How to Invest in Rare Earths and Thorium

DETROIT () -- The Chairman of a Canadian rare earth mining company unwittingly set the tone for the Society of Mining, Metallurgy & Exploration (SME) special session on rare earths last Tuesday morning when he good naturedly warned the audience to "bear with me ... I used to be a geologist, but it's been a long time, so I'm going to skip through the technical stuff and get to our company's progress on developing our ore body commercially."

This statement was made to an audience composed mostly of professional geologists, but there were enough company representatives, almost all of them CEOs, or, as the rest of the English speaking world puts it, Managing Directors, to elicit from a materials industry writer/investment advisor, who was also present, as I was, the remark that "the whole rare earth world is in this room." I agree with his observation if, and only if, you add the caveat "other than the Chinese producers."

The disconnect between the usual conservatism of professional geology and the hype of commercial promotion, usually downplayed, or ignored, at 'investment conferences,' was much in evidence at this meeting. Ironically, it was the businessmen who were sceptical, and the professionals who were excited. Therein lies a tale.

For investors, who read RI, I will say that the two most interesting presentations, and the most important, were the one given by an Australian rare earth's supply consultancy's Executive Director, Dudley Kingsnorth, who regular readers of RI will recognize as a named supply/demand and trends source for a very fine article, which previously appeared here on RI, by Sarah Belfield, entitled "," and another given by a pair of professional geologists on their survey of a specific region in Idaho and Montana. Kingsnorth's was entitled "Rare Earths Supply: The Alternative to China," and the other geological report, which I believe pointed to the best of the alternatives to China, was the one I named and posted a copy of yesterday in my , which could not have been known to either Kingsnorth or Belfield last October, because at the time the validation work on the Lemhi Pass, Idaho/Montana, ore bodies was still being compiled and evaluated on a proprietary basis. .

Kingsnorth discussed the current supply and demand picture for rare earths, detailed by individual metal, and gave, what I considered to be, a very well-informed set of predictions on the future supply and demand drivers for those same metals. His conclusion was that by around 2012-3, unless there is substantial new non-Chinese production by then of at least 50,000 tonnes of rare earth elements (REEs), there will be a shortfall of rare earths, outside of China, which will of course dramatically impact all of the non-Chinese end-users of rare earth metals. He stated, and no one disagreed, that although today China produces essentially 100% of the rare earth metals consumed in the world, they now only consume 60% of those same metals, but with global demand growing at a sizzling 9%-11% per year, and with no let up in that demand growth in sight, Chinese demand in 2012-13 could be equal to the entire 2007 global (i.e., Chinese) production plus 30,000 tonnes, which would mean that China's demand would be equal to its own domestic production under the most optimistic projections. The global demand in 2012, he forecast, would be 185,000-195,000 tonnes.

It is obvious then that even if Chinese production were to continue to grow, and it is actually showing signs currently of some growth rate contraction, that growth may do no more than cover increasing Chinese domestic needs. In fact, ironically, I think that this says that there is a high probability that by 2013 China could be a net importer of rare earth metals.

One key issue to keep in mind, when looking for non-Chinese supplies of REEs, is that rare earth deposits do not simply occur with uniform distributions of the REE series of metals. Companies usually like to describe their 'geologies' with a specialized terminology that uses categories such as light rare earths (LREEs) or 'heavies' (HREEs). This means that their ore bodies contain either, essentially, the first half of the series or the second half; ore bodies may also, and usually do, contain minerals that produce mixtures of LREEs and HREES along with some proportion of yttrium and/or scandium, and, almost always, naturally radioactive thorium, which I discussed yesterday.

The key questions for an investor include:

  1. What specific areas of demand and metals used to meet that demand are driving the high growth rate of demand for those specific REEs, and what types of ore bodies, in the sense of LREES, HREES, yttrium, scandium and, even now, thorium are best suited to meet this demand;
  1. Then for the identified particular demand drivers and metals which non-Chinese rare earth mining opportunities are the best in terms of producing the REEs required, and;
  1. Where are those mining opportunities both in terms of both the length of time until they are producing and the risk that they will never produce, usually for lack of adequate financing?

Before delving into these questions, let's get onto a numerical basis. I will use numbers supplied by Kingsnorth.

The problem is not 60,000 minus 44,000 tonne equals a shortfall of 16,000 tonnes; the problem is that the total of non-Chinese and Chinese demand in 2012-13 is projected to be as high as 195,000 tonnes, so that the shortfall could be 195,000 minus 130,000 equals 60,000 tonnes!

To cut to the chase the key rare earth metal in these equations is neodymium; in 2006 the value of the neodymium consumed was equal to 25% of the total price for the world demand of all REEs. It is projected that by 2012 neodymium demand could contribute 50% of the total paid for all REE consumption!

One more fact to consider: The global consumption of REEs required in 2006 for magnetic alloys for the permanent magnets in electric motors was 22,500 tonnes; it is projected to rise to 45,000 tonnes by 2012-13. The principle REE required is neodymium; as used in neodymium-iron-boron permanent magnets; this is the key element, therefore in determining the future value of any REE mining opportunity.

At this time, February 28, 2006, there is one producing rare earth mine in North America; it is the re-start of the Mountain Pass operation in San Bernadino, County, California, by newly named Chevron Mining, Inc. Mountain Pass was from 1952-1994 a major, if not the major, producing site for REES producing nearly 40% of the world's demand as recently as 1994; it was shut down then the company says due to market conditions (i.e., low prices) in 2000. It has been in the past a vertically integrated operation starting with mining ore and offering everything up to '59s purity metals produced on site.

Today, it is being re-started as a first stage chemical separation house working off existing above ground material; the company's general manager stated that Chevron plans to systematically bring the plant on line and, perhaps, even up to full vertical integration within 5 years, by 2013. A lot will depend on the particular rare earths and the volumes of them that can be brought to market soon, because the return on investment clock in large parent organizations runs very quickly, and this re-start-could easily cost $200 million dollars.

Chevron's first product was said to be didymium; this is a name used historically for a mixed rare earth metal alloy containing dysprosium and preasedymium and used in magnet forming applications. I believe that this route was taken by Chevron, because mixtures are easier to less expensive to produce upstream, and this particular one will allow them to enter the end-user magnet production market in which later on they hope to sell neodymium. Ironically their above ground material contains up to 500 parts per million of thorium, which today is considered only as a contaminant; if the thorium reactor revolution occurs and it is possible to be paid for separating and refining thorium as an asset then the whole dynamic, and certainly the return on investment, of Mountain Pass operations could change.

Every other rare earth mining opportunity outside of China today is only in process of being developed, and in order to determine if all or any of them will be developed one needs to look at which metals they could produce to get an idea whether or not they will be able to find financing.

In the being-developed category are the two Canadian companies, Avalon Ventures [TSX-V:AVL] and Great Western Minerals Group [TSX-V:GWG]. The Chairman of GWG gave a talk at the SME session I attended on the "Geology, Setting and Development of the Hoidas Lake (Saskatchewan) Rare Earth Element Deposit." He stated that the output would be 3,000 tonnes per year, for, at this point, at least 10 years, in total, of REEs within five years after start-up of the mining operation, and he said that this start-up is now under way. Although what exact percentage quantity of the minerals in the ore body would be neodymium was not stated it was mentioned that there would be neodymium production at Hoidas Lake.

It has been reported that Avalon Ventures production will be of the same magnitude. I do not know the percentage by REE composition of the Avalon Ventures ore body.

There are several Australian companies bringing REE mines forward; the largest and I think the closest to vertical integration, like Mountain Pass, is Lynas [ASX:LYC], which has said it will lift, process, and then, because of the economics of starting up a refinery, such as the one already in operation at Mountain Pass, move its ore concentrates to Maylasia, rather than as originally planned to China, because Chinese export taxes on rare earth metals and the serious possibility of restrictions on their exports caused it to change its mind. Lynas has announced that its Mt. Weld mines are the richest concentrations of REEs in the world, but even so, it has also announced that it hopes to reach a peak production of only 20,000 tonnes per annum by 2010.

To be fair a vertical integration agenda is also the plan of GWG, but rather than stop at high purity end products of metals and chemicals like Lynas GWG plans to produce specialty rare earth dependent alloys and forms for end-users at an already existing specialty alloy plant it has acquired and already put into operation using REEs bought from the outside to start it up. Another Australian rare earth mining company is Arafura Resources [ASX:ARU].

There are REE deposits of one type or another in North Carolina, Missouri, Turkey and southern Africa, but none of them is even being surveyed much less under development.

So, at this point is there going to be new non-Chinese production, in sufficient quantity to replace the 40% of Chinese production now exported which will be needed domestically by 2013 to come from and to add the expected increase in demand?

The answer would seem to be not only a resounding no, but also a very shaky 'maybe,' if, and only if Mt. Weld comes into production and there are no problems either at the mine or in Maylasia-remember there is also not enough existing or planned and financed refining capacity to process anything like the projected 60,000 2013 shortfall.

There is one more possibility. No one before this meeting except astute readers of RI had heard of Thorium Energy, Inc. [OTCPK:TREG], which owns the claims in the Lemhi Pass, which the company's geologists announced at the SME session were the largest REE deposits in North America, and until I am convinced that the standard of reserve and resource measurement in Australia is as credible as the data presented, and linked on my , by the geologists working on the Lemhi Pass deposits I am going to say that Lemhi Pass, in total, is probably the richest and highest grade REE deposit group yet found. China may have more REEs but it does not have the grades found at the Lemhi Pass.

One more piece of good news. I discussed the geology of the Lemhi Pass deposits with the presenter-geologists and they told me that the Lemhi Pass deposits are unique in their distribution of REEs in that although they may resemble in part the Mountain Pass deposits they appear to be much richer and larger than the Mountain Pass deposits in the critical middle rare earth elements; they are for example anomalously rich in neodymium!

Thorium Energy, Inc. is in the process of having the exact percentage distribution by individual element calculated for the largest ore bodies so far discovered on their claims.

If the Lemhi Pass is developed over the next five years I believe that it along with the other smaller North American and Australian deposits and the large Australian deposit could make up the REE shortfall.

I also believe that the Lemhi Pass deposits may turn out to be the non-Chinese world's largest resource and source of neodymium. It also has, I have been told, anomalously large amounts of yttrium, samarium and gadolinium.

I'm going to follow all of the non-Chinese REE mining projects this year, and keep you informed on their progress. Right now the score is China, 95+, and the rest of the world, <5; so far only Chevron is playing on the non-Chinese team, but on the bench are two Canadians, two Australians and one additional American. It looks to me like the heavy hitters are one of the Australians and the one other American, but he's the new guy and untested. The clock is running and only the winner of the 2013 season gets to go on playing in the big leagues. Good luck to all the players on the non-Chinese team.

About the Author
Jack Lifton

Jack Lifton is a leading authority on the sourcing and end use trends of rare and strategic metals. He is a founding principal of Technology Metals Research LLC and president of Jack Lifton LLC, consulting for institutional investors doing due diligence on metal- and material-related opportunities.

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