The Rare Earth Space, ‘A Culling of the Herd, and the Survivors’ (Part 1: North America)

Jack-LiftonWhile I was not in attendance at PDAC in Toronto this week, due to prior commitments in Malaysia, I understand from those who did attend and that I talked to that it was a somber affair for those junior REE ventures seeking additional and/or new funding. I am discussing below only companies with deposits in North America. I will discuss Europe and Africa next week and Asia the week after that.

Mining juniors, in general, and rare earth juniors, in particular, are contending with a lack of investment capital, and the writing is on the wall for many, as their projects remain too ‘early stage’, and much too ill defined with regard to end products and their markets, to attract capital (which is bearish and risk averse toward the resource sector at present).

Rare earth exploration juniors are at the edge of the cliff, and the culling of the herd is imminent for many of the blue sky/early stage projects that failed to deliver even an NI 43-101 compliant resource, much less an advance stage development document. I’ve been talking about this thinning of the ranks for some time and the abattoir is primed to start grinding out fresh kill.

Such is the Darwinian nature of the markets, and there’s something to be said for the channeling of capital to the strongest individuals that remain standing in times of drought and famine.

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Two such survivors are Ucore (QTCQX: UURAF) and RER (ASE: REE), which are smallish, right size projects. In the case of Ucore their recent PEA delivered some metrics that set its Bokan property apart from the crowd…not the least of which is an almost absurdly low projection of the CAPEX required to get into production ($221M) and a product mix and form stated to be valuable enough to generate close to $100M per year in pre-tax profit (with a 43% IRR). That’s a bullish return on limited input capital. Ucore plans to be in production in 3 years or so, which places them at the forefront of the international race (along with, in my opinion, RER), to generate HREE’s outside of China.

Ucore estimates that they’ll be producing some 95 TPA of Dy; close to ½ of current US OEM automotive requirements and more than 10X the requirement of US Department of Defense (with which Ucore signed a strategic agreement in Q4 of 2012 for the purpose of advancing their HREE project). DOD is interested in Dy at least partially as an input component in unmanned drones in theaters of war (a topic that has garnered much media attention of late as a bulwark of the Obama administration’s offense strategy in the Middle East). Beyond this, UCU’s Dy output will be readily received by the American automotive industry, as prospective production of EVs and HEV’s continues to grow.

Ucore has yet another ace on the hole with the State of Alaska in their corner. The State has a long history of assisting in the financing of CAPEX to worthy mining projects, with very patient long term, below market interest loans over life of mine. Alaska has a $39B permanent fund, largely the outcome of a robust long term petroleum sector which is now falling into abeyance. So, they’re the rare sovereignty in the western world that has not only significant capital but also the wherewithal to invest in its own future. In Ucore’s case, the stated CAPEX is so low, that the State could singlehandedly guarantee Bokan’s rise to production (witness Alaska’s underwriting of $225M just for the port and road infrastructure at the Red Dog Mine in Central Alaska; an amount which ironically totals more than Bokan’s entire CAPEX requirement). As I mentioned some time ago, the Goldilocks Principle will gain new credibility in the REE space, as it’s the right size project with the right products, Critical Rare Earths that will ultimately prevail. Ucore’s Bokan is such a project.

I have also been following Rare Element Resources, and I am convinced that their new model emphasizing the extraction and production of Critical Rare Earths is a winner. I have been hoping that RER would adopt the business development model that they, in fact, announced at the beginning of 2013, and they did exactly that. I was pleasantly surprised by the increase in extraction efficiency that RER just announced, especially considering the size of their resources. I note with an “I told you so” kind of satisfaction that both Ucore and RER have a business model that de-emphasizes the light rare earths other than the critical rare earth, neodymium. This is the only workable model in a non-Chinese world in which today a Lynas (LYC.AU) and perhaps a Molycorp (NYSE.MCP) are producing, or capable of producing, as much light rare earths as anybody wants (if the price is right, of course).

I am now ready to state a predcition: the Domestic American Survivors of the 2013 Rare Earth Mining Junior Cull will be Ucore and RER, because they are the right size and have the right products.

Unless there is the construction and operation of an efficient rare earth toll (contract) refiner to which North American rare earth miners have open access there can be little hope of survival for those rare earth mining juniors which have just discovered the need for access to a competitive cost separation plant. There are such toll refiners being planned in North America, but they will have limited capacity, so that they will only be able to serve the first that come to them.

For those who ask why I didn’t mention their favorite picks, whichever those picks may be, I repeat that based on my criterion I can only pick Ucore and RER as survivors in this side of the hemisphere. I’m going to a meeting in Europe tomorrow, Saturday, March 9, 2013. When I return next week I’ll reveal my picks as the European and African survivors.

Disclaimer: Jack Lifton is a consultant to Rare Element Resources Ltd. and Ucore Rare Metals Inc.


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About Jack Lifton

Jack Lifton is a Founding Principal of Technology Metals Research, LLC. He is also a consultant, author, and lecturer on the market fundamentals of the technology metals, the term that he coined to describe those strategic rare metals whose electronic properties make our technological society possible. These include the rare earths, lithium and most of the rare metals. Jack Lifton is currently a non-executive Director for Texas Rare Earth Resources Corp. (OTCQX: TRER) and AMR, a private Turkish mining venture. He is a paid business operations/marketing consultant to Rare Element Resources (TSX: RES | NYSE MKT: REE), Ucore Rare Metals (TSXV: UCU | OTCQX: UURAF), Tasman Rare Metals (TSXV: TSM | NYSE MKT: TAS), and NovX21 (TSXV: NOV). He is also the founding co-principal of Technology Metals Research, LLC. His consulting is done through Jack Lifton, LLC, a consultancy he began in 1999 upon his retirement as the CEO of an OEM automotive supply company specializing in process chemistry and metals trading. Jack Lifton, LLC is a member of the Minor Metals Trade Association (www.mmta.co.uk) and Jack is an advisor to the Malaysian Academy of Science in Kuala Lumpur, and he is a member of that Academy’s Rare Earth Task Force.
  1. You have just come back from the Lynas LAMP in Malaysia
    and given a very positive review.

    Question: Why are investors still focused on Molycorp?
    The two seem to be apples and oranges.
    Molycorp is still a big question while Lynas will
    soon see cash flow. What am I not seeing?

    Would you provide a price target for Lynas
    in June 2013? Septimber 2013?

    Thank you

    • Quite frankly I cannot give a share price target for Lynas, or any other company, because I estimate the probability of operational success, and to a lesser extent of commercial success. The stock market is a short term casino, and although share price is a big factor in determining who will survive and continue to be able to raise capital, I am not using share price in my estimate of whether or not a particular company can succeed in meeting it’s customer’s requirements: On time delivery of the specified products at the agreed price.

      Note please that I am a business development consultant to both Ucore and RER, and I do not undertake such consultancies unless I believe the company will succeed. I want you to consider also that have no relationship whatsoever with Lynas nor have I ever had one. It is the same for me with Molycorp. No relationship.

      Thank you for asking and thank you for reading my opinions. They’ve been a long time in the making. It will be 51 years on April 22 that I first encountered rare metals, and that encounter was with neodymium.

      • I’d like to add that I think that decisions on choosing to produce downstream product lines, choosing the right technologies, and good management are the key factors I take into consideration. The first two factors above determine the costs and timing. It is up to the third factor here to make it happen.

  2. I’ve only been a RE investor for three years, what seems like a very long three years, and when it comes to Mr. Lifton expressing his opinions in this area, I am reminded of an old ad for E.F. Hutton which I reword to say, ” When Jack Lifton speaks, people listen.” Cheers!

    • Catlady, I think that jack will address gwg when he discusses Africa as Steenkampskraal is their flagship property. Hoidas is many years away and may even be spun off from gwg before getting it to production. No way that GWG isn’t a survivor.

  3. Hi ya Jack,

    gotta tell ya, I love that straight talking – you never pull any punches

    you can smell the blood on the abattoir floor

    there is a reason you are the leading authority on rare earths, put simply – you know what you’re talking about

    • Forget the North Americans in regards to funding, the Chinese will provide the $1 billion to build-out Quest.

  4. Jack– I wonder if you could please take a moment to clarify a point regarding the subject of your series of “culling” articles. In paragraph 3 above, you say:
    “Rare earth exploration juniors are at the edge of the cliff, and the culling of the herd is imminent for many of the blue sky/early stage projects that failed to deliver even an NI 43-101 compliant resource, much less an advance stage development document. I’ve been talking about this thinning of the ranks for some time and the abattoir is primed to start grinding out fresh kill.”
    I take that to mean that you are not addressing more advanced REE companies that are beyond “blue sky/early” within the scope of these articles. Because there is some grey area in some REE company’s development, would you care to simply clarify here if you are including what are generally called “first producers” that are all farther advanced than the apparent focus of your writing as to survivors? By first producers, I specifically am speaking of Molycorp, Lynas, Great Western Minerals, and perhaps a couple of others that seem to be past the blue sky stage of development.
    I ask this because some on the discussion boards seem to be jumping to conclusions due to misunderstanding the limits and focus of your writing.
    Thanks for your patience, and your unfailing aim for objectivity.

    • poncho – A very fair question. I find it impossible to evaluate Mr. Lifton’s determination of “survivors” in this, the previous and probably the final in this series. How would that be possible if one isn’t told who/what constitutes the “herd” from which there will be culling? It is like saying that Bryant is the best basketball player. Need to define limits, are you talking about his team, his division or the entire league–need that for this statement to have any meaning or relevance. Why will Mr. Lifton not address this very fundamental issue????

    • With Molymess having chosen the Ides of March to release Q4 loses & write downs I just can’t help but add:

      “”Cry ‘Havoc!’, and let slip the dogs of war”

  5. Jack after 51 years you know get to eat the cherry on the ice cream
    good on you for turning your interest into pay back.

    I invest in rare earths and other mines and one thing that gets me going is the lack of accountability on the board level. The pump and dump is just toooooooo much. The board gets ridiculous salaries and perks, shares, options and all things great and small, whilst leaving the share holders footing the bill – even though nothing gets produced (in most cases). This is in line with your blood on the floor.

    The amount of companies that do CAP raising, dilute the share price by issuing millions more is obscene. Boards raising their salaries even though the share price is languishing all goes towards share holders running for the hills.

    I have a few shares that have lost 99% but they still keep pulling in mug punters to inject more funds into a dying swan. Most of the money goes on board salaries.

    If one looks at Lynas (finally due to produce salable qtys soon – it has a very checkered past, with delays, cap raising, shares diluted and a CEO that cashed out at the top, tried to sell off Crown ( a MEGA resource) and a nice boat in the Caymans. Although, the share price dumped from over $2.60 to a now 61 cents. But he still got his salary, bonus and shares.

    To be frank the small REE mines havent got much chance.

    I think the whole industry is in for a major overhaul, in that these MEGA salaries are whats destroying not only the stock but the markets confidence in the company.

    ASIC in Australia is all over these companies and is gaining strength every year. Hopefully they will stop these routs and help gain confidence in the markets so that mug punters can get back in with some confidence that their money is not paying some board members mortgage off or for the wifes face lift.

    If the companies not performing then there should be no bonus or pay increase – simple

  6. All public companies disclose payments to CEOs/boards etc. The likes of Doug Casey have been saying for many to check salaries and insider shareholdings before investing. Salary should be modest, insider shareholding substantial (10-20%..??).

    My industry review suggests access to capital is now one of the most pressing risks, and pushes back by many years the start date for companies needing more than $1 billion for development.

  7. Jack, as always, a genuine, honest and straight opinion. Question, though: you talked about North American, did you leave out / will you talk about Greenland and the REE-opportunities that part of the world will deliver if the Uranium-related issues will be resolved (maybe soon after the elections)?
    (Mind you, I do NOT own any assets in GGG, HUD, RMR or anu other Greenland REE-company, just curious!)

  8. Jack, will you be including Australian hopefuls in your assessment? Alkane appear to be very close to supplying into the much needed HRE market and have the backing of Shin Etsu, a technology leader in permanent magnet production.
    Looking forward to forthcoming posts for ROW rare earth hopefuls.

    • Bob,

      I will give my survivor choices for Europe and Africa this week. Next week I will cover non-Chinese Asia and Australia.

      Jack

  9. I have been tempted to guess who the African survivors will be but I will wait for Jack’s choices. I also feel that like Bruno indicated, more products beyond the REEs can actually be a determinant on whether there is or there is no survival. For example Tantalus’s other potential products beyond REEs sure raise Tantalus’s survivability – in addition to other considerations, of course, in my humble and limited opinion. I am seeing as if the ability to easily extract scandium and gallium, especially scandium when there, could be survival-status-changing – for starters; but one may say that these are not REEs. It may be correct to clearly indicate that REE-byproducts producers like Orbite Aluminae are not taken into account for whatever reasons there maybe or even for simplicity’s sake. Thanks.

    • Orbite Alumina is NOT primarily a rare earth company. It is a high purity alumina producer that can have rare earths and a variety of other technology metals as byproducts. Orbite also licenses a red mud remediation technology. It, Orbite, is a diversified high tech operation.

  10. You need to substantiate your claims with real data. For instance, you cannot predict the future without showing some real correlations.

  11. JACK, I was shocked to see your favored North American HREE producers didn’t include QRM. Please elaborate. Thanks, Ron

  12. apparently Canada is not part of north america. i hear of qrm but nothing about avl and a smaller degree mat who has a partner in toyota.

  13. Jack, thank you for your article. I think current sluggish demand which was caused by unusual price and supply during 2011 should be taken into consideration in terms of mining success. Demand situation is changing day by day and may kill some promising mining project. For instance once deductive motor is developed for automobile, it get no use talking about Dy.

  14. Dear Readers;

    Jack Lifton is a Guest Editor and when he asked to publish this piece on ProEdgeWire this weekend: we accepted. We perceive ourselves to be the source for “Technology Metals” — a term coined by Jack Lifton that he gave me when we were touring the Ucore Rare Metals property together several years ago.

    As a matter of historical context we have numerous Guest Editors that are consultants and that work for other companies.

    The opinions expressed by Jack or any of our writers are their own. The Disclaimer is below the article and is linked throughout our site which clarifies this information. Please also note that we are paid by all the advertisers on the right column of our site and we thank them graciously for their support as we celebrate breaking 12,000 pieces of content online on rare earths later this week.

    Please email me with any questions at Publisher@ProEdgeWire.com if you would like my position on anything…

    Tracy

  15. Lol Tracy, don’t envy your task as moderator. Wherever you look across RE forums passions run high, perhaps symptomatic of a great many underwater investors, of which I am one.
    I’ve read Jack Lifton for 3 years or so and while I could see the sense in what he was writing ( I sold out at the peak but bought back way too early) I didn’t have the patience to watch it unfold. And it has, pretty much exactly the way he said it would. Google JL and tell me I’m wrong.
    That aside, my interpretation of Jack’s writings are all about the market, RE demand, not about individual resource values in the ground but rather their ability to take product to market at an efficient price.
    Lot’s of glossies still abound in this market, and despite hopes & dreams, only a handful will deliver under their current equity.
    GL moderating the cataclysm, but it’s bound to get easier over time.

  16. An authoritative voice like Jack’s which is not out to please anyone is surely needed in the current environment as it. Thanks Jack and the Raremetal blog for the article.

  17. Way back when, I had a choice to select rare earth stocks that had a good business model (per Jack Lifton) and rare earth stocks being promoted by a longtime guru. Jack’s stocks did OK. But the promoter’s stocks took off to much higher multiples. Sometimes it’s about the sizzle.

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