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Chinese Tungsten and the REE Quandary

"Mine more, lose profits" is a risk for byproduct output of rare earth elements...
CHRISTOPHER ECCLESTONE is a principal and mining strategist at Hallgarten & Company in New York, as well as director of Mediterranean Resources, a gold mining company listed on the Toronto Stock Exchange, with properties in Turkey.
Holding a degree from the Royal Melbourne Institute of Technology, and formerly an economic think-tank, Argentine equity and corporate finance analyst, Ecclestone is now focused on rare earth elements (REEs), targeting what he believes are the right-sized projects with the right REEs, as he tells The Gold Report here...
The Gold Report: In a March Hallgarten & Co. research report, you noted that rare earth elements (REEs) had "come out of hibernation". Did they wake up happy or grumpy?
Chris Ecclestone: The REEs have run hot and cold since 2009. They had a run for about a year, went off the boil, then had another run.
This all coincided with the worst overall mining equity market in 10-15 years. Thus, REE stocks were doubly out of favor.
Beginning this year, there's been a better vibe in the mining markets in general. REEs have started to pick themselves up off the floor. They look like a viable investment alternative again. However, I believe that we need at most 20 REE stories. Right now, two are in production. Another four or five will get into production over the next few years. We probably don't need the rest. There will be a race to get into production. If you can't win that race, you might as well pack up your tent and go home.
TGR: Do you see higher REE prices? Has the sector bottomed?
Chris Ecclestone: Prices have bottomed, yes. Some people remain bearish on lanthanum and cerium, which are in massive oversupply. Those prices may go lower. However, I believe it's not in the Chinese interest to see those two metals go lower. Lanthanum and cerium make up the bulk of what China produces in the REE space, but they're not the value-added metals. Metals like Europium may enjoy better prices, but they're a small part of the whole REE complex.
China's bread and butter comes from Bayan Obo, which is not a rare earth mine at all. It's an iron ore mine that produces REEs as a byproduct. The Chinese can't stop producing REEs at Bayan Obo because they'd have to stop producing the iron ore as well.
One of the intriguing things about REEs is that you can't just take the ones you want and leave the others behind. You have to go through the whole chemical extraction process to get those with the biggest market or the best price. You can't send a metal into the tailings pond because it doesn't have a good price today. You have to do them all.
You're stuck in a reverse economy of scale; the more you process, the more unprofitable it could be.
TGR: Given the margins on producing a concentrate or even an oxide, is vertical integration the only way to make money in the REE space?
Chris Ecclestone: The ideal scenario is to be vertically integrated. That is a bit of a challenge for some of the juniors.
Like silicon technology, the mining is not the sexy part of the REE business. No one would say that digging silica out of the ground is the quality end of the tech business. The quality is at Intel's factory, where the silicon chip is put on the circuit board. The mere insertion of the word "rare" in the name was a marketer's dream and has ended up being an investor's nightmare. They're not rare; they're as common as dirt.
TGR: The World Trade Organization (WTO) recently ruled in favor of the US in a trade dispute over Chinese exports of REEs, tungsten and molybdenum. Does that change the playing field for junior REE development companies?
Chris Ecclestone: No, because it won't have much effect on the REE market. I recently attended an antimony conference, where we heard about China's quota on antimony exports and the fact that it never reaches its quota. Yet, according to the official statistics of individual European countries, their individual imports of antimony from China are higher than the entire Chinese export quota. Chinese export quotas do not affect daily life in the REE sector. They will be smuggled out; they will be walked across the border and become Vietnamese REEs.
I think the Chinese are more interested in controlling the prices of REEs than the supply. Call me conspiratorial, but I think that the Chinese sunk the REE prices in 2011 after having pumped it up. They did that because there was a sudden proliferation of REE properties out of nowhere in the west. The Chinese thought, oops, we've shot ourselves in the foot here by attracting all these additional mines. If we let them run down the track with these high prices, five years from now there will be massive overproduction. At that point, the Chinese sunk the prices.
The REE market is easy for the Chinese to manipulate because they have the stockpiles. In 2011, the Chinese released a deluge of product. That sank the price and 75% of the listed REE equities into oblivion. I think the Chinese want to see the prices rise again, but only when they can be confident higher prices won't trigger another surge of new REE companies.
TGR: How is China's role today different from its role in 2010-2011, when the sector exploded?
Chris Ecclestone: It plays essentially the same role now. In 2011, China was pretty much the only game in town. India, Malaysia and Brazil had small amounts of production. 
TGR: If China is the kingmaker and in control, why would an investor wade into these waters?
Chris Ecclestone: There are niche categories. One of them is strategic metals. In 2010, you heard a lot about the perception that the West had made itself too vulnerable to Chinese supply of the strategic metals that the western defense establishment needs. Here we are four years later. China is as threatening or as non-threatening as it was back then.
Will the US do anything about it? So far, not much has happened. The US needs to say, "We need a big stockpile of yttrium, of terbium and samarium and other scarce REEs." Ironically, when you're talking about rare earths used for, say, night vision goggles, the US defense establishment is probably buying the rare earth oxides that go into those from Japan or China. Meanwhile, Japanese are dependent upon the Chinese. Many of the Japanese plants for processing REEs are being forced to move to China because the Chinese have said, "You're not getting it unless you move your plant over here." They're almost like captives of the Chinese and the Japanese don't like that. The US doesn't seem to care.
TGR: Is ilmenite your favorite mineralization to host REEs?
Chris Ecclestone: Ilmenite is not my favorite. It is a titanium-driven product. If the price of titanium goes to hell in a hand basket, some ilmenite projects would follow. The danger some face is dependence on what happens with titanium demand; the REEs are only a byproduct.
I love xenotime because you get yttrium along with it. I like yttrium because of its high-tech uses in anything that must be coated to protect them from very high heat, like jet engines. It's a very interesting strategic metal.
TGR: The WTO ruling also covered Chinese tungsten. Can you update our readers on the supply/demand equation for tungsten and your investment thesis?
Chris Ecclestone: One of the main uses for tungsten is the filaments in electrical light bulbs. The shift toward low energy-consuming bulbs reduces tungsten demand in that industry.
It's also used for hardening, including machine tools. China wants to muscle in on the traditional European strength in machine tools. That means using more tungsten, which is what led to the Chinese export quotas on tungsten. Those quotas frightened a number of European companies that depended on Chinese tungsten.
TGR: What should investors expect in 2014 and beyond in the REE space?
Chris Ecclestone: I compare the REE space to a science-fiction movie, where the spacecraft crew is cryogenically frozen. Some of the crew will defrost the way they're supposed to, but others will be lost.
In the REE space, it will become clearer over the next 12 months which five or six projects are most likely to survive. Many of the other REE companies will change their names and become totally different companies seeking other metals in other countries.
I don't think there will be a second wave of new REE stocks. This is the universe we have, and it's getting smaller, not bigger.
TGR: What's your advice to investors Chris?
Chris Ecclestone: Diversify. If you want to take on REE stocks, buy two or three to mitigate risk.
TGR: Chris, thanks for your time and your insights.

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