The NCPA Conference On Rare Earths And National Security

On Wednesday of this week, the National Center for Policy Analysis (NCPA) hosted its Rare Earths, Critical Metals, Energy & National Security Conference, close to Capitol Hill in Washington, DC. Very much aimed at the DC crowd, the event was billed as an attempt to “raise awareness of how current public policies lead to dependence on China for the U.S. supply of rare earths, and thus undermine our national security.” The announcement from the NCPA on the event went on to say that “[a]s key policy makers, executive branch analysts and think tanks experts, conference participants will play a key role in shaping U.S. resource policies.”

I was a participant in the first panel of the day titled “The Rare Earths: Supply, Shortfall, Strategy“, moderated by NCPA’s Sterling Burnett. Joining me on the panel were Jeff Green, President of J A Green & Company, a DC-based government relations firm, and Thomas Tanon of T² & Associates, an energy and technology industry consulting services firm.  We each gave an overview of our perspectives on the rare earths, with my own presentation focused primarily on defining the rare earths, and reviewing the sources of current and potential future supply. There were some good questions from the audience.

The second panel, titled “Specialty Metals: Assessing Strategic Need” was moderated by Dan McGroarty, President of the American Resources Policy Network. Joining him were Kent Hughes Butts, Professor of Political Military Strategy at the US Army War College, Dan Cordier, the rare-earths specialist at the US Geological Survey (USGS), and Michael Steuer from the US Defense Logistics Agency. This panel covered the topics of stockpiling for national defense needs, and assessments of those needs by various government agencies.

There were some lively questions during this panel session. One note of interest that came out of it, was that the recently passed law that governs the National Defense Stockpile (which does not as yet include rare earths), requires that the President of the United States, and only the President, be authorized to release materials from the Stockpile. This effectively means that once materials go into the Stockpile, it is very difficult to get them out again. Doesn’t exactly seem like a practical approach to me…

I raised the point with this panel, of the relative ease of “solving” the so-called rare-earths problem, compared to other metals, by virtue of the fact that most of the potential new sources of supply of rare earths are primary sources – i.e. they will not necessarily rely on the economics of other metals in order to be produced. Even if they are contained in polymetallic deposits, generally (though not always), the economics of the rare earths will dominate. This is not the case with many of the other rare metals that are critical to hi-tech applications; most if not all of these are actually by-products of base-metals production, such as indium from tin and zinc production, gallium from aluminum production, and so on.

There is a danger that people (especially of the type with short attention spans, such as politicians in Washington, DC) will come to believe that solving the rare-earths supply problem is the same as solving the rare-metals supply problem, when this is clearly not the case. It will be much more difficult to resolve issues for the co-produced rare metals, given the dominance of base-metal economics in such cases. I don’t get the sense that this is really being addressed by the various agencies in Washington.

We then had a presentation from David Diamond, a policy analyst with the US Department of Energy (DOE), and a co-author of the Critical Materials Strategy Report that was published at the end of last year. Dr. Diamond presented a summary of the report’s findings, which we’ve discussed elsewhere on the TMR Web site before, and part of which was incorporated into the Critical Rare Earths Report that TMR published in the summer. He mentioned that the DOE was in the final stages of updating that report, and that the next version would be published in the near future. I look forward to seeing the results of that work.

The conference then adjourned for lunch, where we were later joined by three members of Congress (click on the photos above), who each spoke in turn on a variety of issues concerning rare earths. First up was Senator Lisa Murkowski (R-AK), who focused on the importance of mining to the US economy, and the problem of dependence on foreign sources of minerals. She also took the opportunity to criticize the Environmental Protection Agency (EPA) on a number of issues. Senator Murkowski discussed her Critical Minerals Policy Act, which she introduced earlier this year along 9 Democratic and 10 Republican co-sponsors. She said that

“The legislation requires that USGS generate a list of minerals critical to the U.S. economy, outlines a comprehensive set of policies that will bolster the production of those critical minerals, expands manufacturing, and promotes recycling and alternatives – all while maintaining strong environmental standards.”

Once she concluded her remarks, Senator Murkowski took quite a number of questions on the topics she had covered, before leaving.

Next up was Congressman Doug Lamborn (R-CO), who discussed the legislation that he introduced earlier this year, titled the National Strategic and Critical Minerals Policy Act of 2011, touting it as a “common-sense solution that will provide for our common defense”. Among other things, this bill would require that the Secretary of the Interior evaluate factors impacting domestic mineral development; it also directs the Department of the Interior to

“assemble a report within six months and require[s] them to include a specific inventory of the rare earth element potential on federal lands, and identify impediments or restrictions on the exploration or development of rare earth elements, and provide recommendations to lift the impediments or restrictions while maintaining environmental safeguards.”

Rep. Lamborn was then followed by Congressman Mike Coffman (R-CO), who is well-known for having introduced the Rare Earths Supply-Chain Technology and Resources Transformation Act of 2011 earlier this year – also known as the RESTART Act. Rep. Coffman discussed his perspective that China’s stated industrial policy was mercantilist in nature, with the goal of expanding China’s industrial base at the expense of other countries, including the USA. Rep. Coffman said that he saw rare earths as being a part of the overall issue, and that his main concern was that China was an unreliable trading partner, which was prepared to leverage rare earths for political goals.

I asked Rep. Coffman if he would agree with me that a root cause of our current dependence on China was a major disconnect in the supply chain between end-user companies who pursued a “lowest cost at any cost” profit motive, at the expense of the upstream part of the supply chain and all the while ignoring any potential national security concerns. Rep. Coffman did not acknowledge this point; instead he chose to blame the situation solely on China’s non-free market policies. I suppose in retrospective, that it was perhaps a little much to expect a Republican Congressman to criticize the virtues of American capitalism, at an event hosted by a conservative think tank…

Rep. Coffman was asked if non-US companies could fill the gap in the supply chain. He responded by saying that his key issue was the reliability of trading partners; if companies in friendly countries brought rare-earth production online, this, he said, would “lower the temperature on the issue in Congress” and would “lessen the need for invasive policies from Congress”. This shouldn’t be surprising; even the specialty-metals clauses of the defense-procurement regulations, have exemptions from some strict sourcing requirements, for companies based in a number of countries friendly to the USA.

Both Congressmen commented further on the issues of permitting in the USA, and how overly restrictive permitting practices, and environmental regulations, were reducing the ability of the country to get projects up and running.

The final session of the day was another panel chaired by Dr. Burnett, this time titled “The Value Chain: Industry’s View on Critical Metals Supply“. On the panel were Peter Dent, with Electron Energy Corporation, a US rare-earth magnet manufacturer, Michael Berry of Discovery Investments and publisher of Morning Notes, and Anthony Young, an analyst at Dahlman Rose. Mr. Dent and Dr. Berry gave presentations on their respective viewpoints on this issue at hand. Mr. Dent noted that companies are beginning to switch production to China in order to access materials. Mr. Berry made the interesting comment that the USA should not be relying on Canada to get them through the current issues; China was more than a little interested in investing in Canadian companies, and so the US should be prepared to put its own infrastructure in place. He said that China’s policies on rare earths were just the tip of the iceberg of a much larger strategy.

Mr. Young made a comment on the volatility of share prices, and how news such as the announcement that the DOE would not be giving Molycorp a loan guarantee, caused prices to swing dramatically. I put it to the panel, and Mr. Young in particular, that the bigger issue for this market was the sometimes outlandish valuations made by analysts of the stocks in this sector, with those valuations seeming to have little connection with reality. Mr. Young responded by saying that this was a relatively new sector, with it being difficult to predict production costs and potential product prices, and that his own valuations reflected this. He commented that he had valued Molycorp, for example, at something like $70 / share, before revising it down to $40 / share. Note that this is in contrast to the actual valuation that Dahlman Rose set in May 2011, of $125 / share for Molycorp. Needless to say, I was not exactly convinced by the response. If analysts have such unreliable data, as Mr. Young suggested, then perhaps they shouldn’t be publishing valuations at all…

The panel session closed, and the meeting was brought to a conclusion by NCPA’s Richard Walker. Overall, it was useful to meet new Washington, DC types, and to re-connect with other contacts in the strategic-materials sector and US government at the event.