Jack Lifton: Profit from Really Critical Rare Earth Elements
Interview

Rare earth junior miners are now being culled by their inability to raise enough capital to carry their projects forward to a place where either the product produced directly or the value to be gained from the company's development to that point by a buyer can be more profitable than a less risky investment.

The majority of the rare earth junior miners do not understand the supply chain through which the critical rare earth metals become industrial or consumer products. Additionally, they do not seem to recognize the value chain issue, which can be stated as "How far downstream in the supply chain do I need to take my rare earths in order to be able to sell them at a profit?"

It is very important for the small investor to understand that the share market does not directly benefit the listed company unless the company either sells more of its ownership or pledges future production for present, almost always sharply discounted, revenue.

My judgment of the probability of commercial success of a junior mining venture has nothing to do with its share price or the volatility of that price. Most junior rare earth company stock price volatility comes from market conditions that have nothing to do with anything relevant, or from promotional hype, or the attribution to the value of the company of perceived rare earth prices in an opaque market or from geopolitical factors impacting the market.

I am appalled by the judgment of mining analysts and managers in the rare earth space. The primitive state of the economic analysis of the rare earth supply and demand sector (the rare earth market) is indicative of the poor understanding of resource economics prevalent today among not only the general "educated" public but, in particular, among the credentialed classes of pundits, industrialists and financiers.

Survivors

Here are the self-evident axioms of the calculus of the value of a rare earth deposit as a metric for assessing the probability of commercial success of a junior rare earth mining venture

1. There is not an infinite demand for rare earths, nor can there ever be.
2. There is a finite, quantifiable, supply of rare earths that can be produced in the near- and mid-term and the volume of supply will ultimately be determined by the demand for only some of the rare earths, not, in fact, by any demand for the majority of them, because
3. The production (supply) of the rare earths individually is not congruent with their demand (some rare earth elements are produced in excess of demand and others in deficit of demand).
4. It is ONLY the critical rare earth metals for which there is or can be a demand deficit.
5. The non-Chinese junior mining industry has for the most part mistaken quantity for quality. The development of large rare earth deposits has been given priority over the development of necessary rare earth deposits.

Rare earth prices will go generally up to mistakenly reflect specific supply deficiencies AND ultimately go down when production rates for a critical rare earth exceeds its demand use even though speculation will keep prices distorted and will mask the actual permanent ratcheting up of specific prices due to possibly structural supply shortages, currency appreciation in one country, and currency depreciation in another.

The most important rare earth producers will be those who produce the most valuable critical rare earths. The ones that survive will be producers that learn to market products in profit maximizing related groups such as:

1. Neodymium and dysprosium,
2. Terbium and yttrium, or
3. Europium and yttrium.

Above all, the survivors will be those entities that are the low-cost selling production so as to avoid building inventories of ANY critical rare earth except as prepaid stockpiles against capitalized (fully funded) offtakes.

Size doesn't matter and there can be too much of a good thing. There is never enough of the right thing.

Public Consciousness

The supply of the rare earths issue erupted into the public consciousness about two years ago when, as part of the current agenda for China's planned economy—officially cited as the twelfth five-year plan. It subjected the export of the rare earth elements to strict export controls. The export of the rare earths as raw material forms had been declining since at least the year 2000 when China exported 75% of its rare earth production. By 2010 that figure had slipped to some 30%, although that was calculated upon a much higher production volume than the 2000 figures. Nonetheless, this type of event—the sharp reduction in export quotas—would normally have been arcane and gone unnoticed by Wall Streeters, but two clever groups seem to have foreseen the value in outing this process by bringing it to the world's attention by publicizing it, accurately, as a threat to the technological manufacturing dominance of the West, Japan, and Korea.

The non-Chinese junior rare earth promoters even cleverly managed to bring the U.S. military into the story by simply pointing out that many military weapons platforms and even some weapons used rare earth-based motors, generators, sensors, phosphors and lasers.

These promoters, however, did not understand the demand side of the rare earth market in detail. Not at all. They set out to promote the largest highest-grade deposits of what they called the rare earths as the best investments without regard to the mix of rare earths present in the deposits. As Gareth Hatch's recent seminal paper has shown, the demand for most rare earths has already exceeded the supply from and within China! And rare earths are not all critical.

The future of, and certainly the geographic location of all technological manufacturing dependent on these critical rare earths (CREs), is now limited by the non-production of the CREs outside of China.

The most important rare earth projects are thus those that are either:

1. The lowest cost producers of the light rare earths, and
2. The producers of the most heavy rare earths per-unit of production.

Low-cost producers must, by definition, have low or distributed overheads, so that China's Bayanobo iron mines with their massive rare earths (light) production as a by-product can be considered to be the world's lowest cost light rare earths.

Nevertheless, due to resource nationalism by China, it is reasonable to capitalize free market access to light rare earths as a significant cost reduction for the production of these materials. Thus, a very large deposit such as at Mt. Weld in Australia or Mountain Pass in California can be profitably brought into production if the junior miners can base their product on actual demand.

The ideal production mix of the critical rare earths for a single producer would be projects that can meet the needs of magnet-making, phosphors, and fluid cracking catalysts used in refining oil. Such mixes of projects brought to development could create regional total rare earth supply sectors that would destabilize the Chinese supply monopoly. But such a development will not alter the supply chain issue. Until non-Chinese total rare earth processing, refining, metal and alloy fabrication, and end-use product manufacturing is recreated and made competitive with that of China, the production of rare earths outside of China only serves to supply the Chinese (and Japanese if China so chooses) total supply chains. The one exception to this is the fluid cracking catalyst industry, which is predominantly a western monopoly, although it is today totally dependent on the Chinese for its supply of raw materials.

The following is a regional list of companies that either have the lowest cost production potential or the highest value of critical rare earths in their mixes or both. I have created this list from my own work product. I have visited the rare earth related mine sites of most of the following companies, and I have had privileged (subject to non-disclosure agreements) looks at data and open and frank discussions with both administrative and technical management. Even in natural resource production, some master chefs can make lemonade from lemons. For some of the ones I have not visited I admit that I have been swayed by the technical analyses of distinguished colleagues.

There are many of you who will want to tell me that I have made mistakes in judgment and errors of omission. That is always so, but please don't tell me about short-term share prices. I am a metal trader at heart and a long-term strategic investor, not a day trader or a short seller. My picks for rare earth junior ventures most likely to become profitable producers in the long term are listed below by the location of their deposits in parentheses:

Europe

1. Tasman Metals Ltd. (TSM:TSX.V; TASXF:OTCPK; T61:Fkft) (Sweden)
2. AMR Minerals Ltd. (Turkey)

The United States

1. Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A)(Wyoming)
2. Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX)(Alaska)

Canada

1. Matamec Explorations Inc. (MAT:TSX.V) (Quebec)
2. Quest Rare Minerals Ltd. (QRM:TSX.V; QRM:NYSE.A) (Quebec)
3. Rare Earth Metals Inc. (RA:TSX.V) (Ontario)
4. Commerce Resources Corp. (CCE:TSX.V; D7H:Fkft; CMRZF:OTCQX) (Quebec)

Southern Africa

1. Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) (Western Cape Province, Canada, the USA)
2. Frontier Rare Earths Ltd. (FRO:TSX) (Western Cape Province)
3. Tantalus Rare Earths AG (TRE:CE)
4. Montero Mining and Exploration Ltd. (MON:TSX.V) (Tanzania)

Australia

1. Alkane Resources Ltd. (ALK:ASX)
2. Arafura Resources Ltd. (ARU:ASX)
3. Lynas Corp. (LYC:ASX) (Duncan deposits)

They can be further distinguished by criteria such as producing REEs as byproducts of valuable primary materials. For example:

1. AMR (magnetite, zirconium, niobium)
2. REM (magnetite, zirconium, niobium)
3. Alkane (zirconium, niobium)

And by business model such as:

Partially vertically integrated and already cost competitive at their selling point in the supply chain against Chinese/Japanese competition:

1. Great Western Minerals Group (rare earth permanent magnet alloy producer already)

I am intrigued by the fact that although it is well known that the Soviet Union collapsed economically due to its inability to distinguish necessary from sufficient production, which led to massive overproduction of commodity metals simply to meet arbitrary goals, it is nonetheless deemed a measure of strength to announce goals of massive production of the rare earths (measured as a percentage of existing production). This is only reasonable if the growth of the rare earths market in general is immense or open-ended. It is neither the one nor the other.

We need the production of enough of the critical rare earths to ensure the supply meets the demand. For the most common of the rare earths, lanthanum and cerium, which together make up between 70% and 80% of the total production of the rare earths, we need far less new production.

Some of the above listed junior rare earth ventures are primarily destined to be producers of the light rare earths. I have included them because I think they will be lowest cost, profitable, ventures.

Jack Lifton has more than 47 years of experience in the global OEM automotive, heavy equipment, electrical, electronic, mining, smelting and refining industries. His background includes sourcing, manufacturing and sales of platinum group metal products, rare earth compounds and ceramic specialties used to make catalytic converters, oxygen sensors, batteries and fuel cells. Jack is knowledgeable in locating and analyzing new and recycled supplies of "minor metals," including tellurium, selenium, indium, gallium, silicon, germanium, molybdenum, tungsten, manganese, chromium and the rare earth metals. He is a senior fellow of the Institute for the Analysis of Global Security.Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

DISCLOSURE:
1) The following companies mentioned in this article are sponsors of The Critical Metals Report: Tasman Metals Ltd., Rare Element Resources Ltd., Ucore Rare Metals Inc., Matamec Explorations Inc., Quest Rare Minerals Ltd., Rare Earth Metals Inc., Commerce Resources Corp., Montero Mining and Exploration Ltd.
2) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.