The automotive and energy sectors are witnessing significant shifts as companies and governments navigate the evolving landscape of electric vehicles (EVs) and sustainable energy. Two recent developments highlight these changes: Ford Motor Company’s scaling back of its Michigan battery plant and the Canadian government’s launch of a $1.5 billion Critical Minerals Infrastructure Fund.

Ford’s Revised EV Strategy Amid Market Realities

Ford Motor Company’s (NYSE: F) decision to scale back its $3.5 billion battery plant in Michigan, reducing its production capacity by 43% and cutting jobs, reflects the challenges facing the EV market. Despite the initial excitement and investment in EVs, consumer adoption has been slower than expected, and labor costs are rising.

Political and Economic Implications

Ford’s partnership with Chinese manufacturer CATL has stirred political debates, especially in the context of US-China relations. This move, along with broader market dynamics, signifies the complex interplay of economics, politics, and technological advancements in the EV sector.

Canada’s Strategic Move in Critical Minerals

Concurrently, Canada is stepping up its game in the critical minerals sector, crucial for clean technologies like EV batteries. The $1.5 billion Critical Minerals Infrastructure Fund, announced by Natural Resources Canada, aims to fill infrastructure gaps and promote sustainable mineral production.

A Synergistic Approach to Sustainable Development

Canada’s fund is not just an economic investment but also a strategic move to position the country as a key player in the global shift towards a net-zero-emissions future. This initiative complements efforts like Ford’s, focusing on the development of clean technologies and the reduction of carbon footprints.

The Road Ahead for Ford and Global EV Market

Ford remains committed to its EV strategy, planning to open its revised battery plant in 2026. This plant will be crucial in producing lithium iron phosphate (LFP) batteries, a cheaper alternative to traditional lithium-ion batteries, possibly giving Ford a competitive edge in the market.

Canada’s Vision for Clean Energy and Economic Growth

Canada’s investment in critical minerals infrastructure is a forward-looking approach to enhancing its role in the global supply chain for clean technologies. The focus on sustainable extraction, processing, and recycling of minerals aligns with the global agenda for a net-zero-emissions economy.

Conclusion: A Convergence of Efforts

The juxtaposition of Ford’s scaled-back plans and Canada’s aggressive investment in critical minerals infrastructure paints a picture of a world in transition. While challenges like market dynamics and political considerations shape corporate strategies, national initiatives aim to bolster the infrastructure and supply chains necessary for a sustainable future. Both Ford’s recalibration and Canada’s proactive steps are pivotal in driving the automotive and energy sectors towards a more sustainable and economically viable future.

In late February, I opined that perhaps we had seen a near-term top for the price of lithium. Hindsight suggests that was a pretty good call. However, that was more of a short-term trading view on lithium as opposed to an overall investing view.

Generally speaking, I still believe that the overall lithium market is reasonably bullish over the next several years barring some sort of technological breakthrough that obsoletes the lithium battery.

In fact, if you believe what the IEA published on lithium (along with other critical minerals), you’d be very bullish based on the IEA view that the lithium market will see a 33% compound annual growth rate (“CAGR”) for the next decade.

Another stat that puts future lithium demand into perspective is the fact that Tesla is targeting the manufacture of 20 million electric vehicles (“EVs”) per year by 2030 and in order to produce that many vehicles in a year, Tesla would need more lithium than was produced in the world in 2021.

Assuming lithium prices have now stabilized or perhaps even bottomed before another move higher, the question becomes how best to play lithium going forward.

Lithium Royalty Corp. overview

One option to get more broad-based exposure to the market is the newly listed Lithium Royalty Corp. (TSX: LIRC).

Lithium Royalty is a lithium-focused royalty company with a globally diversified portfolio of 30 high-grade revenue royalties on mineral properties around the world that supply, or are expected to supply, raw materials to support the electrification of transportation and decarbonization of the global economy.

The Company’s portfolio is focused on high-grade and low-cost mineral projects that are primarily located in Australia, Canada, South America, and the United States. Lithium Royalty is a signatory to the United Nations Principles for Responsible Investment.

There are two key takeaways from that corporate description.

• First off, they have focused on “friendly”, stable jurisdictions with 46% (based on acquisition costs) of their projects in North America, 62% comprise OECD nations, and no Russian, Chinese, or African asset exposure. Their non-OECD assets are primarily in Brazil and Argentina, which are both stable enough at present.
• Secondly, the integration of ESG factors and sustainable mining are important considerations in Lithium Royalty’s investment analysis and royalty acquisitions. This includes a focus on the use of renewable power in extraction and processing; infrastructure benefits to remote communities; environmental and economic impact on local communities; water use; surface disruption and remediation plans as well as tailings management.

I’ve noted as recently as last week that I strongly believe a premium will start to be placed on sustainable miners with responsibly sourced materials and a low-carbon footprint. Lithium Royalty definitely ticks that box.

Royalty portfolio and upside potential

But ultimately it comes down to whether you can also make money while being responsible. The royalty that excites me the most at present in the Company’s portfolio is one that has just transitioned from construction to production.

In all Lithium Royalty now has 3 producing royalties but their 90% interest in a 1.0% Net Smelter Royalty (NSR) in SIGMA Lithium Corporation’s (NASDAQ: SGML | TSXV: SGML) Grota do Cirilo project is about to start generating returns with its inaugural shipment of approximately 15,000 tonnes of spodumene concentrate in May 2023. Sigma is now focused on ramping up to full production capacity for Phase 1 of the project, which is expected by July 2023.

Other assets currently generating income for the company are both in Australia, including Allkem Limited’s (ASX: AKE | TSX: AKE) Mt. Cattlin project with a royalty of A$1.50 per tonne of ore mined and Core Lithium Limited‘s (ASX: CXO) Finniss mine where the Company expects to receive its first royalty payment for its 2.5% Gross Overriding Royalty (GOR) as a result of Q1/2023 sales.

In total, Lithium Royalty has 30 royalties in its portfolio, of which 29 are summarized in the slide below. Additionally, the acquisition pipeline currently has 10 additional royalty targets with the opportunity to deploy over US$130 million of new capital.

FIGURE 1: Lithium Royalty’s Current Portfolio of Royalities

Final thoughts

Given the Company just reorganized into the publicly traded entity we have today, my numbers could be a little off. My math suggests the Company finished 2022 with US$35 million in cash, raised a net amount of C$100 million as part of the go-public transaction, and acquired its 30^th royalty position (not included in the above table) for US$1.8 million. Using today’s exchange rate that puts cash available to pursue additional royalties at roughly US$108 million.

There are currently just over 55 million shares outstanding which puts Lithium Royalty’s market cap at C$818 million (US$604 million).

Despite the fact that consumers are starting to see faint glimmers of hope that inflation might finally be peaking and starting to hopefully roll over, the same can not be said for everybody. In the case of the mining community, where projects are developed over the span of years and decades, not days or weeks, the curses of the supply chain and inflation are continuing to rear their ugly heads.

There has been a spate of announcements suggesting that economics for these projects remain robust but costs are growing materially, or in one case, the company has put off the final investment decision until the second half of 2024. This is not encouraging when one thinks about how quickly governments around the world want to expedite the green economy and transition away from fossil fuels, given we are talking about the mines that will supply the resources to undertake this task.

Generation Mining’s Marathon project’s CAPEX just went up by 25%

The first example is Generation Mining Limited (TSX: GENM | OTCQB: GENMF), which is developing the Marathon Project, a large undeveloped palladium-copper deposit in Northwestern Ontario. The Company released its initial Feasibility Study (“FS”) in 2021, but keep in mind a lot has to happen between an FS and the start of construction, of which environmental assessments, permitting, and financing, are some fairly large and time-consuming components. Correspondingly, now that Generation Mining has received its environmental assessment approvals and recently announced an indicative offtake term sheet, it’s time to get serious about financing. Naturally, the Company needs to review how much financing they will need to move forward, so a revised FS was undertaken.

Despite management’s positive spin, the news wasn’t pretty. At the end of March, Generation Mining announced a 25% (C$224 million) increase to the initial construction CAPEX reported in the 2021 FS. Albeit, approximately 19% or C$43 million was due to scope changes, which is reasonable, but 71% (C$160 million) was due to cost escalation, and the final 10% (C$22 million) was a result of increased contingency. That’s a big chunk of change, although it is unlikely to slow the project down as the economics remain solid and global demand for copper seems to be bullish in the long run. As well, the project is touted as being one of the lowest CO2 equivalent intensity mines in the world, which is a factor I’m sure will continue to become more important as time goes on.

Trilogy Metals announces updated Feasibility with CAPEX up 40%

Example number two is a similar story, Trilogy Metals Inc. (TSX: TMQ | NYSE American: TMQ) is advancing exploration and development at the Upper Kobuk Mineral Projects, high-grade copper-zinc-lead-gold-silver-cobalt properties in Northwest Alaska. Very similar to Generation Mining, in mid-February Trilogy announced an updated FS for its Arctic Project. But if you thought the Generation Mining results were exorbitant, wait until you see what happened to Trilogy. Granted it’s not exactly apples to apples given the original Trilogy FS was a year older (2020) and there are somewhat different commodities in a different geographic jurisdiction but…

You know it’s going to be a big number but I personally find it hard to conceive. The updated FS for Trilogy Metals’ Artic Project has gone from US$1.22 billion to US$1.72 billion or a 40% increase. On top of that, annual payable metals production is down from the 2020 FS, implying that little to none of the surge in CAPEX was due to scope creep. Sure there was more than a doubling in mine closure and reclamation expenditures (US$205.4 million to US$428.4 million), which could be regulatory changes or any number of uncontrollable issues. But that still leaves US$271 million seemingly attributable merely to things getting more expensive.

This should be a bit of a wake-up call to investors everywhere who are banking on the optimism of “friend-shoring” natural resources. There are a lot of highly valued junior mining companies with a pre-feasibility study or possibly even less than that, who might be in for quite a reality check if/when the project starts to get serious.

Newmont delays Yanacocha Sulfides Project

All this might explain the simplicity of my third example. Newmont Corporation (TSX: NGT | NYSE: NEM) decided it wasn’t even going to go there with its Yanacocha Sulfides project in Peru. Last September the Company announced it will delay the investment decision for the project to the second half of 2024. As part of the press release Newmont stated that evolving market conditions, including the continued war in Ukraine, record inflation rates, the rising prices for commodities and raw materials, prolonged supply chain disruptions, and competitive labor markets were part of its decision-making process. Unless I’m missing something, I would have to say that “war in Ukraine” is more of an acknowledgment than anything else, because I’m not sure how that impacts a mine in Peru. I would also think the rising price for commodities would be a good thing but maybe they intended it in a different way. Nevertheless, you see the recurring theme of inflation and supply chain in there, so I’ve included it in my synopsis.

Final thoughts

What’s my point? I alluded to it earlier but I will expand on it. First off, I think there might be a little too much optimism baked into a lot of the junior explorers at present. Yes, General Motors (NYSE: GM), Tesla (NASDAQ: TSLA), Ford (NYSE: F) et al are signing deals left, right, and center with numerous companies, and that’s a very bullish thing. But what if GM and Tesla are smart enough to sign deals that have the miner get stuck with all the mining cost increases? The examples above show how an initial Feasibility Study may not be overly relevant a couple of years down the road. So that begs the question “What are the REAL economics of a project?”

Lastly, and this is more of a thought experiment kind of comment, in the grand scheme of things it would appear the world simply doesn’t realize how much new critical minerals projects are going to cost. It seems that old metrics might not be overly relevant anymore. Inflation may have a much larger trickle-down effect than anyone imagined and the price of future EVs might cost a King’s ransom, despite government subsidies.

Most commodities are cyclical in nature. The ebb and flow of demand, potentially from a new application or general growth, which in turn makes the supply of that commodity scarce can cause prices to rise, sometimes dramatically. This is followed by a supply response that typically is too effective (because everyone wants to partake in the high commodity price) and eventually, the demand is outstripped by supply, commodity prices in turn fall or outright collapse and the cycle repeats.

In the case of lithium, we’ve been seeing demand surge as the electric vehicle (EV) revolution accelerates while the ever-increasing supply is failing to keep pace. There are lithium headlines in the news all the time now, with the likes of General Motors Co. (NYSE: GM) and Tesla, Inc. (NASDAQ: TSLA) inking supply deals with producers or the speculation of deals. It would appear we are in the heart of a bull market for lithium….or are we?

Lithium Boom – 1950s

This isn’t the first lithium boom the world has seen. You may be surprised to learn that the first one began in the 1950s when the world’s primary source of lithium came from North Carolina. Lithium was extracted from spodumene (hard rock) and was a key component of the military’s H-bomb program. As a reference point, by the mid-1970s U.S. lithium production was roughly 2,900 tons per year. (1 US ton = 0.97 metric tonne)

Lithium Boom – 1990s

Lithium’s next rally occurred in the early 1990s when Sony first began production of the lithium-ion battery used in consumer electronics. By the end of 1991, Sony had ramped up production to 100,000 batteries a month. Enter Sociedad Química y Minera de Chile S.A., or SQM, the Chilean fertilizer and mining company which began selling lithium (from brine) in late 1996, almost immediately lithium carbonate prices fell by a third, to US$2,000 a ton. This marked the end of the existing American lithium industry.

Current Lithium Production By Country (2021)

^{Source: World Economic Forum}

Lithium Boom – Today!

Fast forward to today and in November we saw lithium prices surge above US$80,000/tonne in a sign that supply was definitely not keeping pace with the huge increase in demand sparked by EVs. You have wildly bullish forecasts suggesting supply needs to grow somewhere between 150,000 to 200,000 tonnes every single year.

For more perspective, consider that Tesla is targeting the manufacture of 20 million EVs per year by 2030.  In order to produce those vehicles in a year, Tesla will need more lithium than was produced in the world last year, which could explain why the market was all excited when Bloomberg reported Tesla has been discussing a possible bid for Sigma Lithium Corporation (TSXV: SGML | NASDAQ: SGML).

And speaking of Sigma Lithium, have a look at their 2 year chart!

^{Source: StockCharts.com}

Investors should be very happy with a 10x move in just under 2 years. There have also been some pretty good runs for some of the Canadian hard rock lithium names. A quick look at the one-year chart for Critical Elements Lithium Corporation (TSXV: CRE | OTCQX: CRECF) and Patriot Battery Metals (TSXV: PMET | OTCQX: PMETF) and you’ll see a double and another 10 bagger. It suggests that we may not be in the early innings of this game.

When all this starts to become prevalent in the news cycle, I start to get a little concerned. It’s almost like fanatic optimism is a harbinger that the cycle is about to end. I know that isn’t very scientific, but let’s look a little closer at what I’m getting at. Capital solves problems. With the lithium price at current levels, lithium mines are some of the most profitable in the whole mining sector. One could surmise that supply might respond more rapidly than currently forecast with lots of capital being thrown at exploration and development at present. I wouldn’t be surprised if Investment Bankers are cold-calling anyone involved with lithium right now to see if they would like to raise capital. On top of that, when you have the likes of Tesla, GM, etc. buying into producers it tends to stretch valuations beyond anything that would otherwise seem reasonable. M&A, especially by companies not actually in the mining business, can often be considered a sign that we are getting close to a top. Again, not scientific by any stretch of the imagination but it also typically isn’t sustainable behaviour.

Is this a Market Top?

I’m not suggesting lithium is going back to US$2,000/ton but we have seen the price retreat to just over US$60,000/tonne largely due to the Chinese market seeing lower subsidies for electrified vehicles and weak consumer confidence. With that said, lithium is still worth eight times more than it was before 2021 and still wildly profitable for both hard rock and brine producers. Is this a sign that the current bull run for lithium prices is over or just taking a breather before it settles into a new price range or perhaps starts to climb again? I guess it depends on your time frame. Traders may want to look at taking a little profit off the table for now, long term buy and hold investors may not even be paying attention to the day-to-day noise in the market and be comfortable holding lithium equities for the foreseeable future.

My caution to anyone wildly bullish on lithium prices and the corresponding mining companies is this – there are a lot of smart capitalists out there and if a component becomes the most expensive part of your product, a lot of effort will be spent to try and find a replacement or an alternative. I also have a nagging concern that at some point in time, the rapid adoption of EVs may overwhelm the electric grid and put a hard stop to EV growth (at least temporarily). Either of these scenarios could have a sudden and very negative impact on lithium prices but not likely in the near future. So when it comes to investing in lithium, make sure your risk tolerance matches your investment exposure.

In this InvestorIntel interview, Tracy Weslosky talks to Critical Minerals Institute’s Chairman Jack Lifton about “an existential crisis for the North American automotive industry.” Speaking about the upcoming Critical Minerals Summit (#CMS2023) to be held from June 14 to 15 at the National Club in Toronto, Canada, Jack says that the summit will focus on the current supply and demand situation of critical minerals for the electric vehicle industry. He adds, “This is one not to miss.”

Jack also discusses Energy Fuels Inc.‘s (NYSE American: UUUU | TSX: EFR) recent acquisition of a rare earth and heavy mineral project in Brazil and he provides an update on Lynas Rare Earths Ltd.’s (ASX: LYC) rare earths processing plant in Malaysia.

He goes on to provide an update on the current lithium market and how automakers like General Motors are investing in lithium companies to support their electric vehicle production and Piedmont Lithium (NASDAQ: PLL | ASX: PLL) just signed a purchase order and $75 million equity deal with LG Chem, Ltd. (KOSE: A051910).

To access the full episode, click here

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About The Critical Minerals Institute

The Critical Mineral Institute (CMI) is an international organization for companies and professionals focused on battery materials, technology metals, defense metals, ESG technologies and practices, the general EV market, and the use of critical minerals for energy and alternative energy production. Offering an online site that features job opportunities that range from consulting roles to Advisory Board positions, the CMI offers a wide range of B2B service solutions. Also offering online and in-person events, the CMI is designed for education, collaboration, and to provide professional opportunities to meet the critical minerals supply chain challenges.

There seems to be news and updates almost daily about domestic critical minerals. Whether that be the establishment of EV battery manufacturing facilities, supply agreements for those facilities or processing of the critical raw materials that will feed the whole supply chain. That is a pretty bullish background for virtually all North American junior mining companies that are in hot pursuit of the many ingredients that go towards fulfilling what is likely every procurement team’s nightmare at present. If Elon Musk, when he’s not too fixated on his latest distraction, is busy signing up lithium and nickel supply contracts directly with mining companies, one could surmise that it’s just a matter of time before everyone else joins the rush. And in fact, last September South Korean LG Energy Solution Inc. (LGES), a leading global manufacturer of lithium-ion batteries for electric vehicles, mobility, IT, and energy storage systems, announced three agreements in a span of 24 hours with Canadian miners to source materials required to make batteries for EVs.

This all seems like a pretty decent backdrop for anyone out there that is working to shore up a resource of critical minerals, especially if they are geographically close to where a lot of this infrastructure is being built. That’s where a junior mining company like Murchison Minerals Ltd. (TSXV: MUR | OTCQB: MURMF), can play a significant role in supplying the minerals needed for the quickly evolving clean energy transition. Murchison is focused on the exploration and development of the 100% owned HPM (Haut-Plateau de la Manicouagan) high-grade nickel-copper-cobalt Project in Quebec and the exploration and development of the 100%-owned Brabant-McKenzie VMS zinc‐copper‐silver deposit located on the Brabant Lake property in north‐central Saskatchewan. These are two of the best mining jurisdictions in Canada and arguably the world. Additionally, these projects are surrounded by excellent, established infrastructure.

On Monday (Jan 17), Murchison updated investors with assay results for the remaining eight diamond drill holes, from the Barre de Fer (BDF) Zone, drilled as part of the 2022 Summer Exploration Program on the HPM Project. These results successfully expanded mineralization down dip as well as along strike to the north and south of the BDF Zone. Results to date have successfully expanded the preliminary modelled mineralization, the current dimensions of the BDF Zone are:

• Mineralization at depth has now been extended down to 475 m, versus the preliminary model at 295 m
• Along strike, the zone of mineralization has been extended from 315 m to 370 m
• Mineralization was expanded along the width of the mineralized zone from 150 m to 200 m, with individual lenses now modelled up to 48 m in thickness, compared to the 28 m in the preliminary version

Source: Murchison Minerals Jan 17, 2023 Press Release

The 2022 Summer Exploration program achieved or surpassed expectations with respect to its three main objectives: expansion and delineation of the BDF Zone, discovery of new nickel-sulphide showings on surface via prospecting, and the identification of additional EM anomalies through property wide geophysics. Murchison expects to release the assay results from the remaining 3 drill holes completed at the Syrah target once results have been finalized and interpreted.

Murchison considers the HPM highly prospective to host additional nickel-copper-cobalt mineralization, particularly at BDF and Syrah where significant mineralization has already been encountered. The HPM project continues to show tremendous promise with its numerous gossanous nickel-copper-cobalt-bearing outcrops spatially linked to historical airborne electro-magnetic (EM) anomalies. The HPM property has developed into an exploration project with mining camp scale prospectivity.

At the end of September Murchison was sitting on approximately C$2.9 million in working capital, which should see the Company through its 2023 planning phase and perhaps even some additional drilling. Murchison is hoping to make 2023 a banner year for the Company. Work has commenced towards drafting an inaugural resource at BDF which is expected to be completed in early 2023. With a market cap of roughly C$25 million and the pursuit of several of the more high-demand critical minerals, investors can hope they achieve their goal.

A decision to support alternate non fossil fueled energy technologies, which has been made by ideologically driven politicians reacting to voter polls, flawed models and end-of-the-world enthusiasts is upending the world’s largest manufacturing industry, OEM automotive, and the financializers taking advantage of the turmoil have thrown the retail commodity metals markets into chaos. This cannot end well.

Should we accept the incompetence of those who ignore foreseeable consequences and are “surprised” and call them unintended consequences? Expertise is not just detailed factual knowledge of a subject; it is also the ability to reason out the consequences of ignoring that factual knowledge when planning.

Thus, the global “reserve” of lithium is not the amount of lithium in the earth’s crust (so-called “earth abundance, a measure of availability wrongly used by many academics). It is that amount of lithium accessible to us economically as defined by current and foreseeable exploration, environmental, and technological capabilities of the mining and refining industries, globally.

You may have noticed that as the necessity for lithium has increased so has its price. Yet, all we hear from the “experts” is that the cost of lithium-ion batteries must and will decline as their use scales upward. The experts tell us that the lithium price increase is only a temporary effect caused by a temporary imbalance between supply and demand. The price, the experts tell us, reflects the high cost of opening new lithium sources, but it, the price, they assure us, will sharply decline when the supply meets the demand. The negative effect that this prediction has upon mining finance, and thus commodity production and supply, seems to have been overlooked by the “experts.”

The Chinese domestic economy accounts for 82% of the production of lithium-ion batteries and 60% of the global processing of lithium for all purposes. The price of lithium is thus set by Chinese demand and supply. Mining finance is thus dependent on Chinese industry to value the target product and revenue from a lithium mine and refinery, but the Chinese economy is based on a detailed and well-articulated industrial policy, which prioritizes government goals through subsidies and cheap loans to targeted industries. Thus, Chinese lithium prices are not market-driven, so that dependence upon them for investment planning by non-Chinese institutional investors is extremely risky. It is the same for any commodity under Chinese control.

This year, 2023, we will be told by the experts that any reduction in the lithium price is proof of the rebalancing of supply and demand, but, in fact, it is more likely that it is a move away from lithium as an asset class by financializers souring on commodities and returning their complex trading to the traditional usual “experts traders.” Chinese entities and their government are notoriously opaque about production levels, inventories and balance sheets. Mandarin fluent experts make their living by reading Chinese “official” statistics and speculating from those along with fantasizing what’s in the minds of Chinese officials who plan and execute industrial policy without any interest whatsoever in the welfare of the non-Chinese world.

An oxymoronically named “Intelligence” group of self-described “analysts” has “studied” the situation and has now decreed that 300 new lithium mines will be needed to reach the EV production goals set by (well-named) “green experts” for 2030. Perhaps these “expert analysts” know so little of natural resource economics, mining costs and the staffing of mining companies that they believe that this is possible. It is not. Existing mines have lifetimes. Their output declines with age. New discoveries take decades to bring into production and are limited to lifetime output declines. It will take an enormous outlay of capital to increase annual lithium production much beyond current outputs and an enormous amount of capital to maintain that output. Does this bode well for decreased lithium pricing?

A sharp decrease in lithium pricing will mean not that supply and demand have balanced due to increasing demand but that miners have determined that demand is peaking, or, worse yet, that future demand goals cannot be reached and so that further discovery and development is a waste of shareholder value (I think that ESG was devised and has been adopted by financiers to head off this very issue).

For American durable goods manufacturing companies facing deglobalization, regionalization, and even national re-focusing on supply chains the real question is: Can the EV and magnet industries be vertically integrated within the political unit in which they operate? I’ll save the acne-challenged experts the trouble of studying this complex question. The answer is assuredly NO. As usual, the markets will determine who are the winners and losers. The US government, also, as usual, can be counted upon to make uninformed, anti-free market, and poor choices.

In 2023 well funded, or at least funded, development of deposits of critical minerals into mines will continue providing that the target production of the minerals is projected to be profitable, and the first product is projected to be delivered on time.

Savvy readers know that my above statement is just boilerplate for an OEM automotive annual report. It’s tautological, its conclusion is contained in its premises. It is not at all certain that high-tech, critical minerals producers and processors, will be ready or even existent by the time the minerals can be delivered to their end-user manufacturers.

Even the car makers who have been so generous (or profligate) in their “investments” in critical mineral production and projects have finally begun to realize that their future demand projects, when measured against contemporary real world supply, have caused critical minerals prices to go too high to support their inclusion in the consumer products manufactured from them. Lithium is a prime example.

Worse than that the bankers who once viewed car makers as AAA investments are now very concerned at the profligate use of the enormous lines of credit by the car makers being used to fund critical minerals wannabes that the banks themselves would never consider. “Use retained earnings” has been the response of credit line providers asked to cover such “investments.”

It’s time that car makers performed a due diligence on the critical minerals’ supply space.

They need to ascertain whether or not the supply of finished components necessary for the assembly of motor vehicles, such as batteries, traction electric motors, miniature accessory electric motors, and, yes, even catalytic converters can meet current and all future demand.

Simultaneously, they need to predict and mandate price maximums for critical minerals that they can afford if their products are to be saleable.

For the first time, they need to address the lifetimes, as well as the costs, of critical mineral enabled components, since consumers will have to keep the vehicles for much longer than in the past in order to be able to afford them at all.

They need to assess these factors for minerals, metals, and manufactured components dependent upon lithium, cobalt, nickel and the rare earths.

If car makers are to change over from ICE powertrains to BEVs then they need to do this right now, and they need to recruit managers and analysts who can do the job.

2023 is a breaking point if there is to be an EV revolution/transformation.

The rare earths sector has had plenty of good news in 2022 including the recently announced proposal by the European Commission (“EC”) for a European Raw Materials Act. A very telling comment in the announcement gives a big clue as to which critical materials hold the greatest concern. The EC stated: “Lithium and rare earths will soon be more important than oil and gas……Our demand for rare earths alone will increase fivefold by 2030.” The supply risk for key rare earths is a problem for all western countries. China dominates the rare earths supply chain (58% of mines, 85% of processing) and the production of powerful rare earth magnets used in EVs, wind turbines, and most military hardware that employ powerful magnets. The U.S has already started various initiatives to support the rare earths supply chain, including some funding from the Infrastructure Act. Last month the Biden administration announced $2.8 billion of grants for various critical materials and battery supply chain related projects in the USA.

So clearly the funds are now flowing and the race is on to develop both an EU and a U.S critical materials and battery supply chain. Given the rising global geopolitical tensions Europe and USA will now need to support the critical materials sector like never before – both funding and permitting.

Source: American Rare Earths company presentation

Today’s company is working as fast as they can to help create a U.S source of critical rare earths from their three USA rare earths projects.

American Rare Earths Limited (ASX: ARR | OTCQB: ARRNF) is focused on developing their 100% owned La Paz Scandium and Rare Earths Project in Arizona, USA. The Company’s other two projects are the Halleck Creek Project in Wyoming and the Searchlight Rare Earths Project in Nevada, USA.

American Rare Earths’ 3 USA rare earths projects currently being explored and developed

Source: American Rare Earths company presentation

La Paz Project update

The La Paz Project has high-value magnet rare earths (NdPr) as well as scandium with a 2021 JORC Resource of 170.6 million tonnes at an average grade of 469ppm Total Rare Earth Oxide (“TREO”) (contained ~80 million kgs TREO, plus 4.4 million kgs of Scandium Oxide (Sc2O3)). American Rare Earths Limited has recently completed the metallurgical test work at La Paz. The results were successful using the Watts & Fisher’s proprietary technology for the extraction of rare earth metals. According to the Company: “The technology shows good promise with further development, moving into piloting down the track. Rapid dissolution of rare earth values within 2 to 3 minutes at leaching temperatures above 225°C.” Next steps at La Paz include South-West Area resource expansion and then a PEA.

The Halleck Creek Project update

At the Halleck Creek Project, the Company continues their drilling campaign to define a significant JORC Resource. The Company stated recently: “The drilling commenced early October and is progressing well. It is anticipated the campaign, analysis and subsequent announcements relating to a maiden JORC resource will be completed in the first quarter of calendar year 2023.” In good news for shareholders, the Halleck Creek exploration target has been increased by 328%, boosted by the newly staked claim area Bluegrass which indicates consistent rare earth mineralisation. Beyond that, the next steps include metallurgy testing.

American Rare Earths has also recently stated they are evaluating even more potential rare earth opportunities in North America. Finally, in more good news the Company’s wholly-owned US subsidiary, Western Rare Earths (WRE), and a consortium of companies (Phinix, LLC and Virginia) were awarded US$500,000 in R&D funding. The consortium will use the funding to develop extraction and separation focused processing technology studies on rare earths ore. The project goal is to produce light, medium, and heavy rare earth oxide products of greater than 95% purity.

American Rare Earths Limited trades on a market cap of A$91 million. Exciting times ahead for this fast-moving company — they are a member of the Critical Minerals Institute.

I can honestly say that the volatility around earnings the last 2 to 3 quarters has been unprecedented. A miss versus expectations or disappointing guidance can lead to enormous losses for a stock with a single day double digit percentage loss becoming increasingly common. I don’t know if it’s related to the lack of confidence in the overall market, the rise of the retail investor (Robinhood and Reddit come to mind), or the increasing influence of algo trading that exacerbates both positive and negative momentum, but something has changed making these massive one day moves far more frequent. I guess one possible benefit to this is that if you feel the market has overreacted it could make for a great short-term trade in the event the market re-evaluates all the information available and determines things aren’t as bad as the market initially thought.

That introduction sets the stage for us to review a company that continues to see sequential top line growth, has an iron clad balance sheet, is squarely in the driver’s seat of the green revolution but as a result of some input cost pressures and demand issues, the bottom line saw an unexpected quarterly loss leading to a 17% yard sale on Friday. That company is Neo Performance Materials Inc. (TSX: NEO), manufacturer of the building blocks of many modern technologies that enhance efficiency and sustainability.  Neo’s advanced industrial materials – magnetic powders and magnets, specialty chemicals, metals, and alloys – are critical to the performance of many everyday products and emerging technologies. Neo has a global platform that includes 10 manufacturing facilities located in China, the United States, Germany, Canada, Estonia, Thailand and South Korea.

So let’s see if we can diagnose what happened in Q3 that caused the market to punish Neo, driving it down to lows not seen since the pandemic plunge in early 2020. As I noted above, revenue numbers continue to see sequential growth both quarterly and year over year in all three of the Company’s business segments – Magnequench, Chemicals & Oxides and Rare Metals. For the three and nine months that ended September 30, 2022, revenues of US$146.6 M and US$481.1 M were 22.4% and 24.7% higher, respectively, than the corresponding periods of 2021. Unfortunately, there’s more to earnings than just revenue and that’s where some of the challenges in the quarter occurred.

Starting with the Magnequench division, where Neo is the world leader in the production of permanent magnetic powders used in bonded and hot-deformed, fully dense neodymium-iron-boron magnets, there was a decline in volumes compared to the corresponding periods of 2021. The recent spike in COVID-19 has affected the free flow of people and production supplies across many parts of Asia and the ongoing semiconductor chip shortage is continuing to impact customers in the automotive and other industries. Additionally, by the third quarter of 2022, selling prices for Magnequench powders declined 30% to 40% from the peak (in the first quarter of 2022) negatively affecting (when prices are falling) overall pricing and margins due to the lead-lag effect of higher cost inventory on hand. In addition to lower margin on sales in the quarter, Neo recorded $8.0 M of provisions for inventories in the third quarter, related to higher cost inventory on hand, relative to lowered selling prices.

Moving on to the Chemicals & Oxides (C&O) division, which manufactures and distributes a broad range of rare-earth-based industrial materials including automotive catalysts, permanent magnetics, consumer electronics, petroleum refining catalysts, medical devices, and wastewater treatment, we see a similar theme. This segment was the biggest drag on the quarter with the three months ended September 30, 2022, reporting an operating loss of US$5.3 M, compared to operating income of $7.1 M in the same period of 2021. The C&O segment continues to see strong demand for various rare earth products, particularly its magnetic-based products, although the segment was adversely affected by the earlier noted rapid decline of rare earth prices while processing higher cost inventory. C&O saw mixed volumes for rare earth elements but slower volumes in the environmental catalyst end markets driven by semiconductor chip shortages. The rapid decline in prices necessitated C&O to record US$6.0 M of provisions for inventories.

As a potential investor, it’s now up to you to decide if the headwinds faced in Q3 are transitory or not. Looking forward, Magnequench, which accounts for roughly 45% of Neo’s revenue, has pass-through pricing agreements for rare earth magnetic elements on the vast majority of its sales contracts. Magnequench earns a targeted margin spread per ton when rare earth prices are stable and over the long term. However, the short-term timing mechanics of the pass-through agreements generally lead to increasing margins when rare earth prices rise and declining margins when rare earth prices fall. The C&O segment, accounting for a little over 1/3^rd of revenue, continues to see strong demand for various rare earth products, particularly its magnetic-based products and the environmentally protective water treatment solutions business continues to perform well with higher volume and new customer adoption. The Rare Metals business continues to make progress in several key strategic initiatives, including selling more products outside of the aerospace industry, expanding its customer base, and diversifying its total end-market exposure.  Sales prices in a number of end markets have recovered and gallium-based products are exhibiting improved market demand.

Neo Performance Materials closed Friday trading at 9.2x trailing 12 month earnings, has a 4.4% dividend yield and C$3.65/share of cash sitting on the balance sheet. Last week the Company announced it has been awarded a grant of up to 18.7 M Euros from the Government of Estonia under Europe’s Just Transition Fund program to help pay for the cost of constructing a state-of-the-art sintered rare earth permanent magnet manufacturing facility in Estonia. The question is, are fundamentals the most important thing in the market these days or momentum trading?