Rare Earths are Not Commodities.

Caroline Wilson-Matamec-Explorations-Inc.-RareMetalBlogInteresting insert fell out of my Financial Post yesterday. Caroline Wilson, Geologist and Director of Investor Relations, Matamec Explorations Inc. (TSXV: MAT) penned an aptly titled article Rare Earths are Not Commodities! Edited by Luisa Moreno, Analyst at Jacob Securities Inc. — thought I would kick off your weekend with this informative read:

“Rare Earths (REE) are customer-specific chemicals, produced to precise chemical and physical specifications. The needs of the end-user must be met. Since customer needs are continually evolving, it requires the suppliers to become an integral link in the supply chain.” These words are taken from REE world expert, Dudley Kingsnorth (IMCOA), March 2011.

China has been supplying the rest of the world with 97% of their rare earths since the early 1980s. However, China’s recent cutback on export quotas is creating opportunities for exploration and development by non-Chinese rare earth companies. With uncertainty in the REE supply, the race is on for these companies to be first to market.

Every company will eventually need to sign a memorandum of understanding (MoU) that will lead to the signing of one or more off-take agreements in order to sell their product. All deposits contain the 15 (or 17 including promethium and scandium) rare earth elements in varying proportions. The highest value is associated with the rarest heavy REEs or, more specifically, the 5 critical metals (Neodymium (Nd), Europium (Eu), Dysprosium (Dy), Terbium (Tb), and Yttrium (Y)) as defined by the US Dept. of Energy (Dec. 2010-2011). The supply/demand equation for individual REOs is out of balance and end-users are specifically looking for a secure supply of these critical elements outside of China.

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Emphasis is on heavy REE deposits that show the potential to get into production quickly. To be of interest to an end-user, each company must demonstrate the technical viability of their project. Every orebody is unique, so the chemical extraction process is project specific. This process includes: beneficiation (increases REE-mineral concentration), extraction (concentrates the REEs into a pure solution), precipitation (eliminates impurities and produces a mixed REE concentrate) and separation of individual rare earths (REEs are chemically similar so they are difficult to separate). Only 5 minerals presently produce REEs (bastnaesite, the South China clays, monazite, xenotime and loparite) and projects whose ore contains these minerals are viewed as less risky despite the uniqueness of such minerals in differing orebodies. Silicate minerals, however, have not produced REEs in the past. They are viewed as more risky sources of REE, but they are typically enriched in the more desirable heavy REEs. Demonstrating a simple low cost process to produce the HREEs is the key to finding an end-user in the present race to production. Location and infrastructure are also key elements that keep the capital costs down.

It is an advantage for a REE exploration company to associate itself with an end-user that is vertically integrated from the mine to the end product. Technical expertise is limited outside China and access to the supply chain of these vertically integrated companies is imperative to fast track the projects into production. The intangible value of having a strategic partner with a complete supply chain is beyond a dollar value. Many of the junior mining companies developing REE projects are completing their metallurgical tests at the lab scale. However, the more advanced projects are preparing or completing pilot plant tests and this is often the most important step to commercialisation. This step, if successful, demonstrates that the chosen processes are technically and commercially viable through a continuously operated pilot plant(s) to produce samples to customer specification(s); to collect data for the Bankable Feasibility Study (BFS) and to complete an Environmental Impact Assessment. End-users are usually more comfortable to take a risk at this stage of the project. The perceived level of risk determines the structure of the agreement being negotiated; for example, minerals that have produced REEs in the past are viewed as less risky and more favourable terms may be negotiated.

In conclusion, negotiating an off-take agreement depends on many variables at the time of negotiation: price trends, forecast of critical REE supply shortage which takes into account the possibility of a reduction in the use of REEs and improvements in recycling methods, and the need for a secure supply of REEs outside China. Companies must build a world class negotiating team to minimize the impact of these uncertainties by signing a mixed contract: spot, long-term, etc. and fitting the off-take agreement to meet the challenges.

Disclaimer: Matamec Explorations Inc. is a sponsor of RareMetalBlog.

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Tracy Weslosky

About Tracy Weslosky

Tracy Weslosky is the Publisher and Editor-in-Chief of InvestorIntel, a leading global investment intelligence source created for the innovative and entrepreneurial minded that represents over 50 publicly listed companies globally that are listed on InvestorIntel.com. Tracy is also the Founder & CEO for ProEdge Media Corp., an online publishing and media production company since 2001; and is the Managing Partner for 724 Capital Corp., a business consulting firm that currently represents U.S. Rare Earths, Inc. Previously she has owned a boutique Investment Banking firm for 7 years that was the basis for a business reality television series called, DealFlow. Aired around the world for 3 years on CNBC World, WealthTV and many other networks globally; Tracy is a speaker, writer and an entrepreneur.
  1. could be that is why the BIG BUCK$ commodity houses are so deeply involved [ KORES, SUMO, TSHUSO, MITSU, etc ]. they understand the supply/ demand variables, have materials/commodity skills and evaluation labs. it is always wise to follow their actions and be ready to act quickly when they commit CASH. but MOU/LEI are not always CASH.

  2. There is an “interesting twist” to the end user scenario that has
    historically been limited to “Industrial Buyers”.
    Now innovation in the Investment World is creating opportunity
    for “Retail Investors”.It is a sleeper that does not get much Media Attention.
    However, it has advanced to the stage that it is also allowed in IRA’s(tax deferred
    Individual Retirement Accounts)…which adds to its’ credibility.
    I am following this with some interest.
    Remember when ETF’s were created for precious metals and all the skepticism that
    surrounded them. Now gigantic quantities have been taken off the market due to
    Large investments in these ETF products.
    Well,now the “Retail Investor” can buy and hold “Physical Quantities” of Industrial Metals.
    “Swiss Metal Assets” offers “Retail Investors” “Baskets” of eleven commonly used but scarce industrial metals for purchase and storage in a Tax-Free Zone Warehouse outside of Zurich.
    3 Baskets (Key Industries)(Solar and Energy)(Construction and Engineering).
    If this type of investment gains popularity and momentum it will add another
    Industry looking for “Off Takes”…The “Investment World” steps in.

  3. i looked at site–
    i give it a TRIPLE CAVEAT EMPTOR:
    buy/sell/store fee structure?
    track record on any previous metals
    market liquidity?
    market maker? price fixer?
    bundled metals into pkgs limits trading
    enough unanswered querries???

  4. Retail Investors holding Physical REE’s is a little on the forward edge.
    There are negatives to consider:
    It is a little new to monitor more than 2 years of track record.
    It might be hard to lock in the buy/sell price that you want.
    Takes longer to liquidate…is there a constant source of Buyers/Sellers.
    If you are an American setting it up as a tax deferred retirement IRA you
    would probably have to roll over a partial existing IRA to equal the value of the baskets purchased. If you are starting an IRA in REE’s then the price of the basket is more than your allowed yearly contribution.also, when you are of the age 70 1/2 when you are required to take minimun distributions then you might have to take out more than you want to as you sell in “Baskets”.
    If you are buying outside of the IRA then those problems do not apply.
    The purchase fees do not bother me if I think there is potential value in the investment.
    The storage fees which are currently fixed for 5 years at 1.5% are not too much of a difference from buying ETF’s/Mutual funds with high expense ratios and hidden fees.
    However, are the storage fees going to be an out of pocket expense or are they taken from money that you have already invested?
    Some positives:
    It is a way for Americans to get out of the USD…Maybe, If not prevented by Regulators.
    Almost all of Americans investments when liquidated come back into USD.
    This plan gives you the opportunity to take profits in other currencies
    and transfer funds to the Bank of your choice.
    The US Dollar has been losing value for years and and it will experience further
    debasement.Increasing Inflation does not help US Investors.
    My Interest in this is that for years I have been setting up an IRA to be inherited by my Daughter(Dual citizenship Swedish/American).
    She lives in Switzerland and I want her to take the distribution in CHF or SEK
    transferred to her bank without first converted to USD and then back again to SEK or CHF.
    At present this Investment concept in physical REE’s is a little too new for me.
    However,…My interest is still alive…it “is” Intriquing.
    I will proceed with caution…more research and monitoring.

  5. Nota Bene
    Back to the core conversation of REE Demand/Supply.
    Who Knows….10 years from now it might be commonplace to
    buy ETF’s in Dysprosium,Europium,yttrium etc.,etc.
    Where there is value, the Investment Community finds a way
    to capitalize on it.
    Another Buy Side for REE’s….. :)

  6. some day, perhaps! not now; not SMA. Dacha metals [ DSM.V ] has failed and had much better transparency. pehaps in the commodities futures [paper mkt ] or in the form of URANIUM PARTICIPATION FUND [ U.TO ]. i would not wait their mkt introduction.

  7. it creates no consintant cash flow upon which to grow the business. the business model is defective. a thriving business needs cash to pay expenes and reward investors [e.g., dividends, groeth, etc ]. how is this done, lest it devours its inventory

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