects that are in the running to deliver new supply by 2015."
The next Cambridge House Critical Metals Conference is June 3 & 4 in Vancouver, preceding the World Resource Investment Conference.
Want to learn more about REES? Check out Jon Hykawy's interview, REEs Explained, (6/25/10) and Jack Lifton's North America Doesn't Need China's Rare Earths (6/21/10).
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DISCLOSURE:
1) Brian Sylvester of The Gold 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 Gold Report or The Energy Report: Avalon Rare Metals and Rare Element Resources.
3) Chris Berry: 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: None.
4) Michael Berry: 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.
5) Mickey Fulp: I personally and/or my family own shares of the following companies mentioned in this interview: Avalon Rare Metals, Rare Element Resources. I personally and/or my family am paid by the following companies mentioned in this interview: None.
6) John Kaiser: 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.
7) Jack Lifton: 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.
