Should I Visit A Chinese Rare Earth Processor?

I frequently get inquiries from clients and others about conferences. The most common question is “which are the most important conferences for me?”. We all know that sector- or topic-specific conferences are great networking opportunities. Junior miners look forward to them as places where they can make a presentation and impress an institutional investor, or meet a large producing company’s acquisitions specialist to talk with them.

However when the market for junior-exploration plays is as dead as it is now, it’s time to reconsider whether or not a conference can be a productive use of capital that is being burned without any way in sight of being replaced or augmented.

I just did a road show (i.e. the taking around of a new [to outside financing] venture to see as many institutional, high-net-worth, and retail investors as possible). Today, in mid-August 2012, I wouldn’t dream of asking the potential investors that I know, to listen to a presentation about an exploration play in any commodity metal. I would however be interested in and inclined to take a novel, or more productive, or lower-cost metal-processing technology venture to see the investment community.

So would I recommend a certain conference next month in China, which includes a visit to a Chinese rare-earth processing company? I would not recommend it to the majority of junior rare-earth-element (REE) ventures that are just now discovering, that they really don’t know what to do with their increasingly less-valuable, mechanically beneficiated ores. Even those who have managed to find an efficient process for the extraction of the critical REEs will, for the most part, only have a process leach solution (PLS) with few places to go but China.

But! What’s Jack saying? Shouldn’t these producers of PLS, obtained by extracting the desired metal values from their ore concentrates, be rushing to offer them for sale to Chinese processers? Well there are several problems. Let me count the problems that come to mind:

1. The chemistry of the PLS has to be tailored to match the capability and chemistry of the processor’s solvent-extraction (SX) REE separation system. This means trivially that if the processor is running REE chlorides and you show up with sulfates, oxalates, oxides, or carbonates, for example, then there will be a discount, an upcharge, based on the cost of “conditioning” your PLS (or process leach solids, if you have dried your solution to save freight and hazardous material handling charges);
2. Anything shipped out of or into a civilized country must obey the contained radioactivity rules for those countries. as well as the international UN laws of carriage of such substances upon the sea, so, if you have not figured out a way to remove or reduce thorium and uranium to legal levels for shipping at the mine site then forget about the whole thing;
3. Chinese companies can only import feedstock materials on a case-by-case basis, and I have personally seen such proposals rejected by the Chinese central authorities that have sole power to make those decisions. The fantasy that many people have, that you can just export any materials to China that are produced in large quantities within China continues to amaze me;
4. It should come as no surprise that Chinese processors can neither process nor export processing technology without the specific permission of the central government. This is done on a case-by-case basis, and the only application that I personally know of that has been successful, is the arrangement that Great Western Minerals Group (GWMG) has with GQD. This arrangement is technology- and site- (South Africa) specific. It is highly unlikely that GWMG could transfer the acquired refining technology to any other site, even within South Africa; the Chinese company cannot construct or solicit to construct another such plant without prior authorization from the Chinese technology export licensing authority;
5. In all cases that I know of, the importer can only dispose of raw materials imported into China for processing with the express permission of the government. This means that Chinese refiners will try to BUY PLS or dried PLS materials but will certainly not pay until they have a specific import license. The license cannot be obtained until the deal is specified. This would mean that a seller would cool his heels and sit on his inventory until the authorities decided to rule on the deal. Even worse it means that the seller can only get the value of the PLS. The added downstream value will be the Chinese importer/processors. Note that a wily Chinese buyer (or one trained in Western trading) might just wait it out to get the prices down by delaying the application for the import license. It is he who must apply (not the exporter) until the PLS supplier is in (more?) desperate shape.

So now I will make a recommendation. If you are attending the Metal Pages conference in China next month, and have never seen a Chinese REE processing plant before, then you should go on the tour – if only to see what the challenge are in the building and operating of such a plant as a business. Attending for networking purposes alone is probably not a sufficient-enough reason, but your mileage may vary. Just remember that the investment community does not want to see a Chinese processing plant; it wants to see a competing plant in a country with a convertible currency.

If you are going to China looking for a technology partner, then I suspect that you will be inundated by Chinese fixers, who say that they can get you a deal. The word to describe these gentlemen is the same as the one used to describe men who prostitute women for their own profit. I don’t doubt that the processing company being visited will also be telling any juniors who show up, that they would like to work with them and that they have an “in” with the government technology licensing or import control agency.

This kind of hustling goes on all of the time inside China, which is a very competitive culture. It reminds me of Vancouver when the independent analysts are promoting a boomlet. The Chinese independent processing business is being condensed by the new superintending reorganization imposed by the central government. To survive independent processors need feed stock. They will try to do a deal but only on their terms.

If you must go please have a nice trip and please don’t call me when you get back; instead, Americans should call the Centers for Disease Control and Prevention (CDC) directly, to receive the morning-after pill. I don’t know how that works in Canada or Australia.

Oh, and if you have time, I’d like a fake Rolex. A friend of mine bought one from a street vendor in Beijing nearly three years ago – it’s still running and it hasn’t turned green. He sure was lucky. He only paid one dollar for it, so he still had money in his pocket when he left China…

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