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Rare Earth Metals: Very Different from Gold Mining

Rare earth miners need to know where their product will end up...

A RARE EARTH miner's route to success differs greatly from that of a Gold Mining firm.

In this interview with The Gold Report's Critical Metals Report, Byron King, editor of Agora Financial's Outstanding Investments newsletter, explains what makes this market distinct for producers and investors alike.

The Critical Metals Report: No year has brought higher highs and lower lows to the rare earth space than 2011. Do you expect the same volatility in 2012? 

Byron King: The short answer is yes. In this market, anything is possible. In 2011 we saw highs toward the beginning of the year because there was a lot of enthusiasm for the technology metals space. We experienced lows towards the end of 2011 because there was a general market selloff. It didn't matter if you were stock-picking. The falling tide sucked everything down. 

Looking ahead into 2012, the good plays are going to see brand-new highs. But along with that good news for a select number of plays, we'll likely see a shakeout of companies that haven't put their business plans firmly on the rails. 

TCMR: There was a time when you could plug in a rare earth land package into a shell company, change the name to something that included the words "rare earths," conduct an initial public offering and watch the share price climb. Those days seem to be over. It's about survival right now. Is this just the natural evolution of this subsector, or is it dying?

Byron King: The non-Chinese rare earth sector is not dying. In fact, the non-Chinese rare earth sector is established, and now it needs to survive. It needs to grow. It needs to prosper. The world cannot afford for the non-Chinese rare earth sector not to make it. 

The rare earth space is at the point of separating out the stock promoters from the company builders and serious managers. The broad economy, and of course the stock market, needs company builders with strategic vision. 

Rare earth miners are distinct from gold miners, who don't really care what ultimately happens to the gold they produce. That is, if you mine gold, it could wind up in Gold Bars, Gold Coins or a gold dental filling. But rare earth miners need to know where those rare earth atoms are going to wind up. Are they going to wind up as zeolite catalyst in an oil refinery, or as part of a battery pack of an electric car, if not a battery in a cell phone or a computer? The rare earth miner is putting the initial raw material into an entire, distinct production chain that needs to be understood from the refining and processing to the end user. 

TCMR: If the rare earth element (REE) sector is to succeed, REEs will likely need to find their way into more everyday products. However, without a readily available and relatively inexpensive supply of REEs, that doesn't seem likely to happen. 

Byron King: It's an unfortunate fact that the problematic supply situation and price spikes of the past two years or so caused an awful lot of research and development (R&D) for future applications to be defunded. Without assured supply, many companies don't want to do R&D for applications that can't get basic inputs. 

At the same time, there's a lot of talk about substituting or engineering around rare earths. That is possible in some cases, but there are certain things for which the atomic properties of a given rare earth atom are utterly unique. People are not going to stop using rare earths in these kinds of apps. 

When the user community sees a more assured supply coming downstream, they'll be more confident in using rare earths in larger quantities. I do think people are going to find more and more uses. There's a lot of development for rare earth applications left to be imagined. Even if we stopped dreaming up new ideas for rare earths, just the inertia of where we already are would take us quite a ways.

TCMR: Do you believe companies have to produce rare metal oxides to make a profit? Or can they make money by producing a rare earth concentrate, which would sell at a much lower price?

Byron King: As with pretty much all mining, the cost per ton is important. There's room for a low-cost company to produce rare earth concentrate and sell it into a more commodity-oriented market. It's going to be tricky. Success would be very company and product specific. 

The companies that are going to make the serious gains and profits will make the right kind of deals with the midstream and downstream processors, refiners and end-users.

TCMR: What are the right kinds of deals?

Byron King: It depends on the rare earth. For example, if a company wanted to sell a light rare earth (LREE) like lanthanum, it would need to get hooked up with the right players in the petroleum refinery catalyst or battery markets.

When it comes to the heavy rare earths (HREES), the highest profit margins appear to be within the lighting phosphors and high-end magnets. 

However, companies have to take the rocks on the mining claims as they find them. They can't just dissolve everything in sulfuric acid and sell the liquor to somebody else—that's not going to work. The chemical application has to be specifically geared toward that particular end-use whether it's going to be a lighting phosphor, magnet powder or battery application.

TCMR: What about the critical metal graphite?

Byron King: I'm fabulously bullish on graphite. It's the next industrial revolution. Graphite is going to become a part of people's lives in a way we can barely conceive. A lot of people's knowledge of graphite begins and ends with the No. 2 lead pencil, but there's graphite everywhere.

In fact, I am speaking to you over an iPhone. The only reason that it's not burning my hand to shreds is that there is a graphite membrane that dissipates heat from the battery. Graphite doesn't burn until 3,000 degrees Celsius, which is above the melting point of steel. If wire bundles or structural steel is wrapped inside of graphite membranes, it's essentially fireproofed.

The applications that we're seeing for graphite are mushrooming, from the iPad to the Boeing 787 Dreamliner, to other mundane but critical applications like fire retardants and suppression systems. 

And that's just plain graphite. That doesn't get into the other angles of graphite, such as carbon nanotubes, which are long, skinny, rod-like pieces of carbon that are immensely strong. A half-inch-thick piece of plastic impregnated with carbon nanotubes has the strength of six inches of armor plate. 

And then there's graphene, an incredible leap of modern technology. Graphene can be used in computer chips as opposed to silicon. This makes the chips smaller, lighter and more power efficient and heat absorbent. 

Silicon's uses over the past 50 years have grown, but we are approaching the atomic limits of what can be done with it. The next step is graphene, and the chip-making industry knows this. It's a quiet revolution, for competitive reasons. But it's a revolution in the making. 

Also, I should add that graphene could be added to steel to make a super metal. Graphene-steel could be 200 times stronger than what we know today. These are just some of the technology leaps that are coming down the road.

TCMR: Do you have any parting thoughts for us on the critical metals space?

Byron King: I'd like to emphasize the difference between mining traditional metals and the new technology metals. This is not your father's mining biz anymore. Today you need a strong downstream focus, including strong business and technical relationships with the processors, refiners and end-users. 

In examining companies, investors should look at the entire process chain all the way down to the consumer product that is manufactured. If the guy who owns the mine and the mill up in the mountains doesn't have a relationship with the midstream processors, downstream refiners and end-user manufacturers, it's just not going to work. That's one of the great warnings that I give to anybody who's thinking of jumping in. Even then, this is a difficult space in which to navigate. But the up-side could be phenomenal. 

TCMR: Thank you.

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