The Gold Report: In a March Hallgarten & Co. research report, you noted that rare earth elements (REEs) had "come out of hibernation." Did they wake up happy or grumpy?
Chris Ecclestone: The REEs have run hot and cold since 2009. They had a run for about a year, went off the boil, then had another run.
At the peak, Molycorp Inc. (MCP:NYSE) had launched and everyone was excited about Lynas Corp. (LYC:ASX). Both had market caps in excess of $1 billion ($1B). An array of midtier stories, like Avalon Rare Earth Metals (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Rare Elements Resources Ltd. (RES:TSX; REE:NYSE.MKT), had market caps in the high hundreds of millions of dollars. Juniors proliferated. In total, there were 50–100 REE stocks listed on the TSX and TSX.V. That's a big group considering the size of the total universe of specialty metals stocks.
Then, the sector was scorched. The price of REEs plummeted. Molycorp and Lynas both encountered cost overruns and Lynas had environmental issues in Malaysia, where it was building its processing plant. These two bellwether stocks became damaged goods. Investors began to think, if the two big ones can't make money in REEs, who can?
"Ucore Rare Metals Inc.'s Bokan Mountain is just the right size."
This all coincided with the worst overall mining equity market in 10–15 years. Thus, REE stocks were doubly out of favor.
Beginning this year, there's been a better vibe in the mining markets in general. REEs have started to pick themselves up off the floor. They look like a viable investment alternative again. However, I believe that we need at most 20 REE stories. Right now, two are in production. Another four or five will get into production over the next few years. We probably don't need the rest. There will be a race to get into production. If you can't win that race, you might as well pack up your tent and go home.
TGR: Do you see higher REE prices? Has the sector bottomed?
CE: Prices have bottomed, yes. Some people remain bearish on lanthanum and cerium, which are in massive oversupply. Those prices may go lower. However, I believe it's not in the Chinese interest to see those two metals go lower. Lanthanum and cerium make up the bulk of what China produces in the REE space, but they're not the value-added metals. Metals like europium may enjoy better prices, but they're a small part of the whole REE complex.
China's bread and butter comes from Bayan Obo, which is not a rare earth mine at all. It's an iron ore mine that produces REEs as a byproduct. The Chinese can't stop producing REEs at Bayan Obo because they'd have to stop producing the iron ore as well.
One of the intriguing things about REEs is that you can't just take the ones you want and leave the others behind. You have to go through the whole chemical extraction process to get those with the biggest market or the best price. You can't send a metal into the tailings pond because it doesn't have a good price today. You have to do them all.
You're stuck in a reverse economy of scale; the more you process, the more unprofitable it could be.
TGR: Given the margins on producing a concentrate or even an oxide, is vertical integration the only way to make money in the REE space?
CE: The ideal scenario is to be vertically integrated. That is a bit of a challenge for some of the juniors. Molycorp is the only company that has the REE soup-to-nuts combo. Molycorp put that together by buying Silmet, an Estonian-based processor. The company then bought Neo Material for its factories around the world and its distribution system. Putting that together cost Molycorp a lot of money and a lot of dilution.
"Mkango Resources Ltd. has some hefty institutional players behind it."
Like silicon technology, the mining is not the sexy part of the REE business. No one would say that digging silica out of the ground is the quality end of the tech business. The quality is at Intel's factory, where the silicon chip is put on the circuit board. The mere insertion of the word "rare" in the name was a marketer's dream and has ended up being an investor's nightmare. They're not rare; they're as common as dirt.
TGR: The World Trade Organization (WTO) recently ruled in favor of the U.S. in a trade dispute over Chinese exports of REEs, tungsten and molybdenum. Does that change the playing field for junior REE development companies?
CE: No, because it won't have much effect on the REE market. I recently attended an antimony conference, where we heard about China's quota on antimony exports and the fact that it never reaches its quota. Yet, according to the official statistics of individual European countries, their individual imports of antimony from China are higher than the entire Chinese export quota. Chinese export quotas do not affect daily life in the REE sector. They will be smuggled out; they will be walked across the border and become Vietnamese REEs.
I think the Chinese are more interested in controlling the prices of REEs than the supply. Call me conspiratorial, but I think that the Chinese sunk the REE prices in 2011 after having pumped it up. They did that because there was a sudden proliferation of REE properties out of nowhere in the west. The Chinese thought, oops, we've shot ourselves in the foot here by attracting all these additional mines. If we let them run down the track with these high prices, five years from now there will be massive overproduction. At that point, the Chinese sunk the prices.
The REE market is easy for the Chinese to manipulate because they have the stockpiles. In 2011, the Chinese released a deluge of product. That sank the price and 75% of the listed REE equities into oblivion. I think the Chinese want to see the prices rise again, but only when they can be confident higher prices won't trigger another surge of new REE companies.
TGR: How is China's role today different from its role in 2010–2011, when the sector exploded?
CE: It plays essentially the same role now. In 2011, China was pretty much the only game in town. India, Malaysia and Brazil had small amounts of production. Today, Molycorp and Lynas look like wounded beasts. They have, just barely, managed to spoil the lanthanum and cerium market for the Chinese. Their existence means that the Chinese don't control those markets anymore. I still don't see either one as competition for the Chinese, but they are price spoilers at the cheap end of the REE space, in lanthanum and cerium.
TGR: If China is the kingmaker and in control, why would an investor wade into these waters?
CE: There are niche categories. One of them is strategic metals. In 2010, you heard a lot about the perception that the West had made itself too vulnerable to Chinese supply of the strategic metals that the western defense establishment needs. Here we are four years later. China is as threatening or as non-threatening as it was back then.
Will the U.S. do anything about it? So far, not much has happened. The U.S. needs to say, "We need a big stockpile of yttrium, of terbium and samarium and other scarce REEs." Ironically, when you're talking about rare earths used for, say, night vision goggles, the U.S. defense establishment is probably buying the rare earth oxides that go into those from Japan or China. Meanwhile, Japanese are dependent upon the Chinese. Many of the Japanese plants for processing REEs are being forced to move to China because the Chinese have said, "You're not getting it unless you move your plant over here." They're almost like captives of the Chinese and the Japanese don't like that. The U.S. doesn't seem to care.
TGR: In a recent interview, Asian Metals Analyst Zachary Schumacher said, "Very few REE projects stand out." Which ones stand out for you?
CE: Great Western Minerals Group Ltd.'s (GWG:TSX.V; GWMGF:OTCQX) project in South Africa is one. Steenkampskraal is an old thorium mine with phenomenal grades in its gigantic tailings. It should be in operation now, but the company seems to be going a bit soft on the pedal because it doesn't want to come to production in this grim market.
TGR: Are you following other REE names?
CE: I like Texas Rare Earth Resources Corp.'s (TRER:OTCQX) Round Mountain project. It's easy to get to and it's more than an REE project; it has beryllium and lithium. It also has yttrium fluorite and it can extract fluorspar, as well as yttrium.
Ucore Rare Metals Inc.'s (UCU:TSX.V; UURAF:OTCQX) Bokan Mountain is just the right size. Ucore saw the light early on and halved the size of the project. It's the companies that are sticking with their oversized projects that will come to grief.
One project without pitfalls in terms of good infrastructure and location is Tasman Metals Ltd.'s (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE) Norra Karr in Sweden. Scandinavia is where REEs were first found. Norra Karr might come to fruition.
TGR: What about African rare earth players? Prospects? Do you know Mkango Resources Ltd. (MKA:TSX.V)?
CE: Africa is interesting for REEs. While Latin America is rather poorly endowed with REEs, Africa is exactly the opposite, at least the southern half of the continent seems to have quite a number of resources of economic proportions. The ones I am acquainted with are in South Africa (Great Western at Steenkampskraal), Namibia with a couple of projects, Tanzania with a couple and Malawi with quite a number, disproportionate to its size. The Japanese, through its agency JOGMEC, have taken a particular interest in the latter country.
I do know Mkango and it seems to be not only one of the more determined and serious players in the REE space, but it has some hefty institutional players behind it (Sprott, Genesis, Och-Ziff) that mark it out from those stocks that are reliant upon retail investors. It has skipped the preliminary economic assessment phase and is heading toward a feasibility study to be published in coming months. This will give us a better idea of its prospects and capital expenses. It seems it will come in at the lower end compared to many of the Canadian REE contenders.
TGR: Does Medallion Resources Ltd. (MDL:TSX.V; MLLOF:OTCQX; MRD:FSE) fit into your thesis of having the right metals and a relatively small footprint?
CE: I know Medallion Resources very well. Its concept is to get REEs as a byproduct of ilmenite and rutile mining. The company wants to put its project at the entrance to the Persian Gulf. That's a smart move because of the cheap energy. Most of the world's ilmenite and rutile production is around the Indian Ocean.
TGR: Is ilmenite your favorite mineralization to host REEs?
CE: Ilmenite is not my favorite. It is a titanium-driven product. If the price of titanium goes to hell in a hand basket, some ilmenite projects would follow. The danger Medallion faces is its dependence on what happens with titanium demand; the REEs are only a byproduct.
I love xenotime because you get yttrium along with it. I like yttrium because of its high-tech uses in anything that must be coated to protect them from very high heat, like jet engines. it's a very interesting strategic metal.
Northern Minerals Ltd. (NTU:ASX) and Spectrum Rare Earths Ltd. (SPX:ASX) are working deposits in Australia. Spectrum claims to have the only ionic absorption clay deposit outside China. It hasn't yet been proven to be adsorption clay, but it definitely contains REE. Ionic adsorption clay is the holy grail of REEs.
TGR: The Alaskan Senate recently approved $145M in long-term bonds to finance Ucore's Bokan Dotson Ridge project. Does that guarantee the mine will be built?
CE: With REE prices going lower, all bets are off. However, you could build a mine with that amount of money.
TGR: Besides financing, what else does the Bokan Dotson project have going for it?
CE: It's the right size. It's better to have a project that runs out in 10 years rather than trying to build the biggest project.
It will be 2016–2017 by the time Bokan Dotson gets built. Some REE prices will be higher then: praseodymium and neodymium, the ones used in wind turbines and in hybrid autos. The Chinese are trying to deal with urban pollution by a wholesale shift toward hybrid autos.
We've seen this over and over in China. When China needs something, it starts by using all of its own product. Then it starts importing the product because demand outstrips production. That's not to say that China will become a net importer of REEs, but if China goes for a big paradigm shift into hybrid autos, it could generate massive demand for neodymium and praseodymium, to be used in the magnets in the engines.
TGR: The WTO ruling also covered Chinese tungsten. Can you update our readers on the supply/demand equation for tungsten and your investment thesis?
CE: One of the main uses for tungsten is the filaments in electrical light bulbs. The shift toward low energy-consuming bulbs reduces tungsten demand in that industry.
It's also used for hardening, including machine tools. China wants to muscle in on the traditional European strength in machine tools. That means using more tungsten, which is what led to the Chinese export quotas on tungsten. Those quotas frightened a number of European companies that depended on Chinese tungsten.
Sandvik AB (STO:SAND), the big Swedish company that produces a lot of heavy machinery, is an example. Sandvik decided to buy an old Austrian mine and get it going again as a source of tungsten outside of China. Sandvik also invested in Wolf Minerals Ltd. (WLF:ASX), which is developing a tungsten mine in the southeast of England.
Global Tungsten & Powders Corp. is a big producer of tungsten powders from mines around the world. GTP backed Malaga until its demise last year. It is now backing Almonty Industries Inc. (AII:TSX.V), which owns the Los Santos Mine in Spain. It has been producing for five years.
We're seeing more tungsten mining in Europe, a place regarded by many as having too many regulations and expensive labor to be worth the effort to start a mine. Australia has a number of projects coming down the track, too.
Size is a problem for North American Tungsten Corp. Ltd.'s (NTC:TSX) Mactung project in the Yukon. It has a $400M budget. The current tungsten price is good, but not phenomenal. If you have an existing mine, that's great, but trying to rustle up $400M today is pushing a rock up a hill. I don't think Mactung will get going until the tungsten price is much higher.
TGR: As far as Almonty goes, how much mine life does Los Santos have?
CE: It has four or five years left. However, Almonty made an abortive bid last year for Ormonde Mining Plc (ORM:LSE). Ormonde's project is also in the Salamanca Province of Spain, which gives Almonty lots of potential economies of scale. Right now, it's in the prefeasibility stage. Almonty would bring its skill set to get the mine going.
Spain is one of the most prospective areas in the world for a lot of minerals, actually. Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) was founded there as a lead-zinc mine. Gold, lead, zinc, even iron ore, tungsten, tin, antimony—Spain has it all, Portugal as well. Lundin Mining Corp. (LUN:TSX) operates big mines in Portugal. Colt Resources Inc. (GTP:TSX.V; COLTF:OTCQX) has a tungsten project outside Lisbon.
In the Iberian Peninsula, you get the added juice of tin in many tungsten deposits. If you really hit the jackpot, you get tantalum as well. You don't need to go to exotic locations or troll around the top of the Andes. Just catch a flight to Madrid.
TGR: What should investors expect in 2014 and beyond in the REE space?
CE: I compare the REE space to a science-fiction movie, where the spacecraft crew is cryogenically frozen. Some of the crew will defrost the way they're supposed to, but others will be lost.
In the REE space, it will become clearer over the next 12 months which five or six projects are most likely to survive. Many of the other REE companies will change their names and become totally different companies seeking other metals in other countries.
I don't think there will be a second wave of new REE stocks. This is the universe we have, and it's getting smaller, not bigger.
TGR: What's your advice to investors Chris?
CE: Diversify. If you want to take on REE stocks, buy two or three to mitigate risk.
TGR: Chris, thanks for your time and your insights.
Christopher Ecclestone is a principal and mining strategist at Hallgarten & Company 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 & Company 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 Company, 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 holds a degree from the Royal Melbourne Institute of Technology.
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1) Brian Sylvester 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 independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Northern Minerals Ltd., Ucore Rare Metals Inc., Mkango Resources Ltd. and Medallion Resources Ltd. Streetwise Reports does not accept stock in exchange for its services.
3) Christopher Ecclestone: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: In the past, I have consulted for Ucore Rare Metals Inc. and Texas Rare Earth Resources Corp. 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 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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