Despite market malaise, the outlook for rare earth element demand is growing more and more compelling. China still controls a majority of the supply, but has been cautioning the world that even its reserves can't last forever. North America desperately needs to establish its own sources, but which juniors will be able to fill that need? Jeb Handwerger, editor and publisher of Gold Stock Trades, predicts which companies may win the race to production in this exclusive interview with The Critical Metals Report.
The Critical Metals Report: Jeb, you successfully forecasted the mining mini-boom from 2009 to early 2011. Now we find ourselves in a protracted down period in the junior mining space, which is even affecting the seniors and producing companies. What market forces are at work here?
Jeb Handwerger: There was a lot of speculative interest in rare earth elements (REEs) in 2011. The REE story was just hitting the mainstream. Then we got hit with the nuclear disaster at Fukushima, the expiration of QE2 in spring 2011, the Euro problems and fear of global contagion of the debt crisis.
REE prices have started to come down and now REE equity valuations have reached rock bottom. This has been accelerated by the overall macroeconomic downturn. Investors are panicking and trying to preserve capital by searching for safe havens. They've exited the resource sector and turned to cash and treasuries. There are record-low yields. Investors are buying treasuries for negative returns. The dollar is extremely overbought and the rally into the dollar is beginning to resemble a herd-like move which may hurt many investors. Despite all the macroeconomic doom and gloom, the fundamentals in the critical heavy rare earths forecasts a supply shortfall in the short term.
TCMR: China restricted its exports of REEs, which caused the share prices of North American-listed equities to increase in 2010 and 2011. How are China's policies affecting REE markets today?
JH: The U.S. Geological Survey (USGS) came out with an estimate of global rare earth oxide (REO) reserves in 2011. It had China around 55 million tons (Mt), about 48.3% of global reserves. China came out with a report recently that indicates it will run out of critical heavy rare earth elements (HREEs) and that the country's reserves are being depleted rapidly due to an exponential rise in demand.
TCMR: But do we believe it?
JH: China is saying to the world that it needs the juniors—and that is the truth. There won't be access forever to an abundant supply of cheap HREEs. China is saying, "We'll help you. We'll help you get the juniors. We'll give you technology and expertise."
That's really what it is going to come down to. Twenty years ago, these metals were not as scarce. Outside of China, there is little or no domestic REE supply being produced today, and it appears we are still years away from producing HREEs.
TCMR: The share prices of North American-listed REE stocks have gone down so much. How should investors play the potential supply problems in and outside of China?
JH: The sector is really beaten down and forgotten, along with the entire resource market. Investors are losing hope that any of these companies are going to be developed in this sort of economic environment. The rare earth sector will break out of the downtrend soon.
There are very attractive HREE assets, some of which have recently published impressive economic studies and preliminary economic assessments (PEAs). Recently, Lynas Corp. (LYC:ASX) announced positive news from the Malaysian parliament, which recommended that a temporary operating license be granted for its advanced materials plant.
The last time Lynas made an announcement like this, it was a positive development throughout the sector. If Lynas begins producing REEs profitably, it will be a real boost to confidence in the sector.
TCMR: Is the market paying attention to Lynas in Malaysia and to the Molycorp-Neo Materials deal?
JH: Lynas went from about $0.90 to $1.10 and has pulled back since the Malaysian Parliament gave an affirmative recommendation on its LAMP Project. It's really just beginning to hit the radar that Lynas and Molycorp may soon be producing a lot of LREEs. A lot of investors don't realize that there have been some major developments in the rare earth sector. It may boost confidence in the sector once investors see that companies are producing LREEs profitably outside of China.
Molycorp Inc. (MCP:NYSE) recently acquired the REE processor Neo Material Technologies (NEM:TSX). Molycorp has mentioned that China's increasing demand for REE materials is predicted to drive production in other countries. One of the benefits of the Molycorp and Neo Material deal is that they will be able to sell to the Chinese market. The world is still completely relying on China, especially for critical HREEs.
The Molycorp and Lynas deals don't answer the HREE problem. The HREEs are a piece of the puzzle that's still missing, and many investors are overlooking HREE assets, such as Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE), Quest Rare Minerals Ltd. (QRM:TSX; QRM:NYSE.A),Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX), Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX), Pele Mountain Resources Inc. (GEM:TSX.V) and Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX).
Look at Matamec. It signed a deal with Toyota Tsusho Group (TYHOF:OTCPK). It has an end user and Toyota coming in and showing confidence in the project, but it's being priced at the same level as it was before the Toyota deal. No credit. Nothing. Matamec has a lot of potential. It shouldn't be trading at the same levels as it was before that deal.
TCMR: Where is demand for HREEs going to come from?
JH: Automotive manufacturing, wind turbine production, the proliferation of electric vehicles and phosphors, which are vital for energy-efficient lighting. They're also used in currencies. Look at the euro. If you hold up the euro to ultraviolet light, those are phosphors inside.
Dysprosium, terbium, europium, neodymium and yttrium are elements that are facing a critical risk of a supply shortfall until 2015. The West talks a lot of talk, but there hasn't been enough walking. There is going to be a real crisis going forward. Instead of doing QE3, which is just around the corner, we should do an "RE1." A lot of these companies are having a difficult time getting the chemistry and metallurgy know-how. It's not, "What's the grade of the asset?" It's "Can you get the ore from the rock? Can you understand the chemistry?" and "Who is going to be the first to really get to production by 2015?"
TCMR: What about Tasman? What are its prospects?
JH: Tasman's Norra Karr project in Sweden is one of the best HREE deposits in the world. It came out with a very impressive PEA, but the market cap is totally neglecting the value. It's just priced at a ridiculous bargain-basement valuation. What's critical is that it has dysprosium, which is key to the automobile industry. Tasman is one of the few REE companies listed on the NYSE. That says a lot for the management team and how much it has been able to advance its project in a short period of time. It may be one of the first major REE deposits that will get to production. It has a lot of geopolitical support and excellent infrastructure. The Europeans appear to be very motivated to develop a domestic secure supply of dysprosium. The answer for them is Tasman.
TCMR: What about Ucore for the U.S.?
JH: Ucore has a very impressive mining engineer, Ken Collison, who recently took over the reins as chief operating officer (COO). Collison was COO of Thompson Creek Metals Co. Inc. (TCM:TSX; TC:NYSE), which I followed very closely. When he was head of Thompson Creek, he took the stock from pennies to $24/share. He's an excellent manager and mining engineer who knows how to develop a mine. He hopes Ucore's Bokan will be his fourth mine that he has built. Collison coming on board is a huge testament to Ucore's potential and economic viability.
Its mine development plan calls for the tailings to be put back, so it's going to be very eco-friendly. It has a very unique eco-friendly mining engineering plan, which is also going to be very good for permitting. That may be why the Bokan Mountain project in Alaska is getting a lot of support politically. It also has excellent infrastructure on the water. I've been to Bokan and seen the deepwater access.
Ucore hasn't released a PEA yet, but it is due soon. It has already announced that it is going to go straight from the PEA to a bankable feasibility study.
It will be very interesting if Ucore gets the only U.S. HREE asset into production in a timely manner. Investors have to understand that it's getting down to which companies are going to make it to production quickly. That's why I like Tasman, Ucore and Pele Mountain (GEM.V)
TCMR: I haven't heard much about Pele, except that it also has uranium. What's the scoop with Pele Mountain?
JH: Oh, yes. There are a lot of economic benefits from having the uranium and the REEs together. It came out with a PEA recently. It is also in an historic mining area in Northern Ontario. Elliot Lake was a productive mining camp for uranium and REEs for decades. It has some desirable critical REEs, such as neodymium, dysprosium and yttrium. It actually produced yttrium in the '70s as a uranium byproduct from monazite and has a lot of local support. It published an updated PEA that optimized and expanded the recoveries of critical REEs.
TCMR: Is its goal to use the uranium income to further fund development of the REE project?
JH: The uranium will hopefully go to pay for the cost of the REE extraction, thereby adding to the economic potential of this project. The REE mineralization is primarily monazite, which already has an established processing method. Dr. Bill Bird is on the advisory board of Pele Mountain. He's also the chief executive of Medallion Resources Ltd. (MDL:TSX.V; MLLOF:OTCQX; MRD:FSE). It's one to put on the radar as well. I've been keeping an eye on it. Medallion has a world-class management team. The company is working on extracting the monazite out of the mineral sands in the Indian Ocean. Medallion is working with monazite because the separation and metallurgy are fairly simple compared to some of the other deposits. It's trying an alternative business model, which may help leapfrog it into production. I'm keeping a close eye on it and watching for any developments. It's a very interesting business plan with a great management team that understands the REE sector really well.
TCMR: Are there any other critical minerals besides the HREEs that should be explored for in North America?
JH: The other mineral that I'm really interested in right now is niobium.
TCMR: Why is that?
JH: The driving force for niobium is the automotive industry, especially fuel-efficient models like the Prius. Niobium is added to the steel in new car designs that are looking to increase fuel efficiency. Nine dollars worth of niobium per car leads to a 100-kilogram (kg) weight reduction.
TCMR: It essentially acts as a lightweight steel strengthener.
JH: Exactly. It saves on fuel and carbon dioxide per vehicle, while at the same time strengthening the steel for passenger safety.
Most niobium right now is coming from Companhia Brasileira de Metalurgia e Mineração (CBMM), Anglo American Plc. (AAUK:NASDAQ) in Brazil and Canadian producer IAMGOLD Corp. (IMG:TSX; IAG:NYSE), which just announced that it is going to do a $950 million (M) expansion of its Niobec mine in Quebec, where it's producing niobium very profitably.
There are concerns of rising resource nationalism in Brazil and the issue of taxes from province to province. The Koreans, Japanese and Chinese did an offtake agreement with Brazil's Companhia Brasileira de Metalurgia e Mineração (CBMM) [state-owned] in 2011. It's critical for the U.S. to have its own strategic supply and not to be reliant on one country. Brazil or Companhia Brasileira de Metalurgia e Mineração could close off at any time or be sold.
Quantum Rare Earth Developments Corp. (QRE:TSX.V; BR3:FSE; QREDF:OTCBB) has one of the few projects worldwide and the only one in the U.S. that has niobium. The Elk Creek deposit in Nebraska was once a Molycorp mine. Even the USGS has designated Elk Creek as one of the largest sources of niobium. It's very similar to an early-stage Niobec. It announced a resource estimate showing a higher-grade resource, 19.3 Mt, grading 0.67% niobium. Yet, the company's stock is trading extremely low for a potential mine that could be a huge asset to the U.S.
JH: I think there will be a joint venture with one of the big U.S. steel companies, or possibly a potential takeout by a company like IAMGOLD. Instead of spending $950M to expand its Niobec mine, it could joint venture or control that company for a fraction of that cost. There's going to be a strategic investment.
TCMR: We'll keep an eye out for that.
Jeb Handwerger is a stock analyst who is syndicated internationally and known throughout the financial industry for his accurate and timely analysis of the equities markets—particularly the precious metals sector. Sign up for his free 30 day trial by clicking here...
1) Sally Lowder of The Critical Metals Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report:Tasman Metals Ltd., Quantum Rare Earth Developments Corp., Quest Rare Minerals Ltd., Ucore Rare Metals Inc. and Matamec Explorations Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Jeb Handwerger: I personally and/or my family own shares of the following companies mentioned in this interview: Avalon Rare Metals Inc., Quantum Rare Earths Ltd., Quest Rare Minerals Ltd., Pele Mountain, Tasman Metals Ltd. and Ucore I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.