I guess that there’s no need now to worry about the future supply of the rare-earth metals. Earlier today the Wall Street Journal reported, in an article entitled “Rare Earths Grow Less Rare“, that Goldman Sachs says that although supplies will remain tight in 2011 and 2012 and prices will remain high, we can be assured (by Goldman Sachs analysts) that the rare earth supply shortage situation will end in 2013 as new supplies come on stream from outside of China.
I sincerely wonder if this is even good nonsense.
With the exception of the fluid cracking catalyst manufacturing industry, which uses chemical compounds of the rare earths produced early in the rare-earth refining process, the overwhelming majority of end users of the rare earths use and require high-purity metals and alloys of the rare earths for their products.
The only three companies today producing significant quantities outside of China, of high-purity metals or alloys, or both, are:
- Molycorp, via the recently acquired operations in Estonia (from Silmet) and Arizona (from Santoku America);
- Great Western Mineral Group, via its wholly owned UK subsidiary, Less Common Metals, Ltd.; and
- Japan’s Santoku, based in Kobe, Japan.
The feed stock for all of these operations, other than the Estonian one, comes from China. The high-purity-metals and -alloys capacity of all three combined, is less than 5% of the world’s total demand.
A number of junior-mining ventures have announced that they will be producing “rare earths” in 2011-15. The mining analysts do not seem to know or recognize that the production of rare earths is not a well-defined phrase. Mines produce ore concentrates. Most so-called “metal” mines then chemically extract the metal values, as chemical compounds, from the mechanically produced ore concentrates. Different metal miners then traditionally do their own thing, so to speak, with the chemical solutions containing the extracted metals.
Copper miners, for example, typically refine their ore concentrates to the metallic state. The quality (grade) of the copper metal produced is determined by the extent and capability of the processing undertaken by the miner. Even those miners of copper who produce high-purity copper “cathodes” by electro-refining are not normally the producers of the final use products, such as wire rod, sheet, and plate. These are produced, for example in the case of electrical conducting wire, by a specialized industry (for example, a ‘wire’ industry), which itself sells only fabricated copper forms to manufacturers who make such devices as electric motors and generators and wiring harnesses for motor vehicles. I can’t think of a vertically integrated manufacturer,for example, of electric motors, i.e. one that mines copper, refines and purifies it, fabricates industrial forms, and builds electric motors. If a reader knows of one please let me know.
The reason that there are no vertically integrated manufacturers of electric motors is the complexity, the engineering and management skills, and the capital costs that would be required. Traditionally end users of fabricated forms of metals want multiple suppliers to keep the costs down and also want the security of assured supply to be at a maximum.
Analogously, lead miners may smelt the ores they mine and concentrate and produce ingots but they do not make battery alloys, battery plates, or batteries.
Iron miners do not generally produce steel, and even the ones who do that, such as China’s immense Bao Steel, do not produce automobiles, dishwashers, or household tools.
The first rare-earth products that will be produced outside of China will be mechanically concentrated ores, the lowest value sellable product in the supply chain. It will then be necessary, in all cases, to chemically extract the mixed rare earths from the ore concentrates, and by chemical processing isolate the mixed rare earths from any other metals that may be present in the ore. The result will be isolated (but still mixed together) rare earths, either in chemical solution or as chemical solids, typically carbonates, These forms at this early stage of refining are also a selling point in the value chain.
The next step, historically first done commercially in the USA by Molycorp, is to treat the mixed rare earths in chemical form in a solvent exchange “separation plant.” This is an expensive facility to build, as it can easily involve hundreds of repetitive steps taking up to a month to finish a single batch of material, and although batches can be run almost continuously the size of the plant must reflect the optimum large batch size for producing enough volume to make a profit, by selling the resulting commercially pure separated chemical compounds.
Molycorp has said that it plans to ultimately produce up to 50,000 tpa of rare earths, which means, if this means rare-earth metals, its separation plant must be delivering 140 tpd of product and must be processing 4,175 t at any one time. If this is to be done in one separation plant, it will be the largest one in the world. I don’t think that Molycorp will be unable to do this; I only question the amount of time that it will take to construct, prove out, and operate a plant of this size. By the way, if Molycorp is speaking of the production of metals, then the throughput of chemicals will be some 250 tpd with a load of 7,500 t just of product in the system. That’s 15 million pounds of material being processed at any one time.
In any case, whatever the output of the Molycorp separation plant, it will need to be of very high quality (purity) in order to minimize the cost and time required for the next step, the ultra-purification of the rare earths by the method of ion-exchange. The separated, commercially pure rare-earth compounds that are the output of the separation plant are sellable at a higher price than that to be realized either from the ore concentrate or from the sale of the mixed chemically extracted rare earth compounds that were fed into the separation plant.The ultra-purified forms from the ion exchange process are of much higher value yet.
Note that at any step in the purification process, all of the rare earths have to be separated from each other in order to purify them. This means that economically, the very small amounts of the higher atomic-numbered “heavy” rare earths in any deposit, cannot be produced economically, unless as many of the other rare earths present with the “heavies”can also be sold, not just recovered.
This is the dilemma of the deposits of the rare earths that show relatively high values for the heavy rare earths. They cannot possibly be profitably produced just by producing and selling only the heavy rare earths, because their processing will be too expensive to compete for markets for their simultaneously produced light rare earths when up against lower-cost light-rare-earth-producing behemoths such as Molycorp, Lynas, or Bao.
A straightforward solution would be for an end user to buy the critical heavy rare earths, and all of its needs for the light rare earths, from the heavy-rare-earth producer. This might necessitate paying more than the market price for the light rare earths, but it would secure the supply of the critical heavy rare earths, for example, for under the hood applications of rare-earth permanent magnets by an automaker.
In any case, before we make the most important rare-earth product, magnets, we must first be able to make pure metals and pure alloys. The processes for these require tight controls of temperature and pressure and expensive equipment operated by skilled workers.
Rare-earth metals can be produced by reducing a chemical form such as a chloride with high-purity magnesium, calcium, or lithium. They can also be prepared by electrochemical reduction of molten ionic salts of the rare earths. The analyst community writes about these processes as if they are easy to do because others, such as the Chinese, have done them and are doing them, so how hard can it be? I have actually heard it said that if the Chinese can do it then anyone can do it. This is racist sentiment, and is simply not true.
The production of high-purity metals is as much an art as it is science and engineering. It requires diligent attention to operational details and mis-steps that can contaminate, and thus ruin the end product. Continuity of engineering, a practice denigrated by American capitalists, is key to any such project. One learns how to purify metals by doing it, not by reading manuals.
However, that having been said, let’s say that it is now several years from now and we have non-Chinese production of high-purity rare-earth metals. These are very sellable at significant margins over production cost, and, in my opinion, represent the best first selling point in the supply chain for a vertically integrated (from the mine onwards) rare-earth producer. It will not be easy for a miner to become a producer of high-purity rare-earth metals. This challenge will separate the men from the boys immediately.
To make rare-earth permanent magnets, which are the most profitable selling point that any rare-earth vertically integrated producer could hope to reach, requires the skills to make high-purity fabricated forms of neodymium-iron-boron and samarium-cobalt alloys. The knowledge of how to add various other enabling elements such as dysprosium will also be required. Such knowledge today requires access to proprietary information about complex physical and chemical processes that have been developed through man years of research and development and trial and error. These skills CANNOT be learned from a manual or by reading patents.
I am reluctant to believe that junior miners with only, at best, limited knowledge of the chemistry and metallurgy of the rare earths, will even be able to produce separated commercially pure chemical compounds. Yet I am told by analysts that all one has to do is find a rare-earth deposit and the end-use product, the rare-earth permanent magnet, can not only be produced but can be produced easily by the junior miner. Oh, and all of these skills, I am further informed, will be learned and mastered in just a couple of years.
What I think is that of the more than 220 listed rare-earth junior miners outside of China that my colleague Gareth is tracking as of April 2011, there will now be a cull. If rare-earth pricing requires that one must produce high-purity metals to provide a minimum return on the needed investment to develop a mine, then perhaps a dozen of these ventures will survive even until 2013. If it is necessary to produce alloys from which rare-earth permanent magnets can be formed, in order for a rare-earth miner to be profitable, then only at most half a dozen will survive and then only if they can produce the alloys in-house.
There is a caveat. A miner producing rare earths as a byproduct of a profitable operation, such as iron-ore mining or gold mining can, of course, be a profitable rare-earth-ore-concentrate seller, because his overheads are covered by the primary production. I know of one such venture, not yet listed, currently in operation, and I am looking at another two later this summer. I call these boutique metals operations, and, of course, they do not need to produce rare earths to be profitable.
Note that even the above caveat has a caveat. A rare-earth refiner who needs feedstock, such as we are hearing is the case with some of the Chinese rare-earth separation plants, needs a steady high-volume flow to “load”his plant. He cannot be changing the feed chemistry in his process arbitrarily at any time. The minimum requirement will be to load the plant for a process cycle. This means that the refiner needs to only source from fairly large operations, and this minimum size is going to be an issue of long-term capital outlays with a low probability of a competitive return on the investment. For those who will not do their own separation and further refining, it is a horse race to see which if any of the ore concentrators/chemical extractors can be first to a very limited market.
I do not think that the world demand for high-purity rare-earth metals and alloys, for use outside of China, will be met by non-Chinese production by 2013, because until there is a high rate of production of commercially pure separated rare-earth chemical compounds, there will simply not be enough feedstock to gamble on continuous large-scale production of these high-tech materials, by those who have never before done such high volume processing of such complex materials.
The problem is thus the potential of an export reduction or total cutoff of rare earths contained in finished goods, which is not the case at the moment. This potential Chinese action is a critical issue for the Japanese rare-earth permanent-magnet and battery-alloy manufacturing industry. It is not an issue in the USA or Europe, where neither product type is produced, or has been produced, except in very limited volumes,in more than a decade. It will only be an issue in the USA and Europe, if China cuts off the export of rare earths contained in finished goods such as batteries, lasers, and rare-earth permanent magnets.
I think that Goldman Sach’s analysts are wrong, because they do not understand manufacturing, chemical, or mining engineering, and they do not understand the makeup of the “rare-earths” market; most of all, because they underestimate the power and growing technical and financial skills of China, Inc.
The survivors of the coming rare-earth junior-mining cull will be the earliest to production of commercially useful forms of the rare earths, the high-purity chemicals, metals, and alloys. There will be no large-scale sustained production of any of these forms outside of China, the metals and alloys in particular, for several years yet.
As for the production of high volumes of rare-earth permanent magnets with tightly held specifications, by those not now producing them, I think it will be more than 5 years before we see a new competitor to China and Japan in this category, if ever…
Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).
Most TSX-V REEs are rubbish. Full stop. First, their grades are laughable. I have more REEs in my backyard than what most of these crap TSX cri-miners have . Second, they’re sweet little pump vehicles. Third, they exist by virtue of a “mania” and will leave ONLY idiot bagholders once the market balances.
Look at the ASX, children. For real, economic grades look at NTU:ASX, and PEK:ASX (I own both) and compare to the TSX. ALK:ASX in NSW can’t mine their REEs because its against the law due to the Ux content, and ARU:ASX will need a billion or so to get going. Now I own Be, IB:TSX-V, it’s real, and needed.
Until such time as the pump dumps by all means carry on your circle jerk.
We recommend only Dacha Strategic Metals that own the physical heavy REE to our subscribers because of a few facts:
– If Lynas & Molycorp succeeds it will change the markets for the main light REEs which will drastically reduce value for future juniors AND for Lynas and Molycorp. If they do not succeed we do not want to own them.
– If it is fairly easy to enter production… it is only a question of time before we have oversupply, eventually also around 2015 in the heavy area (one junior seem to be enough for these small markets). So if that is the case we do not want to own juniors enterering production by then.
– If as is more likely it is very difficult to succed for juniors due to technical and environmental reasons then there is a high risk of failure for them so we do not want to own them.
My collegues and I are very greatful to Mr Lifton for putting out so much valuable information helping us to better understand this interesting area of mining & metals.
The ore from ALKANE is NOT classified as a radioactive deposit and is a major world resource of zirconium, hafnium, niobium, tantalum, yttrium and rare earth elements
You are right production of uranium is currently prohibited in NSW – however it DOES NOT apply to Alkane. Check their website
GOLDMAN SACHs – unless they can sell REE’s as derivatives then they are going to bag it
Investment banks are invariably staffed by bright young MBAs who are long on education and short on experience. The beginner’s mind holds all things possible. The expert, however, knows that the possibilities are far more limited.
While China is cutting down the exports the world demand for the rare earth material is increasing. The high demand not only comes from industrial automation applications where pneumatic, hydraulic and traditional electric drives are replaced by permanent magnet technology and expanding manufacturing industry, but also from consumer products. The list of consumer products that require rare earth materials are hybrid vehicle, mobile phones, plasma televisions, computer hard drives, catalytic converters, rechargeable batteries, X-ray units, stadium lights, energy efficient bulbs, fibre optics and glass additives [Carl, 2010] . Power generation is another area where the mechanical, thermal, wind or any other form of energy is converted primarily to electrical energy because of the convenience for efficient power transmission and distribution. Traditionally classical synchronous motors were used for the power generation which uses electromagnets for the power conversion. But over the last decade they have been replaced by permanent magnet technology. Defence systems such as precision-guided munitions, lasers, communications systems, radar systems, avionics systems, night vision equipments and satellites also use rare earth material [Carl, 2010]. Hybrid vehicles and power generation from wind energy are two areas which are expanding rapidly. A typical hybrid vehicle requires 9 to 15kg of rare earth material [Drives and control, 2010]. According to OICA  the industrial output of passenger and commercial automobiles produced in 2009 was about 60 millions. With the assumption of this demand remains same for few years and half of these vehicles are produced as electric vehicles in few years which is fair assumption considering the predicted shortages of fossil fuel and the environment consequences of CO2 emission, the world demand for electric or hybrid vehicle will be 30 millions. With efficient usage of rare earth material assuming 10kg material per vehicle, the required material is 300,000 tons which more than two times of current total production of rare earth material. In the power generation area, typically a 3MW generator based on permanent magnet technology requires about 50kg of rare earth material. The total energy generation in 2007 was 18 trillion kWh [EIA, 2010]. If all the classical generators are replaced by energy efficient permanent magnet generators and if it assumed the energy generation is not changing then about 36000 tons of rare earth material is needed for these generators. This is one quarter of total current production of rare earth minerals. In fact it can be approximately predicted based on historical consumption data that in 2100 [Hedrick, 2010] the rare material demand will be 12.8 million tons about 100 times higher than current consumption. The increasing consumption in the other industries such as power generation and automobiles may severely affect the material supply to unsustainable level for industrial automation industry and its competitiveness outside China.
Excellent analysis Jack as always.
The crucial question to me is will the consuming industries such as autos realize that hey will have to subsidize the non Chinese production of the magnet metals by off take agreements or other capital investments at several levels of the supply chain via Molycorp, GWG/LCM and other potential metal producers and their necessary concentrate suppliers further down the supply chain; or permanently surrender large portions of their own supply chain to China and possibly India.
Given that the large tonnage Rare Earth deposits are mostly Bastnaesite which is deficient in some of the magnet metals, there will have to be some production from deposits that are too small to support the necessary chemical separation plant for economic reasons. The Molycorp and Lynas deposits can not produce all of the necessary magnet metals without massive overproduction of the Light REEs.
I’m holding my GWG:TSX-V at least until the market appreciates it. I also hold IB:TSX-V and am quite optimistic. What do you think of IB. I like the President and Board but question the other senior (or only) management. Too close to Howe Street!!
Add to my earlier comment:
I don’t think the Goldman analyst even begins to understand the practical operational, mining and technical issues:
Metallurgy: very few of the minerals in many of the various deposits have ever been processed as rare earth ores on any scale except the laboratory bench. In most cases the processing requires considerable amounts of environmentally sensitive and potentially polluting acids bases or both at relatively high temperatures and pressures
Mine permitting: typically a multi-year process in most western countries
Permitting a chemical separation plant also is not quick and easy or technically simple as Jack points out.
The technical expertise required to run a separation plant also pointed out by Jack
The Rare Earth Elements are not interchangeable you can’t replace neodymium with cerium in a magnet.
Let alone the political issues derived from the presence of uranium and or thorium in most REE deposits. See the Lynas protests in Malaysia for an excellent example of this issue.
Do you remain on Great western’s payroll.
No/little mention of Lynas.
I have never been a paid consultant to Great Western. I am a long term holder of GW shares.
I don’t mention Lynas, because it is my opinion until their processing plant radioactive residue issue is resolved in Malaysia they have little incentive to continue any operations. Raw ore (in this case from Mt Weld) is, in and of itself, the lowest valued item in any rare earth supply chain.
I reaffirm my belief that the issue of radioactive residue must be settled before a rare earth miner can become a serious contender for the title of rare earth producer.
a sound, sobering review. the ultimate REE market size in OECD is highly dependent on “green” energy solutions, their wide application, and strong economic expansion/growth of western nations.
investors, make your forecasts of use and place you bets accordingly.
i’ve sold and moved on to better risk/reward environments over the next four years; i will watch NEM.TO/PATINGA[BRAZIL] closely.
success to all; CAVEAT EMPTOR.
few days agao,i read a report wrote by Credit Suisse ananlysts from China about baotou rare earth,the world largest producer.
-Congratulations Jack; for your thought provoking, sobering analysis, of the substantial technical challenges facing the worldwide REE industry going forward.
– Regarding GS, I am entirely dismissive of the Malcolm Southwood / Goldman Sachs recent evaluation / outlook report. I strongly suspect that deep within the bowels of Goldmans ranks, lies an entirely differing opinion of the long term worldwide REE fundamentals. This recently published article in the highly read NY Times, is merely Goldmans attempt to yet again affect investor behavioral sentiment, whilst simultaneously and covertly staking their REE positions, to the long term benefit of ???, you guessed it !, Goldman Sachs !
I think your analysis of Goldman Sachs; “strategy” is mostly accurate. It seems to me that Goldman, through its worldwide network of affiliates, could easily take a short position in MCP and then make announcements like this one. If they don’t then they’re not nearly as smart as we give them credit for. This kind of cosmopolitan trading is exactly what is to be expected when financial institutions go cosmopolitan, by which I mean that they have no further allegiance to their country of origin.Globalism isn’t the problem, and never was, its cosmopolitanism that threatens the health, safety, and quality of life of the national locations of the capitalist centers.
Jack, another great read -cheers.
Untill MCP start coining it invetsing in REE companies is going to be sentiment and partially faith based. I have freinds who look after large client portfolios and they repeatadly tell me they can’t/won’t invest in this sector as “non of these companies are making any money…” (and, by definition they cannot plug the numbers into their limited models and get anything sensible out…)
Nick Outram [also see ‘Dragon Metals’ group on Facebook]
” CORRECTION ”
-My earlier post of today, ( # 14 ) should have read ” WALL STREET JOURNAL ”
-my apologies; u4eah
Something went wrong with my post so once more:
I strongly agree with posts 14 and 15 that GS have some negative intention with thisn story, once more cheating nearly everybody.
But how to get a proof and then make it public for SEC prosecution?
No doubt GWG (LCM) has advanced technology to make REE alloy from pure RE metal. But I don’t think they have the technology and capacity to separate mixed RE oxides and extract the pure RE metal from RE oxide. And as you mentioned, the separation and extraction processes are high value added and critical. The lack of the ability of separation and extraction will break its profit chain.
Great analysis as always, Jack. Minor correction: There are several companies in Europe producing substantial amounts of RE magnets (NdFeB and SmCo): Vacuumschmelze, Neorem Magnets, Mf. Schramberg.
Your analyses is a good class for all involved with REE. Goldman Sachs (GS), evaluations are not trustable even in case of financial matters. FEDS slam GS with huge civil fraud charges over subprime mortgages. (see Goldman Sachs fiasco on the web).
As a geologist, I know that the potencial deposits of REE are quite big
because the elements are common in alkaline stones or rocks of volcanic origin. However, as you wrote very well, the challenge wil be to get them (REE), from the rocks at a reasonable cost.
Goldman Sachs wouldn’t be the group who prompted the commodity sell-off last week by lowering their target price on oil, only to turn around and revise it upwards??……Oh wait, it would, so I will choose to ignore this. As blackjack said, just wait until they’ve flooded the markets with ETFs then see how bullish they get.
Thanks for another excellent article Jack. Any news on Tantalus Rare Earths by the way?
it seems that Stans Energy had produced suchlike metalls. So they have the experiences. Or is this wrong ?
If you have the time you might be interested in a post on Seeking Alpha titled “Why the U.S. and China Want a Cheap Dollar”. The author Jeb Handwerger posits that with a weak dollar and strong Yuan, China will be buying up companies and resources on the cheap, and that includes ree supplies and companies. (the part about the secret dinner meeting and action plan is a little disturbing)
It’ll have to be over supplied, given the price trend in the past two years. You may be surprised if you have a chance to look at the stockpiles built at Bao Steel Real Earth(ticker: 600111). It’ll be another bubble after internet and housing, likely recorded in history textbook.
Thank you for continuing to write such great analysis of the rare earth situation.
I am a bit confused on one point in this article. You write:
“With the exception of the fluid cracking catalyst manufacturing industry, which uses chemical compounds of the rare earths produced early in the rare-earth refining process, the overwhelming majority of end users of the rare earths use and require high-purity metals and alloys of the rare earths for their products.”
However, from Gupta and Krishnamurthy’s book Extractive Metallurgy of Rare Earths (2005):
“To sum up, it may be pointed out that on a volume basis, approximately 95% of the usage of the rare earths is in the mixed form; the individual elemental forms of the rare earths account for the remaining 5% of the total volume, but this component represents over 50% of the monetary value.” pg470.
Could you please clarify your meaning? Or if you have a source for this information could you please direct me to it?
Thanks for a very informative article – the finest I have read on the subject.
Would you have a view on Unicore (UCU.V) and Tasman metals(TSM.V)? I am invested in them based on analyst recommendations and would appreciate your thoughts on whether they may survive the cull.
I doubt Jack is going to give individual stock advice or who is going to make it and who is not.
Oh wait…. I stand corrected…. Jack is long GWMGF. What does that tell you??
My unending thanks to Mr. Lifton for his observations and advice.
My average buy in for my 100k of GWMGF is about $0.15.
Regardless of all the noise it is patently obvious that GWMGF will be the first to market with a significant amount of HREE material that both MCP and Lynas can only drool over.
I also hold sadly not enough of UURAF and AVL but continue to buy on dips. There is growing demand for LREE right now so I also hold Lynas as I believe that they will greatly outproduce a vastly overpriced MCP by year end.
Read this article. It highlights how complicated this process is, very clearly.
Great Article Jack, bottom line, It’s not that simple…
You mentioned the problems Lynas faces with the Thorium issue… Do you feel that Moly has solved this issue and does not face any headwinds in this area?
This is in a Moly SEC filing…
“REOs contain naturally occurring radioactive substances, such as thorium and uranium. The mining and processing of REOs involves the handling and disposal of such substances, and accordingly we are subject to extensive safety, health and environmental laws, regulations and permits regarding radioactive substances. Significant costs, obligations or liabilities may be incurred with respect to such requirements, and any future changes in such requirements (or the interpretation or enforcement thereof) may have a material adverse effect on our business or results of operations. One such permit pursuant to which we currently operate is a Radioactive Materials License issued and administered by the California Department of Health Services Radiologic Health Branch. The license applies to the use of sealed radioactive sources used for gauging volumes of materials, as well as certain other activities. A failure to maintain or renew this license could materially adversely affect our business or results of operations.”
Could you comment on this? Could this ultimately affect their production costs’ of $2.77/kg?
Thanks for your excellent articles! I particularly appreciated your analysis of the Estonia acquisition…
Predictions are easy to make. I like to examine results. If MCP can prove production costs of $2.75/kg then I think it will be the world’s low-cost producer.
Can anyone tell me exactly what is being produced at $2.75/kg? Is it ore concentrate? If whatever is being costed out at $2.75/kg is beyond ore concentrate in the supply chain then MCP is very impressive indeed.
Even if its just 60%(?) ore concentrate though I will be impressed only after a 1000 tons of this ore concentrate have been consistently run and the actual costs computed on those first 1,000,000 kgs. This will be the defining moment, not the prediction but the practice.
Let’s all hope it works out,
Very interesting & informative article. Thanks for posting.
My understanding is that Lynas has developed a cash cost of $10.00 per kilogram for high purity oxides of which 30.1% is for the production and benefication of the low level percentage concentrates and the balance of 69.9% is for the separation and extraction of high purity oxides. I assume that the $2.75 by MCP is for the benefication of the concentrates as that is the material they are currently selling and not high purity oxides or metals which would be in line with Lynas’s cash costs per kilogram.
your are wrong. LCM already produce Rare Earth Metals:
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