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Rare
earth elements have made possible improvements in everything from smart
phones and plasma televisions to clean energy technology. In this exclusive
interview with The Critical Metals Report, Jason Burack, independent investor
and cofounder of Wall St. for Main St., and Kevin Kerr, commodities trader
and president of Kerr Trading, share the names of the rare earth element
companies to watch as the market grows.
Companies
Mentioned: Avalon Rare Metals Inc. - Commerce
Resources Corp. - Great Western Minerals Group Ltd. - Greenland
Minerals & Energy Ltd. - Lynas Corporation - Medallion Resources
Ltd. - Molycorp Minerals - Neo Material Technologies - Quest Rare
Minerals Ltd. - Rare Element Resources Ltd. - Stans Energy
Corp. - Tasman Metals Ltd. - Ucore Rare
Metals Inc.
The
Critical Metals Report: The rare earth element (REE) space
is the most complicated space in the mining and metals sector. Mining these
elements is complex, often involving permitting and infrastructure issues.
Once mined, separating REEs to high manufacturer
purity levels is even more complex. Then selling the isolated REEs often
involves highly specialized marketing. Why should an investor place money in
the REE space?
Jason Burack: REEs have an amazing amount of innovation upside right
now. Because of the innovations coming down the pipeline, the market has the
potential to exhibit an annual double-digit growth rate, which offers far
more upside than most other commodity sectors. It's an amazing growth
opportunity for investors because the REEs are going to play an important
role in making high-end technologies efficient and also in supporting new
innovations. In new high-end technologies, REEs are the secret sauce.
Kevin Kerr: These are the metals of the future. There are applications
with these metals that we can't even conceive of yet. It's very exciting to
be involved in these elements. I think part of the benefit of REE mines is
that they are limited. There are few players out there that really have all
those elements and are innovating. The ones that do have all the pieces in
place offer good opportunities for investors. There's always risk with
anything new, but the risk/reward balance is very good in this sector.
TCMR: Can you comment on some of the recent innovations?
KK: For years, REEs were just wasting away; they were not really
considered a good investment until engineers realized they were vital to some
of the things we use every day—everything from specialized glass to
green energy technologies and special batteries to super magnets. The list
goes on, including developing technologies like water purification systems,
which I believe Molycorp Minerals (NYSE:MCP) is exploring. Prices have
exploded.
JB: The primary use for REEs for a long time was the europium in color
TV sets. Molycorp, which was supplying much of this demand, had decades'
worth of used tailings sitting around doing nothing. The Chinese saw the
potential of this market and spent a lot of time and money to build out uses
for the other REEs mined alongside the europium.
TCMR: The United States and Mexico have filed a Memorandum of
Understanding with the World Trade Organization over China's protectionism
regarding REEs. China controls about 95% of the world's REE supply today. The
Chinese government increased tariffs and reduced exports, while cracking down
on illegal miners. This will further limit the supply and tighten their grip
on prices. Do you think the U.S. and Mexico are going to get anywhere by filing
complaints against China? Or are we just going to have to wait for another
supply of REEs to come to market?
JB: I would prefer a free market solution to government intervention,
but REEs are not a free market right now. China has
a monopoly on supply and processing, but the government seems to be willing
to reduce control. What China cares most about is the high-end value chain
products because they saw what oil processing and related innovations did for
the U.S. economy. China cares most about the higher value-added product jobs.
That is why they are limiting export. They want the manufacturers to come to
them.
As a result, you are going to see these other deposits, like Mountain Pass,
coming back online. You are going to see Lynas
Corporation's (ASX:LYC) Mount Weld and Great Western
Minerals Group Ltd. (TSX.V:GWG; OTCQX:GWMGF) come online. The supply
problems, at least in the light rare earth elements (LREEs), will start to
resolve themselves over the next couple years. The problem with the heavy
rare earth elements (HREEs) is in supply. China is going to guard their
higher-end jobs because they want that value-added industry.
KK: China certainly has a monopoly on HREEs. The question is how long
will it take to build the next HREE processing facility outside of China? The
answer is a long time, mainly because of environmental and regional problems.
Also, who's going to partner up to build this facility? The red tape, whether
it's in the EU or the U.S. or Mexico, is far more extensive than it is in
China. They are years and years ahead of us in the game of producing HREEs.
TCMR: Kevin, you've spent 23 years as a commodity trader. What does
that experience tell you about the REE space? And what's the path for
investors to make money here?
KK: This is one of the opportunities that a
trader will see only once in a lifetime. A lot of people say, "This is just
a bubble." I don't agree. I've seen many contracts and future markets
come and go, but with REEs, it's different. These are vital commodities that
we are all using every day. We don't want to lose our ultra-light cell phones
and go back to the Gordon Gekko–style phones with the big battery.
These things are only going to be more in demand, especially as the world
population grows.
Investors can see it as a monumental opportunity. There's certainly risk, and
that's important to stress. Anytime you're trading in something new, you have
to look out for those risks. But ultimately these markets are going to be
some of the leaders in the 21st century.
JB: Because of the innovation upside as more people switch to newer
smart phones and to alternative energy technologies, as the military becomes
more efficient with less manpower and more unmanned vehicles, REEs play an
important role. And the REEs market can grow a lot per year as the pie gets
bigger with new innovations.
TCMR: You suggest in your Dragon Metals Report that three
metals reign supreme among REEs. What are those and what are their primary
uses?
JB: Well, if I was rewriting the Dragon Metals Report today I
would actually expand the three to six: three lights and three heavies. The
number-one LREE is neodymium, which is used in the neodymium-iron-boron
magnet, a permanent magnet technology. Neodymium-iron-boron magnet technology
has allowed for miniaturization of a lot of high-end electronics. It has
literally made everything smaller, thinner and lighter. Consumers just love
the fact that their iPad is so thin now. People talk about the operating
systems and the processing speeds and all their applications, and they love
them. They wouldn't have any of this without the neodymium-iron-boron magnets.
The next two are lanthanum and cerium. Lanthanum will have a
humongous industrial demand increase in petroleum refining. Oil and REEs are
linked in this aspect. You will see a humongous increase as lanthanum is used
very heavily in the refining process to crack heavy sour crude oil. The other
one is cerium, which is used in car catalytic converters. Also, you're going
to see Molycorp bring on this XSORBX water filter, which combines cerium and
nanotechnology. It's the only filter that's capable of removing pathogens and
pharmaceuticals that the modern municipal water filtration systems cannot
remove.
The heavies tend to be more prevalent on the Department of Energy's Critical
Metals Strategy list, so they have even better supply/demand fundamentals than
the lights. Dysprosium is used in a trace amount in the
neodymium–iron–boron magnet, but the magnet wouldn't be as good
as it is without the dysprosium in it. Dysprosium is not very common in terms
of the percentage amounts in most REE deposits. It's the most critical on the
entire Department of Energy's Critical Metals Strategy list because it's rare
and it's very important to clean energy. The other couple of heavies that
people should learn the names of are terbium and europium. Terbium is used in
compact fluorescent light bulbs as well as in smart phones. Europium is going
into smart phones too.
TCMR: In many cases REE production in China has caused vast
environmental degradation. Some Chinese farmers can't safely plant crops near
the mine sites, and drinking water in these areas can sometimes be deadly.
Nonetheless, Molycorp plans to mine 20,000 tons per year of REEs in
California, which is not considered a "mine friendly" state. What
makes you think Mountain Pass will be permitted?
JB: Molycorp is using innovative technologies in their processing
facilities now. Yes, California does have environmental concerns, but
California wants to transition to clean energy and the state has been
subsidizing that. Molycorp has to demonstrate that it can operate in an
environmentally responsible way and that they can do it at scale. The company
has the capital and the know-how to be able to do it. It's already a
previously mined ore body with decades of data, so that's an advantage. The
infrastructure is there.
There is new technology to process the REEs safely and do all the refining.
It's going to cost a little bit more money up front, but Molycorp management
is saying their production costs are going to be even lower than China's
costs. It'll be an impressive feat if Molycorp management actually delivers
on these promises.
TCMR: It's possible that these companies spending hundreds of millions
of dollars to bring their mines into production and build the facilities to
properly separate those metals from one another could be jeopardized if China
opens the tap, floods the market with heavies. How are companies going to
deal with that?
JB: We don't have a free REE market. Governments will probably buy
REEs for a secure supply to protect REE miners bringing production online. In
fact, Japan, the U.S. and the EU have all recommended that their governments
start stockpiling a safe and secure REE supply to
protect themselves from the Chinese monopolizing the industry.
KK: This is a real concern. China could dump pretty much anything on
the market, and they do once in a while. They're shrewd traders. No one can
say for sure what they will do, but the stockpiling that's gone on will have
some effect as well.
TCMR: In early August, we witnessed a massive selloff of REE names. On
August 8, names like Quest Rare Minerals Ltd. (TSX.V:QRM; NYSE.A:QRM) and Avalon Rare
Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) fell at more than 10% and
13% respectively. Are these so cheap now that it's time to fill your boots?
JB: If I was building a model REE portfolio and I had to concentrate
the majority of my money into three companies, they would be Neo
Material Technologies (TSX:NEM), Molycorp and Great Western Minerals.
Then I would sprinkle some of the other top juniors like Quest, Avalon, Tasman Metals
Ltd. (TSX.V:TSM; OTCPK:TASXF; Fkft:T61), Stans Energy
Corp. (TSX.V:HRE) or Ucore Rare Metals Inc. (TSX.V:UCU; OTCQX:UURAF). Lynas
and Rare
Element Resources Ltd. (TSX:RES; NYSE.A:REE), which might have some more
heavies in the deposit, are wait and sees.
Investors really need to be discriminatory with their capital. If they are
going to put a model REEs portfolio together, I think the heavy concentration
should be in Neo Material Technologies, which is already profitable. They
don't have to worry about the prices of the supply, and they make a
value-added product so their profit margins are safer. Molycorp has the
funding in place already, and it already knows its ore body. I think Molycorp
and Great Western Minerals Group Ltd. are going to end up consolidating the
sector with some of these other juniors.
TCMR: You've said "for this industry to flourish over the longer
term it will have to consolidate." What are consolidators going to be
looking for in companies that are just below them on the food chain?
KK: The race is on to figure out who's going to team up and create the
next HREE processing facility outside of China. Everyone is looking for who
has the cash, who has the supplies and the infrastructure. We've already seen
some consolidation in the last nine months, and we're going to see a lot
more.
JB: If I was looking to consolidate the industry, I'd stick with my
vertical integration strategy, focus on those making the higher value-added
products. There aren't a lot of people around that have the technical
know-how to do it. And there aren't a lot of these facilities in the world.
Only a handful of facilities exist outside of China.
I think one of them in France just sold for a big amount of money. Great
Western Minerals has a couple of them and so does Neo Materials Technologies.
So, if I was looking to acquire and consolidate the space, I think Molycorp
is going to end up being the control stock here, like PotashCorp (TSX:POT;
NYSE:POT) has become in the fertilizer industry. I think Molycorp will go
after Ucore for some of the heavy deposits and then the processing facilities
like Stans Energy. Then maybe they'll go after some other processing
companies or do a joint venture with Neo Material Technologies further up the
value chain.
TCMR: Ucore was just given "priority permitting assistance"
from the U.S. Department of Agriculture. What does that mean for the stock?
JB: Ucore is going to be a big winner. I project the supply crisis in
LREEs will be solved by the 2014-2015 timeframe depending on what true demand
turns out to be. Then only the heavies will be in true supply deficit/crisis
mode. For a company like Molycorp, which is going to be a lower cost
producer, that's going to be fine. Some of these other juniors that are
planning on bringing production online from 2015 to 2017, primarily with
light and very little heavies, are going to see a lot of trouble. Ucore has
an infrastructure advantage, so they can be online and producing probably
before 2015, probably the end of 2013 if everything goes according to plan.
TCMR: What about Ucore's Bokan Mountain in terms of its HREE versus
LREE content? Is this the kind of play that might suit a
Molycorp?
JB: Yes, Bokan has higher heavies than lights compared to some of the
other deposits. The infrastructure advantage is so good that the capital
expenditure (capex) to get Bokan Mountain back into production is going to be
minimal compared to some of these other mining projects.
TCMR: Molycorp, Lynas and Great Western are projected to be the first
REE miners to reach production. But what are some companies that you think
could surprise you and our readers?
JB: Commerce
Resources Corp. (TSX.V:CCE; Fkft:D7H; OTCQX:CMRZF) and Medallion
Resources Ltd. (TSX.V:MDL; OTCQX:MLLOF) could surprise along with Greenland
Minerals & Energy Ltd. (ASX:GGG).
Greenland is a developing country. Most of the country's revenue is coming
from fishing and it is just starting to develop natural resource plays. If it
is done environmentally responsibly, I think there will be less red tape in
Greenland. And the deposit in Greenland is absolutely massive. The question
is about the infrastructure because it's a developing country.
In general, though, I wouldn't risk putting a lot of capital into the plays
below the cuff, the top two tiers of companies I suggested in my model REE
portfolio, because the supply issues are going to solve themselves,
especially in the lights, by 2014 or 2015.
TCMR: Kevin, what are you hearing about Stans Energy in Estonia and
about the feasibility study on the Kutessay II project in the fourth quarter?
KK: It depends on who you talk to and when you talk to them about
Stans. The concerns are legitimate about how much control Russia has over
Stans and what they want, what the facility's condition is, et cetera. I'm
holding my judgment until I see it for myself. They are certainly one to be
watched.
JB: The positives include a tremendous infrastructure advantage. Stans
has the processing facility there; it just needs to be renovated, so the
capex is not going to be absolutely massive. The company can probably keep
the capex below a couple hundred million bucks. That's a big advantage. And,
it also has a technical advantage because the people who used to work at the
facility still live around there. The company also has an innovation deal
with a renowned Russian laboratory that specializes in REEs to separate them
and innovate with them.
On the negative side, the company's total grade of the ore body is low. That
means the margin for error is very low on the mining side. Stans will have to
make up for it on the processing side. And then you have the geopolitical
risk on top of that. Investors are going to have to weigh these risks and
rewards to determine if they are comfortable with Stans.
TCMR: Are you following any other companies that you think investors should
be interested in?
JB: I think the most undervalued one right now is Great Western
Minerals. It just announced a breakthrough deal with an already established
and successful Chinese REE processor to team up to build another REE
processing facility in South Africa closer to its Steenkampskraal Mine. Great
Western Minerals is the only non-Chinese future REE miner to announce such a
deal. It adds a lot of credibility to the company.
TCMR: How can people get your Dragon Metals Report and find out
more about you both?
KK: We actually have our own website, dragonmetalsreport.com, where
people can pick up the report and watch a video interview. They'll be able to
see samples of the report before they purchase it.
TCMR: Do you have some parting thoughts on the REE space before we let
you go?
KK: I really believe this is a once-in-a-lifetime trader's
opportunity. I've never seen a market that has so much innovation potential
that we can't even conceive of yet. I probably won't see a market like it
again in my lifetime.
TCMR: Thank you for your insights.
Kevin Kerr has had over two decades of intensive industry
and trading experience as a floor trader and broker as well as an OTC
derivatives broker in New York and London. He travels the globe in search of
resource opportunities and is the author of A Maniac Commodity Trader's
Guide to Making a Fortune: A Not-So Crazy Road Map to Riches, which was
published by John Wiley and Sons. Kevin has appeared on Cavuto on Fox, Kudlow
& Co. on CNBC, The Daily Show on the Comedy Channel, Fox Business News,
NBC, ABC, CNN, and many more. He has acted as an analyst and trading advisor
for publications at prestigious publishers like Weiss Research, Dow Jones
Newswire, and Agora Financial. Kevin's website, www.kerrtrade.com,
offers visitors his blog and video blog, media page and events schedule, and
political and economic commentary.
Jason Burack is an investor, entrepreneur, financial
historian, Austrian School economist, and contrarian. Jason co-founded the
startup financial education company Wall St for Main St, LLC, to try to help
the people of Main Street by teaching them the knowledge, skills, research
methods, and investing expertise of Wall Street. You can also find Jason's
work at his blog website at www.jasonburack.com.
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