EDITOR: | October 29th, 2013 | 37 Comments

The lesson of J.P. Morgan with rare earths

| October 29, 2013 | 37 Comments
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JPMORGAN-LAWSUIT/What lesson are we, as investors or potential investors, to learn from reading J.P. Morgan’s “projection” of Molycorp’s future earnings and its calculation of the company’s net present “value”? I think we are learning that J.P. Morgan is recognizing that the era during which Molycorp was the bellwether of the rare earth sector is now over. For the shares of any other rare earth producer or junior mining company to move up or down in lock step with Molycorp’s share price is not realistic. Molycorp is a producer only of certain chemical compounds and mixtures of the light rare earths. Its costs are not competitive, and its influence on global light rare earth prices is demonstrably nil.

In fact just one other company’s share price should be linked to that of Molycorp. That one company is Lynas. Both companies are producers (on and off during their respective re-start and start-up) of the same product mix in a market where there is not enough non-Chinese demand to utilize anything like the total of their targeted production levels. Both have problems getting into or back into production but Lynas, is not saddled with a costly array of non-core operations.

If further proof is needed of the isolation of Molycorp from a market in which its influence is waning it is being supplied by Toyotsu the 65-year-old Japanese trading company, which today announced that it is bringing roasters on-line to produce light rare earth individual and blended oxides at a new solvent extraction separation and purification facility it is constructing with Indian Rare Earths, which itself has been producing rare earth chemicals since the early 1950s. Toyotsu also has made a substantial investment in Canada’s Matamec deposit, and I would guess that when and if it brings that deposit into operation the heavy rare earth rich ore concentrates will be shipped to the Toyotsu-Indian Rare Earth facility in Kerala (India) for processing into end-use products for Toyota Motor’s supply chain.

It is very important that you keep in mind that Toyota, itself, is one of the largest end-users of rare earth based components outside of China. If Toyota can get light rare earths from India, or from relatively local Asian or African producers, along with heavy rare earths from the same region or Canada then it will need nothing at all from Molycorp or Lynas. Remember also that in order for either Molycorp or Lynas to supply Chinese customers domestically the offered products would have to be profitable at far less costs than are being incurred by either company today. In addition it is clear that cerium is in surplus in China, as most likely, is lanthanum. Therefore neither Molycorp nor Lynas will be able to sell the bulk of their production into China either.

The world’s major market for rare earths, China, already needs more heavy rare earths and yttrium than it says it can produce. It, the Chinese domestic market, has no need for imported light rare earths in any form. Those junior rare earth ventures which have the best survival potential are the ones that have the highest proportion of heavy rare earths and yttrium in their overall mix of rare earths. To further their chances of survival they need to be able to produce at the lowest cost and add value downstream as much as possible, but in total amounts that will not negatively affect the prices of the rare earths.

Rare earth production is not war production. The goal is not to produce as much as possible or in any case to out produce the other guy (the “enemy?”). The goal is to produce profitably less than the market’s overall demand in order to obtain a share of the market.

Chinese practice has proven that rare earth separation plants with capacities of 1,000-5,000 tons per year are the most cost effective providing that their feed stocks have the most value not of grade but in their composition. The solubilities of the rare earth compounds fed into a solvent extraction plant are the limiting factor.  The conundrum is that in order to process the relatively large volumes of light rare earths-half of which are not even sellable – it is necessary to have very large and expensive capacity. The solution is to have the smallest capacity possible to process just the heavy rare earths and yttrium in the residues from the removal of the light rare earths. The more of the feed stock that is of heavy rare earths and yttrium the better. Neither Molycorp or Lynas considered this possibility and neither one of them has ownership or control of a heavy rare earth, yttrium deposit nor has either one built a heavy rare earth, yttrium capable separation facility.

It has been a mistake to assume a huge demand for light rare earths and build expensive large capacity SX plants to separate them. It must not be overlooked that J.P. Morgan has basically downgraded Molycorp by tacitly recognizing this error in its business model.

At the present time, the Fall of 2013, the overwhelming majority of the global demand for all of the rare earths is in China. The Chinese domestic rare earth market demand is currently self-sufficient in supplies of the light rare earths from domestic sources. The Chinese rare earth industry believes that it will always be self-sufficient based on domestic production of the light rare earths. The Chinese rare earth industry has been sourcing heavy rare earths outside of China for a long time, but it buys only ore concentrates, which can be utilized by its domestic heavy rare earth, yttrium refining industry, and which have the further advantage of being able to be imported into China as raw materials not found in China (such as xenotime concentrates).

I think that the lesson to be learned about securing a supply of rare earths is from the activities of Japan’s private equity sector. Japanese companies, such as Toyota, have made an overall procurement plan and are spending money to pursue its realization. The Japanese government has deployed its national geological survey to assist Japanese private industry to find deposits. It is up to the businessmen to determine if the deposits can be developed profitably and benefit Japanese industry. And it is up to these same businessmen to find the capital to do so.

No industry competitive with the Chinese or (soon) Japanese rare earth based industry can be built without a commitment by a region or a nation to the development of a total rare earth supply chain under the ownership or control of regional actors. The acquisition and control of ore bodies of rare earths is the anchor to any such supply chain. Even more importantly those ore bodies must be of the right type; they must contain heavy rare earths and yttrium that can be efficiently processed in volumes linked as little as possible to the volumes of the light rare earths that must be removed or recovered from the same ores.

The only regions or nations in which such TRESCs (total rare earths supply chain) can be developed are the USA, Western Europe, India, and Malaysia. Each of them has or has easy access to deposits in friendly free-market economies that have heavy rare earths and yttrium as well as enough light rare earths to produce rare earth permanent magnets, alloys, and catalysts to support domestic industries and make them independent of foreign natural resources. Each of these nations and regions also has enough such resources to support an export industry after domestic demands are met. National and regional governments can only help in the creation of TRESCs as Japan’s has done by providing expertise that private equity does not have. Governments with farseeing capabilities (a contradiction in terms?) can also provide capital and regulatory help.

The USA is uniquely favored with the right size and type of deposits and the knowledge base and skill set to create a TRESC. Western Europe is also so favored. India’s journey to a TRESC has begun, and Malaysia’s is not far behind. Ore bodies can be defined as resource geography. But geography alone is not destiny. The destiny of the rare earth industry is now being determined. As they say in Anglican Sunday services “Thus endeth the lesson.”


Jack Lifton

Editor:

Jack Lifton is the Sr. Editor for InvestorIntel Corp. and is the CEO for Jack Lifton, LLC. He is also a consultant, author, and lecturer ... <Read more about Jack Lifton>


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Comments

  • Tracy Weslosky

    BREAKING NEWS in the REE Sector: WTO rules against China on rare earths export quotas – InvestorIntel http://shar.es/IcRZi

    How will this impact pricing Jack?

    October 29, 2013 - 1:58 PM

    • Tracy Weslosky

      I just finished a breakfast meeting where this topic was discussed at length – both the WTO ruling and the JP Morgan downgrade. The group included investment bankers and the commentary was — ‘didn’t JP Morgan just do their last round of financing 2 weeks earlier?’ — or my favorite line: ‘is it so bad out there that the bankers are eating their young?’

      Well technically they were correct as JP Morgan was part of the investment banking group that was part of an announcement released on October 21 put out by Molycorp that MCP had closed their nearly $250M raise. Excerpt from MCP new release: “previously announced registered public offering of 51,750,000 shares of its common stock (“Shares”), which included the issuance of 6,750,000 Shares as a result of the underwriters’ exercise in full of their option to purchase additional Shares in the Offering, at a price per share of $5.00 (the “Offering”). The Offering resulted in net proceeds to the Company, after estimated fees and expenses payable by the Company, of approximately $247.5 million.”

      Okay — so JP Morgan participated in a nearly $250M raise, only to thank MCP for their commission checks, which pay their salaries with a downgrade? Yes, I understand the utilization of Chinese walls – but this would mean that JP Morgan solicited their clients for investing in this raise at $5 p/share — only to downgrade them less than 2 weeks later to $3 p/share?

      Let me know what you think….

      October 30, 2013 - 10:30 AM

      • Nevada George

        I think… it is the same old song being
        played over and over again.
        JP’s Behavioral Finance Boys sitting
        in the back room have “Big Brains” and
        “sharp pencils”… and fat wallets.
        They are experts at playing on investor sentiment.

        October 30, 2013 - 10:50 AM

      • Tim Ainsworth

        Tracy, look to the levels of short interest post the insto funding early in the year, no doubt the same will occur with this latest raise. Hunt with the hounds & run with the hare.

        November 4, 2013 - 7:38 AM

  • Veritas Bob

    Jack,

    1) You wrote “Neither Molycorp or Lynas considered this possibility and neither one of them has ownership or control of a heavy rare earth, yttrium deposit nor has either one built a heavy rare earth, yttrium capable separation facility.” Does Molycorp (Molycorp Canada, i.e. Neo Materials) have some heavy rare earth, yttrium capable separation facilities in China, and if so, can you assess it? What about Molycorp Silmet capabilities?

    2) You wrote “The only regions or nations in which such TRESCs (total rare earths supply chain) can be developed are the USA, Western Europe, India, and Malaysia.” Was omission of Canada (or perhaps listing of North America or USA/Canada instead of USA) an oversight or intentional, and if intentional, why?

    October 29, 2013 - 2:16 PM

    • Jack Lifton

      Bob,

      I do not think that Silmet has any significant capabilities or capacities in HREE, Y separation and purification. I would guess that the new Molycorp CEO has Silmet on his short list for paring down the company.

      Also Canada is included in North America, but not in the list of countries that on-their-own could create a domestic TRESC in enough time for the project to be economically viable.

      October 29, 2013 - 2:42 PM

      • Veritas Bob

        Jack, your statement I quoted above referred to “regions or nations”, but did not mention North America (or Canada), hence my question. So it seems to me that your text should be amended to mention North America, unless you are sticking with an interpretation that only USA should be mentioned because USA can do it with or without other county(ies) in North America, bur Canada can not do it alone.

        Also, perhaps it slipped through the cracks in my question above, but I was wondering what your assessment is of Molycorp’s capabilities in China for heavy rare earth, yttrium separation.

        Thanks,

        October 29, 2013 - 3:00 PM

      • Nevada George

        Does Medallion Resources/Takamul Investments plan in Oman have any
        place in this picture?

        October 30, 2013 - 10:54 AM

      • andrew

        Jack,

        Further to this point, how about South Africa? James Kenny is under the impression that Frontier Rare Earths will be able to go from mining, to transport, to desalination, etc all the way to an end product. Are you familiar with this resource and, if so, do you see any reason that this geography could not become a TRESC under his management?

        October 30, 2013 - 4:50 PM

      • NJM

        we would be most interested to learn about the Uganda/China connections since one of our Group companies Nilefos Minerals Ltd. was deprived of its rights to a Mining Lease over this deposit by the Uganda Government in June this year!! An entirely arbitrary and possible corrupt Act, and could it jeopradise Uganda’s ambitions to become a leading minerals processor incl. for oil and gas???

        December 9, 2013 - 4:11 AM

  • J. Best

    Thanks Jack. I have enjoyed your videos and the 5 part series. I have learned so much and truly value your ability to take rare earths and make it understandable and enjoyable even to a true layman. Again, appreciated and eagerly anticipate your next article.

    October 29, 2013 - 2:31 PM

  • Aat Oskam

    Company /Tonnes Dy
    AVL 72000
    PAW 56000
    TRER 42000
    DNI 22000
    TAS 15000
    QRM 15000
    ALK 13000
    NTU 8500
    LYC 8300
    HAS 6700
    REE 6000
    UCU 1100
    MCP 1000
    If I did the math right: above the total amount of the main HREE Dysprosium in tonnes (at a theoretical 100% recovery) of well known companies. Question is not grade/tonnes, Jack says, but who’s first to produce? My guess is MCP, TAS, ALK, LYC, in that order. If so: grade does matter IMO, Jack?

    October 29, 2013 - 3:59 PM

    • Jack Lifton

      Aat,

      Forget kgs in the ground and 100% recovery. The first doesn’t matter except in gold, and the second is a pipedream. The big winner by your measure would be Brazil’s Pitinga with tens or hundreds of thousands of tons of xenotime ore with 9% dysprosium.

      It is processing capability and capacity that count, not grade.

      In a finite market those who produce first have the first advantage

      After that it is those who produce at the lowest cost with the lowest selling price.

      In the USA the race is on among Rare Element Resources, Ucore, and Texas Rare Earths to be first. After that I am going to guess that they will all contribute concentrates to a central processing plant. Who will own the central processing plant is the only question I can’t answer at this moment.

      In Europe, by the way, the winner will be Tasman, which will anchor the European TRESC.

      Look to Hastings and Northern Minerals for HREE production late in this decade.

      Jack

      October 29, 2013 - 5:03 PM

      • Veritas Bob

        “After that I am going to guess that they will all contribute concentrates to a central processing plant. Who will own the central processing plant is the only question I can’t answer at this moment.”
        Innovation Metals, per chance?

        October 29, 2013 - 5:39 PM

      • SteauaOilers

        Jack, what about a regional processing plant in Africa? Mintek might already have a possible breakthrough in performing some REE separation, they will basically have a pilot plant ready by the end of this year.

        October 29, 2013 - 9:20 PM

  • David Mortimer

    Does anyone know what the faith Of Stans Energy will be out in Kyrygstan , it holds the license to a heavy REE mine but is been hounded by a chinese company who is bribing officials over there to rob the mine off of them.

    October 29, 2013 - 7:41 PM

  • aurelius

    Jack, S. Africa is a nation that has already demonstrated its commitment to the development of REE and possesses plenty of both types. It has also backed Mintek, which many of us believe is quite significant. Is there a reason why that region was not mentioned?

    October 30, 2013 - 4:14 AM

  • bourque

    It would seem that all the HRE biased deposits are so low in % total that any benefit on the separation side is offset by the cost of handling the mega volumes of run of earth or mine stock coming into the processing/benefication plant. And so it is a no brainer that the benefication process/plant has to be orders of magnitude larger involving more of the chemical solutions needed to work. Or as in the case of TRER, any in situ heap leaching on the scale that they are considering conjures up huge environmental concerns, that would likely scare the boots off any Texan.

    October 30, 2013 - 7:50 AM

  • Laurent Krull

    I see the destiny of the RE industry a little bit different..

    Maybe have you forgotten that it is not a mining industry that follow only feed supply/demand of raw material. It is a chemical industry. The downstream industry needs to get their volumes of material responding to specific quality criteria, coming from diversified sources at a coherent price and during a specific time.
    In addition we observe increasing customers concern about the ethics in sourcing raw materials and their sustainable development . Sustainability reporting will be more and more used (e.g., Siemens) and will participate in the competitiveness of end products.

    Concerning HREE , of course they will have a preponderant role in that competitiveness and the location of any new HREE separation plant will have a strategic role for the chemical group, who would capable to support the cost..I agree, USA and Western Europe are the most promising location outside of China for such endeavour.

    October 31, 2013 - 10:00 AM

  • David

    Just sharing something that many may not be aware of as yet. We (Ugandans) also just found this out just about 1.5 months ago (yours truly stumbled on it). For your own conclusions, just please go to this link
    http://www.inter-reseaux.org/IMG/pdf/02_Van_Kauwenbergh–Fertilizer_Raw_Material_Resources.pdf
    Then go to Uganda and read about Sukulu. See the table Chemical Analyses of SukuluOre / Soils (not the concentrate but the ore which in this case are the residual soils which are about 230,000,000T).
    Do some relative distribution calculations and I hope you will be as shocked as I was. Plot these values on the TRM chat and see where Sukulu would plot. Please note that analsyes for Dy to Lu are not given. Do a relationship analysis and see what the Dy is most likely to be if Terbium is like that (TMR has all the data you need).
    One foremost REE company just got ‘beaten’ out of applying for an exploration license over this area. And you ask who are now in it? The Chinese, who moved earth and heaven to get it.
    We in Uganda, to make a long story short, want only separated REOs exported (an individual REO separation plant here) and a limit to how much can be extracted per year- to not more that 30KTPY.
    Please let me know your thoughts because since I mentioned this in a Conference, no one, has dared say anything about it to me.

    November 2, 2013 - 11:15 AM

    • Jack Lifton

      David,

      Can you tell me how to find information on these Ugandan deposits? In particular can you tell me which Chinese company won the concession? Note also please that one cannot extrapolate the concentration of one rare earth from that of another unless one knows the exact mineralogy of the deposit in which case it is possible to guess from historical data.
      Thank you,

      Jack
      Co-founder of TMR

      November 2, 2013 - 11:34 PM

      • David

        Jack,
        Thanks for the correction re Dy. There is not much information, I think, on the chemical analyses for rare earths, outside of the hard rock carbonatites as these carbonatite areas were being explored mainly for phosphates, etc.,. Most people I think assumed that the grade of REEs and their relative distribution in the soils would be akin to those of the hard rock carbonatites from which they arise – and completely missed their potential value until I pointed it out, based on that report.
        I also imagine that online there could be much information as this area of Uganda basically is known to be one of those hosting a rather large number of carbonatites – worldwide. At this link you could navigate around and get much info – much of which I cannot say I do know as I have not been focused on them.
        http://www.uganda-mining.go.ug/magnoliaPublic/en/Data-Portal.html
        I have been focused on a prospect of largely unconsolidated to semi-consolidated mudrocks (or clays) which has shown rather high values of REEs, Ga, Sc and Zircon as well alumina, etc., – which info I could send easily.
        The Chinese Company is Guangzhou Dongsong Energy Group. The well known REE company which I mentioned, since this is common knowledge here, is Frontier Rare Earths.

        November 3, 2013 - 4:47 AM

        • Jack Lifton

          Thank you very much. I am not surprised at which Chinese company it is. I believe it is the one we here know as GQD. If so then they are expert in the recovery of heavy rare earth values from “clays.” This Chinese company is also vertically integrated it mines, refines, fabricates intermediates, and manufactures rare earth permanent magnets. It’s interesting to note that the “well-known” REE company you mention seems to be just following the strategy of acquiring “deposits’ to bolster its “story” for the share-market, but even so it is telling us that something is going on in Uganda. Chinese companies have a big advantage. It si that they are not just exploration juniors; they are operating integrated producers.
          Please keep me in the loop.

          Jack

          November 3, 2013 - 9:49 AM

          • Veritas Bob

            This being the same GQD, with which Great Western announced with great fanfare http://www.gwmg.ca/html/news/media-releases/index.cfm?ReportID=203424 , the establishment of a JV to construct a rare earth separation plant and separate rare earths from Great Western’s Steenkampskraal mine under a tolling arrangement. Is that JV officially extinct?

            November 3, 2013 - 11:09 AM

          • Veritas Bob

            Actually, are you sure that GQD, “Ganzhou Qiandong Rare Earth Group Co” is the same company, or affiliated in any way or in any subsidiary or supersidiary relationship, with Guangzhou Dongsong Energy Group, which signed the $560 million Ugandan phosphate development deal? Information on Guangzhou Dongsong Energy Group seems rather scarce, other than its mention in the Ugandan phosphate deal.

            November 3, 2013 - 11:39 AM

          • David

            Jack,
            Thanks for that erudite explanation. It at least helps to know that we have a group which can deliver to the country’s expectations. Now the rest then is upon us. Thanks very much. I will be keeping you in the loop.

            November 3, 2013 - 1:43 PM

  • aurelius

    I notice how diligently Jack Lifton has avoided answering questions dealing with S. Africa, where so much is being done by private firms and the government. I wonder why.

    November 3, 2013 - 4:35 AM

    • Jack Lifton

      Aurelius,

      Number one: I spoke on the future of rare metals production in South Africa at Indaba in 2010. The Cape Town press told me that i was the first to speak on that topic that they know of. The audience was 600 people.
      Number two: I don’t trust governments to do anything efficiently or even competently.
      Therefore: I am aware of the fact that South Africa has rich deposits of rare metals and a history of mining them, but I am also aware that the processing of the rare earths, for example, is new to South Africa, and so, without outside help, it could be a generation before production gets under way domestically. Local politics in South Africa are the major impediment to progress in developing its rare metals’ resources. This will ultimately be sorted out, but what will inhibit development is a lack of capital. Institutional investors pulled out of South Africa in the first decade of this century. Are they coming back soon???
      Jack

      November 3, 2013 - 9:56 AM

      • SteauaOilers

        Jack, regarding the processing capabilities in South Africa, could you please comment on the latest efforts of Mintek, which might have a possible breakthrough with REE separation and will have a pilot plant ready by the end of this year?

        http://www.miningne.ws/2013/03/05/minteks-possible-breakthrough/

        November 3, 2013 - 10:12 AM

        • Jack Lifton

          SteauaOilers,

          The linked article is riddled with errors of fact and logic, but that does not necessarily reflect poorly upon Mintek as much as it does upon the fact-checking at the publication. I do not know enough about Mintek or this project of theirs to estimate where they are in their plan to “demonstrate” capability by April, 2014. I am very interested, and I will follow up. In fact I will try to contact Mintek for a discussion of this.

          Jack

          November 3, 2013 - 12:37 PM

  • Jack Lifton

    Veritas Bob,

    No, I am not sure that the Chinese company involved is GQD. But whether it is or not I do not see how that fact would impact the “jv” with Great Western if that jv is still in process.
    The point I am trying to make is that Chinese companies have advantages over non-Chinese companies when it comes to rare earth projects. They, the Chinese, now have access to or have in operation all of the components of total rare earth supply chains. This allows the Chinese to calculate the true costs and therefore the true value of a project. Notwithstanding the cavalier attitude of the writer of the embedded linked article that started this discussion the Chinese bring to the table a vast “working” knowledge of the extractive metallurgy of the rare earths as well as experienced operational knowledge of large scale separation and purification technologies. The idea that they have stood still and simply run the same technologies developed 30 years ago is a foolish conceit.
    The real problem we have outside of China is our picture of their industry as being operated by coolies in conical straw hats stirring leaking plastic vats with bamboo paddles. Until we are willing to face the fact that the West’s loss of this industry was due to our own short sighted greed and Chinese willingness to build for the long term we will never turn this situation back to our own advantage. We need to learn from the Chinese success in this field that long term planning is not a capitalist strong point, but we cannot win in the future without doing it..
    .

    November 3, 2013 - 7:18 PM

    • Veritas Bob

      My reference to the GQD JV with Great Western was not meant to imply that the Ugandan deal would affect it. But without placing blame, as I do not know the story, it illustrates that not every deal with GQD appears to pan out. If the JV is not officially extinct, at minimum, it appears to be rather unhealthy.

      November 3, 2013 - 8:55 PM

      • Jack Lifton

        Veritas Bob,

        Readers keep asking me why I don’t mention Great Western in my choice of survivors. The answer is that i do not see, or have any knowledge of, any progress in the j/v with GQD. Without a processing plant or a toll refining contract I don’t see how GW has any advantage. To paraphrase: “Being close to a solution to separation and purification” only counts in market-announcement-land and maybe in rare earth horseshoes.
        Jack

        November 4, 2013 - 7:45 AM

    • Tim Ainsworth

      Jack,
      Moly describes its former Neo JV in Jiangyin as: “JAMR refines ion adsorption clay concentrates to produce a range of heavy rare earth products ” which raises two questions given its focus on ion clay con:
      Would they have the capability to do final separation of the small amounts of HRE from Moly’s hard rock source?
      Does China have significant capability/capacity to separate HRE from hard rock source?

      December 9, 2013 - 7:48 AM

  • David

    “Until we are willing to face the fact that the West’s loss of this industry was due to our own short sighted greed and Chinese willingness to build for the long term we will never turn this situation back to our own advantage. We need to learn from the Chinese success in this field that long term planning is not a capitalist strong point, but we cannot win in the future without doing it..”

    This part above is worth really quoting. And we need someone come and tell it to us, to our face here (in Uganda and Africa) , that unless we think so, we shall be bleeding forever.

    November 4, 2013 - 1:34 AM

  • bourque

    The only appearance here on the GQD/GWG front is the highly secretive nature of what is happening behind the scenes involving Mintek. What is apparent is that they seem to have taken Jack’s advice from last year and wisely reassessed the benefication and separation aspects of SKK, with the intent of improving the processes before going any further.

    November 4, 2013 - 8:25 AM

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