The Mining Report: In
early January on your Technology Metals Research blog you wrote, "China is still as much in charge of
its rare earth elements (REE) supply as it ever was," after China
abolished export quotas in favor of an export licensing system. What is the
Chinese government's goal here?
Gareth Hatch: It's twofold. One is to get
control of its entire REE supply chain, but it's also about generating more
revenue. China is going to abolish REE export tariffs, which is a requirement
of the recent World Trade Organization (WTO) ruling, and that will happen in
May. By doing so, China is saying, "We'll sort of play by the WTO
rules." But Chinese officials are now talking about replacing tariffs
with a value-added resource tax.
Another
noteworthy aspect of these measures is that a considerable percentage of REE
exports from China are smuggled out of the country and that means lost tax
revenues. China is trying to address those leaks. The new system requires
that a license be issued on a shipment-by-shipment basis, but it's not quite
clear yet what set of rules and regulations are applied internally or what
paperwork is required. That was likely reflected in the lower-than-expected
REE export numbers in January.
TMR: There's also some government-mandated
consolidation happening in China's REE space. What is happening and why are
those changes important?
GH: This has been going on for well over
a year. Chinese authorities are consolidating the industry into six
conglomerates, referred to as the "five plus one." The one is the
large entity in northern China that used to be Baosteel, now called China
Northern Rare Earth Group, which controls most of the country's light rare
earth production. There are five other entities into which companies are tucked
or subsumed. Basically, it's to gain further control of the industry by
making the managers of the largest companies responsible for the activities
of the companies further down the supply chain.
In the
last year China has closed many obsolete facilities in an effort to modernize
and improve efficiency, as well as reduce illegal mining and smuggling. China
is putting the groundwork in place to produce these materials, critical
materials, in a way that prepares for higher prices. I would argue it's laid the
groundwork for the long-term survival and prosperity of the Chinese rare
earth industry in an era when pollution and environmental issues are growing
more significant there.
TMR: What's next?
GH: The biggest question is: What happens
as we transition away from a tariff, which until May could be anything from
15% to 25% on top of normal Chinese prices, to a value-added resource tax?
All things being equal, prices of REE exports should stay about the same—it's
the internal price that will go up because those end-users weren't used to
paying that tax. And what will the impact of that be?
Once
that's smoothed out, all signs are that prices will start to increase
somewhat, but REE prices should in theory be the same whether you're using
them in China or you're using them outside, with perhaps one or two
exceptions like dysprosium and terbium. The rare earth industry in China is
rapidly turning into supply chains that produce at a much higher standard for
pollution and environmental control, and that means that there's also a
potentially level playing field.
TMR: What's the likely impact on rare
earth equities of these measures committed to by the Chinese government?
GH: There are two potential impacts, both
of which, for companies trying to develop capacity outside of China, work in
their favor. One, any time prices are likely to increase there are two
potential reactions. If the prices go crazy—and we witnessed that in
2010–2011—demand goes down. But if prices go to a level just above the cost
of production where there's a floor on the price that takes into account
environmentally sound processing, then it becomes easier in theory to compete
if you're going to produce REE in an environmentally sustainable manner. This
should benefit the two projects that are up and running outside of China and
the others that investors are most interested in.
Then
there is the issue of internal Chinese demand. Are the Chinese GDP growth
numbers real? Even the most conservative predictions suggest that there will
continue to be increased demand for the high-tech consumer goods that require
REEs. The theory is that demand for high-tech goods will increase REE demand
inside of China, which may affect the ability to source REEs outside of
China. For the first time in a couple of years, the picture looks more rosy
if you're in the rare earth sector outside of China.
TMR: Do you see a day when China will be
a net importer of rare earths?
GH: It's possible for certain rare
earths. And there is a possibility that companies outside of China could
produce REEs at prices that compete with the Chinese. One sign of that shift
happened when Tantalus
Rare Earths AG (TEATF:OTC; TAEN:GR) announced a joint venture with
Shenghe Resources Holding Co. Ltd., a Chinese rare earth company with the
third largest mine in China. Tantalus has a REE project in Madagascar and
Shenghe basically plans to buy concentrate from that future mine to produce
oxides in China because that could be more strategically advantageous than
continuing to mine REE deposits in China.
TMR: China is obviously the biggest
ongoing narrative in the REE space, but another key issue is processing and
processing costs. Are there two or three promising processing technologies
that you can tell us about?
GH: There have certainly been
announcements in the last several months relating to new processes that are
being evaluated to separate rare earths. Ucore Rare
Metals Inc. (UCU:TSX.V; UURAF:OTCQX) is working with a company in the
U.S. on something called Molecular Recognition Technology (MRT), which
purports to selectively home in on rare earths in solution and get them out
without solvent extraction. I'm not a fan of 'science via press release.' It
remains to be seen how it all works.
Another
one is Texas
Rare Earth Resources Corp. (TRER:OTCQX), which is trying to use something
called continuous ion exchange. That is a combination of the well-established
ion exchange columns on a continuous processing basis—with the goal of not
having to do laborious solvent extraction. And Rare Element
Resources Ltd. (RES:TSX; REE:NYSE.MKT) appears to have developed a process
that produces high-purity rare earth concentrates with no thorium or other
deleterious elements. The purity is as high as four or five nines
(99.99-99.999%), which is really quite remarkable.
TMR: Your company, Technology Metals
Research, is working with the U.S. Department of Defense (DOD) on processing
technologies. Please tell us about that.
GH: Technology Metals Research is
overseeing a project that's being funded by the Army Research Laboratory,
which is part of the DOD. My other company, Innovation Metals, is a project
participant and has a lab-scale solvent-extraction pilot plant in operation
in the outskirts of Toronto, Canada, using proven technology and process-flow
diagrams to optimize processes for the separation of heavy rare earth concentrates.
The project is also looking at three new processes, two of which are based on
the same chemistry as solvent extraction but with reaction rates that are
orders of magnitude greater than existing methods.
The
initial results are promising; these processes could considerably speed up
processing, which would ultimately reduce the hardware footprint and capital
costs for a commercial facility. The third process uses biology as a means of
producing rare earths. The idea is to use biological entities to precipitate
pure metals and oxides.
TMR: Are there plans to commercialize
this technology?
GH: Yes, commercialization is the goal.
The first round of funding is to verify the proof of concepts and compare
them to the solvent extraction that Innovation Metals Corp. is doing. The
funding from the Army Research Lab is part of an overall initiative to help
develop a domestic supply chain for critical rare earths. It's no good having
mines in the U.S. or Canada producing rare earths if you can't turn them into
useful products here.
TMR: Technology Metals Research maintains
the Advanced Rare Earth Projects Index. What are some companies on that index
with news worth sharing?
GH: Tasman Metals
Ltd.'s (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE) Norra Kärr deposit
in Sweden recently completed a prefeasibility study. It's a nice deposit with
a great strategic location—it's clearly the best REE deposit in Europe. At
the end of the day you need cold hard cash to advance projects. Europe will
show its interest by investing in the project.
A chart
of Value Metrics for Advance Rare Earth Projects is available here.
TMR: What are some other companies with
news?
GH: Northern
Minerals Ltd. (NTU:ASX) recently received its environmental permits for
the Browns Range deposit in Australia and has started a bankable feasibility
study there; it just announced a nearly $50M financing deal to make that
happen.
Namibia Rare
Earths Inc. (NRE:TSX; NMREF:OTCQX) recently published its first
preliminary economic assessment (PEA) for the Lofdal REE project in Namibia.
I helped put together the market study for that report. Northern Minerals and
Namibia Rare Earths have two projects with some of the highest percentages of
HREEs. Both projects are hosted in xenotime mineralization, which has
relatively straightforward metallurgy.
TMR: Does the relatively high
distribution of HREEs in those respective deposits make it easier for those
companies to raise money for development?
GH: It makes it easier to get their feet
in the door, but the overall grade is important. If there is a lot of
dysprosium and terbium in a xenotime deposit, that is very attractive but you
can't just focus on that. Xenotime, eudialyte or other minerals that contain
heavy rare earths tend to be low-grade deposits. That then becomes an issue
of mining and production, and the cost and challenges associated with that.
You have to look at factors like overall grade, recovery rates and costs of
infrastructure.
TMR: You helped complete the market study
for the Lofdal PEA. What are your thoughts on that project?
GH: Lofdal has great rare earth
distribution and simple mineralogy. It still needs some infrastructure but it
has great potential. One thing I would look for Namibia Rare Earths to do is
to eventually expand the size of the mineral resource.
TMR: Any others?
GH: Another company on the index is Commerce
Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX), which is operating a
mini pilot plant to process a bulk sample from the Ashram REE deposit in
Quebec. Commerce has basically developed a process to produce concentrate
with a relatively high concentration of REEs. Ideally, the company would need
to scale up and show that it can do it on at least a semi-continuous basis
with a much larger sample, which means being exposed to more variability. The
company is trying to confirm that it has a process that works to produce a
viable mineral concentrate. It's an important part of any project in order to
move it forward.
TMR: You mentioned Ucore earlier. It has
a PEA on the Bokan Mountain project in Alaska. What's the next step?
GH: Its PEA is way out of date on pricing
and it's due for an update. Ucore has started on a feasibility study and it
appears that the company will have financial support from the Alaskan
government for at least part of the costs. But any decision on financing will
rely on a comprehensive feasibility study report. Ucore is hoping to get that
feasibility study done this year.
TMR: Does it have a leg up on other REE
developers given the support from the Alaskan government?
GH: There are significant benefits but we
have to be clear as to what that support is. The Alaskan government's
commitment of $145 million hinges on the outcome of the feasibility study.
Although the potential funding is conditional, it's a significant plus for
the project and other investors will see that as a positive. Of course, Ucore
has excellent support from Senator Lisa Murkowski, who is now chair of the
U.S. Senate Committee on Energy & Natural Resources.
TMR: What about other projects in
Australia?
GH: Alkane
Resources Ltd. (ALK:ASX; ANLKY:OTCQX;), which is also in the index, is
funding the Dubbo Zirconia project with nearby gold production. It's a great
idea. I had the chance to visit the deposit and demo plant in Australia a few
years ago. I've always liked that project from a technical point of view.
Alkane has the process locked in and it knows exactly what it needs to do. If
you have another project that can generate cash flow that's a great thing,
and Alkane's Tomingley gold project has been operating very well, but the
Dubbo project still needs more money than what Tomingley alone can generate.
Ultimately there are very few junior mining companies in the REE sector that
are generating revenues. I think that's a plus. It's ready to go once Alkane
has the financing.
TMR: What's the timeline for getting
Dubbo permitted?
GH: Alkane was recently informed by the
local plan assessment commission that the environmental permits have been
approved, subject to the usual conditions. I am not aware of any major
issues. Dubbo will produce not just rare earths, but zirconium and niobium,
so there's a medley of metals. Alkane will not only rely on REEs to generate
revenue.
TMR: Let's switch gears to graphite, and
graphene in particular, which is getting attention in the mainstream media.
What is real and what is hype?
GH: I'm a material scientist by training.
I've been aware of graphene since it was first produced at the University of
Manchester in the U.K., close to where I grew up. Graphene definitely holds a
lot of promise. Some of the hype is justified in light of the things that you
can do with this stuff, but it boils down to how do you produce this material
at a reasonable cost.
Second,
we have to remember that it doesn't take a lot of graphite to make graphene
into the light-technology items people are talking about. A little graphene
goes a long way. This isn't a story of tens or hundreds of thousands of tons
of graphite being turned into graphene so much as it is what is the
technology sector willing to do with it at various price points. As you lower
the cost of producing it in bulk, what windows will open? It is sometimes
hard to evaluate exactly what progress the folks working on the production
side are making. I take the news reports with a pinch of salt, but the
promise is definitely there if we can make it at a reasonable price.
TMR: What are some companies with what
you would consider the most advanced graphite projects?
GH: There's a handful that I follow on
our Advanced Graphite Projects Index. Names that come to mind include Northern
Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) in Canada with the Bissett
Creek deposit and Focus Graphite Inc. (FMS:TSX.V; FCSMF:OTCQX; FKC:FSE) with
the Lac Knife deposit In Quebec. These companies are at the feasibility study
level. They're working to determine if it is possible to turn the material
from their respective projects into battery-grade graphite.
Other
names that I keep track of are Mason Graphite
Inc. (LLG:TSX.V; MGPHF:OTCQX) with the Lac Guéret graphite project in
Quebec. I recently visited Canada Carbon Inc.'s (CCB:TSX.V) Miller vein graphite
project in Québec but it's not on our index because it does not have an NI
43-101-guided mineral resource estimate yet.
We
probably have to keep an eye on what Zenyatta
Ventures Ltd. (ZEN:TSX.V) is doing with its Albany deposit in Ontario.
And the last one I'll mention is Graphite One
Resources Inc. (GPH:TSX.V), which has the Graphite Creek deposit in
Alaska. It's a large deposit and if it can develop a good quality project in
Alaska, it could open the door for the state government and others to help
develop it.
TMR: Focus Graphite bills itself as the
most advanced battery-grade graphite project in North America. Are
lithium-ion batteries and other power cells driving investment in this space?
GH: Yes, the driver here is energy
storage. There's been a lot of buzz since Tesla Motors Inc. (TSLA:NASDAQ)
announced its plan to build a "Gigafactory" for the production of a
variety of parts and components including the lithium-ion batteries required
to power its vehicles and others. Tesla's stated goal is to source all of its
materials from North America. The production of hundreds of thousands of
vehicles per year means that we are going to build batteries using anodes
that contain graphite.
The
questions is: Will it be natural graphite or synthetic? If companies can
demonstrate that they can consistently deliver a product that meets Tesla's
needs at a cost that is competitive to synthetic graphite, they may have a
winning graphite project. That immediately puts the focus on the most
advanced projects in North America. Focus Graphite is one of those companies.
If it can scale up and do what it says it can do, it could certainly be a
contender.
TMR: 2015 will be remembered as the year
of what in the REE space?
GH: This may be the year of innovative
processes. I think we'll really start to see what's real and what isn't this
year in REE processing. Perhaps a technology will be established as a
game-changer.
The
other thing would be the reemergence of a stronger, leaner Chinese REE
sector. The REE industry in China for the last two or three years has been
all about export quotas and tariffs. But this unprecedented consolidation and
coordination is something to keep an eye on because it will affect potential
supply in ways that are positive for folks with an interest in rare earth
projects outside of China.
TMR: Thank you for your insights, Gareth.
For several years, Hatch was director of technology at
Dexter Magnetic Technologies. He holds five U.S. patents on a variety of
magnetic devices. A two-time graduate of the University of Birmingham in the
U.K., Hatch has a Bachelor of Engineering with Honours in materials science
and technology and a Ph.D. in metallurgy and materials, focused on rare earth
permanent-magnet alloys. He is a Fellow of the Institute of Materials,
Minerals & Mining, a Fellow of the Institution of Engineering &
Technology, a Chartered Engineer and a senior member of the IEEE. Hatch is
also a member of the Strategic Materials Advisory Council.
