It’s no secret that there is a surplus of cerium (Ce) supply within the rare-earth-element (REE) market. More recently I’ve been hearing folks grumbling that we will soon be awash with yttrium (Y) too, with more than one junior-mining executive referring to Y as “the Ce of the heavy REE world”…

While I do not agree with this sentiment when it comes to future Y supply, I am always interested to learn about potential new applications for this element, given the greater potential for availability in coming years. So when Ryan Castilloux, author of the recent Adamas Intelligence report “Rare Earth Market Outlook: Supply, Demand and Pricing from 2014-2020” told me about an emerging application that could dramatically increase demand for Y, I was intrigued. When he started talking about another application that could also significantly increase demand for Ce as well, I naturally started to pay close attention.

As part of his recent 12-month study of the rare-earth sector, Ryan uncovered these and numerous other potential new uses for REEs that could significantly impact demand before 2020. Not all of them have the same chances of penetrating the market, and the actual impact on demand will vary, but being aware of these new uses is vital to understanding the medium- and long-term prospects for the sector.

Following our recent discussion on his new report, I got together with Ryan again recently and persuaded him to discuss some of these emerging end uses in more detail. We put together a 40-minute video of the discussion, which I think you’ll find to be very interesting.

You can access the free video by clicking here or by clicking the image above. Get in touch with us if you have any questions on the discussion.

You can also get more details on Ryan’s 573-page report by visiting http://www.REEreport.com. – if you order an electronic copy of the report by the end of December 5, 2014, TMR will send you a free printed hard copy, as well as a copy of our forthcoming report on recent global rare-earth import & export statistics, covering dozens of individual rare-earth products and product groups.

You hardly need me to point out that the rare-earth junior mining sector is in a challenging place right now. The current state of rare-earth prices and their impact on the market cap of pretty much every company in the sector, has everyone concerned.

Are things going to get better? Are future rare-earth prices going to reach the numbers predicted in recent scoping and pre-feasibility studies? What will be the effects of the ongoing crackdown on illegal mining in China? What will the demand profile for individual rare earths really be, in the not-too-distant future?

These questions and more like them, were the basis of a 12-month-long ‘deep-dive’ study of the rare-earth sector by Adamas Intelligence. Adamas recently concluded that study and has published its findings in a 573-page report, titled “Rare Earth Market Outlook: Supply, Demand and Pricing from 2014-2020“.

I recently got together with Ryan Castilloux, founder of Adamas and the lead author on the report (which also looks at the period 2008-2013), to discuss some of its major findings.

We put together a 30-minute video of the discussion, which gets into the structure and content of the report, as well as featuring key data and charts to describe top-level data.


The good news? The market and prices are set to bounce back, particularly in the face of growing demand for individual rare earths, for specific applications.

Ryan has done a masterful job with this report, which is just about the most comprehensive review of the rare-earth sector that I’ve ever seen.

You can access the free video by clicking here or by clicking the image above. Get in touch with us if you have any questions on the discussion, or the report itself; and look out for details of a second video that we’re working on, discussing some exciting emerging end-use applications for rare earths, which could have a further positive impact on rare-earth demand before 2020.

From my perspective, the natural evolution and expansion of global free-market capitalism into mainland China was disrupted by the reforms of Deng Xiaoping about 25 years ago. By fiat he created a centrally commanded version of capitalism in which it appeared that domestic Chinese costs (of both skilled and unskilled labor) were lower than those in the then-developed world. We now know that this was only a perception (an artifact), due to virtual and actual subsidies paid by the Chinese local, provincial, and national governments, to ‘kick-start’ and then maintain what turned out to be a massive export-driven Chinese national economy.

The ‘reforms’ of Deng were labeled Capitalism with Chinese characteristics and they worked. However, the logical, foreseeable consequences of the subsidy program (invisible to foreigners but known to insiders), namely the economic cancers of over-capacity and over-supply, also began. Its consequences are now sharply curtailing the rate of growth of the Chinese economy, and the impact of these consequences is also to hold back the global ‘recovery’ from the debt-fueled Western economic collapse of 2007.

The Chinese national government is taking official, not virtual, steps to attempt to reverse the impact of this over-capacity and over-production on its economy, and in this way is again having a direct impact on the entire global economy. This is very apparent in the global rare-earth sector. This sector is tiny in the context of the global industrial economy, but it is a perfect example of the problems created by central (command) control of the production of a natural resource.

The news from China about the reorganization of its domestic rare-earth-mining sector is a strong indication, I think, that from a global point of view the world’s rare-earth total supply chain is also in a rapid transition to reorganization, and, alliteration aside, it is, by economic necessity, evolving toward one of compact regional centers, as distinct from the current Sinocentric model.

In the paradigmatic and foremost of these centers, China, the rare-earth markets are being directed to reorganize into survivable units, i.e. with a minimum size to be profitable, even without virtual and actual subsidies. China’s rare-earth supply chain has too much of everything – mines, separation plants, metal / alloy / fine-chemical makers, and magnet and other end-use product makers. China announced just this past weekend that strict limits on emissions of pollution from named industries, such as mining, are to be enforced. From the point of view of economics, this means the capitalizing (recognizing the costs as liabilities) of both curbs on current polluting emissions and of remediation (cleaning up) of the damage from past emissions.

This means that even as over-production and over-capacities in the total supply chain, which is today essentially Chinese, have driven down the selling prices of the rare earths, the industry will be saddled with new and permanent increased costs of operation and the huge legacy costs of an industry long used to artisanal mining (in China’s case this means rogue and illegal mining). To implement a ‘crackdown’ the Chinese government has already added very significant taxes to mining and processing to fund remediation; it has also promulgated expensive regulations requiring proof of the holding of licenses to produce and to consume rare earths. These taxes and regulations will force the industry to contract, by creating a minimum size for a profitable rare-earth business.

The rising costs in China though, especially due to capitalization of environmental remediation, are also fueled by an expansion of the rule of law (equality of the rich and poor before the law) and even a distinct glimmer of a serious adherence to the concept of property rights, are reworking the rare-earth landscape (“if your pollution injures me or my property I can bring you to law, or, as in China – and the USA – the State can shut you down, pending the resolution of the problem”).

Most of the (logical) evolution of China from a “developing nation,” which it loves to call itself in international trade, to the world’s second largest economy by GDP, has taken place in plain sight and with lots of publicity. We outsiders who do not read Mandarin or understand Chinese culture, see the overall plan, but certainly not the operational details at any particular sites.

The fierce internal competition in China among legal producers of the rare earths, has until now been matched in ferocity by illegal, unregulated ‘midnight mining’. The existing dozens of small separation plants in China (and even nearby in places such as Vietnam and Thailand) have operated for years on irregular offers of such illegal material as cash-generating icing on the cake. Now, as the central government of China forces consolidation and requires certificates of mine and separation-plant allocation, the illegal miners have to work with a ‘total illegal supply chain’ to keep everything ‘off the books’. Those who puzzle over the existence of an illegal separation plant built by Chinese ‘contractors’ in Vietnam and ask, “from where does it get feedstock?” are naive in the extreme. Such a plant is part of an illegal total supply chain. I can only assume that corrupt officials in China, Vietnam, and perhaps other Southeast Asian countries, keep this supply chain going.

I discuss this, because it is a plausible explanation of how a seeming global shortage supported by ‘official data on total production’ of the critical rare earths, does not seem to cause extreme distress or shutdown of industries totally dependent on rare-earth permanent-magnet (REPM) alloys, modified with dysprosium and terbium. The fact that official production figures do not support the current demand picture of dysprosium and terbium, show that end-users must now, in the face of the Chinese crackdown on illegal production, secure their supplies outside of China. If, for example, as the Chinese repeatedly say, they are not able to expand their proven resources of heavy rare earths through legal mining regulated as to health, safety, and pollution, then the illegal mining and refining that is supporting the current shortfalls, is undoubtedly draining the reserves much faster than the official figures are showing. This is the real crisis!

Non-Chinese sources of heavy rare earths must now be brought into production under all circumstances. Non-Chinese manufacturing centers and regions need to attain self-sufficiency as soon as possible. There are ion-adsorption clays exactly as those in China in the tropical regions, in addition to numerous non-Chinese hard-rock sources, including those listed on the TMR Advanced Rare-Earth Projects Index.

There is, however, simply not enough middle and heavy rare-earth separation and purification capacity outside of China, to support European, North American, and non-Chinese, Southeast Asian DEMAND, along with an increasing Chinese domestic demand. This is in particular true as Chinese domestic demand literally explodes. Long-term Chinese planning is based on the very fact that Chinese sources of the heavy rare earths must be conserved, to support the changeover of the Chinese economy from being export-driven to being domestic-consumer-driven.

For the total rare-earth supply chain, the news is even worse. Outside of China the global capacity for rare-earth metals and alloys production is tiny. If we base non-Chinese REPM production capacity on secure access to didymium metal, samarium metal, ferro-dysprosium, and cobalt, then I suspect non-Chinese capacity would be today at most just 10% of global demand.

The non-Chinese world, even if its costs become level with or lower than those in China, still has one big problem – the cost of building new separation and metal and alloy making facilities, as compared with the already arrayed and substantial available capacity within China. This problem can only be resolved by central, regionally deployed tolling facilities for separation, such as the one being developed in Quebec by Innovation Metals Corp. (whose President is my TMR colleague Gareth Hatch), and perhaps even for metal and alloy making. I believe that this will occur in four regions: Europe, North America, Japan, and Korea. India will most likely be a fifth non-Chinese rare earth total supply chain center, but perhaps later than the first four here mentioned.

Disclosure: Jack Lifton is a member of the Technical Advisory Board for Innovation Metals Corp.

During a visit to Australia last month, I had the opportunity to visit the Commonwealth Scientific And Industrial Research Organization (CSIRO), the country’s main governmental organization for scientific research and development. More specifically, I visited CSIRO’s Materials Science & Engineering Division in Lindfield, New South Wales, about eight miles north of Sydney.

CSIRO is well known in many parts of the international scientific community for the quality of its work. It has its origins in the Advisory Council of Science and Industry which was founded in 1916. Today CSIRO has over 6,500 staff (approximately 5,200 full-time equivalents or FTEs) who work at 56 sites in Australia and overseas. While folks outside of Australia may not be too familiar with CSIRO, you undoubtedly are a beneficiary of some of its work; inventions at CSIRO include the underlying technology behind Wi-Fi systems, phase contrast imaging for X-ray imaging and atomic absorption spectroscopy. The organization had an annual budget in 2012-2013 of approximately AUD 1.6 billion.

Materials Science & Engineering at Lindfield (the Division also has sites in Victoria) shares a building with the National Measurement Institute (NMI), Australia’s top body responsible for maintaining Australia’s measurement standards. I had to chuckle when I arrived in the lobby of the building – on the wall opposite the front entrance are a couple of clocks which show VERY precisely the time at that moment – no excuses for being late in this building! I later found out that it was here at this location, in a collaboration between the NMI and CSIRO’s Australian Centre for Precision Optics (ACPO), that a pair of extremely round objects were created and measured, as part of the international Avogadro project. This is an initiative centered on developing a new way of defining the kilogram, the SI unit of mass. Unlike all of the other fundamental SI units of measurement, the kilogram is the only one that is defined as a comparison to a physical object. The NMI / ACPO project set out to produce two perfect spheres of pure, single-isotope silicon, containing enough atoms to make a kilogram. The idea is for other researchers to then measure the number of atoms in these spheres, in order to re-define the kilogram. The best sphere that the scientists achieved as part of the project had an out-of-roundness of just 35 nanometers – less than 150 times the diameter of a single silicon atom!

My visit to the Lindfield facility was hosted by Dr. Stephen Collocott, a long-time researcher in the field of magnetic materials and applications. I first met Dr. Collocott at a magnetic-materials conference many, many moons ago. We’ve been corresponding and bumping into each at conferences and workshops ever since. It was great to finally get to visit him on his home turf and to learn more about the work that he and his colleagues do at CSIRO.

Dr. Collocott wears two hats these days; he is the group leader for magnetic materials research at CSIRO’s Materials Science & Engineering division; he is also the stream leader for electric drive systems, within CSIRO’S Future Manufacturing Flagship initiative. These Flagships bring together multi-disciplinary teams to focus on key research themes. Dr. Collocott’s group has for years been involved in the application of magnetic materials to real engineering systems, and so is a natural fit for the Future Manufacturing Flagship. The group frequently conducts contract research for OEMs and other companies in the manufacturing, automotive, appliance and general transportation sectors. Past and present clients include GM Holden (both CSIRO and GM Holden are members of the Co-operative Research Centre for Advanced Automotive Technology), Electrolux, Marrand Enginering, and Transfield. The group, presently consisting of eight researchers, has particular expertise in electric machine design using 2D and 3D FEA, power and control electronics and machine simulation.

The magnetic materials group at CSIRO was involved in some of the early work to characterize and optimize neodymium (Nd)-based permanent magnet alloys (Nd-Fe-B). In the early 1990s, a spin-out company called Australia Magnetic Technology (AMT) actually set-up to manufacture approximately 50 tonnes / year of these materials in a pilot plant for the Australian market. Plans to scale up production were put on hold indefinitely due to falling prices at that time, as a result of the growth of Chinese magnet companies. AMT was eventually acquired in 2003 by AMF Magnetics, another Australian magnetics company.

The CSIRO magnetics group continued with its materials research work, being involved in the subsequent discovery of so-called 3-29 rare-earth intermetallic phases for possible permanent magnet applications. They were also involved in melt spinning, mechanical alloying and hydrogen-based processing of rare-earth-based materials, as well as powder metallurgy. This work eventually evolved into looking at more fundamental questions concerning magnetic materials, relating to, for example, the role of dysprosium in increasing the resistance of Nd-Fe-B magnets to being demagnetized (coercivity). The purpose of such research was to increase understanding of the underlying mechanism in such materials, rather than creating incremental improvements in specific magnetic alloys.

The group then turned its attentions to the use of magnetic materials for specific end-use applications, building on the industrial collaborations that it had fostered over the years. These days the focus is on high torque density and high power density electric drives, based on brushless permanent-magnet machines as well as switched-reluctant machines that use no magnets at all. The idea is to provide the best machine required for the specific application being developed and refined. Examples of such applications include drives for electric vehicles and for more energy-efficient (and lower cost) consumer appliances such as washing machines. Some of the group’s machines have been used in ultra-long distance races for solar-powered vehicles, where the ultimate in efficiency and reduced weight is required. Being able to meet or exceed the specifications for such challenging applications helps to spur the wider development and utilization of such devices for commercial applications, just as innovations that we see in, for example, Formula One racing cars eventually make their way into the mainstream some years later.

During my visit I got a chance to tour Dr. Collocott’s group laboratories; as you might imagine, a number of the projects are sensitive (commercially or otherwise); I was allowed to take some photos though, which can be seen by clicking the thumbnail images above. I saw some really interesting electric devices and equipment under development, but I think my favorite device of the ones that I was shown was a more energy-efficient electric sheep shearing device. This tool uses an Nd-Fe-B magnet, and dissipates heat by using the blood flow in the operator’s hand, without him or her noticing the device getting warm. A very clever and elegant way to improve a long-established tool used in one of Australia’s quintessential industries.

Dr. Collocott commented that 60% of the CSIRO budget comes from government funding; the rest is drawn from contract research, royalties and licensing fees from previous technology, as well as cooperative entities. The organization has a number of ongoing research programs in collaboration with groups outside of Australia. One example in which Dr. Collocott is involved is with the University of Shanghai. He commented that quite often, Australian-based researchers are seen as “honest brokers” when it comes to their perspective on matters pertaining to strategic materials. This reinforces similar comments that I’ve heard from others too, from entities that would rather work with Australian than US or even Canadian groups, for this reason.

That said, CSIRO as a whole has strong collaborations with partners in Canada and the USA, with dozens of projects undertaken each year. Canadian projects tend to focus on minerals, mining, mineral resources and related engineering services. Recent partners include Alcan, COREM, Barrick Gold, Riot Tinto Alcan and Syncrude. Incidentally, CSIRO has a Minerals Down Under Flagship which builds on the organization’s expertise in these areas (most notably on extraction and separation), based at a CSIRO facility in Clayton, Victoria. US-based partners include Boeing, Chevron, DuPont, NASA, the US Department of Agriculture, the National Oceanic and Atmospheric Administration. According to the CSIRO web site, other initiatives include the Fulbright CSIRO Postgraduate Scholarship, established in 2008 to enable an American citizen to undertake postgraduate research in Australia at a CSIRO institute.

The strong Australian dollar has been an ongoing issues from the economic perspective, since it hurts the country’s ability to export products that it manufactures. As a consequence there has been a lot of off-shoring to Thailand and Malaysia, primarily because of free-trade agreements in place with these two countries. The once strong electrical appliance industry in Australia has largely disappeared, with some exceptions, namely in the large refrigeration and commercial cooking appliance markets. There has been 15-20% decline in the manufacturing of larger passenger vehicles in Australia; Toyota, General Motors and Ford still have a visible presence but are confined these days only to a handful of vehicles being manufactured in the country.

Still, it is through working with entities like CSIRO that the Australian manufacturing sector can re-group and prosper once again. CSIRO is undoubtedly a jewel in Australia’s crown, a jewel that hitherto now has not got a lot of whole lot of attention from strategic materials folks outside of the academic community. Folks in the rare-earths sector may have heard of the work and capabilities of ANSTO Minerals, another Australian government organization, with respect to process development; CSIRO also has extensive capabilities and experience in these and other related areas too and should not be overlooked. Groups like the one that Dr. Collocott leads can be a “below-the-radar secret weapon” for manufacturers, who need high quality contract research done by folks who know what they are doing.

My thanks go to Stephen Collocott for facilitating my visit to the CSIRO Materials Science & Engineering Division.

Rare-earth deposits are not rare; they are just rarely put into production. Why is that? It is because of pricing economics driven by supply and demand. The demand for the rare earths as raw materials is today in southeast Asia, so it should not be surprising to see how the producing supply base has migrated to that part of the world. Yet pundits and politically charged writers keep hinting at a vast intentional Chinese conspiracy to ‘control’ the rare earths. It is more than likely actually a consequence of the operations of the market forces of (what we now ironically call) free-market capitalism. as practiced today by governments following the model originated by John Maynard Keynes.

The American financial regulators are as guilty of allowing foreseeable but unintended consequences of their actions, as the Chinese regulators are responsible for maximizing the benefits of American oversight for China’s economy. There is actually no intractable problem so long as both economies practice free trade, but when Chinese self-interest is seen as a threat to American self-interest, it is the ‘other’ rather than the ‘system’ that is brought into ill-repute.

Rare-earth-based production (the supply) and production levels are determined by the economics of overall demand. So long as the lowest cost for rare-earth products is obtained by buying such types of goods manufactured in China, the total supply chain and the focus of the rare-earth industry will remain in China.

Today, in early March 2012, I am going to give one prescription for the re-birth, health and continued growth of a non-Chinese rare-earth industry, and I’m also going to make one prediction about the growth of the global rare-earth industry over the next ten years.

First, before I assume the mantle of the business-survival specialist or of a resource-markets Nostradamus, I need to point out that the growth of demand for a rare-earth element (REE) is in the case of almost all of the REEs, within a unique market for each of them individually. The demand for cerium (Ce), for example, has almost nothing whatsoever to do with the demand for lanthanum (La), or any other REE. They are not interchangeable, nor substitutable for each other, except in very few cases such as that of neodymium (Nd) and praseodymium (Pr), which in some limited applications in rare-earth permanent magnets (REPMs), are substitutable/interchangeable.

Notably the demand for Nd for use in REPMs is the principal driver of the demand for dysprosium (Dy), whereas the inverse is not true. This complex subject, the demand for individual and certain combinations of the REEs, is glossed over by pundits as if it doesn’t matter. This is a fatal flaw in creating investment strategies for developing REE supply, because what is overlooked is that the supply of the rare earths must be examined on an element-by-element basis. and not looked upon simply as a ‘basket’ containing all of the REEs.

This error of assuming that all or most of the REEs are interchangeable for marketing purposes, gives rise to the glib assumption that the same strategies will work for selling REEs to a variety of end users, whose only common interest is that their products all contain REEs.

An even more flawed assumption is the idea that the individual REEs are of equal importance to our technological economy in any of their uses, and so one simply calculates a basket price and this metric then defines an opportunity to produce a combined value. Nothing could be farther from the truth.

China appears to have unused (excess) capacity in the production of the lower-atomic-numbered rare earths (LANREs) in the amount of more than 50%! This means that China could ramp up production to twice today’s output of LANREs and, based on even old (from 1997) basically anecdotal data from the US Geological Survey, keep this level of production up indefinitely.

On March 5, 2012, there was official news from China (reported in the China Daily, the English-language version of the People’s Daily, the house organ of the Chinese Communist Party) for example, that Jiangxi Copper, which has been given responsibility to consolidate rare-earth production in Sichuan province, says that it will increase production there to 50,000 tpa and will target the export markets! Rare-earth prognosticators please pay attention! Jiangxi Copper is a world-class commodity-metals-producing giant. It is also state-owned and has more working capital and borrowing firepower than all of the non-Chinese rare-earth ventures on Earth combined.

The domestic growth of the Chinese demand for the REEs is today without doubt the principal driver for any attempts to increase the supply of REEs. China’s domestic demand for all of the REEs today is probably at 70-80% of the world’s total supply (also, of course, today produced in China domestically).

China is openly moving to change its economy from an export-led to a domestic-consumption-led model. As China does this, the domestic demand for REE-containing consumer products (the vast majority) will increase in China, apparently without decreasing outside of China. Unless there is increased production of those among the REEs that are the critical REEs, there will be shortages and price hikes – but NOT in China, which will simply consume more REEs domestically while reducing exports, as it has already begun to do precisely to prepare for the change of direction in its economy.

Reacting to that change and to world opinion, China has restructured its REE industry and this has resulted, for example, in Jiangxi Copper telling the world that it will ramp up production in the area under its control, so that both the Chinese domestic market and the export market can be served.

Jiangxi is a new competitor in the global REE market, and it is a large profitable company run by excellent managers. It has no competition outside of China in the REE space that can match it in resources of intellectual property, manpower resources, capital, and knowledge of world markets.

Yet in China, Jiangxi faces Baosteel and Chinalco in the newly consolidated REE production space as its competitors. Keep in mind that it will be an uphill battle to beat China at its own game inside China. So what is left for the non-Chinese REE supply wannabes is to produce something that the Chinese domestic REE market needs, and which is not produced in China in sufficient quantity, so that it will be in demand whether or not a total supply chain is ever constructed outside of China.

It seems that the higher-atomic-numbered rare earths (HANREs), the so-called ‘heavy rare earths’ fit this description and their number may even be joined by the LANRE Nd.

There are two cultures on Bay Street (the center of junior-mining finance in Toronto, and most likely the financial world). Among the denizens of one of those two cultures, it is the share price of a company that measures its success; in the other culture, the question asked is: ‘how much money will it take to bring this venture into (profitable) production?’. The probability of achieving profitable production is this second group’s measurement of success.

It is late in the rare-earth ‘boom’ and so lately the line between the two cultures has begun to blur in the rare-earth ‘space.’

Junior mining is basically the mineral-data mining of the Earth. The data are discovered and recorded by field geologists and then it is filtered through layers of physical and chemical analysis, until for a given volume of the Earth’s crust, a picture can be drawn in three dimensions, of the distribution of specific minerals within the chosen volume. If there are known mechanical and chemical procedures for recovering any valuable metals or minerals in the defined volume, and the result of those procedures is a product, or products that can be sold for more than the cost of production in volumes above the break-even cost of the venture then, if those factors have additionally a high probability of continuing in time, we have a mineable ore body that is economic.

The day of reckoning is upon the rare-earth juniors. Those of them who have no knowledge of supply-and-demand-based pricing, or the geographic distribution of demand, or who have no knowledge of finance will be gone first. Even among those that survive this first cut, if they believe that the goal of a business is anything other than producing consistently a competitive profit from selling products produced at the lowest cost with the lowest possible break-even threshold, then they will be gone next.

The survivors will be those ventures which can sell their product at a profit, at a place in the supply chain which their management and marketing skills can maintain.

The Vatican in Rome regularly issues statements of Catholic doctrine, which are intended to be the ‘correct’ interpretations of questions of faith for believers. These statements are written in church Latin and the translation of the category aspect of the title of all such statements is a papal ‘bull.’ This is the short form of the Latin word bulla, used to describe the clay stamp traditionally applied to such edicts, and from which in English, we get the word ‘bulletin.’

I consider this article to be a ‘bulletin’ to investors in the rare-earth space.

I am not. nor do I pretend to be infallible, but I recognize that much of what passes for interpretation in the mainstream media of the announcements that regularly flow from junior miners, or, in some cases from companies actually running mining operations, is just plain ‘bull.’

If a junior miner is to survive. it must either sell its ore body or develop a profitable mining operation. There has been little interest by the major mining companies in purchasing the properties of the current rare-earth juniors. Therefore to survive, the juniors will have to try to put their ore bodies into production as mines. This means that the clock is ticking. There will be no more than a dozen rare-earth ventures outside of China in actual development by the end of 2014. The global REE demand outside of China needs very little additional supply of the LANREs if it does not ramp up its metal-, alloy-, and component-manufacturing supply chain. Certainly there is way too much potential and/or planned production of the LANREs chasing too small a market.

It is just the opposite for the HANREs. China is short of these very critical materials, so that even if no supply chain at all is constructed or enhanced outside of China for using such raw materials, there will be a demand for them.

The problem with the HANREs market is that it is not understood as a free-standing market by non-Chinese investors. Additionally it has turned out that the highest grades of HANREs as a proportion of total REEs, are in hard-rock ores and tin and uranium residues, the ‘metallurgy’ (cracking) of which has not been successfully (i.e. economically) achieved to date. I believe, however, that the metallurgies of the hard-rock ores have been addressed with sufficient success outside of China, by companies attempting this endeavor, to allow me to recommend to my institutional-investment clients that they fund the development of the best-managed and best-sited ones.

The skills to extract the HANREs into a pregnant leach solution, and to separate the individual HANREs from that solution are in very short supply. No one, as of yet, outside of China has addressed the commercial separation of the HANREs. Innovation Metals, a company co-founded by my TMR colleague Gareth (and to which I am an advisor), is attempting to do something about this, with its goal of creating the world’s first independent rare-earth separation facilities, to toll-treat rare-earth concentrates. Do not be fooled by those who say that all you have to do is ‘buy’ a property and ‘feed’ the ore into an existing LANRE separation system. This is flim-flam.

I predict that at least one, perhaps two American companies, and one European company will be producing HANREs competitively with the Chinese within 3-5 years. from hard-rock mining. I further predict that it is these operations which will catalyze the re-birth of a non-Chinese total supply chain for the production of Dy-modified REPMs. There are a number of promising Canadian, Southern African, and Australian HANRE-themed junior miners, who I believe will become suppliers to the total supply chains located in the USA, Europe, Japan, or even China. Their ability to do so will be based on competitive pricing.

I am not mentioning Great Western Minerals Group’s South African/UK integrated operations, because they are now in a group of one, at least with regard to the commercial production and utilization in the downstream total supply chain of the heavy rare earth Dy. As far as I know their, output of Dy is fully taken up by their customers, and is only a market factor in the reduction of non-Chinese demand for Dy it will cause (less than 3% of the current market).

The first step in the production of a REE is the mining of an ore containing a mineral that has REEs in its molecular or physical composition. In simple English, a rare-earth mineral is one in which the REEs are either chemically bound into, or in a few cases, just physically attached (adsorbed) onto a substrate mineral. The ore at Molycorp’s Mountain Pass mine is an example of the first and the famous adsorption clays in China’s southern provinces are an example of the second.

A common pundit error at this point is to declare that the ores with the highest concentrations of the rare earths are the most valuable. The most valuable rare-earth ores are those from which the rare earths can be extracted efficiently at the lowest cost per unit. In fact, the most pressing problem today in the rare-earth supply space is the fact that all of the HANREs now produced commercially, are from the very low overall grade ‘ionic adsorption clays in China. This is because of:

1. The fact that by ignoring (and not capitalizing) safety or environmental ‘costs’, the Chinese mining industry has been able to continue due to the high demand for their ‘unique’ products, and
2. The lucky situation that the ionic clays are essentially thorium and uranium free, allowing their processing by crude heap leaching in the open.

For hard rock, HANRE-enriched deposits have been found outside of China, the concentration of desired minerals is accomplished by preparing the ore (typically this involves crushing and/or grinding followed by gravity separation). Milling is the first step, with the second typically done by floatation, in which the higher specific gravity minerals are separated from the lighter ‘rock’. by a combination of surface-chemistry techniques and the differences in their densities.

When we have the ore concentrated, we come to a point in the process where mining terminology diverges from both common English and from the strict definitions of terms as they are used in modern materials science. When miners use the term ‘metallurgy’, they usually mean ONLY the extraction from an ore concentrate of the CHEMICAL forms of the elements desired.

In such cases, developing the metallurgy means chemically leaching the ore or ore concentrate. Leaching is a wet chemical process most often involving acids or bases), which places into solution the chemical elements present in the ore, so that they can be further chemically processed to separate them from each other.

Typically even the separated elemental chemicals must be further purified – especially in the frequent case where separation is not analytical (i.e., is not complete). The purified chemicals are then reduced by chemical/physical processes to create pure metals.

An example of straightforward mining metallurgy is the processing of common sulfide ores of copper (Cu). Their metallurgy starts with roasting ( i.e. forced-air, high-temperature oxidation). The Cu oxide so obtained is dissolved in sulfuric acid, obtained in part by capturing the sulphur dioxide from the roasting, catalytically oxidizing it further to sulphur trioxide and dissolving this in water.

The Cu sulphate solution is electrolyzed so that the pure Cu collects on the cathode and the nuisance metals, such as molybdenum, gold, silver, palladium, tellurium, selenium, and arsenic collect in the “mud” formed under the anode. Some of the nuisance metals contained in the Cu ore are also collected in part from the exhaust gases of the roaster, which include volatile oxide species of many of the elements also present in the mud.

The mining metallurgy of Cu ores is complex, and time- and energy- (and thus capital-) intensive, but it pales in comparison with the complexity of the separation of the individual rare earths after they have been extracted from their ores into a pregnant leach solution.

The separation of the mixed rare earths produced by the leaching of their ore concentrates into individual REEs is a labor intensive, time-consuming operation, accomplished commercially today only via the process known as solvent extraction (SX), which is expensive to facilitize, difficult to supply with some Chinese-produced chemical reagents, slow, and in need of a large body of skilled chemical engineers for its operations and quality control. Outside of China, and previously in Japan and possibly Kyrgyzstan, no-one has yet constructed a SX operation with the capability to separate the HANREs.

I have been told that a HANRE-separation-capable facility is, in fact, being constructed in the Western Cape province of South Africa, by Great Western Minerals Group, but I do not know the timetable for that project. I do know that the punditry has now figured out that the HANREs are the most desirable of the REEs, but, once again, the highest grade. largest total ore tonnages are being mindlessly touted as ‘the best investments.’

Of course, the best investments are the well-managed ventures that own ore bodies for which known extraction techniques work, and from which a pregnant-leach solution can be made, which will be capable of being fed into a separation plant, that will produce separated, purified rare-earth chemicals. All of this will have to be done at the lowest costs possible and the lowest breakeven possible.

HANREs so produced, mainly Dy and terbium (Tb), will be saleable into a market in deficit for the rest of this decade and beyond.

A total supply chain to produce Dy-modified Nd-based magnets will be built in Europe. I believe that such a project is also underway in the USA. The successful mining ventures in the HANRE space will most likely sell their products in a magnet ‘bundle’. In order to get Dy, the customer will also need to buy Nd in a ratio of the two that insures the total sale of both.

There are already too many contenders in the LANRE space outside of China. The survivors will be the low cost, lowest breakeven, producers.

Anyone who is going to invest in a junior rare-earth-mining venture must look at its balance sheet, for its break-even point at reasonable prices. One must also ask exactly what market share the company needs, to break even at those prices. Next one must ask for a list of the products to be produced, which are to be sold at that point into the supply chain, and match that list with the companies expertise, or access to expertise, necessary to technically accomplish each step in the supply chain in which it will be directly involved.

Size matters in a high-school locker room. Only skills and break evens matter in the world of mining…

Disclosure: at the time of writing Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).

Earlier today I got word that the US Department of Energy (DOE) has released an update to its Critical Materials Strategy, which was first published as a report in December 2011 2010. This document has helped to shape a fair amount of the debate on rare earths in particular, and critical & strategic materials in general, in the past 12 months.

You can download a copy of the report from here.

I’m still digesting the contents of the report; I can tell you that the DOE still considers the five rare earths dysprosium, neodymium, terbium, europium and yttrium to be critical in the short and medium term; indium is judged to now be near-critical in the near term, compared to being categorized as critical in the 2010 report.

New sections include one that covers the use of rare earths in fluid cracking catalysts, and how the petrochemical refining industry reacted to escalating prices of materials in 2011.

More to follow once we’ve had a chance to read through the report more thoroughly.

Update (01/17/12): the URLs for the report have been updated, since the original links no longer work.

I’ve received a number of emails today from people wanting to hear my thoughts on a news release from Northeastern University published earlier today, pertaining to a new magnetic material that researchers at the University have apparently discovered.

According to the announcement, the “super-strong magnetic material” may “revolutionize the production of magnets found in computers, mobile phones, electric cars and wind-powered generators“. According to one of the co-authors of the study, “[s]tate-of-the-art electric motors and generators contain highly coercive magnets that are based on rare-earth elements, but we have developed a new material with similar properties without those exotic elements“.

The material is apparently based on a compound of manganese (Mn) and gallium (Ga), with Northeastern claiming that the material “can be synthesized on the nanoscale to produce a coercive field that rivals materials containing rare-earth elements, which are considerably more expensive to process and mine“.

The message boards are abuzz with this announcement, apparently with many people (i.e. retail investors in the rare-earth sector) now worried that this material is the death knell for permanent magnets based on the rare earths neodymium / praseodymium (Nd / Pr), and thus the hopes and dreams for untold riches from these commodities…

Take a deep breath, folks.  Being a materials scientist by training, I am naturally a big fan of ongoing research & development work on new engineering materials, and I will read with interest more details on this research, in a forthcoming edition of Applied Physics Letters. I am much less of a fan of the now well-worn path of hype disguised as scientific (and more importantly engineering) breakthroughs, which this announcement represents.  Here’s why:

• While Mn is cheap as chips, Ga is at present 2-3 times more expensive than Nd / Pr;

• The production of Ga is approximately 200 tpa – of which perhaps 100 tpa comes from recycling – and it is presently all spoken for. Compare this to the more than 20-25 ktpa of Nd + Pr available each year, and the prospects for multiples of this production rate in the near future, from new sources of supply.

• All new Ga is produced as a byproduct of aluminum and zinc production. The supply dynamics of these two metals alone will determine future availability of Ga – not its potential use in a permanent-magnet material.

• Given the painfully long road to commercialization for other materials that rely on similar processing routes, it is highly unlikely that synthesis “at the nanoscale” will be less expensive than mining and processing rare earths any time soon.

• Finally, while we’re at it – a “highly coercive” magnet material, is not the same thing as a “super-strong” magnetic material. The former refers to the ability of a material to resist being demagnetized; the latter to the ability of the magnet to do work.

Yesterday I listened to a conference call hosted by Molycorp Inc. (NYSE:MCP), to discuss the company’s Q3 2011 financial performance. The call covered the expected ground, going over the financials and milestones that the company achieved in this last period. No surprises there; Mark Smith, the company’s CEO, pointed out the record revenues that the company earned in this period, which of course is great news for Molycorp shareholders.

As the call proceeded, Mr. Smith started to review what he called the company’s “multi-pronged heavy rare-earth strategy” for the mid- and long term. My ears pricked up at this point, to see if he would confirm some important information about the heavy rare earths at Mountain Pass that I had heard about for the first time earlier this week, from someone else at Molycorp. Unfortunately he did not; later in this article I will share with you what I heard earlier in the week anyway, and let you come to your own conclusion.

Mr. Smith described four different parts to the Molycorp’s heavy rare-earth plan. These include recycling, increasing the efficient use of heavy rare earths in key applications, and deploying new cracking technologies at Mountain Pass, to enable both bastnaesite and monazite ores to be processed at the facility. In the past, Mr. Smith noted, only bastnaesite was processed, with the monazite present in the ore body going into the tailings basin. Mr. Smith noted that with this capability, the new cracking facility would be capable of processing mineral concentrates from other rare-earth resources as well, and in response to a question from an analyst, named this capability as the most important part of the overall plan.

Mr. Smith also mentioned the recently announced strategy from Molycorp, to look at additional properties known to Molycorp, which contain minerals with significant heavy-rare-earth element (HREE) content. While he gave no further detail on the make-up or location of these projects beyond that which has been previously provided, given his statement about the cracking facility at Mountain Pass, one could reasonably surmise that such deposits are likely to be dominated by monazite, since there is usually very little HREE content in bastnaesite minerals.

Molycorp has consistently stayed “on-message” with its statements that it will be producing 10 rare earths in “commercially significant quantities”, from the Mountain Pass ore body. This was re-iterated once again in the company’s October 2011 presentation, titled “Rare Earth Resurgence: Molycorp’s Plan to Increase Global Diversity in Rare Earths Through Technology Innovation” and available on its Web site. In this presentation the 10 “significant REEs” are listed as lanthanum (La), cerium (Ce), praseodymium (Pr), neodymium (Nd), samarium (Sm), europium (Eu), gadolinium (Gd), terbium (Tb), dysprosium (Dy), and yttrium (Y). I’ve re-ordered the list shown on the Molycorp slide, to reflect ascending atomic number. The slide includes a statement below the list which says that “Molycorp intends to produce all 10 of these rare earth elements commercially”.

Later in the slide deck, in a separate section titled “Project Phoenix Update”, is a chart which shows which rare earths and metals Molycorp plans to produce during Phases 1 & 2 of their new production capabilities. The list includes oxide equivalents of Ce, La, Nd-Pr (together known as didymium), as well as La metal and “other”. The first four items on the list total around 99% of production, if I read the chart right; looking at the REE distribution in the Mountain Pass ore body, that makes sense, since it matches the average content of those items in the ore body.

One might infer from my last two paragraphs above that, although the REEs Sm-Eu-Gd-Tb-Dy-Y are a small proportion of the Mountain Pass ore body, that they will still be processed into finished products in the near future, just like their more dominant Ce-La-Nd-Pr counterparts.

A reasonable inference, but, it turns out, an erroneous one.

I’ve wondered for a long time now, just how Molycorp intended to produce these “other” REEs in “commercially significant quantities”, given the small quantities present in the ore body. Surely it wouldn’t make sense, I thought, to build HREE separation circuits, given the significant costs associated with such a capability, for such a small quantity. I know others have wondered the same thing, how such capabilities could be accounted for in the $781 million budget for Project Phoenix.

Well finally, all appears to have become clear, following some comments that I heard this week from a Molycorp official other than Mr. Smith.  The first comment concerned the fact that the quantities of Dy and other HREEs to be produced from Mountain Pass remain to be determined, in part because there is still work to be done to quantify the distribution and quantity of Dy and the other HREEs present in the Mountain Pass ore body.

The official then mentioned that the separation of MREOs / HREOs (i.e. oxides of Sm-Eu-Gd plus the remaining HREOs) would likely form part of a “Phase 3” for Project Phoenix, and that until then, any MREE / HREE-rich concentrates produced in the new cracking facility, would likely be stored as concentrates, for future disposition. When I asked if the official could confirm that the costs for such a Phase 3 MREE / HREE separation facility, were NOT included in the $781 million budget for Project Phoenix, he indicated that they probably weren’t. Therefore, if I understood this official correctly, it appears that Molycorp has no plans at this time, to produce separated MREOs / HREOs at Mountain Pass, during the first two phases of Project Phoenix.

Now technically, to my knowledge Molycorp has never actually explicitly said that they would produce separated MREOs / HREOs as part of the ramp up to 40,000 t of product, but the company’s assertion that it will produce such elements in “commercially significant quantities”, made in the same “breath” as reference to the others that we know are going to be produced, certainly implied otherwise, and obviously could well have given many in the market the wrong impression, if what the aforementioned official said, is accurate…

One other comment on the call yesterday caught my attention, because I believe it is also misleading. This relates to the assertion that the 30,000 t of rare-earth export quota issued by the Chinese authorities for 2011, is actually equivalent to only 21,000 t of REOs, because of the inclusion of ferroalloys on the list of compounds covered by the quotas. This was the same assertion made by Molycorp in a New York Times article at the end of July 2011.

The article stated:

“Everybody seems to be relaxed because the year-on-year number for 2011 versus 2010 is basically the same amount of materials, roughly 30,000 tons of export quotas,” Molycorp Inc. CEO Mark Smith said in an interview. “The discrepancy is created because China continues to add more products that are covered by the quotas, but we never seem to want to take that into account.”

So far, so good.

Doing an apples-to-apples comparison, Smith says, China’s export quota is really closer to around 20,000 tons. Meanwhile, he predicts the global demand to be much higher.

And here’s the problem – that was NOT an “apples-to-apples comparison”. Apples-to-apples would be directly comparing the 20-22,000 t REO equivalent in 2011 with the 22-24,000 t REO equivalent in 2010 that IMCOA and others estimated on the same basis – the difference being accounted for by the inclusion of ferroalloys this year. The same applies to previous years too, of course.

In the original NYT article, the comparison was instead made between the 30,000 t figure for 2010, and the equivalent of a figure of 21,000 t for 2011. The same (in my mind flawed) logic is contained in the summary comments on the conference call yesterday. In the absence of the fuller comparison described above, using this 21,000 t figure in this way is in my mind potentially misleading, and should be discouraged.

Anyway – that’s it for now. Check out the TMR Web site again soon for more comments and perspective on the rare-earths sector.

UPDATE #1 (11/13/11): Since posting the original piece above, we’ve received unsolicited feedback from recent visitors to the Mountain Pass project, who were apparently told that MREE/HREE-containing concentrates from Phase 1 & 2 processes, would be stockpiled for further processing at some indeterminate point in the future.

Rare Element Resources (RER) (AMEX.REE) today issued a press release that makes very good reading for the American civilian and military industrial manufacturing sector. The company now joins Ucore Rare Metals (Ucore) (TSX.V:UCU) as having a high potential for producing the critical rare earths, dysprosium (Dy), terbium (Tb), europium (Eu), and neodymium (Nd) in commercial quantities. Additionally RER could produce samarium (Sm), gadolinium (Gd), and yttrium (Y) in notable and certainly commercial quantities, thus joining Ucore in that capacity too.

So now there are two potential domestic American heavy rare-earth element (HREE) producers, which I think are viable and have high probabilities of commercial success.

The sole free-market criterion for measuring the value of a company is profitability. “Junior” mining companies are mineral-exploration ventures organized to explore for, and verify, valuable deposits of minerals that can be either developed by the junior or sold by it to a mining company for development as a profitable venture. Profitability in the junior-mining space almost always means the difference between the sale price for the deposit and the cost of getting to the next saleable point.

Thus junior miners are speculative ventures, which, in a fair and balanced world, would be rated as much by their management experience and marketing skills as by the economic value of their deposits.

Unfortunately this is not the case. The measure of success (metric) used in the junior mining world is the previous experience of the particular promoters involved in successful past promotions, especially in gold, the forever fad and, most recently, uranium.

Human nature is to create fads and measure the worth of individuals by their adherence to the particular “narrative” of the latest fad. For the last three years, the promotional aspect of the stock markets based in Vancouver, Toronto, Sydney, Perth, Frankfurt, London and New York have been suucessfully promoting a rare-earth boomlet. Various pundits and money managers have spun stories of the importance of the rare-earth elements (REEs) beyond any recognizable common-sense logic, in order to lower the bar for entry to the rare-earth junior-mining corral.

Some REEs are indeed very important for the maintenance of the mass production of the miniaturized electronic devices, which the younger members of society (and many others) seems to believe have always existed, and have always been available cheaply and abundantly.

The conversion of our technological society’s electric motors and generators to smaller and more powerful versions using rare-earth permanent magnets (REPMs) continues unabated. REPMs, particularly of the neodymium-iron-boron (Nd-Fe-B) type, dominate the market in terms of value, for permanent magnets for all uses.

Interestingly enough, of the small percentage of rare-earth-based magnets, powders and alloys imported into the USA, most is used by high-tech civilian industry, such as that for medical imaging devices. Only a smaller amount of the total is used for significant military devices. For example, just a tiny amount of the REE Sm is imported into the USA, for direct conversion here into samarium cobalt (Sm-Co) alloys for REPMs used extensively for the US military.

I doubt that more than 500 tonnes in total of magnet alloy as raw materials are imported into the USA each year for magnet fabrication, and of that amount, I seriously doubt that more than 100 tonnes is used exclusively for military production.

Over 90% of the world’s REPMs are made in Asia (60% in China and 30% in Japan). The alloys from which they are made are produced almost entirely  in China, from REEs produced domestically there.

Anyone in the USA who is planning to manufacture REPMs from domestically (USA) produced REEs is facing the situation that:

• No rare-earth ores have been mined in North America in the 21st century;

• No American company, using American-developed technology, has produced pure REEs in the USA in the 21st century (do note that I’m referring to metals here, not oxides);

• No American company has made Nd-Fe-B magnets from the individual REEs in the USA since at least 2004. Electron Energy  in Lancaster, Pennsylvania has however been making Sm-Co-based REPMs and alloys for decades. The company has, I believe, recently entered into an off-take with Great Western Minerals Group (GWMG) (TSX.V:GWG) for rare-earth metals to be produced by the latter company’s Less Common Metals subsidiary, which will eventually use feedstock for GWMG’s future mining and refining operations in South Africa;

• Only a small overall tonnage of REPMs are currently produced in the USA, from a rare-earth-metal base, and, critically;

• All of the commercially available Dy used to modify the heat cycle sensitivity of REPMs, which is critical in their largest end-use, “under the hood” applications in the OEM automotive industry, as well as in their military use, is and always has been produced in China.

Just two of the US junior-mining ventures currently in development, Ucore in Alaska and RER in Wyoming, are likely to produce Dy in significant quantities in time for the American military and industrial complexes to free themselves of Chinese monopolizing of the rare-earth space in general, and of the HREEs in particular, before the possible discontinuing of the export of Dy by China by 2015.

America needs between 5,000 and 10,000 tpa of lanthanum (La) (90%) and cerium (Ce) (10%) in order for the fluid cracking catalyst (FCC) manufacturing industry to remain based mainly in the USA. America also needs 4,000 tpa of Nd at most,  to manufacture all of the REPMs used in every application in the USA today, rather than import most of them from China and Japan – this estimate may even be too high -and America needs between 400-1,200 tpa of Dy to modify those magnets so that they can be repeatedly exposed to heating and cooling cycles (such as “under the hood”) and retain their original properties. Also, if America has 100 tpa of domestically produced Tb, it could dominate the world of non-incandescent lighting if it so desired.

Some of the above high-tonnage production is simply not possible in the USA. For critical applications, investors should look first to those who can in fact produce Dy and Tb and, of course, La and Nd.

All of the emphasis so far has been on La, Ce and Nd, but only one of those, Nd, is really a critical metal that I believe is even now in short supply.

The important critical heavy rare-earth metals for America are now Dy and Tb because they are not produced in the USA, but are necessary for the high tech devices of which America is the largest per-capita consumer.

The smart play, is clearly to support those who can produce the most critical of the rare earths, by also buying all of the La, Ce and Nd that they can produce. Rare Element Resources and Ucore Rare Metals should be the choice for end users of magnet materials and of lighting materials and of fluid cracking catalyst materials, because by buying out the production of these two companies in total, American companies can be assured of independence from Chinese decisions on allocation.

I also urge American civilian and military industry to support vertical integration in the REPM and the phosphor industries. America has all of the technology to transform rare-earth-ore conentrates, the first item in the rare-earth end-use product supply chain, into finished magnets and CFLs. Yet we have simply abandoned these industrial steps, all of them, actually, for momentary cheaper prices.

Since neither Ucore nor RER could provide individually or even together enough La and Nd for the American FCC industry, or a revived domestic magnet manufacturing industry, the smart play for end-user procurement is to form a buying group, and to enter into off-take agreements for the entire outputs of these two companies and to divide up the critical materials among themselves

Additional LA, Ce and Nd needed by American industry can be purchased from Molycorp (NYSE:MCP), which can then dedicate the balance of its enormous production of light rare earths to rich overseas markets such as Japan, Korea, India and China itself.

I urge the management of RER and Ucore to determine their actual cost of production of all of the rare-earth metals individually, and then to offer them to a procurement operation at a known level of profit and a predictable cost for the buyer.

The two mining companies should be very profitable, and the end users will continue to be able to utilize rare earths in their products. They will thus compete with Chinese industries that will continue to have easy access to raw materials the prices of which are now climbing within, China along with labor, regulatory, health, and safety costs.

It is obvious that if Molycorp’s projections are accurate, then it will be producing at lower costs than the Chinese. At that point Molycorp can sell its output to the world’s largest growing consumer of its products, China, as well as to Japan, which today sources from China exclusively.

If American self-sufficiency is important, to insure that our civilian and military manufacturing industries retain their market share and can grow, then those sectors of our economy must strike bargains with and buy from Rare Element Resources and Ucore Rare Metals to ensure their own prosperity, as well as that of you and me.

I urge industry, both civilian and military, to grow a pair, work together, and get the ball(s) rolling before America becomes an industrial backwater.

Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG). He is also a consultant to Rare Element Resources (AMEX:REE) and to Ucore Rare Metals (TSX.V:UCU).

The “horse race” theme that I devised two years ago, with the winner to be the first to produce heavy rare-earth oxides (HREOs) outside of China, is now in the final lap. The smart money is on the smart management of Great Western Minerals Group (GWMG).

GWMG has brought the entire rare-earth junior mining sector outside of China to a turning point, as evidenced by its recent press release. Today is the last day of the hype-based, rare-earth-junior-mining-stock promotional “boomlet”.

In November 2009 at the Hard Assets Conference in San Francisco, I predicted that there was a “horse race” underway to be the first company outside of China to produce HREOs commercially. I also predicted that the winner would be GWMG, because they were the only one at that time, to have taken the first steps to vertical integration, which I think is critical for REO wannabes in the REO business world, as I see and understand it, and have understood it for nearly 5 decades.

At the time I was immediately threatened with no less than three independent legal actions, due to my selections for entrants in the “horse race.” One of the presumptive litigants apparently had a board member present when I made the prediction, and he asked his CEO to sue me for not mentioning their company. The other two were mentioned in the “horse race” but not to win, place, or show. All three had in common that they did not have significant, commercial levels of HREOs in their ore bodies under development, which are critical for the production of, among other things, high-performance  rare-earth permanent magnets. I was threatened by the CEOs of the two that I said would place out of the money, with lawsuits for defamation, for “disparaging their companies.”

I myself attended the University of Detroit School of Law some 40 years ago, so I informed the men who called to threaten me, that I welcomed their actions. I said that I would of course be calling the chairman of a certain well-known investment bank as a witness, to explain why his company dropped out of both of the ventures that were threatening to sue me. “Let’s add that bank to the defamation suit as a party defendant,” I told them.

Unsurprisingly I didn’t hear further from either one.

The proximate cause of the lawsuit threats I just mentioned was that the “horse race” talk was filmed illegally by an attendee, and it went out over the Internet (the rights to the presentation were actually owned jointly by me and Summit Media, the sponsor of the Hard Assets Conferences). One of the aforementioned CEOs told me that this publication of the video was a slander to a third party, or a libel.

Those who threatened to sue me were rather unprofessional. They thought that they could frighten me into silence, or into retracting my prediction from fear, but obviously they were wrong.

The race to be the first to produce commercial quantities of REOs outside of China has entered a new phase today.

I predict again that GWMG will be the first ever junior rare-earth miner outside of China, to become a profitable producer of commercial quantities of heavy rare earth forms, beyond separated purified HREOs.

I note that GWMG’s new partner is an experienced processor, which has been providing GWMG’s Less Common Metals (LCM) subsidiary with pure rare-earth metals, for manufacturing into rare-earth permanent magnet alloys, and other compounds, for LCM’s customers. I further note that among those customers is now to be Japan’s Aichi Steel, a manufacturer of rare-earth permanent magnets so large, as to be able to take all of GWMG’s projected production of relevant rare earths from Steenkampskraal.

Therefore I predict that GWMG will be the target for discussion of a joint venture or even an acquisition, by many good juniors with HREOs in their ore bodies. They will all basically propose that the GWMG rare-earth separation plant be expanded, to accommodate their ores on a partnership basis. This is because the most added values available to rare earths that can be added by a mining company, are done by moving downstream towards the production of pure metals. Up to that point in the value chain, we are speaking of mining engineering and chemical metallurgical engineering. When one reaches the next stage, that of producing magnet alloys and magnets, one has reached the provenance of skilled specialists in materials and physics. Such skill sets are not bought; they are earned with Darwinian ruthlessness, in the real world of high-tech product development and manufacturing.

GW’s primary skill set within its core competency, has now been stated or shown to encompass:

• Mining;

• Ore concentration (mechanically);

• Extraction of metal values;

• Separation of the rare earths from each other and from the radioactive constituents of the ore body;

• The legal and safe disposition of the radioactive residues;

• The production of pure rare-earth metals from the purified chemical forms; and

• The production of specialty alloys of neodymium (Nd), samarium (Sm) and dysprosium (Dy) for use in the production of high quality rare-earth permanent magnets.

I sincerely congratulate Gary Billingsley, the Executive Chairman of GWMG and Jim Engdahl, GWMG’s CEO, for their perseverance in the face of great odds. The first time I ever heard of the “mine-to-market” strategy was when Gary Billingsley told me about it perhaps 2 – 3 years ago. I thought it was a winner then, and I think it’s a winner now. After that time though, GWMG struggled to navigate in the flood of hype and promotion, aided and abetted by pundits and self-appointed experts, who believed that bigger was better, and that since, in their alternate universe, the demand for the rare earths would grow infinitely, then rare-earth mining would be most profitable to those who could mine the most material.

In fact there is no rare-earths market at all; there are markets for some of the rare earths individually, but the cost structure for any rare earth is a function of what it costs to separate and purify it from all of the other rare earths and associated metals. This is a uniquely different problem from that of any other metal.

Few outside of China, have mastered the skills required to produce an entity such as pure Nd or pure Dy chemical compounds. Fewer still, anywhere, have the ability to make pure metals from these compounds, and only a very few have the education, experience, and time-proven skills to produce rare-earth magnet alloys. Although all of this expertise was originated in the West, it is today almost all resident in China or Japan.

If the West wishes to inure its supplies of rare earth metals and alloys independently of production from China, then it can encourage through private-equity business models, such as that of GWMG, or national governments can subsidize such models.

Now that the fog of hype and promotion is clearing a little I urge investors to take note of these facts:

• There is not now, nor will there ever be an open (unlimited) demand for rare earths. Current speculation on this demand is just that, speculation. Ignore it unless it references hard data-in particular data about Chinese and Japanese demand!

• Any planned or projected production levels must be capable of being made profitably, at whatever point in the supply and value chains the mine intends to sell its product. This means that there must be a buyer (or buyers) for all of the production at the lowest profitable selling price.

• At that point the mine must be the low-cost producer if it is operating in the free market, and if it is to be competitive in that market.

• Each step in the supply chain requires a different skill set from managers and engineers than the one preceding it. Such skill sets get rarer as one goes further along the value chain towards the end product. College degrees are nice, successful experience is necessary. In particular, there is today no private jobbing of rare-earth separation outside of China, so no one is going to be able to restart the rare-earth supply chain anywhere, until there comes into existence a rare-earth separation and refining industry with proven capability and demonstrated capacity.

• Marketing is a skill that must be present from the beginning. It is one of the first steps not the last.

• Rare-earth ore concentrates can be produced as byproducts of otherwise profitable operations, such as iron-ore and uranium mining.

• In the above cases it is possible for a miner to be a low-cost producer of rare-earth ore concentrates, and to match much larger, dedicated rare-earth mines in the costs at that point on a per kg basis.

• Rare-earth separation plants can be built with a flow-through capacity of 2,500 tpa year for under $25 million. The scale up is not linear. A 10 ktpa plant cannot automatically be assumed to cost $100 million; it may be much more due to increased process control requirements. Note well, that the largest rare-earth solvent-exchange facility ever built, is in China, and has a yearly flow-through capacity of less than 10 ktpa. Scaling up to this level and beyond has never yet been done, and the impediments are so far unknown and are thought to be challenging.

• Thus it is possible that a relatively small, light-rare-earth mine with predominantly weathered, or easily accessible ores for which the metallurgy is well-known, such as bastnaesite, could make a profit at a much lower level of production than a larger mine, even at the separated REO stage, because of its lower startup and overhead costs.

• It is also possible that a small mine with significant HREOs could be profitable, even if it can only sell the HREOs, and perhaps Nd oxide.

• The market will buy what it needs at the lowest not the highest price.

• Boutique-metals mines based on niobium, tantalum, zirconium, and titanium, for example, individually or in combination, may be able to become profitable because of the now-higher and sustained prices of any or all of certain rare earths that are critical, such as Nd, Dy, terbium, europium and yttrium.

When future bond-rating agencies rate the producing rare-earth mines from the middle of this decade forward, for the purpose of fixing the interest rate on that corporations bonds, they will look at profitability and the ability of management to sustain profitability. Those are their only metrics.

I’m sure that GWMG will be highly rated.

Once again I congratulate the management of GWMG for a job well done. I hope that GWMG is producing metals and alloys vertically within 18 months from now.

Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).