by Lara Crigger – Hard Asset Investor – Published: September 3, 2010
Is the rare earths metals hype overblown? Yes, says Jack Lifton, co-founder of Technology Metals Research, who adds that although the panic over Chinese “hoarding” is misplaced, the U.S.’ dissolution of its domestic rare earth metals production has been equally “foolish.”
Jack Lifton is one of the world’s foremost experts on rare earth metals, and is a highly sought-after author, consultant and lecturer in the industry. With over 48 years’ experience in the metals business, Lifton continues to advise institutional investors and high-tech OEM companies worldwide on the complexities of the natural resource sector.
At the recent 21st Rare Earth Permanent Magnet Workshop in Bled, Slovenia, Lifton presented a paper outlining the steps the U.S. would need to take to reestablish a presence in the rare earths industry.
Editor Lara Crigger caught up with Lifton right before he began a two-week rare earth investing “road show” that would take him to Beijing, Shanghai and beyond. He shared with HAI some thoughts on the rare earth metals industry, including why the current rare earth panic is overblown, how China has managed to dominate the market and what the U.S. needs to do to make an REE comeback.
Crigger: Is the panic over securing our rare earth metals supply overblown? Do we need to worry about China “hoarding” rare earth elements [REEs]?
Lifton: Yes. China doesn’t consider itself to be hoarding anything. They figure that they’re using their own materials for their own needs. They question why we insist on using words like “control” and “hoard,” because they ask, “If you needed the material, why shut your factories?”
So it’s as simple as that. We really are foolish in America. We’ve shut down an industry that’s strategic and critical, and all in the name of low cost. Now we’re surprised that the consequences that are obvious in doing this have now come back to bite us. I’m not surprised, and neither is anybody else in China.
Crigger: The materials are still there, though.
Lifton: The utilities are still there. But we haven’t been doing this for awhile, and people don’t just sit around waiting for work. You have to reconstruct the intellectual basis of the industry, as well as the physical basis, and that’s the problem.
Crigger: Are the people in this industry generally heading over to places like China, where the importance of REEs is better acknowledged?
Lifton: Well, they die. They get other jobs. If you’re a chemical engineer specializing in separating rare earths, where do you think you’re going to get employment in the U.S.? There’s nobody doing it here. So if you’re deciding what to do in grad school, you get a different specialty. Or if you were already doing this, you have to retrain yourself, or find something in the home cleaning or Slurpee-mixing fields, because what you were doing is gone.
I don’t know what possesses politicians to think that they can simply invent intellectual capital. You can’t. It takes time. And once you fall behind in your specialty, you are behind. You have to catch up. It’s not a matter of reading the latest papers; you also have to go back to what happened between the latest papers, and when you knew how to do it.
So I find the politicians and financial minds in America seem to have no knowledge whatsoever of manufacturing or mining. They just think that money solves all problems.
Crigger: So what do we need to do to keep those knowledgeable people around?
Lifton: The first step would be to go ahead and fund the RESTART Act [a bill to reestablish domestic rare earth minerals production in the U.S.]. I didn’t say enact it. That doesn’t mean anything. They need to actually put some money in it. And they need to get it done while we still have a core of people at the point in their working lives where we could get this done, because that is a diminishing resource. If this doesn’t get done in the next decade, it will never get done, because we’ll have lost any ability to do it.
Crigger: How else do we need to adapt the way that we think about rare earth metals in this country?
Lifton: We have to decide that rare earth metals are as important as, say, bridges with no intended anchor point. And the only ones who can do that are the people in Congress, who hold the purse strings. But Congresspeople have notoriously short attention spans. When you have a television camera there, they say, “Whatever it is you support, so do I,” and the moment the camera switches off, they walk away.
This is sort of beside the point, but I think America needs national goals. Let’s say that, for argument’s sake, we’d like to restore our standard of living to what it was in 2008. To do that, we better start creating wealth and creating high-tech items that we can not only use ourselves, but sell to the rest of the world. For example, if you mine rare earths in California, you could actually mine a lot more than the U.S. needs, and have the rest for export material to make a profit.
So perhaps someone in Washington should go back and study basic economics, because they don’t seem to understand anything about wealth creation. There’s an anti-resource bias in Washington that’s palpable. Do we really think that energy creates itself, or metals just drop out of the sky?
Crigger: At least on the financial side, we see investors say, “Well, we don’t know what REEs are, but hey, let’s learn.”
Lifton: Exactly, and if the politicians had that much interest, we wouldn’t have that problem. My personal business is that I do due diligence for institutional investors looking into metal opportunities, and I can tell you that I have seen more interest among bankers and fund managers than I’ve ever seen in Washington. They’re the ones asking, “What are rare earths? How do they fit into the economy?” And they’re honest: They admit, “We don’t know what you’re talking about, so just start at the beginning.” Of course, that can be a problem in other ways.
Crigger: How so?
Lifton: Well, the problem for junior miners – exploration companies, I mean, not production companies – is that the institutional investors have an unfortunate requirement: They need to make a profit. They do not make investments that don’t return something.
But there’s a huge distinction between stock market plays and actual company operation. When the institutional investors that I have as clients take a look at a mining operation, they say, “When will $1 become $1.50, and is that a faster rate than if we put our money in gold or some solid paper?” The answer at the present time is, “No.”
And it’s true. The concentrates mine is just not profitable. Really, don’t believe anything about rare earth prices rocketing up. They may be rocketing up in pure metals, but not for ore concentrates, because the value is added after that. So your mine needs to be on a combined balance sheet.
Two or three of the junior miners in rare earths have adopted this strategy, and they’re the ones that are getting the most attention. Because if you just admit that you don’t make money mining rare earths, that you make money in producing products from rare earths, well, then you can get somewhere.
Crigger: How does this compare to what China has done?
Lifton: Well, the problem is the mining companies are small. They’re not big enough to buy a mine and finance a refinery, so you need the real end-user – the car company, the jet engine company – to come in and help.
In the case of China, the Chinese have simply put all the rare earths under the control of their large base metal companies. Those companies are now responsible for delivering high-purity rare earth metals, after they’ve restructured the industry over the next five years.
A few weeks ago, China announced that Baosteel, Jiangxi Copper and Chalco have now been given the assignment of geographically restructuring the rare earth production in their geographic regions. Today, there’s 129 official recognized rare earth miners in China – and god knows how many flying under the radar – and 79 refiners. That’s 208 companies. By the end of 2015, you will see three companies: Baosteel, Jiangxi Copper and Chalco. As far as they’re concerned, bigger – and more consolidated – is better.
Crigger: It’s all part of that same machine, that same philosophy, that’s driven the staggering growth we’ve seen in China over the past two or three decades.
Lifton: Well, 20 years ago, China was producing less than 50 million tons of steel a year. Today, they’re producing 650 million tons of steel. That’s 6.5 times as much as the U.S., 5 times as much as Europe, and more than all the rest of the world put together.
China has done more growth in metals production in a generation than the entire world put together. Rare earths are the tip of the iceberg. Frankly, you shouldn’t bother looking at them as much as you should steel, iron, copper, aluminum, tungsten, antimony – these are all metals where China is both the dominant demand in the world, and the dominant producer.
Investors say, “We’re not going to invest in mining, because you know what happens: The $3 price of copper becomes $.70, and we lose our money.” Well, if China’s demand continues, we will never see a commodity bust again.
Crigger: Of course, eventually we wouldn’t be able to keep up.
Lifton: Right, their demand is so high that the world is already straining. You know, we used to laugh about the Soviets and their five-year plans. “We’re producing more steel than anybody else!” they said. Of course, that steel was stockpiled, and they weren’t using it, and it was killing their economy. People say China’s doing the same thing. It isn’t. The Chinese are using these materials, and they’re producing like crazy. At this point in time, China’s producing some 53-56 percent of all the metals of all kinds in the world, and yes, they export some, but everything they export is value-added in China. They are creating jobs, wealth, industries.
The rare earths are a real issue, because China doesn’t think it has enough. That is, they think they have enough reserves, but not production. And their demand is outpacing their production at the moment. So there’s a window here for Western mining to supply China with goods it needs.
But the danger is that what happened before will happen again: China will then ramp up its production and come roaring back, and kill everyone else in price. They did this in the ’90s, and they killed the non-Chinese rare earth industry—by 2002, it was shut down.
Crigger: So then is it even worth it for any non-Chinese company to jump into this fray again?
Lifton: Well in the short term at least, absolutely there’s value. And for the heavy rare earths, the ones China doesn’t believe it has enough reserves of. That’s a good business to be in.
But you can’t produce one type of rare earth without producing all of them. So the big issue is, who’s going to be the lowest-cost producer of terbium, europium and dysprosium? Because those are the three materials China thinks it needs outside sources of.
An astute businessman might say to China, “Look, I have a deposit in Alaska or South Africa of material, and it’s got heavy rare earths in it, but here’s the problem – we’re going to produce lanthanum, cerium, neodymium, and all sorts of things you already have enough of. So I can’t sell you the heavies unless you buy the lights. You have to buy the entire cow; I’m not selling the milk.” The Chinese used to say no, but now they say, “Let’s talk about it.”
The Chinese are realizing they have to change the dynamic. Instead of saying, “We must control it,” they’re saying, “Can we invest enough money to develop something and then we can buy the output?” Because in a capitalist society, the risk is that somebody will out bid you. That’s not a problem for the Chinese. They need the material, they will not be outbid.