I’m in Beijing, China, where I spoke yesterday at the Asian Metal “Rare Earths Summit 2010”. I sort of stumbled through my presentation, because I was absolutely distracted by the candor of the speakers from the Chinese rare earth mining, refining, and end-user industries. Considering the volume of nonsense being broadcast outside of China by stock promoters, the conference was an amazing breath of fresh air in a city not well known for its air quality (although I must say that Beijing weather and its air are first class right now).
Subscribers to The Jack Lifton Report can read the paper that I presented (if you’re not already a subscriber, joining is free and it’s as simple as filling out the short form in the upper right of this Web page). I warn you that it’s not for the complacent. You’re going to find out some facts about the Chinese metals industry, particularly about its size and growth rate, that will make you think very hard about the position that America’s foolish concentration on not producing natural resources, has put us into.
I heard fascinating talks by Dr. Zhu Baoliang, Chief Economist of the Economic Forecasting Department of the China State Information Center, and Professor Zhao Yumin, Director of the Chinese Academy of International Trade and Economic Cooperation. Both of these speakers emphasized that China welcomes non-Chinese production of the rare earths into the world market, because China’s domestic economic growth rate means that China needs more and more of its own domestic resources of all metals for its own use. Therefore, since China does not want to impede the growth of the world economy of which it considers itself a part, it must hope, both speakers said, that its best customer and biggest competitor, Japan, will be able to find resources of metals such as the rare earths from somewhere other than China.
After my talk Dr. Zhao asked me my opinion. I told him that I believe that China wants Australian, and/or American, and Canadian and/or South African rare earth mines to come into production so that, not only can China dedicate more of its own resources to its domestic economy, but also that China has the option to buy rare earth materials from non-Chinese suppliers, should the time come when Chinese demand outstrips Chinese domestic supply.
A key issue for the Chinese economy and the Chinese mining industry is a preoccupation with preventing commodity price inflation and preventing the Chinese currency from appreciating so fast, that Chinese exports become non-competitive. These pre-occupations are keeping the prices of all commodities produced in China from rising. In the opinion of the Chinese speakers, the low prices of the rare earth metals are a result of economic forces far beyond the industry’s ability to control.
An old China “hand” (as we used to call men like him) who was at the conference, told me that the Northern rare earth mines operate at best with a 20% gross margin and the Southern ones, the so-called ionic clays from which the higher atomic numbered rare earths, europium, dysprosium, and terbium are produced, can run so that they have a 30% gross margin. These margins are too low for the amount of environmental remediation necessary to meet WTO and new stringent Chinese domestic standards for safety and health. At the same time that the Chinese rare earth industry is facing environmental challenges, it must also restructure to improve efficiency and to eliminate so-called artisanal mining entirely.
The end result is that China’s mining industry as a whole and rare earth mining industry in particular, will be producing less material in the near term than was originally planned. Chinese high tech manufacturing industry, especially the alternate energy and other green industries, are swamped with business, and they don’t care about the problems of the mining industry – just as would happen anywhere in the world.
This in my opinion is a fantastic opportunity for those rare earth ventures outside of China that can be brought into production as soon as possible. There will be a sorting out later in the decade, when the Chinese light rare earth mining industry has remediated its environmental and productivity issues, but until then there will be strong markets in both Japan and China for rare earths.
I will report on my views of the future of the rare earth industry both inside and outside of China next week, when I return from China to attend the APS workshop on critical materials at MIT. I will have another chance there to speak with Dr. Karl Gschneidner, the dean of rare earth scientists, and Dr. Anthony Mariano, the world’s best known rare earth geologist. I want to get for you their opinions on what I heard in China.
Stay tuned and hold on to your money until we know a little more.
Jack,
I’ve got to ask you about that last statement “…hold on to your money until we know a little more.” Are you implying that people possibly interested in investing in the REE market should save some dry powder from other investments to be able to enter the REE’s, or are you implying that potential investors in the REE market should be in a “HOLD” status until we see how things shake out down the road?
Thanks!
DGood,
That is a very good question. I am still in Beijing at the moment, but I think I’d like to answer you now:
I make my living by consulting to institutional investors who are doing due diligence on rare metals production and utilization strategic investment opportunities. My specialty is to study such an opportunity as closely as I am allowed-some of them not only let me tour their facilities they also let me examine some actual records of, for example, drilling or elemental analysis, and even more. I then use a metric I have devised along with a colleague as a model and calculate the probability of commercial success of the venture I am studying. This is not a measure in any way of the current share price of the company, or, in the case, of a company that is private, of any future share price. It is a measure of the value of that venture to the global industrial community within which I spent my life in my first career,
Having said all that I can now answer your question from that perspective.
There are very few REE ventures out there outside of China as well as inside of China for which we have incontrovertible-perhaps third party independently verified-data as to their ore body compositions, extent of ore body, metallurgy, business model, and marketing plans. You can speculate and invest in any one of the non-Chinese ones that are listed, if you like. Just remember that when you do that you are betting only that someone else is willing to take a greater risk that you are taking and will then pay you more than you paid for that share. This is how the system (game) works when it’s working mostly in the dark.
I’m trying to tell my institutional clients only whether or not a company will deliver its product in a time frame that will allow them to make a reasonable profit on their large intended investments in a time frame with which they can live.
My one line of advice in this brief report should have been better stated.
I repeat the advice then this way:
I do not have enough information yet on most of the newly listed companies to assess their probability of commercial success with any degree of comfort. As for the older intended new producers and the restarting of one former producer I am confident that the market wants some of them to succeed as does the global industrial manufacturing community, including that of the People’s Republic of China.
It is necessary that for a mining venture to succeed it must have an extensive ore body of high enough grade, an existing or easily built infrastructure, a metallurgy, access to the refining industry, and a marketing plan. None of these by themselves or even all of them together are, however, sufficient for commercial success. It is the operational management of a company that has everything else going for it that matters most of all.
My personal assessment of managers is not a matter for public discussion, but I will say that I was astounded last year when in making simple true statements about the composition of ore bodies using data taken from public records I was soon afterwards the recipient of two letters threatening me with legal action for allegedly disparaging the entities who sent me the letters. I responded privately to those threat letters, and I will tell you publicly that those letters caused me to rethink my former assessments of the management of both companies.
I have decided to start making a public list of mining ventures for which I have high hopes of commercial success, but unlike my colleague, John Kaiser, who is a financial analyst as well as an expert on mining, I cannot tell you if you should or when you should invest based on just the activities of the companies in the financial market.
I will just tell if I would invest at this point based on my belief in the company’s probability for future commercial success.
I’m going home (Detroit), and I’ll be in Boston from Weds to Saturday. I’m going to the UK the following week and then to NYC for the Hard Assets Conference on May 10 at the Marriott Marquis. I’m planning to have my first brief list of REE companies ready to disclose in NYC.
Don’t let that prevent you from investing between now and then. It’s just that I’m waiting for information and the answers to some questions before I would do so.
Dear Mr. Lifton (I prefere the German way to call someone),
I am as you short of my seventy´s birthday and since 45 years in connection with stock, fonds and equity investment.
Let me tell you, that I am engaged in REE´s as I was told from an Australian friend (I have married on Phillip Island near Melbourne) that the REE-future may be interesting. That was 2005.
But from all the people I have met in this “environment” you are special. Your answers are correct, your explanations are precise. I am happy to have met you by the help of my friends from http://www.goldseiten.de, where I am writing sometimes about my ideas how to invest. (Without any commercial interests).
My request to you is: If you are meeting Dr. Kurt Gschneidner (looks like German or more Austrian ancestors) please ask him about his view about the chances the Gadolinium use in cooling systems in the nearer future. I my self have developped a new technology for a cooling system, which is (that is my humble conviction) morefold efficient that the existing principles. But if the Gadolinium using system would have chances to get the success on the markets, I am convinced that this system will win.
Thank you for helping me to decide what I should do.
Best regards from Germany
Dr. Dietmar Siebholz
I posted this opinion elsewhere, on the 23rd which I think generally reflected what Jack found out, though no time line or estimated price increase was offered.
“For the past few months I have repeatedly stated that, imo, prices absolutely must rise, and probably dramatically in the next 2 years. But, given the apparent global economic resurgence, and China’s problems with its overproduction, environmental degradations (which it now has to correct) , and its realization that all the hyper / underpriced production has NOT produced the economic boon it anticipated, China will escalate prices until it begins to see a profitable balance. Meanwhile export supply quotas will be reduced virtually ensuring that prices will increase, which will embolden investments in other nations’ REEsources.
And this will be the driver that garners the investment monies we need to see in the West. In the west, higher wages, environmental mitigation, and higher domestic demands will augment the already rising prices from China, to make REE businesses, from mine to market, viable.”
Well, I’d rather be lucky than good, though that doesn’t happen often enough .
Thanks for your reply, Jack Now another question if you don’t mind, sir.
What are your thoughts on mergers, partnerships, and/or acquistions in the REE industry?
I picked up on your thoughts about the growing number of newer entities entering the REE sector, and how this number seems to be growing and growing. I’ve read and heard, and I believe it really is accurate, that there is no way ALL of these companies can make it. They can’t ALL be profitable.
I can look out over the currently known “larger” players and wishfully hope that a couple of them would combine to begin to create a stronger North American force in REE’s which would cover the full mine-to-market process, combining one company with say some highly desirable properties with another company who might have a processing facility and some fairly decent properties.
Since none or very few companies have the money or financing to complete acquistions, can you ever see mergers or partnerships taking place among North America entities? Do you believe that such activity would be highly beneficial in this industry?
Thanks in advance for your thoughts.
Dear Mr. Lifton:
As usual, your comments are interesting.
I would like to speak briefly about an unusual solution to stockpile PGM’s and HREE’s.
As previously mentioned, I would like Canada to establish a strategic stockpile of these metals. However, these metals would not be put in one place. They would actually be used in millions of places.
The car manufacturers and customers would lease the PGM’s and HREE’s from the government that are used in all vehicles. If the car no longer operates, then all PGM’s and HREE’s would be recycled at privately owned facilities which meet government approval. The PGM’s and HREE’s could then be re-leased.
Dennis Carlton Rossi
Dear Mr. Rossi,
I think you’ve hit on a good idea that is something new. It would actually not surprise me if a government such as that of China, Japan, or Korea, the economic systems of all of which hold that domestic natural resources are the property of the people or of the state, decided to stockpile and “lease” `critical rare technology metals to companies, which then would “utilize” them for (domestic?) customers who in turn would be obligated to return the “metal” to the stockpile for recycling at the end of their use of it. In fact this may be the only way to resolve the future’s limited amounts of rare technology metals so that some fairness of distribution is maintained.
While it is true that Canada is also among the nations that recognize the ownership of domestic natural resources as belonging to the people I think that Canada’s government would have a hard time accepting such “permanent” stewardship of a resource.
I realize that in my answer I may have gone beyond what you were suggesting, but I think this is a very good idea, and, quite frankly, I don’t see any other way for a future world to handle the issue fairly.
DGood,
If the goal of a M&A in the rare earth sector is to create one supplier of commercial quantities of all of the rare earths either in one country or, at least, outside of China in the near term then some type of merger between ( or acquisition of or by) a larger REE producer with a smaller one will happen. If the goal is merely to create an integrated producer then I would guess that the larger buyer would be a Chinese entity such as China Min Metal or China Non Ferrous moving to increase its core supplies of the HREEs in particular. I think this is already underway as we have seen over the last few years attempts by large Chinese resource based companies (CNOOC and China Non ferrous) to buy both Lynas and Molycorp.
To believe that the above moves were just a unique attempt not to be repeated is to mistake a feint for an all out attack. Businessmen everywhere seek competitive advantage in their markets; that’s what business is about.
There is as of yet no well capitalized western REE miner that has undedicated capital for mergers and acquisitions. Molycorp seems headed in that direction. If it succeeds in an IPO or looks as if it will I think we will see Chinese companies actively seeking acquisitions beforehand. In fact I think it is already happening, and not just in the REE sector. Chinese, Japanese, and soon Korean comapnies are actively seeking natural resources of all kinds everywhere. Don’t narrow your focus so much that you ignore opportunities to profit from Chinese plays in the western natural resource markets in general.
Mr. Lifton,
Thank you, you’ve hit on exactly what I have been thinking too. If I were the Chinese, and I had endless$$s to spend on natural resources, don’t you think they are looking hard to our northern border, especially after being spurned by the Aussies with Lynas.
Whether it’s Avalon’s or Quest’s deposit, with their advanced metallurgical knowledge and experience with HREEs, they could simply buy the entire deposit of either company for about $1B and solve their HREE supply issues for a long time to come.
I think you’re right 100%, this is business and they don’t want to play their cards too quickly, but my bet is the M&A activity really heats up once some of these deposits like AVL’s and QRM’s are much more defined and the PEA and metallurgical work is figured out.
It would be good to get this done for them, putting on my business hat, before Chinese official policy forces REE prices skyward I think, so we may see a lot of activity this fall I would guess.
But the idea that the Chinese could lock up a supply like AVL’s or QRM’s (which I am betting is going to be the biggest REE find to date outside China – the mineralization results are absolutely outstanding) for a paltry $1B or so (pocket change for the Chinese) makes absolute sense.
But I think the Chinese are going to want something with HREE in good supply. AVL is about 20-25% and QRM is about 50% and mid-40s in the lower grades.
Interesting times are ahead. My thinking is that Moly may take another run at GWG or (given the history there where they tried to essentially steal a solid asset from GWG) they may try to get RES, which has its own processing capabilities.
But I guess my question to you Mr. Lifton, is there any reason you can think of where the Chinese don’t try to make a “strategic” purchase of either AVL or QRM just to lock down the resources? Or do you think they will try to stick with Australian deposits — but those really don’t have solid supplies of HREEs? The Chinese were willing to purchase a majority ownership in Lynas for over $450M, I don’t know why they just don’t try to take out an entire company in Canada for $1B and be done with it.
Many thanks for your thoughts.
There is one big obstacle to consider the PGM contents of a car as a retrievable capital: using the car disperses high amounts of nanometric PGM along the roads, which will not be re-imbursed by the recyclers.
http://www.businessgreen.com/business-green/news/2263071/un-warns-rare-metal-shortage
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