Gareth Hatch: Navigating the Rare Earth Metals Landscape
Interview

The Critical Metals Report: Gareth, Greenland's natural resource minister said that beginning in 2012, his country will take bids to develop its rare earth element (REE) deposits. What do you make of that?

Gareth Hatch: It was a little surprising, frankly. Of course it very much depends on the existing relationships in place between the private-sector companies and the government there, and how they intend to exploit those resources, but I might be a little concerned if I were one of the private companies and the government had not approached me first, before making this announcement.

TCMR: Are you talking about companies like Hudson Resources Inc. (HUD:TSX.V)?

GH: Possibly, yes. Of course we don't know who has talked with whom. Hudson has its Sarfartoq project in the southwest. Greenland Minerals & Energy Ltd. (GGG:ASX) has its large Kvanefjeld deposit in the south, and a handful of others have projects, too. They have invested a lot of time, effort and money into their projects.

TCMR: Molycorp Inc.'s (MCP:NYSE) CEO, Mark Smith, asserts that the 30 thousand ton (kt) REE export quota issued by Chinese authorities for 2011 is equivalent to only 21 kt rare earth oxides (REOs). Considering that ferroalloys are included in the list of compounds covered by the quota, it seems like an even tighter quota than was expected.

GH: Including this new category of materials likely does reduce the equivalent REO to 21–22 kt, but in 2010, without ferroalloys, the equivalent was 22–24 kt. We have to compare the right sets of numbers. I agree that there has been a decline, even if it is not as dramatic as going from 30–21 kt. Whichever way you look at it, it is still less than the demand for rare earth oxides, although of course there are significant quantities of rare earths being exported out of China illegally.

TCMR: Electric vehicles are a key end-use for rare earths, particularly in permanent magnets. Is the recent, highly publicized combustion of Chevrolet's Volt a threat to the sector?

GH: I don't think so. If there were systemic safety issues that threatened the rollout of these vehicles, and subsequent market penetration, then there might be some concern about demand. But I think it's unlikely. On the other hand, from a material usage point of view, if there really is a problem caused by Li-ion batteries, then this could be an opportunity: Prius-class hybrid vehicles use nickel-metal hydride batteries, which contain fair quantities of rare earths. Either way, I don't see the industry being derailed.

TCMR: In Critical Rare Earths, you say that the world will break even on supply and demand for neodymium oxide by 2013, but not until 2015 for europium oxide. Meanwhile, Byron Capital says there will be 5 kt of annual oversupply of neodymium oxide by 2013, and 309 tons of extra europium oxide by 2015. Whom do investors believe?

GH: There are several differences between our numbers. Byron is predicting lower demand than the U.S. Department of Energy (DOE), whose projection numbers I used in my report. With respect to europium specifically, Byron includes some potential ionic-clay deposits outside of China in its projections. I suppose that one or two of these might exist. Byron assumes that they do and that they can be brought online faster than other sources of supply, which will generally come from hard-rock deposits; I did not factor hypothetical ionic-clay deposits into my calculations.

TCMR: Byron assumes there will be less demand for neodymium and europium because, if they are too expensive, end users find alternatives. In some cases, that has already happened.

GH: The DOE numbers were based on projections completed in the latter half of last year, and prices didn't peak until this past summer. When the DOE updates its data, it will likely factor in current prices and potential effects on demand. If we look at downstream end uses, the price of raw materials directly affects the price of permanent magnets, for example, and motor engineers are already starting to choose designs that use fewer magnets, because the cost savings outweigh the additional manufacturing challenges of such designs. Thus, I can see current demand projections being quite different from where they were a year ago. Byron likely has a more up-to-date set of assumptions. We are waiting to see what updated figures the DOE puts out before the end of this year, and based on that, I would imagine that in the first half of next year we would revise our surplus/deficit projections accordingly.

TCMR: What numbers are rare earth companies using to project supply and demand?

GH: Most junior mining companies use the data that Dudley Kingsnorth puts out from Industrial Minerals Company of Australia (IMCOA). He typically updates his information two or three times a year. Mr. Kingsnorth recently reduced his demand projection for 2015 from about 190–170 kt of total rare earths. Other companies, most notably Lynas Corp. (LYC:ASX) and Molycorp, combine IMCOA's numbers with their own research, but get roughly similar projections.

TCMR: You also said the grade and distribution of the critical REE (CREE) neodymium has the greatest influence on the rankings by grade, of CREEs present within specific mineral resources. Does that mean the higher the grade of neodymium present, the more likely a deposit is to be developed?

GH: Not necessarily. By mass, you would expect to see more neodymium than any of the other rare earths (i.e. europium, terbium, dysprosium and yttrium) simply because it is a light REE (LREE) and LREEs are more abundant; the other four are heavy REEs (HREEs) and generally occur in much lower quantities than neodymium. That said, there is increasing demand for neodymium-based permanent magnets, and thus neodymium (and praseodymium) and its usage in magnets will be a key factor in the potential development of early-stage projects. However, other factors must be considered, such as first-mover advantage and infrastructure. Some would argue that these are more important than the grade present of a particular element. You don't have to have a top-five CREE distribution or grade to have a potentially successful project.

TCMR: In terms of the in-situ quantity of individual CREEs, what are the top-five deposits?

GH: If you look at the breakdown of in-situ tonnage of each of the five CREEs, for neodymium, the Kvanefjeld project in Greenland and the Nechalacho project at Thor Lake, owned by Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX), ranks highest. They both have well over an estimated 800 kt of neodymium within their respective mineral resources. You've also got the relatively new resource estimates for the Montviel project in Quebec from GéoMégA Resources Inc. (GMA:TSX.V) and the Eldor Project owned by Commerce Resources Corp. (CCE:TSX.V; D7H:Fkft; CMRZF:OTCQX). The fifth-ranked deposit by quantity of neodymium would be Strange Lake, owned by Quest Rare Minerals Ltd. (QRM:TSX.V; QRM:NYSE.A).

It's important to bear in mind the maturity levels for each of the projects in this sector in terms of their mineral-resource estimates. Many of the early-stage exploration projects have Inferred resource estimates only, in contrast to, for example, Avalon's Nechalacho deposit, which in addition to having a portion of its mineral resources at the Indicated level (which gives a higher degree of confidence in that part of the estimate than data at the Inferred level), is also one of the very few projects out there with an actual mineral-reserve estimate (i.e. a portion of the mineral resource has been independently determined to be economically viable). That gives you a particularly high level of confidence in the overall in-situ quantity data for a development project like that, versus those at a much earlier stage. If you look at europium, terbium and dysprosium, Nechalacho has the most of each in the ground, based on those resource estimates. You have Montviel and Eldor for europium, too. Mount Weld in Australia, owned by Lynas, has quite a bit of europium and terbium and Kvanefjeld again shows up on the list, for europium.

Other names that show up as you go down the line: the Norra Karr project from Tasman Metals Ltd. (TSM:TSX.V; TASXF:OTCPK; T61:Fkft) in Sweden would be one. Norra Karr features quite a bit of terbium and dysprosium, as does Alkane Resources Ltd.'s (ALK:ASX) Dubbo Zirconia Project in Australia. They make the top five for quantity of in-situ dysprosium and yttrium. Some of the same names show up repeatedly, reflecting the overall size and maturity of their rare earth estimates.

TCMR: What were your impressions when you recently visited Tasman Metals' Norra Karr project? Can it supply European manufacturers with the rare earths that they need?

GH: Well, one has to remember that these materials are fungible, so you can use them anywhere, not just in one geographic region, but certainly, shipping costs do apply. What struck me about Norra Karr was that it's maybe 400 meters from a major highway that comes southwest from Stockholm. From an infrastructure and accessibility point of view, it doesn't get much better than that.

TCMR: Is the company planning to produce oxides or concentrate?

GH: The current plans go as far as the concentrate stage. Like a number of other rare-earth projects currently under exploration and development, Norra Karr contains zirconium silicate minerals, so Tasman will have to demonstrate that it can handle what are thought of by some, to be difficult minerals to process.

HREE concentrates are typically going to be separated via different processing circuits than the other concentrates potentially produced at such deposits; so the company may go elsewhere to get its concentrates separated; Tasman is keeping its options open. The company may not necessarily do the separation in-house.

TCMR: Isn't that where the most value is?

GH: It is. Tasman won't necessarily sell its concentrates; there are potential opportunities to do tolling or to maintain value and ownership in other ways. The key concept behind Innovation Metals Corp., the company that I recently co-founded with Patrick Wong, is the creation of centralized separation facilities for just this type of scenario—to provide services to companies that have concentrates, particularly HREE concentrates. The companies could toll those materials for a nominal fee, while retaining ownership of the separated materials afterward, all without having to invest extensive capital in big and expensive separation facilities of their own.

TCMR: Like a base-metal smelter.

GH: Yes; this tolling concept is a fairly well known concept in other industries. The key technical challenge of course, is whether you can take in concentrate feedstock from multiple sources. We think we can do that.

TCMR: What struck you when you visited Quest's Strange Lake deposit in northern Quebec?

GH: Quest has a really nice deposit up there; a number of knowledgeable geologists walked us through the details on our visit. Quest also has a very professional organization and is well resourced. The challenge of course, is that Strange Lake is tucked away in a part of Canada that would require significant new infrastructure, to be able to properly service it and to get materials in and out.

When we were there, the company was just finishing up exploration and was starting the process of "handing over the reins" to the engineering people. Quest is now finishing up its prefeasibility study. The company has also recently added a director to its board with mining project experience. Quest is looking to expand and looking to put the right people in place to make this project a reality, if it can get the next stage funded.

TCMR: Quest President and CEO Peter Cashin has been talking about not only shipping concentrate, but separating the rare earths into oxides. What are your thoughts on the probability of that?

GH: These companies have to make a decision: at what point should they sell: at the concentrate stage or after producing oxides? If they can find the capital to build separation facilities and produce oxides and they have workable processes, then they will of course consider separating concentrates into oxides. Currently there aren't many alternatives; no one processes commercially significant quantities of heavy rare earths outside of China, which is where a company like Innovation Metals comes in. If Quest doesn't get into separating oxides, it has to figure out how to maximize its revenues from its concentrates.

TCMR: What other projects have you visited?

GH: I have visited Avalon's Nechalacho project in the Northwest Territories, which is in the advanced stages of development. The company is currently looking to hire a number of additional production and engineering folks. I have always been impressed with the Avalon management team's handling of technical development, especially its interactions with the First Nations people who live in that area.

TCMR: Nechalacho has some impact benefit agreements worked out with the local First Nations. However, there could be some issues as people learn about the environmental risks associated with rare earth mining. Do you think that Avalon's exceptional relationship with First Nations will mitigate that?

GH: The plan for Nechalacho is to mine underground. Visually and physically, underground mining has less impact on the surface, though of course every project has supporting facilities above ground.

TCMR: But there will be tailings, right? And often these deposits have elements like uranium or thorium, which are radioactive. I'm not sure if Nechalacho has these, but it's common.

GH: Certainly some groups are likely to be concerned about the effects, sure, but that's not unique to Nechalacho. As I said, I have always been impressed with Avalon's corporate and social responsibility initiatives; I think that the company has a genuine desire to do the right thing, and yes—it has very good relations with the local people—exemplary, in fact.

We need education on this. Environmental protection is extremely important, but some companies are actually prepared to invest in the technology and careful planning that can be used to reduce and to mitigate environmental impact. The industry as a whole needs to get that story out there. It is also important that consumers realize where the magnets in their cars and hard drives, the phosphors in their computer screens come from— ultimately from minerals that you have to get out of the ground. That is not an excuse to rape and pillage the land, and some companies in the industry are better than others in doing their bit. But this is not just a rare earth issue; it's a mining issue in general.

TCMR: Among the projects you named, what's a rough estimate of the average cost of development?

GH: At a minimum you're talking in the low hundreds of millions of dollars. Larger projects with higher production rates or HREE-rich deposits tend to run from half a billion to over a billion. Projections for the Kvanefjeld project in Greenland, for example, are over $2.3 billion (B). There is quite a range for different types of projects in different stages of development. Of course, if a project has already completed a prefeasibility study, the current cost estimates should be closer to the actual final costs, than those in a scoping study or other earlier-stage estimates.

TCMR: Are any projects going to be developed for under $200 million (M)?

GH: The Tasman folks have said that Norra Karr is looking at $200M for getting to the concentrate stage. Its relatively low number for a HREE project is influenced by the presence of existing infrastructure. Smaller projects, like the Bokan-Dotson deposit in Alaska owned by Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX), and the Zeus/Kipawa project in Quebec owned by Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX ), are fairly modest from a production rate point of view. Assuming these companies can sort their metallurgy and flow sheets out, my understanding is that current estimates for Bokan-Dotson are around $175M for development, and for Zeus / Kipawa, probably closer to $300-350M.

TCMR: Much like Tasman Metals, Matamec is also close to infrastructure and located in a mining-friendly area.

GH: I had the chance to take a trip out to Matamec, and it was pretty close to power lines and logging roads and not far from paved ones. It was a short hop from North Bay, and Quebec is by all accounts a mining-friendly jurisdiction.

TCMR: What are some promising projects in Africa?

GH: One is the Steenkampskraal mine in South Africa, which I visited earlier this year, and is owned by Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX). It is a former thorium mine with historical estimates of very rich REE grades. It is currently being refurbished. Also in South Africa is Zandkopsdrift, the project owned by Frontier Rare Earths Ltd. (FRO:TSX), which has Indicated and Inferred mineral-resource estimates. It is going through the scoping study for Zandkopsdrift right now, more usually known these days as the preliminary economic assessment (PEA). Montero Mining and Exploration Ltd. (MON:TSX.V) recently published an Inferred mineral-resource estimate for its Wigu Hill project in Tanzania. The other project that some folks will be familiar with is Kangankunde, in Malawi, currently owned by Lynas. Those four have the most public-domain data available on their exploration activities, out of all of the REE exploration projects currently underway in Africa.

TCMR: Frontier and Montero both have deals with Korea Resources Corp. (KORES). Do you think that that gives them an advantage?

GH: It depends on the scope and scale of KORES' involvement, but in terms of financing and support, there is a potential distinction in the investor's mind between them and other companies at similar stages of development. Some see it as offering increased confidence that the company will have access to funds and other resources. On the other hand, there is potential concern from the supply chain that once such resources are developed, they won't be available on the market, so the deals would have little direct benefit to non-Korean end users. I think it's too early to say, but it is clear that non-private-sector actors are looking to establish long-term relationships with the owners of potential sources of supply, on behalf of end-user companies in their respective countries.

TCMR: Why do you think KORES chose those two deposits?

GH: Their mineral-resource estimates show that they have good grades (over 2%) of LREE materials, contained in minerals that should be fairly straightforward to process. Do remember that LREEs are still required for a wide range of applications; I think that this simple fact gets lost in the stampede of interest in HREE projects sometimes.

TCMR: What is the production timeline for Frontier's and Montero's projects?

GH: Montero has just recently defined its resource, so I would be surprised if the company was throwing around production dates yet. Frontier is estimating that its Zandkopsdrift project will enter production in about 2014. Some investors would probably stick their neck out and use such dates, but for me, the scoping study/PEA stages are perhaps a little early for decent estimates.

TCMR: Is there anything you'd like to leave our readers with?

GH: They need to realize that the investor's point of view is very different from that of the supply chain. Investors are looking to grow their investments through dividends and increased share prices, while supply-chain folks are looking for production—they need metals and other finished goods. They really don't care which projects succeed in the stock market, so long as some do. They are also not going to wait forever for projects to come onstream, in the face of escalating prices; they will do what they need to, whether that is engineering re-design work, or reducing the per-unit quantities of materials that they need. Therefore, investors need to keep a close eye on demand estimates. The conversation about Byron's numbers versus mine was a good illustration of that. The supply chain ultimately dictates demand, and understanding the individual rare earths, each with their own demand profiles, will give some clues about where the supply chain is going, and thus the potential future market as a whole.

TCMR: Are you saying there isn't room for all of these projects to be developed?

GH: TMR is tracking well over 390 different rare earth projects at present; I can't see more than 8-10 coming onstream in the next 5-7 years. My colleague Jack Lifton recently got some heat for saying something similar recently, but it should be pretty obvious that that's the nature of the beast. Projects already well past exploration and into the development and engineering stage, and beyond, clearly have first-mover advantage. As demand grows, other projects might become viable.

TCMR: Thank you, Gareth; it's been a pleasure.

Gareth Hatch is a founding principal of Technology Metals Research, LLC. He is interested in helping people to understand the challenges associated with the growing demand for rare-earth elements [REEs] and other critical and strategic materials. Hatch is also a co-founder of Innovation Metals Corp, a provider of downstream processing and marketing services to the strategic-metals industry. For several years, Hatch was director of technology at Dexter Magnetic Technologies. He holds five U.S. patents on a variety of magnetic devices. A two-time graduate of the University of Birmingham in the UK, Gareth has a Bachelor of English (Hons) in materials science and technology and a Ph.D. in metallurgy and materials. He is a Fellow of the Institute of Materials, Minerals & Mining, a Fellow of the Institution of Engineering & Technology, a Chartered Engineer and a Senior Member of the IEEE.

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DISCLOSURE:
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: Quest Rare Minerals, Matamec Explorations Inc., Ucore Rare Metals Inc., Commerce Resources Corp., Tasman Metals Inc., Montero Mining and Exploration Inc. and Frontier Rare Earths Ltd.
3) Gareth Hatch: I personally and/or my family own shares of the following companies mentioned in this interview: Innovation Metals Corp. I personally and/or my family am paid by the following companies mentioned in this interview: Innovation Metals Corp.