EDITOR: | May 2nd, 2014 | 11 Comments

The rare earth ‘basket price’ business model fantasy

| May 02, 2014 | 11 Comments
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Jack Lifton sent me this piece early today with what appears to be 3 title candidates: 1) Breaking the Laws of Economics and Thermodynamics 2) Why have so many rare earth junior ventures failed? and 3) What does the future hold for the rare earths?

Jack Lifton: They have failed because they were based on a triple fantasy:

  1.  That there is an infinitely growing demand for all of the rare earths, which was incorporated into business models that said that if we just dig out the rare earth bearing ore and beneficiate it to a “mixed concentrate” then “they” will buy it, because
  2. The separation and purification of the individual rare earths by “traditional” methods is easy and, in any case, everyone producing PLS concentrates would be faced with the same costs of downstream separation and purification so the playing field would be level, and
  3. Producers of high-tech products such as rare earth permanent magnets, alloys, lasers, and catalysts would race to non-Chinese producers of their raw materials and invest billions to be assured of a reliable non-Chinese supply.

That the above premises were widely believed was obviously from the very beginning of the recent rare earth run-up. In addition I noticed that the same ventures that were based on internal predictions of a dramatic and continuing growth of demand also predicted that prices would rise at the same time. I then, as now, refer to this fantasy as the “breakdown for rare earth juniors of the law of supply and demand.”

Lifton-BNNI also noted that none of the REE juniors seem to understand that the rare earths were technology-enabling-metals, which had to be separated, purified, and sometimes blended to achieve usefulness. In the overwhelming inability of the managers of junior REE ventures to understand basic chemical thermodynamics; they did not comprehend or contemplate that the extraction of the rare earths as a mixture from their minerals gave a product that was NOT the same value as the separated and purified rare earth metals, alloys, and chemical compounds. They completely failed to take in account (or, most likely, understand) the costs and processes needed to transform mixed concentrates of the rare earths and other metallic elements, which were mixed with them in nature, into individual purified rare earth commercial products with the highest value. This led to the adoption of a set of terms commonly used in mining, which were only meaningful when applied to the extraction of the mixed rare earths from their ores and inappropriate in the context of refining the rare earths, and which masked ignorance. I am speaking of the common term,” metallurgy” which should be only used to mean the extraction of the desired element(s) from  ore concentrate at economical levels, and the absurd term, “basket price,” which assumes that the mixed concentrate can be priced as if it is already separated and purified into individual rare earths in commercially (customer specified) forms and formats (blends) each and every one of which can be marketed into the infinite demand space in which the marketing plans were located.

It’s very easy to blame the “Chinese” for the failure of a non-Chinese  rare earth production sector to gain the traction necessary for investors to fund it to actual production of individual rare earths in customer specified commercial forms . But, in fact, the failure to begin producing the suite of rare earths outside of China that are currently deemed to be critical is due to the fact that doing so would require accepting the consequences  of the breaking of laws; those of economics and those of nature.

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Jack Lifton

Editor:

Jack Lifton is the CEO for Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. Technology metals ... <Read more about Jack Lifton>


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Comments

  • wwwater

    Mr. Lifton – Your article seems to lump every non-Chinese rare earth venture into not understanding the dynamics of the rare earth sector, which is incorrect. There are some that are taking steps to properly evaluate the potential of developing a project and some have gone beyond that by establishing a value added segment. Agreed many project CEO’s have enticed investors by using the terms you have highlighted and over inflated the success rate of that project. If a non-Chinese project can provide verifiable data as to CAPEX and OPEX comparable to those of Chinese stand alone projects, notice I said stand alone, as much of the rare earths in China are by-products of other mineral processing, then that project has a chance of remaining up right and on it’s feet.

    May 2, 2014 - 12:37 PM

    • Motherearth

      WWwater well said, take Great Western for example, here this is taken from their latest news release, Marc LeVier, Company President and CEO, commented, “This is a major milestone in our Company’s history and I am looking forward to reviewing the positive results with all of our stakeholders. Over the last month, we identified several areas where additional evaluation was warranted in order to ensure maximum design efficiency. This included infrastructure, mine plan and process optimization, as well as input of the latest data regarding rare earth element pricing and market forecasting. The objective was to reduce capital requirements and maximize production, all of which help to further improve the return on investment.”

      May 2, 2014 - 1:26 PM

  • hackenzac

    I’m assuming that you are referring the second law of thermodynamics, the one about entropy. The more ordered the state, the higher the economic value but I can’t tell if you’re being literal or metaphorical. Maybe you’d care to elaborate on thermodynamics as they pertain to economics. I think maybe you lost a few folks here. And that Great Western cult is just plain weird with a disordered reality, again the second law but applied mentally, perhaps your meaning in terms of thought processes behind lame business models. Do tell. What did you mean by thermodynamics?

    May 2, 2014 - 4:43 PM

    • Jack Lifton

      Hackenzac,

      What I mean by “thermodynamics” is the amount and cost of the energy required to transform the concentrate that is produced by extracting the mixed rare earths from an ore into customer specified commercial products. The fantasy among rare earth juniors is that after producing the mixed “con” everyone of them will face the same costs and sell into the same markets. These costs are not optional and if an end user must pay for all of the costs after the “metallurgy,” as miners like to call the extraction of the desired values from an ore, then the value of the mixed “con” will be substantially discounted from the value of the separated individual products quoted in places such as Metal-Pages. Even at the very first step after making the PLS Chinese “refiners” are “discounting” light rare earth PLS by as much as 50-60%! Heavy rare earth PLS is discounted less, but unless a PEA states that the project will be producing separated individual rare earths then that project must use discounted Chinese domestic prices to be credible.

      I have been remiss in the past in not addressing the amount of energy required for each step in the supply chain for the rare earth products, but I am now working on that, so that the value of the products at the conclusion of each step can be understood as a proportion of the whole cost. I note also that the CAPEX for separating a mixed “con” will depend on the distribution of the rare earths in the “con” and on which of those products is to be brought to market.

      A great deal of energy and time is required to (temporarily) reverse the state in which we find rare earths, mixed and fully oxidized, on this planet. Quantifying these particular values of time and energy as costs is critical to determine whether or not any project can be profitable.

      May 3, 2014 - 4:38 PM

      • Lid

        Mr. Lifton, according what you said, then I have to conclude that only the down stream capability speaks in volume. by that I mean capability of making alloys, magnets.

        May 3, 2014 - 4:57 PM

      • hackenzac

        Have you seen any ROW PEA’s or FS’s that use discounted Chinese domestic prices? That sounds like a project killer. And as for the cost of the energy inputs, it seems that’s a big North American advantage at this point depending on location and the transportation requirements.as well as the mining/processing overhead with Ucore at a distinct advantage with essentially to a great extent a gravity powered operation that flows downhill but several of the proposed US projects are going to have energy access advantages if they’re close to gas and power, even Molycorp, better than Sweden that’s for sure not to mention some out there place like Namibia.. Maybe BTU’s per ton or something like that kind of metric might be an illuminating way to look at things. I see now that you were being literal in your reference to thermodynamics and I’m curious to see how you’ll apply it quantitatively.

        May 5, 2014 - 11:55 AM

  • Jack Lifton

    Lid,

    I don’t know if I understand your question. If you are asking if as much value is added from metal making then alloy making then magnet making as has been added up to that point by mining then beneficiating/extracting then separation/purification I would say yes.

    Jack

    May 3, 2014 - 5:31 PM

  • JJ

    Great article and clarifications by Jack for all juniors out there.
    The cost structure all the way to separated products should be compared against the basket price for the given REO distribution. The sooner we understand this the better as it will provide a more transparent economical assessment of a new projects. Example if the discount for lights is 50-60% what is it for heavies?

    May 5, 2014 - 3:45 AM

  • bourque

    Once again it looks like profit is the metric upon which to base success.

    May 5, 2014 - 8:19 AM

  • Veritas Bob

    In addition to everything Jack wrote, there is another fantasy aspect to the basket price. People are using current prices, not futures or forward prices reflecting supply and demand forecasts for when the products will be bought or sold. If new production represents a significant percentage increase in supply, this could be of non-trivial consequence. If a liquid futures market with contracts sufficiently far into the future develops, then an opportunity to remove this fantasy aspect could arise.

    May 5, 2014 - 9:35 AM

    • Venture capitalist

      Agreed, new equilibrium pricing is a real issue for REE juniors, and first mover advantage will be key for a few companies, all others will fail. However, I don’t really see the need for this outdated understanding of REEs by companies, it’s not 2011 anymore. Every serious junior knows what’s going on by now, and every serious junior just mentions refinery costs for oxides if they don’t do this in-house etc. No need to call a basket price “absurd” at all, and surely no reason to use discounted Chinese domestic prices.

      May 7, 2014 - 5:40 AM

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