Usually around this time of year I would have already posted an update on the export quotas issued by the Chinese Ministry of Commerce (MOFCOM) to rare-earth element (REE) producers in China.

Not so this year.

The twice yearly announcements on the specifics of the allocations were always met with a degree of interest that far outweighed their real importance. It was the illusory nature of the export quotas and the complete misreading of the 2010 quota allocations, by entities outside of China, that led to the completely unnecessary, yet unfortunately destructive run up (and subsequent crash) in prices for these materials in 2010 and 2011.

On December 31, 2014 MOFCOM announced that dozens of products previously subject to export quotas would instead now be subject to an export licensing regime. Perhaps the fact that REEs can be found cheek to jowl alongside live cattle, frozen meat, tungsten, sand, motorcycles and paraffin, to name but a few of the commodities listed, will finally correct the notion that some folks have of REEs as unique, precious snowflakes in the grand scheme of nefarious Chinese strategy. Or perhaps not…

We must remember that the export quotas were only one aspect of the overall export regime for REEs and other commodities, subject to the 2014 WTO ruling against China and a subsequent rejected appeal. Another important aspect was the imposition of export tariffs on REE products. The mid-December announcement from the Chinese Ministry of Finance, detailing the export tariffs for REEs in 2015, shows that such tariffs are still alive and well. At the very least, they indicate that China is taking a phased approach to the elimination of its export-control system for REEs in a manner that satisfies the WTO ruling. The continuation of export tariffs on REEs comes in the face of reported recent discussions on the imposition of a new value-added tax on REEs, as a replacement for the revenues generated by export tariffs. There are some indications that a switch over may occur later in 2015, but for now, the export tariffs are here to stay.

Since the announcement on the elimination of export quotas, we have seen dozens of inevitable headlines proclaiming the death of Chinese control over its exports of REEs. The reality is that China is still as much in charge of its REE supply chain as it ever was. An additional MOFCOM announcement indicated that REEs are now to be exported through only 9 designated ports. Export licenses will be “handled” through a Special Commissioner’s Office within MOFCOM, on a case-by-case, shipment-by-shipment basis. A number of sources in China indicate that to date, there is little guidance available to would-be exporters on the criteria to be fulfilled, for an export license to be issued, beyond the presentation of a sales contract with a buyer outside of China.

Such ambiguity would seem to resonate with the third aspect of the WTO complaint and ruling against China, concerning the lack of transparency internally with respect to specific rules and regulations pertaining to exports. Perhaps more details will be officially forthcoming, or perhaps not.

It is unlikely that the announced changes will have any meaningful impact on the “bandwidth” of REE exports that are exported from China via non-official channels (i.e. smuggled out). A number of the recent news stories have lamented that the elimination of export quotas will see increased exports and further decreases in REE pricing. I disagree. Perhaps some of the smuggled materials will now go through official channels, especially in the wake of the ongoing consolidation of the Chinese REE industry into six conglomerates; but the overall supply, through official and non-official channels, is unlikely to be affected.

Furthermore, the discussed new VAT proposed would be at similar levels to the existing export tariffs for REEs, thus the ongoing imposition off export tariffs and the subsequent change over, if and when it happens, is not likely to affect FOB China (export) prices either.

So for the time being at least, it is business as usual for Chinese REE exports.

Update (02/01/15): since this article was originally published, the authorities in China announced plans to eliminate the export tariffs on REEs in May 2015.

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.

Earlier this week the Chinese Ministry of Commerce (MOFCOM) announced the second round of allocations of rare-earth export quotas for 2014, to companies operating in China. This follows the initial announcement on the first allocation for 2014, which was made in December 2013.

A total of 15,501 t of export quotas was allocated in this second round, comprising 13,692 t of light rare-earth (LRE) products and 1,809 t of medium / heavy rare-earth (M / HRE) products. This brings the total allocations for 2014 to 30,611 t, which is similar to the totals for the past four years.

We can now take a look at the specific allocation numbers associated with this week’s announcement, before reviewing allocations over the past few years. The companies below, highlighted in green are Chinese / non-Chinese joint-venture (JV) companies – the rest are Chinese-owned. The list is sorted from highest-to-lowest total allocation:

* Part of Solvay, which was allocated a total of 1,736 t.
** Part of China Minmetals Group, which was allocated a total of 781 t.
*** Part of Molycorp, which was allocated a total of 1,173 t.
**** Part of Baogang Group, which was allocated a total of 1,303 t.

Here is a comparison of the quota allocations for the past six years:

In 2014, the proportion of M/HRE to total allocations was 11.8%. This compares to 11.7% for 2013 and 12.5% for 2012, the first year that the quotas were split in this way.

There is once again no reflection in the quota allocations, or in the system as a whole, of the findings of the recent WTO case against China concerning export quotas and tariffs. The WTO ruled that the export-control system for rare earths (and other metals) is at odds with the trade rules of the WTO. The case in the latter stages of the appeals process.

Introduction

On March 26, 2014, the World Trade Organization (WTO) issued its long-awaited findings in response to formal complaints made by the United States (USA), the European Union (EU) and Japan (collectively the Complainants), concerning China’s approach to the exports of rare-earth elements (REEs), tungsten (W) and molybdenum (Mo).

The 257-page document, combining the individual sets of findings for each Complainant (the Report), was completed by a three-person Panel of the WTO’s Dispute Settlement Body (DSB). It is an exhaustive evaluation of the measures that China has put in place to regulate the export of these materials, and follows a two-year investigation by the WTO into the complaints made.

My March 2012 article on the initiation of the WTO actions, reviewed the details of the initial complaints, and the mechanism behind the WTO dispute process, including the DSB. In it I suggested the potential arguments that China might make to defend its export measures, using certain exceptions to the WTO rules, and the potential consequences of various outcomes.

In the following article, I will review the main findings of the DSB Panel, the basis for their determinations, and the key takeaway points from the Report. We’ll also look at what China’s next moves might be, and the potential consequences for REE supply and pricing. I’ll also highlight the ongoing key advantage that the Chinese downstream REE supply chain has over other countries, even in light of the recent WTO findings.

The Complaints

Since the initial request for the formation of a DSB Panel to review the issues at hand, the specific complaints were refined. They focused specifically on measures relating to export duties, export quotas and the limitations placed on companies that are permitted to export these materials. The Complainants alleged that these measures are inconsistent with China’s obligations under its Accession Protocol – the document that codifies China’s acceptance into the WTO. They also alleged that the measures were inconsistent with the 1994 General Agreement on Tariffs and Trade (GATT) – specifically Article XI on the General Elimination of Quantitative Restrictions.

Initial claims relating to “an alleged lack of uniform, impartial, or reasonable administration of the export quotas” were dropped soon after the process began.

China responded by claiming that the country’s export-related measures were permitted, by virtue of Article XX of the 1994 GATT, related to General Exceptions. China pointed specifically to Article XX(b) relating to measures “necessary to protect human, animal or plant life or health” and Article XX(g) relating to measures for the conservation of “exhaustible natural resources“.

Process Timeline

• The process started on March 13, 2012, when the Complainants each requested consultations with China, under WTO rules, with respect to the initial measures and claims that were detailed in my previous article;
• Consultations were held during April 25-26, 2012. These consultations did not resolve the dispute between China and the Complainants (collectively the Parties);
• On June 27, 2012, the Complainants each requested that a DSB Panel be established;
• On July 23, 2012, the DSB established a single Panel to hear the cases presented by the Complainants;
• On September 12, 2012, the Complainants requested that the Director-General determine determine the specific membership of the Panel;
• On September 24, 2012, the Director-General appointed Mr. Nacer Benjelloun-Touimi to chair the Panel, and Mr. Hugo Cayrús
 and Mr Darlington Mwape as the additional members;
• The Panel adopted a set of Working Procedures and a timetable on October 18, 2012;
• The first substantive meeting of the Panel with the Parties took place during February 26-28, 2013, during which an additional session with interested third parties also took place;
• A second substantive meetings of the Panel and the Parties was held during June 18-19, 2013;
• The Panel sent questions to the Parties on February 13, 2013, March 1, 2013, April 11, 2013, May 30, 2013 and June 21, 2013;
• The Panel issued the descriptive part of its Reports to the Parties on July 31, 2013;
• The Interim Reports were issued to the Parties on October 23, 2013; and
• The Panel issued its Final Reports to the Parties on December 13, 2013.

Summary of the Panel’s Findings

The final combined Report from the Panel went into painstaking, exhaustive detail on every aspect of each specific complaint, and China’s responses to those complaints. In summary, the DSB Panel found that:

• Because its Accession Protocol does not form part of the permanent ‘framework’ of the 1994 GATT, China could not claim the benefit of the exceptions noted in Article XX of the 1994 GATT for the imposition of export duties or export quotas, or for imposing certain restrictions on the activities of companies that export REEs, W and Mo, which otherwise contravene the provisions of its Accession Protocol;

• Even if Article XX was available to China as a justification for export duties, those duties were not “necessary to protect human, animal, or plant life or health“, as required under Article XX(b), and thus the imposition of export duties was “inconsistent with China’s WTO obligations”;

• China’s export quotas “were designed to achieve industrial policy goals rather than conservation”, thus negating China’s ability to use Article XX(g) to justify the imposition of export quotas. The Panel further found that these measures did not work together with other measures imposed on domestic Chinese use of REEs, W and Mo, as also required by Article XX (g); and

• Although Article XX did allow for “restrictions on the rights of enterprises to export” REEs and Mo, China did not demonstrate how such restrictions on the basis of Article XX(g) specifically, were justified. The Panel found that these “trading rights restrictions breach its WTO obligations“.

Analysis

Having reviewed the Panel Report in its entirety, there are three overarching themes to take away from it:

1) The negative environmental impact of mining and processing in China is undisputed
During the WTO process, China strongly asserted that the mining and production of REEs and other metals in China has caused significant harm to its environment, and to the health of people, animals and plants in the country. China presented extensive evidence on the environmental risks associated with the REE supply chain, including reference to the toxicity of mine tailings and the challenge of air and water pollution. The Report included China’s statement that:

[T]he risks to human, animal or plant life or health and the costs of controlling such risks are key reasons why rare earth production was shut down outside China. In this regard, China submits that companies outside of China that were producing, or had the capability to produce, rare earths were not ready to bear the high costs of implementing technology that would tackle environmental harm and meet national regulatory environmental requirements.

The EU and the USA did not dispute China’s assertion with respect to environmental damage; Japan indicated that it deferred to the Panel’s judgment on this particular issue.

After reviewing the evidence, the Panel stated in the Report that it considers that “China has demonstrated that the mining and production of rare earths, tungsten, and molybdenum have caused grave harm to the environment and to the life and health of humans, animals, and plants in China“.

The initial announcement of the Panel’s findings at the end of March met with significant criticism from entities within China, the implication being that the WTO had not considered the environmental impact of the REE industry in China, in its findings. On the contrary, the Panel made it crystal clear that it did in fact recognize that such harm had occurred. The Panel insisted however, that the existence of such damage “does not suffice to demonstrate that export duties are necessary to protect human, animal or plant life or health“.

2) China did not demonstrate that export duties have a material effect on environmental protection
In response to the complaints made, China insisted that its export duties on REEs, W and Mo were “an integral part of a comprehensive policy that has the goal to reduce pollution and protect the health of China’s population, its animals and plants“.

The Panel noted that it was not sufficient to simply state that the imposition of export duties was part of a wider “comprehensive policy for environmental protection” in China. In fact, the Panel found that no part of the comprehensive environmental policy that China cited, showed a link between export duties and “a pollution reduction objective“. There was no evidence to suggest that putting export duties in place would have or had had any material effect on the stated goal of pollution control. This was a similar finding to a previous WTO dispute involving China.

This assertion of a connection was always going to be a problem for China to prove, since the final destination of a resource (i.e. outside of China) really has no bearing on the way that it was produced in the first place.

3) China did not demonstrate evenhandedness with measures associated with resource management
The Panel noted that export duties increase the price of REE products that are exported for use outside China. China failed to demonstrated that there were any corresponding measures that increase the price of REE products that are intended for use inside China.

The discussion on export quotas centered on China’s insistence that it was allowed per Article XX(g) to impose such quotas on the basis of “the conservation of exhaustible natural resources“. However, this exception also requires that “such measures are made effective in conjunction with restrictions on domestic production or consumption“. The Panel acknowledged that each member of the WTO has permanent sovereignty over its natural resources, and that member countries may adopt “conservation measures should they wish to do so, in the light of their own objectives and policy goals, including economic and sustainable development“.

However, the Panel noted that:

no WTO Member has, under WTO law, the right to dictate or control the allocation or distribution of rare earth resources to achieve an economic objective. WTO Members’ right to adopt conservation programmes is not a right to control the international markets in which extracted products are bought and sold.

The Panel found that China had not demonstrated evenhandedness in its approach to domestic and foreign entities, with respect to access to REEs, and thus the imposition of export quotas was not made in conjunction with other measures that would affect the domestic supply chain. There was significant discussion on the role of production and separation quotas, but the Panel was not convinced that the impact of the measures was anything other than discriminatory against foreign entities.

What’s Next?

China has up to 60 days from the date of the Report’s publication, to decide if it will appeal against the Panel’s findings. If it does not, or if it does and the findings are upheld, then it is likely that China would be required to drop its export duties and export quotas on REEs.

The export duties on individual REE products varies from 15-25%; in addition, since the price spike of 2010-2011 there have been additional costs associated with ‘quota surcharges’ on individual REE products. In the absence of other measures, the elimination of China’s REE export measures would have the effect of reducing the export prices for REEs to those currently enjoyed in China, for use in China.

While this is great news for end users of REEs, it is not particularly good news for the operators of existing REE mines outside of China, or the developers of new REE projects. Many developers have for some time been using erroneous price assumptions when reviewing the economics of their projects, since they have assumed that they could sell intermediate concentrates into China, at discounts to FOB / export prices. The reality is that such sales would have to be competitive to internally sourced concentrates, and so the correct approach is to discount in relation to domestic, not FOB / export prices. If the prices converge as a result of the elimination of export controls, then the ambiguity goes away, and we are left with similar prices regardless of the destination of the products.

That said, there have already been discussions within the industry in China, concerning the imposition of across-the-board resource taxes on REE products, which would elevate the prices above the current domestic levels, presumably to some point below current FOB prices. If China is genuinely concerned about controlling the environmental impact of REE production, and in protecting its resources from exhaustion, then the imposition of such taxes, as well as a reduction in the overall production quotas, and the imposition of pollution taxes, could be effective measures – measures which do not discriminate against foreign entities, thus conforming with the WTO rules.

It should be noted that regardless of the outcome of the WTO dispute, downstream users of REE products in China, that incorporate these materials into components and other goods that are then exported from China, will still have a distinct advantage over downstream users outside of China. Apart from labor costs, exports of finished goods are eligible for a rebate on the 16% VAT paid on the original raw REE materials, a rebate that has not been given on exported raw materials since 2007.

We will keep an eye on the appeals process for this WTO case, and will of course share what we discover, when we have more to report.

On February 26, 2014, Tesla Motors Inc. (NDQ:TSLA) announced details of its long-awaited “gigafactory”, an ambitious plan to build a facility to manufacture lithium-ion batteries in large-enough quantities to meet the needs of the 500,000 electric vehicles (EVs) that the company plans to produce in 2020. Tesla proposes to build this facility somewhere in the southwest United States, in reasonable proximity to its California-based vehicle assembly plant.

Tesla’s plans call for the creation of 35 GWh/year of production capacity for its third-generation Model E vehicle, implying an average 70 kWh of storage capacity per vehicle. The plan calls for an additional 15 GWh/year of production capacity, presumably to meet the needs of additional ventures with which Tesla founder and CEO Elon Musk is involved.

In addition to the significant quantities of lithium, cobalt and other metals that the batteries from this proposed facility will require, even greater quantities of graphite will be needed to produce the anodes that are used in these batteries.

It is obviously early days for the gigafactory initiative, and a number of important details have yet to emerge. There is certainly no guarantee that Tesla will actually move forward with the project, or that it might not morph into some other form. Nonetheless, it is important that the supply chain gets itself ready to participate.

Bloomberg picked up on the use of graphite in lithium-ion batteries in a March 14, 2014 article. Titled “Teslas in California Help Bring Dirty Rain to China“, Bloomberg linked the future Tesla facility to the significant pollution generated by China’s natural-graphite industry, which has “fouled air and water, damaged crops and raised health concerns“. Of particular concern is the use of acids by the Chinese industry to purify mined graphite so that it can be used in battery anodes.

Tesla’s battery supplier is Panasonic Corporation (TYO:6752), providing battery packs for the Tesla Model S vehicle that contain more than 7,100 individual 18650-model cells. It is unclear if Panasonic uses synthetic or natural graphite in these batteries, or how such materials are processed. Mr. Musk did use his Twitter account on the same day that the Bloomberg article was published, to describe the accusations as “[b]eyond ridiculous“.

Nonetheless, synthetic graphite is twice the cost of battery-grade natural-flake graphite, and is typically derived from petroleum coke, which relies on crude oil as its source. Tesla has a stated goal of reducing the unit cost of battery production by a minimum of 30% between now and the initial ramp-up of the Model E in 2017. Natural flake graphite stands to play a significant role in reducing the unit costs of battery production and in reducing the environmental footprint associated with production, if acid-based purification steps can be avoided.

The present flake-graphite market is dominated by China; aside from the issues of pollution, there is increasing evidence that the country’s flake-graphite resources are becoming depleted. Fortunately, there are a number of promising flake-graphite projects under development outside of China.

Producing battery-grade flake graphite
As with any natural resource, the quantity and grade of any given graphite deposit is important, but the type and distribution of the flake size, their purity and their amenability to processing dictate the quality of any given project.

The graphite ore is mined from the deposit and is subject to standard beneficiation processes, such as crushing, milling and flotation. The higher the initial head grade, the cheaper this process will generally be, all other things being equal. The resulting graphite concentrate, known as run-of-mine, or ROM concentrate, is typically sold directly to end-users in a number of sectors. Some junior mining companies are planning to upgrade a portion of that ROM concentrate internally for specific applications, such as the high-purity graphite used in the production of battery anodes.

Battery-grade graphite requires very high purity levels, typically >99.9% carbon-as-graphite (Cg). This material also needs to be spheroidized using careful processes that convert the flat graphite flakes into potato-like shapes, which pack much more efficiently into a given space. The high purity levels and the enhanced “tapping” density (to >0.9 kg/m³) are important for producing the high electrical conductivity that is required during anode operation.

Spheroidizing the graphite flakes also reduces their size, a process known as micronization. Standard battery-grade materials require an average diameter of approximately 10-30 μm, so in theory, feedstock materials with flake sizes greater than 30 μm (+400 mesh) could be used. However, starting purity levels tend to decrease with flake size, so flake material with an average diameter of 150 μm (+150 mesh) or greater is typically used. This is, of course, a double-edged sword, since the larger the flakes used, the more energy will be required to reduce the average size of the flakes to the desired 10-30 μm. Smaller particles are preferred, as this makes it easier for the lithium ions in the electrolyte to diffuse between graphite particles.

It should be noted that it is the tendency for purity levels to increase with flake size that is the real reason for the common ‘mantra’ that for battery-grade materials, the bigger the flake size, the better. In fact, the ideal precursor material would have small flake size if it had sufficient purity levels for the subsequent processing to be cost-effective.

One other important factor in the production of battery-grade materials is that of wastage. The standard spheroidizing and micronizing processes used in China waste up to 60-70% of the mass of total graphite flakes present during processing. Therefore, for every one tonne of spheroidal graphite produced in China, approximately three tonnes of feedstock materials might be required (though the waste materials can be used for other purposes).

The graphite may be purified before or after spheroidizing and micronizing, depending on the manufacturer. As mentioned earlier, the low-cost approach typically used in China is to leach the impurities from the graphite with acid, with the associated environmental concerns that that brings. Alternatively (and far more acceptable in Western jurisdictions), a thermal process can be applied. This typically involves the use of halogen gases to cause chemical reactions at high temperatures with the impurities, which covert the resulting compounds into gases too and eliminate them from the bulk graphite material. The higher the starting purity levels of the graphite after initial concentration at the mine site, the lower the cost will be for purification, and this can make a substantial difference when comparing concentrate feedstocks with different starting purity levels. TMR estimates that the cost difference in purifying a 95% Cg concentrate to >99.9% Cg, versus taking a 98% Cg concentrate to >99.9% Cg could be as much as $2-3,000/t of concentrate, using thermal processes.

The final step for preparing spheroidal graphite for anode production is the application of a coating to the particles to reduce their specific surface area. This is important, as reducing the specific surface area will increase the long-term capacity of the battery cell. Intercalation of the electrolyte solvent into the graphite and its reaction with it causes expansion of the graphite, with the potential for delamination and a lowering of the life expectancy.

During the first charge of the battery cell, an initial, irreversible chemical reaction occurs between the electrolyte and the graphite in the anode, resulting in the formation of a so-called surface electrolyte interphase (SEI) layer. Once formed, this layer reduces further decomposition of the electrolyte and actually protects the graphite anode from exfoliating.

With too large a specific surface area, the formation of the SEI layer can reduce the graphite’s ability to subsequently hold and to release the lithium ions in the electrolyte, thus reducing lifetime capacity for the battery. Coating the graphite prior to anode production reduces this effect and helps to maintain the maximum capacity possible for the battery. The coating can also reduce the chances of a runaway chemical reaction in the battery.

Such coatings are typically carbon- (not graphite-) based; uncoated spheroidal graphite typically sells for $3-4,000/metric tonne (t); coated spheroidal graphite sells for $9-10,000/t. The battery manufacturers typically apply these coatings, though some traders will buy uncoated materials and apply coatings before selling the finished product to the battery manufacturers.

How much battery-grade graphite will Tesla need?
Let’s return now to Tesla and its proposed gigafactory. We know that the 500,000 EVs that Tesla has planned for 2020 will require a total of 35 GWh of energy storage. We now need to determine how much graphite will be contained in those batteries.

The Department of Energy estimates that graphite constitutes approximately 16% by weight of a typical lithium-ion battery. The Panasonic spec sheet for its 18650 batteries indicates that each cell weighs 45 g, which means that the 7,104 cells in the 85 kWh battery pack for the 2013 Tesla Model S weigh approximately 320 kg. We can therefore estimate that these batteries use approximately 0.62 kg of graphite/kWh storage capacity – over 54 kg of graphite per 85 kWh vehicle. Note that the battery pack for a Tesla Model S is approximately four times the capacity of a “standard” battery EV.

This translates into approximately 21,600 t of graphite required for the 500,000 batteries (each with 70 kWh capacity) needed in 2020. However, we need to account for the relatively low (30%) yield of battery-grade graphite, using current processing methods. This means that some 72,050 t of graphite feedstock would actually be required for these batteries at those yields.

Using today’s prices for synthetic (~$20,000/t) and coated spheroidal natural graphite (~$10,000/t), all other things being equal, a switch from all-synthetic to all-natural-graphite anodes for those 500,000 EVs/year would save $216M in material costs, which translates to over $6/kWh, or over $430 per vehicle. Not a bad start.

On top of the batteries for its EVs, Tesla will need a further 9,250 t of graphite for the additional 15 GWh/year of non-EV capacity at the gigafactory, which in turn, would require 30,900 t of graphite feedstocks for the production of battery-grade materials, at current yield levels.

This is a total of just under 30,900 t of graphite in the batteries, requiring 102,900 t of feedstocks using current processing methods and yields. This is over 125% of the global natural flake graphite market, currently at 80-85,000 t/year!

Who can supply this battery-grade graphite?
Clearly, there is a potential significant imbalance between current levels of supply and the projected future demand for graphite, if the Tesla gigafactory comes on-stream.

TMR tracks graphite projects under development via the TMR Advanced Graphite Projects Index. The minimum requirement for a project’s inclusion on the Index is for it to have an NI 43-101- or JORC Code-compliant mineral resource estimate. At present, there are 23 such mineral resources on the Index associated with 20 graphite projects being developed by 16 different companies in 8 countries. Those resources are:

Projects on the TMR Advanced Graphite Projects Index (March 2014)

Project	Location	Owner	Ticker Symbol(s)	Resource
Albany	CAN	Zenyatta Ventures Ltd.	TSX.V:ZEN	NI 43-101
Balama East	MOZ	Syrah Resources Ltd.	ASX:SYR	JORC
Balama West	MOZ	Syrah Resources Ltd.	ASX:SYR	JORC
Bissett Creek	CAN	Northern Graphite Corporation	TSX.V:NGC, OTCBB:NGPHF	NI 43-101
Campoona	AUS	Archer Exploration Ltd.	ASX:AXE	JORC
Epanko	TZA	Kibaran Resources Limited	ASX:KNL	JORC
Geuman	KOR	Lamboo Resources Ltd.	ASX:LMB	JORC
Graphite Creek	USA	Graphite One Resources, Inc.	TSX.V:GPH, OTCQX:GPHOF	NI 43-101
Kearney	CAN	Ontario Graphite Co.	N/A	NI 43-101
Kookaburra Gully	AUS	Lincoln Minerals Limited	ASX:LML	JORC
Koppio	AUS	Lincoln Minerals Limited	ASX:LML	JORC
Kringel	SWE	Flinders Resources Ltd.	TSX.V:FDR	NI 43-101
Lac Guéret	CAN	Mason Graphite Corp	TSX.V:LLG	NI 43-101
Lac Knife	CAN	Focus Graphite Inc.	TSX.V:FMS, OTXQX:FCSMF, F:FKC	NI 43-101
McIntosh	AUS	Lamboo Resources Ltd.	ASX.LMB	JORC
Mousseau West	CAN	Graniz Mondal Inc.	TSX.V:GRA.H	NI 43-101
Molo	MDG	Energizer Resources Inc.	TSX:EGZ, OTCBB:ENZR	NI 43-101
Nunasvaara	SWE	Talga Resources Limited	ASX:TLG	JORC
Raitajärvi	SWE	Talga Resources Limited	ASX:TLG	JORC
Samcheok	KOR	Lamboo Resources Ltd.	ASX:LMB	JORC
Taehwa	KOR	Lamboo Resources Ltd.	ASX:LMB	JORC
Uley Main Road	AUS	Valence Industries Limited	ASX:VXL	JORC

Any number of these projects potentially has what it takes to become successful graphite mines, especially given the pressure that demand from lithium-ion batteries and other applications might put on the overall supply chain. However, to be in a position to be able to produce battery-grade graphite by 2017, when Tesla says that it will commence production ramp up of the Model E, only projects that are far enough along are likely to have the opportunity to capitalize on the demand from the gigafactory. One can argue as to how to define “far enough along,” but my suggested requirements would include:

• The project should have as a minimum, Demonstrated mineral resources (i.e. Measured + Indicated);
• The project should have a completed Feasibility Study *FS), or have one underway;
• A purification process for getting to battery-grade (>99.9% Cg) should have been defined and successfully tested (preferably without using the wet acid method); and
• A spheroidization and micronization process should have been defined and tested.

Additional considerations relate specifically to potential costs of production, and include:

• Initial grade of in-situ graphite (relates to beneficiation costs);
• The resulting purity levels of the resulting run-of-mine (ROM) concentrates after beneficiation (relates to subsequent purification costs);
• The proportion of smaller flake materials with higher purity levels after beneficiation (related to subsequent spheroidization and micronization costs and yield levels);
• Whether or not a coating process has been developed and tested for the spheroidal graphite; and
• Proximity of the project to the southwest US, proposed home of the Tesla gigafactory.

I acknowledge that there can be no ‘definitive’ list of criteria for assessing projects for this exercise, but nevertheless, the above are what I’ve chosen to use. I re-iterate that I am looking here only at the potential ability of graphite projects to service the needs of the Tesla gigafactory within the announced time frame for its development. There are plenty of other future opportunities for companies and projects that might not quite be ready for the gigafactory.

Applying the initial set of criteria to the projects on the TMR Index results in the following three companies (in alphabetical order) and their projects:

• Focus Graphite Inc. with the Lac Knife project in Quebec, Canada;
• Northern Graphite Corp. with the Bissett Creek project in Ontario, Canada; and
• Syrah Resources Ltd. with the Balama project in Mozambique.

It should be noted that additional companies may be developing high-purity, spheroidized and micronized battery-grade graphite, but to my knowledge, these are the only three that have discussed such developments and their achievements in the public domain, and which meet the other primary criteria.

Focus Graphite Inc.
Focus announced the completion of a Preliminary Economic Assessment (PEA) in October 2012 on its Lac Knife project in Quebec, Canada. In November 2013, the company updated the economics for the PEA, which put the capex requirement for going into production at $126M (including a $24M contingency). It also announced commencement of a definitive FS for Lac Knife, which is slated for completion by late spring or early summer this year.

Lac Knife has total Demonstrated mineral resources of 9.6 Mt @ an average 14.8% Cg. Focus plans to produce 44,300 t/year of graphite from the future mine, with a mine life of 20 years. Metallurgical work to date indicates that the ROM concentrate will have a purity level of >96.6% Cg and will cost a total of $458/t to produce.

The flake graphite in the Lac Knife ROM concentrate is distributed as follows:

The >98% Cg purity levels of the Lac Knife flake above 75 μm (constituting almost 80% of the content) is particularly high. The company recently indicated that this is a result of most of the impurities being found at the surface of the flakes, instead of being “ingrained” in the layers.

In November 2013, Focus announced that it was working on the production of spheroidal graphite from Lac Knife concentrates and the development of purification processes for producing battery-grade graphite. During this month’s PDAC Convention in Toronto, Focus showed samples of 99.95% Cg battery-grade, spheroidal graphite. Company management has subsequently indicated that coatings for this battery-grade material are currently being tested, the results of which should be announced in the near future.

In an industry first, Focus announced a significant off-take agreement in December 2013 with a Chinese industrial conglomerate for up to 40,000 t/year of its concentrates. A clarification earlier this month indicated that this agreement calls for a minimum purchase of 20,000 t/year by this Chinese group.

Northern Graphite Corp.
Northern announced the completion of a definitive FS in July 2012 on its Bissett Creek project in Ontario, Canada. In August 2013, the company received final approval for the project and was granted a mining lease, allowing it to begin construction subject to financing. In September 2013, the company updated the economics for the FS, which put the capex requirement for producing 20,800 t/year, with a mine life of 28 years, at $101.6M (including a $9.3M contingency). Operating costs were estimated at $795/t ROM concentrate.

In October 2013, Northern announced the completion of an “Expansion Case” PEA for the Bissett Creek project, which would see an increase in the production rate to 33,183 t, an initial capex of 146.8M and reduced operating costs of $695/t.

Bissett Creek has Probable mineral reserves of 28.3 Mt @ 2.1% Cg. Total Demonstrated mineral resources are an estimated 69.8 Mt @ an average 1.7% Cg. Metallurgical work to date indicates that the ROM concentrate will have a purity level of >96% Cg.

The flake graphite in the Bissett Creek ROM concentrate is distributed as follows:

In October 2012, Northern announced that it had successfully produced spheroidal graphite from Bissett Creek concentrates, with up to 70% yields when starting with so-called large (180-300 μm or -50 / +80 mesh) flake. In September 2013, the company announced the development of a proprietary method for the purification of concentrates and spheroidized graphite to 99.95% Cg. The company claims that the cost of this purification process will be less than $1,000/t. Company management indicates that this is a “low-temperature thermal process” that uses no acids, in which a mixture of gases, tailored to the impurities and mineralogy of the Bissett Creek deposit, is used.

In November 2013, Northern announced that it had partnered with Coulometrics to develop coatings for their spheroidal graphite, and earlier this month, the company announced the completion and successful testing of this work.

Syrah Resources Ltd.
Syrah announced the completion of a Scoping Study (SS) for its Balama West deposit in June 2013, one of a number of endeavors associated with its Balama project. However, because the study was based on an Inferred mineral resource only, the company was required to clarify that the SS did not demonstrate economic viability. I have been unable to find many more details or numbers in an announcement on the SS itself. Balama West was subsequently upgraded, with reported total Demonstrated mineral resources of 13.6Mt @ 19.8% Cg.

A statement in December 2013 indicated that the company was in the process of undertaking an FS to be completed by Q1 2014.

In January 2014, Syrah announced that it had purified ROM concentrate to >99.9% Cg using a “chemical wash” containing acids. Earlier this month, the company announced that it had produced spheroidal graphite with an average diameter of 4.7 μm, from a 100 μm feedstock. It is unclear as to why the graphite was micronized to below the standard 10-30 μm range typically used for battery anodes.

The flake graphite in Balama East ROM concentrate is distributed as follows [per the same announcement made earlier this month]:

It should be noted that the published flake size ranges are for Balama East (which does not have Demonstrated mineral resources), as opposed to the Balama West deposit.

In March 2014, Syrah announced the completion of a Memorandum of Understanding (MOU) with a subsidiary of Chinalco Group of China for an off-take of 80-100,000 t of graphite over an unspecified time period. The MOU required the two parties to negotiate a binding off-take agreement within three months of execution.

Discussion
From their public announcements, it is clear that these three companies are well on their way to achieving the technical milestones required for the production of battery-grade graphite.

In terms of other parameters, however, it may be a little early to determine if Syrah Resources will be able to provide such materials in time for the launch of the proposed Tesla gigafactory. The lack of a detailed, published SS summary or other quantitative analysis makes it difficult to evaluate the applicability of the Balama project to the gigafactory at this time. Completing a binding off-take agreement with the Chinalco subsidiary could go some way to assuaging such uncertainty; however, the larger issue probably relates to the location of the deposit in Mozambique – a long way from southwest United States. This distance puts Balama at a disadvantage in terms of transportation costs when compared to the other two projects, and potential access to infrastructure.

In terms of technical progress, the results announced by Northern Graphite to date indicate that it has a product that is ready to go for the battery market, with similar definitive results expected from Focus Graphite in the very near future. Based on the Bissett Creek Expansion Case PEA and the Lac Knife PEA (and subsequent updates), Focus appears to have significantly lower operating costs to produce its ROM concentrate, and the resulting concentrate has higher Cg purity levels across the various flake-size ranges.

The projects of both of these companies are located in Canada, which presents relatively inexpensive transportation costs for getting materials to the southwest United States.

It is always hard to compare ‘apples to apples’ when it comes to graphite project flake size, as each company has its own mesh size ranges that it uses to report. However, it appears that the Lac Knife ROM concentrate has a significantly higher proportion of flake, at higher purity levels after beneficiation than that for Bissett Creek. Northern states that the cost to get to high-purity battery grade with its proprietary process is less than $1,000/t; how much less will determine the overall costs required to get from the lower purity levels in the ROM concentrate to 99.9% Cg. Starting at levels above 98% Cg, as Lac Knife does, is a distinct advantage.

The completion of a definitive FS for Northern’s project means that the costs of production of ROM concentrate that result from the study have a higher degree of certainty at this point than those detailed in the Lac Knife PEA (and subsequent updates) for Focus Graphite. Relying on the Expansion Case PEA lowers the production-cost estimates for Bissett Creek, but decreases the accuracy of those numbers compared to the original FS.

It remains to be seen if there will be any increase in anticipated product costs in the forthcoming Lac Knife FS. The costs would have to increase by more than 50%, however, to reach those estimated in the Bissett Creek Expansion Case PEA. The Lac Knife cost advantage is likely a result of the significantly higher grade to be found at Lac Knife (14.8% Cg for Demonstrated resources vs. 1.7% Cg at Bissett Creek), and the proposed larger annual production rate, which naturally gives economies of scale. One might question why the estimated cost differential is not actually higher, given the distinct baseline differences, but it likely indicates that the cost of physical comminution (crushing and grinding) of the graphite ore is a relatively small fraction of the overall mining and processing costs.

Finally, there can be no mine without the financing to construct and to operate the mine. While Northern is no doubt negotiating with third-parties on future off-take agreements and other arrangements, the fact that Focus was the first company in the sector to complete such an agreement, and for such a substantial proportion of its planned output, is significant.

Based on the above criteria, I believe that both Northern and Focus have the potential to take advantage of the Tesla gigafactory, if it comes to fruition. Given the volumes of material required, it is entirely possible that both could service the supply chain requirements. I believe, however, that Focus may well stand to gain greater benefit from the opportunity that the gigafactory presents. Its lower ROM concentrate operating costs, likely lower battery-grade purification costs and the fact that it has already secured a significant off-take agreement (making it that much easier to finance the eventual construction of the mine) are key factors.

I wish both companies well, and I make one last observation. Even if the Tesla gigafactory does not come to pass, there will undoubtedly be opportunities for these and other graphite companies to service the needs of the wider EV market in the years to come. Doing so does not need to come at the expense of the environment either, as appears to be the case in the Chinese graphite sector.

Vehicles ‘fueled’ by electricity, especially electricity generated via renewable means, need to be built using as sustainable and environmentally-friendly a supply chain as possible. In the case of batteries for EVs and the graphite required to make them, natural-flake sources are clearly the way to go.

Disclosure: at the time of writing, Gareth Hatch is neither a shareholder of, nor a consultant to any of the companies mentioned in this article.

It is fuel-cell-vehicle (FCV) season again as many of the world’s premier car makers make their annual ritual announcement that they are ‘studying’ or putting into ‘limited production’ passenger-carrying vehicles for personal use (i.e. cars), propelled by electricity generated by ‘fuel cells.’

Once again, the perception of greeniosity is meant to trick us into thinking that the fundamental laws of economics have been suspended.

As far as I can determine, the electricity for FCVs will be generated when diatomic hydrogen molecules are split into hydrogen ions and free electrons, by the action of passing the hydrogen over a catalyst. This previous sentence is totally intelligible to a chemical engineer with the only undefined word in it being ‘catalyst.’

As far as I know the only such ‘practical’ catalysts known for such a reaction are the platinum-group metals (PGMs), primarily the metal palladium (Pd). There has been a lot of research over the last 20 years on trying to produce a fuel-cell chemistry based on a more readily available catalyst than a PGM but the results have not been economical. One such program backed by no less than Kleiner Perkins is for a Solid Oxide Fuel Cell (SOFC), which uses the extremely scarce rare-earth-element (REE) related metal scandium (Sc) in its catalyst.

The thing that all current fuel-cell technologies have in common, is that they rely for their operation on large amounts of very scarce materials such as PGMs or Sc, as in the discussion above.

There is another problem, the relative value to achieving the goal of reducing carbon emissions of a FCVm versus an internal combustion engine (ICE) vehicle, using a catalytic converter. This is the real issue of the most efficient use of strategic metals. Let’s say that a Pd-based fuel cell would use at least one ounce of Pd in order to be able to produce enough electricity to power a four-passenger car. That same amount of Pd could be used to manufacture 100 exhaust-emission catalytic converters, for hydrocarbon-fueled ICE-powered vehicles! Note well, that new global production of Pd is in the 200 tons per year range. This is twice what it was 10 years ago, but nearly impossible to increase as most of the world’s new Pd comes from its production as a byproduct of nickel mining in Russia and Canada, with a little more coming from South African platinum mining. North America produces some 10% in total of the world’s annual new Pd. It is difficult to see how green technologists could ask us to depend on either Russia or South Africa for an ‘assured supply’ of anything much less for an increased supply.

So, the best solution for constructing fuel cells is not to use environmentally precious Pd or any other PGM in such a horribly wasteful way. Unfortunately, the best SOFC, based on Sc, is an even worse solution. There simply is not enough Sc produced in the world. Currently just a few tons a year are produced, so it is believed, in the former Soviet Union.

So we can either rob Peter or mine an empty bank vault.

There is a real analogy here to the REE supply issue now facing the world, and even an interface, since Sc is only likely ever to be produced as a byproduct of REE production (which itself is ironically usually produced as a byproduct of iron mining).

PGMs used in automotive-exhaust emission control devices (catalytic converters) are so scarce as to be among the most recycled materials on the planet. In relative-percentage-recycled terms they are right up there with iron, copper, aluminum, lead, and gold. But it is in absolute terms that the comparison fails. An excellent example of this is the PGM rhodium (Rh), used to eliminate acid-forming nitrogen oxides from automotive ICE exhaust. The world production of new Rh as a byproduct of South African platinum production is 30 tons a year. Yet the apparent demand from the global OEM automotive industry is nearly 50 tons per year. This additional material must come from the extensive recycling of catalytic converters.

It is the same type of thing with the REEs with a notable exception geographically. In China extensive recycling of REE industrial process waste as well as of end-of-life waste, is one of three things that keeps the supply of the key heavy REEs terbium and dysprosium, nearly equal to the demand. The others are illegal production within China and purchase of heavy REE ore concentrates from outside of China. The three processes together provide a doubling of ‘official’ production of these key REEs.

Only now in 2014 is there even the beginning of a non-Chinese REE recycling industry. This is because with just one exception, there is no REE separation plant outside of China with the capability/capacity to separate the heavy REEs from ore concentrates or scrap; there are 38 such facilities in China.

What little Sc is produced in the world may be augmented by the three processes above, but officially there is no verifiable Sc production anywhere. So, if there is to be a fuel-cell-powered OEM automotive power-train revolution, it will have to be itself driven by a fuel-cell technology that as of now is unproven, and does not involve a need for large quantities of either PGMs or Sc.

At the moment, supplies of PGMs and Sc globally are either insufficient or unavailable. Thus fuel-cell-powered vehicles will be curiosities, or the toys of the elites, for the foreseeable future.

Earlier today the Chinese Ministry of Commerce (MOFCOM) announced the first round of allocations of rare-earth export quotas for 2014, to companies operating in China.

A total of 15,110 t of export quotas was allocated in this first round, comprising 13,314 t of light rare-earth (LRE) products and 1,796 t of medium / heavy rare-earth (M / HRE) products. Initial mainstream media reports appear to have missed MOFCOM’s indication that the first-round allocation represents 70% of the annual quota for 2014. If this is the case, then the estimated quota for 2014 will be 21,586 t, approximately 70% of the 2013 quota allocation of 30,999 t.

Update (12/14/13): Further clarification of the MOFCOM announcement indicates that the first-round quota allocations for antimony, indium, molybdenum, silver, tin and tungsten will be 70% of their respective annual quotas for 2014, but that this will NOT be the case for rare earths.

One company that usually receives export-quota allocations, Inner Mongolia Baotou Hefa Rare Earth Co., will not be given a specific allocation, according to MOFCOM, until it has rectified environmental issues at its facilities.

Let’s now take a look at the allocation numbers associated with today’s announcement, before reviewing them in the context of the recent allocations. The companies below, highlighted in green are Chinese / non-Chinese joint-venture (JV) companies – the rest are Chinese-owned. The list is sorted from highest-to-lowest total allocation:

* Part of China Minmetals Group, which was allocated a total of 812 t.
** Part of Molycorp, which was allocated a total of 1,168 t.
*** Part of Baogang Group, which was allocated a total of 875 t (significantly lower than in previous allocations because Inner Mongolia Baotou Hefa Rare Earth Co. was not assigned quota at this time).

Here is a comparison of the quota allocations for the past six years:

If the second allocations in 2014 are similar in terms of LRE : M/HRE proportions to the first, then 11.9% of the total would be allocated to M/HRE products in 2014. This compares to 11.7% for 2013 and 12.5% for 2012, the first year that the quotas were split in this way.

There seems to be no reflection in the quota numbers, of the recent World Trade Organization ruling against China, with respect to rare-earth exports. It remains to be seen if the second allocations are in any way affected.

Update (12/13/13): by request I have added notes above to indicate which two facilities are owned by Molycorp.

Last month saw the publication of a new report by Adamas Intelligence, in which the company predicts a massive reduction in active rare-earth-element (REE) projects due to diminished investor interest, and a stark inability for most projects to be economic because of their inherent elemental make up, poor cost and pricing assumptions, and a lack of processing capacity outside of China. Adamas kindly provided TMR with a copy of the report for review.

Titled “Sifting The Winners From Losers Amidst The Impending Rare Earth Industry Shakeout”, the 121-page report connects these negative factors to the lingering effects of the 2008-2009 global financial crisis, and the recent spikes in REE prices.

With a dramatic reduction in the number of ‘live’ projects in the near future as its initial premise, the Adamas report attempts to determine just who the ‘winners’ and ‘losers’ in the REE sector will be, by using a set of comparative parameters that normalizes each of the existing advanced projects via a single price deck, and applying discounts to basket prices using a consistent methodology and cost factors for each project, as appropriate.

The result is a list of just 10 projects that Adamas believes are going to make it.

The report kicks things off with a Landscape section, providing a history of the REE sector from the 18th century to the present day, including industry development and the growth of REE demand. This section also includes some good background materials on the how and why of REE-bearing mineral formation, as well as a brief review of the 800 or so occurrences of REEs around the world, drawing mainly on US Geological Survey data. Particularly useful in this section is a description of over dozen different types of REE deposits.

Using 46 of the advanced REE projects present on the TMR Advanced Rare-Earth Projects Index on June 1, 2013 as its basis, the report then turns its attention to specific projects for subsequent analysis. Created in 2009 to help compare ‘apples to apples’ in the REE sector, the TMR Index was first published on our Web site in 2010 and has subsequently become the de facto industry standard for tracking such projects. To be included on the Index, a REE project needs to have a mineral-resource estimate that is compliant to internationally recognized guidelines such as Canada’s NI 43-101 (which uses the CIM framework), Australia’s JORC Code and South Africa’s SAMREC code.

The Adamas report divides the 46 projects into two groups. The first includes those at the so-called resource-exploration stage, where a resource has been defined but no further work has been completed. The second includes projects at the so-called project-development stage, ranging from those currently undergoing a preliminary economic assessment (PEA) / scoping study, to those at the pre-feasibility (PFS) and feasibility study (FS) stages. As it happens, there are 23 projects in each of the two groups.

The report then looks at the different forms of REE products that each of these projects is slated to produce, and how the project owners plan to derive revenues from them. Toll separation is the route that makes the most sense to me, given my involvement in the Innovation Metals initiative to develop an independent REE toll separation capability in North America.

It is quite remarkable, however, how many companies have given little to no thought  beyond the production of an intermediate mixed REE concentrate. A good number have completely unrealistic expectations of the revenues that they think that they will be able to generate from selling such concentrates. The Adamas report does a particularly nice job in breaking down the ‘sentiment’ of the various project owners on this topic, evaluating in detail the implications of the lack of processing capacity and demand for intermediate products outside of China (hint: it’s not good for the sector…).

Adamas subsequently builds here on its earlier premise that an industry shake out is inevitable, given the sheer number of projects in the pipeline – a premise that Jack Lifton and I share. As I frequently mention to our clients, TMR has always looked at this sector from the perspective of the technology supply chain, which is not necessarily aligned with that of the investment community. The supply chain is looking for raw materials with which to manufacture products, not a three-bagger in the next 12 months…

Though there are exceptions, in general the supply chain doesn’t care which REE projects will successfully come to fruition, only that enough come to fruition such that their ability to secure REE metals, oxides and other compounds from sources outside of China, at a reasonable price, is realized. Individual players in the supply chain will, however, want to have a good idea of which projects stand a chance of success, for the purposes of securing supply contracts and other arrangements.

From the investor perspective, however, there are simply too many projects chasing a finite amount of capital. As an accredited investor remarked to me only last week, there is a large volume of opportunities chasing capital right now, in a very tight money market. Valuations for individual companies continue to decline “which makes money very patient”.

Adamas rounds out the Landscape section with some interesting commentary on the “[m]isleading metrics and ambiguous reporting practices” that we see in the sector. The wide variations in the way that data is reported by junior mining companies is by no means unique to the rare-earth sector – it is however more egregious than pretty much any other sector out there.

To combat the various reporting discrepancies, in the Analysis section Adamas begins to lay out an approach for normalized metrics that allow for the appropriate comparison of one project to another. In general I like the approach that is used here. The free TMR Index keeps things pretty simple for REE projects, focusing on the most basic project information such as resource size, grade and distribution of individual rare-earth oxides and the like. TMR’s paying clients and subscribers get access to the dozens of additional parameters that we track, and about which any serious student of the sector needs to be aware (what TMR refers to as ‘probability of success’ metrics). Adamas does a good job of its own in collating these types of metrics, and in using them to help the reader make the ‘apples to apples’ comparisons that are absolutely required when evaluating the sector.

The report collates specific parameters such as project size, grade, relatively distribution and potential co-products. It also includes projected operating costs, capital costs, sustaining capital costs and contingencies, as well as projected head grade, production capacities and recovery rates. All of these parameters are used to paint the appropriate picture.

Analysis begins with the 23 exploration-stage projects, with Adamas comparing and ranking projects on the basis of four parameters that have a specific weighting:

1. Total quantity of in-situ REOs in the mineral resource (40%);
2. Quantity of in-situ critical REOs (CREOS) and their relative abundance in the resource (30%);
3. Hypothetical value of the in-situ REOs (20%); and
4. The relative abundance of total REOs (TREOs) minus the relative abundance of oxides of lanthanum and cerium (10%).

The 23 development-stage projects are evaluated with a different set of parameters, weighted as follows:

1. Gross profit from REOs and REO equivalent over the life of the mine (40%);
2. Total quantity of CREOs recovered over the life of the mine (20%);
3. Capital expense payback period (15%);
4. [Revenues from non-REOs / total cost] + [75% x [revenues from REOs / total cost]] (10%);
5. Annual production of less-desirable REOs (7.5%); and
6. Project capital cost per unit mass of REO and REO equivalent produced annually (7.5%).

This differentiation between the two types of projects is pretty useful and logical. However, the Adamas ranking approach does not allow for direct comparisons between projects in the exploration-stage group, and those in the development-stage group, since the latter relies on information that can only come from a completed PEA, PFS or FS report.

It should be further noted that Adamas does not include Molycorp’s Mountain Pass or Lynas Corp’s Mount Weld CLD projects in this report. At first glance this is probably because both of these projects are now in operation (though their run rates do not yet match their operational capacity), and in a sense have ostensibly ‘made it’. It should be noted, however, that anyone looking for data on these two projects of a similar type to that currently available for development-stage projects will have a surprisingly hard job doing so – especially for the Mount Weld CLD project. Because these two projects ‘came of age’ a number of years ago in terms of resource and reserve development, much of the information is simply not in the public domain.

Actually reaching the production stage is no guarantee of either profitability or strict adherence to either a previously assumed operational or business model. As the 19th century Prussian military strategist Helmuth von Moltke remarked, “no battle plan survives contact with the enemy”.

Adamas uses a proprietary projected 2015-2020 price deck for separated REOs, in order to put dollar values on product sales. It is similar to the one that I use in my own work, which I based on historical (pre-2010) prices, modified by a few relevant external factors. The Adamas numbers are refreshingly conservative, which means of course that a number of the junior mining companies are not going to like them. Swap these prices in for those in many of the PEA reports out there (and even in one or two PFS reports) and you’ll quickly find that such projects are not going to be economic – a finding that becomes readily apparent in the Adamas report.

In addition to REOs, Adamas has also developed a price deck for co-products of REE projects, such as zirconia, and oxides of niobium and tantalum. The report further normalizes project basket prices to account for the different types of mixed REE concentrates that each project will yield (e.g. carbonates, hydroxides, chlorides, oxides etc.).

The report includes some interesting charts that plot various parameters against each other. A selection of these charts is shown in the gallery below (they are fully labelled in the report itself).

So, after assigning rankings to each project based on the metrics above, within each group Adamas gives each project a final ranking, based on a final score using the weightings described above. I have to say that the final rankings for the exploration-stage projects contained a few surprises. There were fewer surprises in the development-stage project rankings; I am not at liberty to share specific details here out of respect for the proprietary nature of the Adamas report – get a copy of the report for yourself to see where the various projects stand.

It should be clearly noted that the final rankings obtained via the Adamas methodology depend entirely on the parameters chosen, and the weightings that were applied. Such an approach is necessarily arbitrary, and changing the parameters used, or the weightings assigned, will doubtless result in different outcomes. It goes without saying that the dollar-value assumptions made, are based on the data provided by project owners and their engineering consultants in the technical reports that they put out. Nevertheless, it is certainly an interesting and useful approach. If you’d like to look at alternative methodologies, Adamas provides all of the underlying data used to create the rankings, so that you can ‘roll your own’ if you so desire.

The Analysis section concludes with an acknowledgement that the ranking approach used may not suit the requirements of every investor or other users of the data. The report notes, however, that the top seven-ranked projects in the development-stage group account for over 90% of the total group’s gross profits, as represented in the chart below.

The report then turns to the fundamental question posed in the title of this review article – who will survive the impending shakeout? In the Outlook section, Adamas predicts that only 10 out of the 46 projects will make it. Of these 10, eight are in the development stage, with only two projects currently at the exploration stage making it through to the other side.

Adamas summarizes its findings as follows:

• The top-five ranked projects in the development-stage group “offer robust profit margins, timely payback on pre-production capital, and the prospect of solid revenues from REOs and non-REO products alike. As proposed, these projects can endure REO price swings and will remain lucrative amidst a future marked by low REO prices”.

• The sixth, seventh, and eighth ranked development-stage projects, “have what it takes to endure the impending bloodbath. Robust profit margins, timely payback on pre-production capital, strategic integration, REO separation plans, and/or promise of polymetallic revenue streams are just some of the pros that will keep these players alive”.

• Adamas notes that five of the top-eight ranked development-stage projects are looking to produce separated REOs, whereas the other three plan to produce only mixed REE concentrates.

• Adamas believes that its third- and sixth-ranked exploration-stage projects will survive. “High relative distribution of CREOs and potential speed-to-production will keep the third-ranked project interesting, while polymetallic revenue potential, an expansive resource, and toll-separation arrangements will keep wind in the sails of the sixth-ranked project”.

The report goes on to warn of hurdles that will remain even after the herd has been culled.

For the remainder of the report, Adamas has produced one-page Profiles for each of the 46 individual projects that it reviewed, containing a multitude of data points and parameters that will be of interest. An example of the format that they’ve used is shown here (click to enlarge).

So now to getting access to the report; Adamas is offering two versions of the new publication:

1) The complete 121-page report, including the Landscape, Analysis and Outlook sections plus the individual project Profiles, is normally available for $2,997. I managed to persuade Adamas, however, to give TMR readers a 10% discount on that price for a limited time, which will drop it to around $2,697. To order the full report, click HERE and use the coupon code ‘TMR-REE‘ to get your discount:

2) Adamas is also offering the set of Project Profiles as a standalone product. The 58 pages in this offering include the set of 46 one-page profiles for each project, as well as the Adamas price decks for REO and non-REO products, and details of their basket-price discounting methodology and separation costs. Your investment for this offering is $997, and it can be ordered by clicking HERE.

Both offerings come with four quarterly updates, and will include any new projects that are added to the TMR Advanced Rare-earth Projects Index since the last update. The first update is scheduled to be published on November 1, 2013.

At the Perth AusIMM Critical Minerals conference held in June this year, my esteemed colleague Dudley Kingsnorth presented updated forecasts for the near-term future of the global rare-earth market. Some of the details were recently reported by InvestorIntel. Prof. Kingsnorth’s forecasts always command attention; I would like to offer my own perspective on what we might expect in the latter half of the present decade.

No nation has ever industrialized faster than the Peoples’ Republic of China is now in the process of doing. But even so, and even though we admire China’s breathtaking industrial (re)evolution, common sense tells us that every so often, even the champion runner must take a breather to recover his equilibrium so he can continue, or realize that he cannot continue the pace (note: I’m an old-timer, and I can’t abide political correctness in the written word, so I won’t alternate ‘he’ and ‘she’ or substitute some form of ‘person’ in common phrases). This is finally what’s happening in China. Optimists will say that China is taking a breather, to see just where the new base line of its GDP growth should reside. Pessimists will tell you that the game is over, and that China cannot keep expanding forever. As usual the reality lies somewhere in between.

I emphasize the state of China’s economy, because in the case of the rare-earth total supply chain, China is most of the global ball game. Certainly for the rest of this decade, as China goes, so goes the rare-earth market. China, as of this writing still produces 95% of the world’s rare-earths supply and China, as of this writing, still consumes more than 75% of the world’s rare earth supply. Consumption here does NOT mean domestic internal use; it means that China adds the majority of the final value to its rare-earth supply and even that is usually in the form of components of more complex assemblies (vacuum cleaners, automobile components, or wind turbine generators, for example).

It is becoming clear that China likely does NOT possess the world’s largest resources and reserves of the rare earths. That title, so my colleague and TMR co-founder Gareth Hatch informs me, may well belong to Greenland or Canada. Let’s call them together the North Atlantic Mineral Resource Zone (NAMRZ). That said, China certainly possesses the world’s largest (by volume production capacity) rare-earths total supply chain, and its very large reserves of rare earths could supply the world’s demand for centuries. The rare earths in the NAMRZ are not only undeveloped, but they are in a zone that currently does not have enough access to capital or technology domestically, to create a total rare-earths supply chain of the magnitude of the one in China.

The ideal solution for the NAMRZ would be to put in place as much value addition as possible, so as to capture the most benefit from its vast resources of ALL of the rare earths. The business model of Innovation Metals Corp. (IMC), co-founded by Gareth and to which I am a technical advisor, accomplishes just that. IMC would reduce the tens of thousands of tonnes of mixed rare-earth concentrates that could be produced in the zone from hundreds of thousands of tonnes of mineral concentrates, to a few thousand tons of rare-earth chemicals, and ultimately metallic forms, which are much more valuable and profitable.

But let us turn back to where the rare-earths market may be in the latter half of the decade. First of all, China is not reducing the production of rare earths and condensing the size and numbers of players in the rare-earth total supply chain, to single out the rare-earth industry only for environmental issues. China is modernizing. Credit is too easy; savings are too large; consumption is too low; and production capacity across the board is too large in China, for an economy that is slowing down its rate of growth to a new normal. Large operating companies in the rare-earth sector and beyond, would do well to notice this ‘new normal’ in the American, Australian and other economies.

China, in other words, is trying to streamline its economy to become more responsive to the markets and to lower costs across the board, so as to remain competitive globally, even as its standard of living and labor costs increase rapidly. It is frequently pointed out that the world’s ‘second-largest economy’, on a per-capita basis, is still only one quarter of the size of the US economy, on a per-capita basis. What is not pointed out, however, is that China’s middle class is growing, while America’s is declining. This means that discretionary purchases of gadgets that depend on rare-earth enablers for some of their properties, such as all miniaturized personal entertainment, communication, data processing, appliances and the like will continue to increase in China, even as its economy slows to a new equilibrium of somewhere between two (the best case) and seven (the current case) times the rate of growth of the US economy. You don’t need to be a mathematician to understand that a Chinese economy that consistently grows at a rate of more than twice that of the US, will surpass the total GDP of the US within just a few years (unless there is an American economic miracle).

I foresee that the Chinese domestic total supply chain for rare earths will become more competitive as it reduces the number of marginal and loss-making individual players. It is difficult to see China’s production capacity for rare earths ever being less than the world demand. If, as Prof. Kingsnorth recently forecasted, we see 200-240,000 tonnes of rare-earth demand in 2020, that number is still less than China’s current capacity for their production at the mine site, reflected perhaps in Prof. Kingsnorth’s forecast of 240-280,000 tonnes of rare-earth SUPPLY in the same year.

The only impediments to continued Chinese dominance of the rare-earth total supply chain would be:

1. Political insecurity of supply caused by Chinese actions;
2. The creation and rise of efficient non-Chinese total supply chains, with cost structures less than those in China (note: if non-Chinese mines produce at lower cost than Chinese mines, then the buyers of this lower-cost feed stock will first of all be Chinese rare-earth processors and end users, unless the rest of the non-Chinese total supply chain is put in place and operates at an even lower cost!); and
3. The rise of an outlier such as India or Brazil, as a lower cost actor in the total supply chain space. This would be, like Chinese dominance, an economic phenomenon that is very unlikely to occur in nations with less centrally managed economies than that of China.

China today produces all of the world’s heavy rare earths as well as the majority of the world’s neodymium/praseodymium. Thus China has a virtual monopoly on critical rare earths as they can be defined by today’s consumer demands. China does not seem to have, however, any hard-rock deposits with economically recoverable heavy rare earths. Therefore, the extremely inefficient and costly-to-process ion-adsorbed clays are the only resources available in the world today, for terbium, dysprosium, and yttrium, which together are three of the five or so “critical” rare earths as I define them (there is growing evidence that europium is not in short supply and will get less likely to be, even if its new production is limited to just China).

I agree that market forces drove the rare-earth exploration boomlet of the last few years, but that market was capitalized by the casino-like gamblers who create and bet upon commodities within the venture exchanges of Toronto, Vancouver, Perth, New York, and London. The total supply chain issue was completely ignored by the hucksters and promoters in those markets, but its centralization in China and the dearth of the skills to create or expand it outside of China, kept genuine productive capital investment out of the non-Chinese market.

For the last six years, at least, I have heard over and over again the lament, “why don’t the big end users give us off takes that are either paid for, or that we can use as collateral to borrow to develop our mines?” The reason is that they had nothing to gain and a great deal to lose, by investing in the lowest value-adding part of a natural-resource supply chain – the development of the mineral ore body into a producing mine. None of the Global 1000 manufacturing companies buys directly from a mine. They buy from their tier-one suppliers who in the rare-earth supply chain are probably the last of 7-10 steps in the end-user directed total supply chain.

While the promoters owned the market, productive capital was as scarce as junior miners who understood their place in the rare-earth total supply chain.

The realization that there is a complex total rare-earth supply chain is a recent development. Those who have recognized it are now scrambling to either place themselves as far downstream in that chain as they can, or to partner with those who are freestanding members of the chain, downstream from them. As I see it, the only hope for non-Chinese juniors who are in the medium/ heavy rare-earth space, is to combine their efforts to support a central toll-separation facility such as the one being developed by IMC, so as to bring their costs of moving downstream under control. Most of the investment in the rare-earth junior mining space was speculative and wasted. The survivors will downsize their participation in the total supply chain, so as to have the lowest break-even possible, and they will combine their efforts into the least number of separation/purification and metal/alloy making plants possible in order to assure profitability.

I sincerely believe that if a group of juniors were to approach large end users with such a plan, and with the skill sets in place from existing qualified technology vendors, then the end users would buy in.

In the mean time, if you want to know what will be the supply and demand of the rare earths for the rest of this decade, I would ask the Chinese for details of their industry consolidation plan, their timetable for switching from an investment / export to a domestic-consumption economy, and their political plans to co-operate within the WTO rules. After that, I would ask the Japanese what they are going to do about their lack of the initial step in the rare-earth total supply chain. I’ve heard enough anecdotes to give me serious doubt that Viet Nam is going to be an easy partner; I don’t doubt that once India gets into the production of rare earths, it will expand into the total supply chain and become a competitor, not a partner, of both Japan and then of China.

I predict that only one of the two large-scale existing light rare-earth producers will survive. I don’t know yet which one I would pick between Molycorp and Lynas. I predict also that there will be several non-Chinese medium / heavy rare-earth producers that will survive and thrive, but only by moving down the supply chain, as far as they can, to reach a reproducible profitability at the lowest cost.

Rare-earth production could well reach 240-280,000 tonnes by 2020 but almost half of that would be cerium, most of which will have little in the way of unique use. Therefore the real supply of useful and valuable rare earths will be slightly more than half of those figures.

When I project a future basket price for a project, these days I only price the critical rare earths from a deposit. Try that for a dose of optimistic reality.

Disclosure: Jack Lifton is a member of the Technical Advisory Board for Innovation Metals Corp. At the time of writing, he holds no shares or stock options in, nor does he consult to, any of the publicly traded rare-earth companies mentioned above.