John Kaiser is one of the first analysts who was talking about the Rare Earths and we are following him for years by now. As always, the recent doom and gloom will provide the very good entry point into the Rare Earths Bull market, but you will have to be very selective and chose the right players in the sector.
Our approach is to invest into the early risky plays, but with other commodities and project providing the necessary risk diversification. If the particular REE project will be developing into something interesting all company will be driven forward by this valuation.
TNR Gold is a very early stage REE developer at this moment, but has already attracted Chinese Ganfeng into its International Lithium Corp. spin off. Its ability to source attractive projects and strategic partners will be crucial for the exploration success. Insiders are buying International Lithium and TNR Gold."
"TNR Gold owns 28% in the International Lithium Corp., 100% in Shotgun Gold project and involved in the Los Azules Copper project in Argentina, which is under the litigation dispute with Minera Andes now."
Please, do not forget, that we own stocks we are writing about and have position in these companies. We are not providing any investment advise on this blog and there is no solicitation to buy or sell any particular company here. Always consult with your qualified financial adviser before making any investment decisions.
Lithium and Rare Earths: Aljazeera: The global race to grab a share of rare earth metals in Central Asia has begun.
John Kaiser talks about the rare earths producer and investor side and points out that China may have the largest stake in developing sources outside its borders. Critical Metals report interview.
Author: JT Long
Posted: Wednesday , 09 Nov 2011
PETALUMA, CA -
The Critical Metals Report: John, you were one of the first analysts to start following the rare earth sector. You have watched it go from sleepy to overheated and now partially downgraded. In a recent newsletter, you blamed the recent steep downturn in juniors on "Eurozone and Tea Party-inspired fears about a market crash leading to a '30s-style depression that will sink the global economy and send us back to caves where rare earths are of no use." Is that our only option?
John Kaiser: This ironic comment was designed to convey the absurdity of what is happening in the rare earth sector. So no, I don't think that is our future. The slamming of the rare earth stocks based on warnings that global growth is slowing and high prices are generating "demand destruction" is the reverse of the media hype that we had before. It has had a negative effect on the valuations of rare earth juniors, in particular the ones that are still in the process of developing a new supply. Some advanced but early-stage companies are being punished on the down side because the leaders in the sector retreated significantly. It is very unfair.
TCMR: So, even though the small companies didn't rise with the bubble, the mainstream media and J.P. Morgan's negative reporting on one large company is hitting their prices?
JK: Yes. The rare earth prices were definitely in a bubble. That is not the same as the rare earth stock prices. The rare earth prices did not really start to move until July 2010 when China drastically cut its export quotas. And even then, it was just the export prices that moved dramatically. Chinese domestic prices stayed flat. Only when China cracked down on polluting operators at the end of 2010, did domestic prices start to go up because the world had gotten used to about 120,000 tons (Kt) of production from China, instead of the officially sanctioned 93,800 tons. The West faces losing 30 Kt of production, which is a problem because last year China reported its domestic rare earth consumption as 87 Kt. A rare earth mine can't be rushed into production overnight so it will take time for capacity outside China to be developed. This reality has caused pressure, even in China, which is fulfilling its own needs first. Furthermore, the crackdown included plugging lucrative smuggling channels, through which rare earths bypassed the quota system.
China's crackdown on polluting operators has implications far beyond the rare earth sector. It shows that China is becoming impatient with its status as the world's cost dumping ground. As China is coming under pressure internally from an emerging middle class demanding environmental and working standards, it is being forced to take action. The rare earth sector could be a leading indicator of a trend shift, which has positive implications for countries such as the United States and Europe, which have not been able to compete in manufacturing goods because they won't tolerate the types of operating standards that China has allowed. As the Chinese cost structure rises, the rationale for moving production to China will diminish. China's ability to dominate 95% of total rare earth supply critical to a lot of sophisticated downstream technologies is one of its bargaining chips keeping end users in the country.
TCMR: How are end-users reacting?
JK: We have seen two reactions. One is companies shifting production capacity to China to get access to these critical materials. The problem is that China does not yet have any serious laws protecting intellectual property, so companies are taking a chance that they can protect their technology from being stolen by operators who will compete by making cheaper versions of their own products. Of course, this is a serious threat to Western countries that want to retain high-end manufacturing.
Other companies are trying to engineer out hard-to-access materials, thus creating the "demand destruction" being discussed. The substitution is usually for an inferior substance, but it is a temporary solution for a supply gap that every company has to manage. Rare earths are already coming back into the market as Chinese hoarders realize this substitution response could ease the shortage and wipe out their profits. The result is a healthy normalization of rare earth prices. Domestic prices, to a large degree, are starting to approach the 3-year average for export prices. The export prices still have a ways to come down. I think we will soon see Chinese domestic prices stabilize, and that will be the new reality, rather than the cheap pricing from 2008 or the elevated pricing during the middle of this year. That normalized pricing could make a lot of mining projects more economic than three years ago and technologies more practical than they are right now.
TCMR: Are some end users trying to lock in resources for the future?
JK: One of the big things missing from the junior sector has been any serious action by any party-major mining company or end user-to acquire a stake in a rare earth mining project. There have been nonbinding offtake arrangements that are meaningless because they don't involve any commitments. What the sector really needs is for the end users to step up to the plate and make some serious investments to guarantee 2015-2016 supply. I think in 2012 we will see movement. The juniors need to know how much of an ownership premium end users are willing to pay to control future supply. The end users don't need to make money on these rare earths. If they can produce this stuff at a reasonable price, they make all their money downstream by selling a hybrid car with a lanthanum-based nickel-metal-hydride battery. A lot of these decisions involving future product lines cannot be made unless inputs are secured.
TCMR: You mentioned that all the rare elements are not the same. You have a chart of the prices of some of the different ones-europium, terbium, dysprosium, which are used in batteries and lasers. Those are commanding very high spot prices. Are these heavy rare earths going to be in demand beyond 2015? Is that still going to be an area where companies can make good money?
JK: Yes. The heavy rare earths today primarily come from ionic clay deposits in China. Once they are stripped away, you cannot drill and find more of them. They are gone. This is a problem because they play an important role in technology growth. China could actually become a net importer of the heavy rare earths down the road. That means it is in China's best interest to have rare earths available from multiple sources around the world. So this concern that China is setting everybody up for another big gotcha by encouraging Western companies to develop deposits only to open the taps and flood the market with new production may have been the case in the '80s when China was a full communistic nation desperate for hard currency, but it is no longer the case today.
The world does not need dozens and dozens of these deposits, however, which is why I think the race has already pretty much been wrapped up.
Large deposits will go on-stream at rates that will produce a pretty good amount of heavy rare earths. They will have the ability, should demand increase beyond expectations, to scale up production. Those companies will have enough material to keep everyone supplied for 50-100 years.
There could be a little window for the smaller deposits to come in and produce some material, but because these things are chemical plants, it is not like starting a gold mine by digging up a gold vein and processing it. Small scale is not necessarily a solution for quick supply. A number of companies on the promotional circuit with smaller deposits will be inconsequential in solving long-term problems, but still require an extraordinary amount of time and effort to actually bring on-stream.
TCMR: What about in the light rare earth elements? Is it a similar timeline and outlook?
JK: No. There is a huge abundance of light rare earth deposits in the world. So there will be no shortage of light rare earths by 2015-2016. There have been some major discoveries. I think that in 2020 and beyond, when the anxiety about supply security diminishes, overall demand will increase as end users become comfortable once more with deploying rare earth dependent technologies. So I see no shortage of future supply for the light rare earths. There are numerous smaller deposits all around the world with grades of 2-3% or higher. Right now, a lot of work is going into the process technology for recovering rare earths and separating it. So even from all the failures that will happen, there will be a windfall of knowledge on how to do it and how not to do it.
This is sort of an interesting thing about the whole mining and exploration sector. People make all these negative statements about the extraordinarily high failure rate in mineral exploration, but all those failures generate valuable information. Sometimes the failures are simply a function of grade and the price of the commodity. We saw that in the last decade where the juniors generated more than $60B worth of takeover bids largely on the basis of taking deposits found in prior decades and abandoned as worthless and rethinking them in light of scaled-up demand. So even when these companies fail, they often generate valuable information, which is a legacy for future generations. All the work going into the rare earth sector right now is a gift to the future, even if it has no payoff for many of the participants in the short term.
TCMR: That is a great thought to leave with our readers. Thank you very much for your time.
John Kaiser, a mining analyst with over 25 years' experience, is editor of Kaiser Research Online. He specializes in high-risk speculative Canadian securities and the resource sector is the primary focus for an investment approach he developed that combines his "bottom-fishing strategy" with his "rational speculation model." Kaiser began work in January 1983 as a research assistant with Continental Carlisle Douglas, a Vancouver brokerage firm that specialized in Vancouver Stock Exchange listed securities. In 1989 he moved to Pacific International Securities Inc., where he was research director until April 1994 when he moved to the United States with his family. He launched the Kaiser Bottom-Fishing Report (now Kaiser Research Online) as an independent publication in October 1994 and developed it into an online commentary and information portal. He has written extensively about the junior resource sector, is frequently quoted by the media, and is a regular speaker at investment conferences. Since 2008 he has developed a focus on security of supply issues and how they relate to critical metals such as rare earths."