Gold News

Investing in Rare Earth Elements

Exploration for REEs "in the doldrums" as China tightens supply...
GEOLOGIST Alex Knox has been involved in the mineral exploration industry since 1970, unearthing uranium, gold, rare earths, niobium, diamonds, slate and limestone in Canada, the US, Mongolia, Bolivia, Peru and Argentina.
Currently focused on rare earth elements, and sitting on the REE Advisory Board of three publicly traded Canadian junior mineral exploration companies, Knox speaks here to The Gold Report's sister title, The Metals Report, about investing in the rare earth space...
The Metals Report: Alex, what is your overview of the rare earth element space?
Alex Knox: I see a dramatic need for investment and development of heavy rare earth element deposits in the western world, now that China's crackdown on illegal mining has presumably cut into its production of HREEs. A number of companies have reached prefeasibility or preliminary economic assessment, and one already has a feasibility study. Overall, I believe this space offers the most potential growth and the most potential to add new deposits.
TMR: Can investing in rare earth elements make money?
Alex Knox: Certainly. On the heavy rare earth side, the deposits coming on stream will be profitable. At the present prices of the companies that own these deposits, there is substantial upside. I think the market will pick two or three of these companies and make them the winners in the HREE space.
TMR: Rare earth expert Jack Lifton has written that, "non-Chinese sources of heavy rare earths must now be brought into production under all circumstances. Non-Chinese manufacturing centers and regions need to attain self-sufficiency as soon as possible." What's your view?
Alex Knox: I totally agree. The Chinese will protect their low-cost resources, the South China ionic clays. End users operating outside of China will need to secure supplies elsewhere. There is a good market opportunity for companies that can get these deposits to market in a profitable state.
TMR: Yet in 2012, half of China's export quota on REEs wasn't used. The 2013 quota is 5 tons higher than 2012. Doesn't that suggest there is less demand?
Alex Knox: Again, there is a distinction between light rare earth elements and heavy rare earths. Given China's crackdown on illegal mining and illegal export of HREEs, those exports are volumetrically small compared to the LREEs. There is not a lot of tonnage, but there is high value. The tonnage mainly comes from the LREEs.
The fact that the overall quota has risen doesn't mean that the output of HREEs will increase. I believe the supply of HREEs from China may actually decrease, while the overall quota for all REEs increases.
TMR: Can illegal Chinese exports meet the world's supply needs for heavy rare earth elements?
Alex Knox: The South China clays are a finite resource. They lack vertical extent. Some are only 10 meters thick and are often fairly low grade. To extract significant quantities requires immense surface disturbance because you have to strip off a lot of land to take out the top 10 or so meters. This surface destruction is unsustainable. The Chinese recognize that and are trying to eliminate illegal mining to save these resources for themselves.
TMR: Lifton noted that, even if non-Chinese HREE costs become level or lower than prices in China, the cost of building new separation and alloy-making facilities would be in the billions. He argues that the problem can be solved by "central, regionally deployed tolling facilities for separation." How likely is that?
Alex Knox: These facilities are expensive to build. Also, the expertise to design and run them is very thin on the ground. The facilities largely depend on Chinese technology or Chinese expertise. For a western company to build its own rare earth separation plant seems to me inefficient.
One would hope that companies could agree to reduce their individual capital costs by creating a central, large-volume, efficient and well-managed separation plant as Lifton suggests. However, these companies are competitors. One wonders whether they could collaborate to bring this vision into reality.
TMR: Could an REE company with deep investing pockets and expertise take that on?
Alex Knox: It's a bit of a chicken-and-egg situation. A company would have to have secure sources of supply for a proposed processing plant before it had the economic justification to build it.
TMR: If there were steady supplies of REEs, especially HREEs, would manufacturers start changing the way they build high-tech devices, such as cars and lighting systems?
Alex Knox: This is another chicken-and-egg situation. Lack of reliable supplies of, say, dysprosium, terbium or lutetium inhibits research into their uses. As deposits come on stream and the supply becomes stable and predictable, people will do more research and find uses for these elements.
There are certain heavy rare earth elements – holmium and lutetium, to name a couple – for which there are almost no known uses because the supply is virtually zero. If supplies could be found, people would research how to use them and they would gain in value.
TMR: Could governments get involved in building regional facilities or backing loans for their construction?
Alex Knox: The US government might do it, because it takes a more strategic view of things. Some of these HREEs have military applications, and a secure source might be desirable. This might be an advantage to a companies whose HREE deposit is in the US There are a number of HREE deposits in Québec, so the Québec government might fund something or offer tax advantages to the Québec producers to secure a supply.
TMR: The Tech Metals Research Advanced Rare-Earth Projects Index identifies 56 advanced-stage REE projects and almost that many companies. How many of these companies do you reckon will develop their projects into mines in the next 6 to 10 years?
Alex Knox: The REE space is microscopic compared to other metals markets. Market capacity can be satisfied by a handful of REE deposits coming into production. On the LREE side, many would argue that demand has already been more than met by the Mt. Weld and Mountain Pass deposits. There may be room for one or two more if they're very cost effective. On the HREE side, four or five deposits might saturate the market. Out of that list of 56, I suspect no more than 10 would find the market share to get into production. Anybody who enters the market after that will have to compete on price and knock out existing producers.
TMR: What's the name of the game now in this space? Part of the game has to be financing, but what else?
Alex Knox: Metallurgy. In many cases, the metallurgy is based on assumptions that may no longer be valid. Some of these companies have been working on the metallurgy of their deposits since 2009. Since 2009, some companies have changed their processes to take advantage of advances in filtration technology.
TMR: Will other companies use the metallurgy to extract as much of the REES as you can and coproduce the byproducts that will add value to the bottom line?
Alex Knox: I would hope so. Granite-based HREE deposits can be quite treasure troves of other minerals: niobium, tantalum, uranium, even thorium. There are lots of little cash registers in these deposits. If they can be extracted and marketed profitably, they could add substantially to the revenue from the same amount of ore. That is nothing but great for the bottom line.
The idea of thorium reactors is getting a lot of play in the nuclear industry. To date, byproduct thorium has been a detriment. If it could be sold for use in a thorium reactor, it would be a real benefit.
TMR: If you were an investor with $100 million to invest in the REE space, how would you deploy it among those equities and what company characteristics would you look for?
Alex Knox: I would certainly go toward the HREEs or look for an LREE producer with significant byproduct credits to ensure another revenue source.
There are substantial opportunities in the sector once you we see who has the upper hand in terms of metallurgy and who can keep costs down and revenues up. The prices of the HREE producers are so depressed now that the companies – maybe as many as three of them – that get into production will be profitable investments in the long run.
TMR: What are the most dramatic changes investors should expect in this space over the next 6 to 10 years?
Alex Knox: It is a given that you will start to see major western REE producers. If a consistent supply of rare earths causes a rise in demand, there will be space in the market for additional producers. That may spur exploration.
Exploration for rare earth deposits has been in the doldrums for the last couple of years. Many of the deposits we've been talking about are 30-40% HREEs. That leaves a substantial quantity of LREEs that will have to be gotten rid of. Neodymium is easy to sell because there's a demand. But the deposits will also produce substantial quantities of lanthanum and cerium, which are not in short supply at all.
A couple of recently announced deposits contain ore that more than 90% HREEs. If these get to production, they will be producing exactly what the marketplace wants and none of the stuff that's in oversupply.
TMR: Do you have a parting thought or two for our readers?
Alex Knox: There is very little news in the REE sector now because everybody's doing their metallurgical testing, their optimization. It's not a very exciting time in the rare earth space because there's not much exploration. Companies are hunkered down to boost the value of their products and lower their capital costs.
In the next six months, I expect to see a real shakeout as companies release amended PEAs, prefeasibility studies and feasibility studies across the REE space. That is when smart investors will be able to look at the numbers and pick out the winners. At these depressed prices, there will be substantial profit potential when the winners and losers emerge. This is a good time to keep your eyes open and sharpen your pencil to crunch some numbers.
TMR: Alex, thank you for your time and your insights.

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