Lifton ‘Unchained’ (Part 5): The Future Demand for Rare Earths
This is the fifth and final installment in our five-part Lifton ‘Unchained’ commentary on the Rare Earth & Critical Materials Market. In case you missed them, be sure to check out Jack’s first four articles in his ‘Unchained’ series: Part 1: The State of the Rare Earth Market, Part 2: The Driver for Global Rare Earth Demand, Part 3: Forecasting Chinese Rare Earth Demand, and Part 4: China is officially shifting focus to domestic consumer demand.
Before I discuss my vision of the future demand for the rare earths collectively and individually let me say that I have concluded from watching the Chinese rare earth industry evolve in fits and starts over the last 25 years from a labor intensive to a capital intensive mode within a rapidly evolving and every day more sophisticated Chinese industrial economy that the Chinese industry wants non-Chinese sources of certain individual rare earths to come into existence and thrive as soon as possible.
Note that it is extremely difficult for Chinese companies to export proprietary technology. Beijing frowns on any foreign investment that does not create a net increase in domestic Chinese employment. Beijing is however interested in foreign investment schemes that maintain domestic Chinese employment. So the definition of a profitable foreign investment for a Chinese company means an investment that will first and foremost add to or secure jobs in China, second of all will create wealth in China (either by a direct repatriation of profits earned overseas or by adding value in China to existing assets in China, and last and least will be profitable enough in the foreign location so as not to require additional or operating capital from China beyond the initial investment. That any FDI made by a Chinese entity outside of China can achieve this goal is a risk best left up to the Chinese investors to determine.
Even though the above criteria are extremely difficult to achieve, based on my experience in China and on discussions I have had in China, I believe that Chinese investors, private, institutional, and industry-related are interested in late stage development rare earth juniors that are targeting the production of HREEs.
The main issue is a chicken and egg problem. In order for non-Chinese producers of HREEs to go into production they must know the costs associated with each stage of value chain addition. This means that they must know both the capital costs and the operating costs not just for producing a mixed concentrate process leach solution-reaching this stage is called “solving the ‘metallurgy’” in the junior mining world of achieving 43-101 bankability-and this knowledge is absolutely critical for a rare earth junior to determine where their product(s) should enter the supply chain and what they must do to get their rare earths to that point downstream. Notwithstanding the fact that solving the metallurgy is just one of the first steps in a 5 or 6 step value chain it is constantly spun by a total-supply-chain illiterate punditry into the last barrier to success. This is ridiculous. Knowledge of the CAPEX/OPEX in the total supply chain is the only way to calculate the minimum selling price for a rare earth value added product anywhere in the supply chain. This knowledge at the present time is the exclusive preserve of mostly Chinese and a few Japanese companies with just one experienced western company in the small club.
At this point in time, late September, 2013, I am not aware of any non Chinese company whatsoever that has in operation, in one country, or even in one region, a total rare earth supply chain beginning with the mine and culminating with the production in-house of a customer specified profitable product, such as a rare earth permanent magnet. There are by contrast many Chinese domestic companies that own and operate a total rare earth supply chain, beginning with a mine, or mines, and culminating in the production of end-use rare earth enabled components such as magnets, sensors, phosphors, batteries, and catalysts. These Chinese companies know the CAPEX and OPEX of each step in the total supply chain.
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It is obvious that in an ideal world Chinese companies would be eager to buy HREE containing PLS produced by non-Chinese companies. Because such materials would not be burdened with the costs of Chinese domestic environmental remediation and the new (for China) health and safety regulations. In fact Chinese trading companies today already scour the world for HREE bearing residues from, for example, tin mining. The residues from cassiterite processing can include xenotime, for example, an yttrium phosphate that typically contains up to 9% of dysprosium and 1-2% of terbium along with 60% of yttrium just like the ionic adsorption clays. I personally reviewed one such transaction where 98% xenotime was sold ex-southeast Asia to a mainland China broker for $32,000.00/ton. Fifty tons of such material has the same content as 50,000 tons of ionic adsorption clays. Any questions on why such materials from outside are more desirable than those from inside China?
Of course the group I will call the HREE-themed juniors are not selling high grade xenotime. In fact they are trying to work out just how far downstream from producing radioactive nuclide free PLSs they must go in order to be able to sell their products at a profit. But just keep in mind that the HREEs that can be produced from non-Chinese hard rock deposits will require less processing volumes in China of a minimum of a factor 10, and will generate no domestic Chinese pollution issues whatsoever.
I was asked in China to identify those hard rock non-Chinese HREE projects which should be looked at by Chinese HREE processors who need to find security of supply for their feedstocks. I mentioned Rare Element Resources, Ucore, and Texas Rare Earth Resources in the USA, Tasman Metals in Europe, and Hastings and Northern Minerals in Australia. The open question, I said, was “How do Chinese comapnies make it profitable for any or all of those foreign junior rare earth companies to produce HREEs, so that the Chinese processors can work out a scheme with the Chinese central government to be able to buy them, or so that the non-Chinese rare earth end user product industry will have sufficient material so as not to need to buy from China’s diminishing capability to produce safely enough HREEs for its own use?”
No one was laughing when the interpreter finished translating.
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>