Ninja Neodymium Investors

DETROIT () -- I have entitled this essay "Ninja Neodymium Investors" and used the below scientific shorthand symbol and some basic physical and chemical data for metallic neodymium to illustrate the point I want to make today. Investing in materials of which you know very little, while others know a lot, is very risky. You need to ask and have answered some very basic questions before you take any risk.

Investing in minor metals is a "breakout" phenomenon; they, minor metals, have always been there, but no one really noticed them, or outside of the metallurgical community, paid much attention to them before, and so the promoters of such investments are marketing them like toothpaste, everyone really uses it, or should, or will do so very soon; our brand is better than the leading brand; and this offer of a low price is an introduction only and won't ever be repeated. Sound familiar?

Having run out of credibility in asking you to invest at the current top in existing suppliers of relatively well known commodities such as coal, oil, gas, copper, lead, zinc, aluminium and so forth and so on, investment professionals are touting (please look up this word in your dictionary!) minor metals as one of next biggest (to them anyway) as of yet undervalued investments.

It is common to refer to such investments as being of the "breakout" type; any minute now they may go sky high, and you certainly don't want to miss this opportunity (for me to make my Porsche payment right now while you take a chance on neodymium with no downside to the investment advisor), do you?

It will take me many articles such as this one to acquaint you with the downside, as well as the upside, of investments in those lesser known metals known as the minor metals. the Minor Metals Trade Association (full disclosure: I have just applied for election to that non-profit body) lists something like 37 different metals in its grouping of minor metals and its list is limited only by the requirement that the metal be available in commerce in a standard form as new technologies create a demand for metals, which have up until now been ignored as having no significant uses.

Interest in one subgroup of the minor metals which consists of chemically and thus geologically related elements known as the rare earths certainly makes this subgroup a possible breakout investment opportunity.

Let me define "Ninja Neodymium Investor" for you, so you can avoid becoming one. In the current (drying up of) credit crisis in banking that resulted from taking too much risk against which, it turned out there was no insurance, only the illusion of insurance through credit swaps, which, in the end no one would buy, because they were impossible to value, there came to be a common type of credit customer-particularly for home mortgages-known in banking circles as the "Ninja borrower," defined, in the Financial Times, today, as those "borrowers having no incomes, jobs or assets."

I am now going to define a Ninja Neodymium Investor (NNI) pronounced "ninnie," as one who has no knowledge of the asset class in which he is asked to invest, but can't resist getting in on the bottom floor of a good thing that is breaking out. Such NNI's give off the glow of easy money to stock promoters.

I'm going to start your asset class education with the name element of my article. Here's your primer on the most valuable of the rare earth elements, neodymium.

There are no primary rare earth mines yet discovered on the earth. The rare earth elements are like all other elements distributed throughout the earth's crust. Neodymium itself is twice as plentiful as lead and half as abundant as copper in the earth's crust and only cerium and lanthanum, of all of the rare earths, are more abundant than neodymium in the earth's crust.

Human beings do not and cannot simply mine the earth's crust other than at or very near a small part of the 30% of its surface that is dry land in temperate climates; the crust is 40 kilometres thick, but almost all mining takes place in the first kilometre. Also it is not true that, for example, you can simply sift through a cubic yard of dirt from anywhere and extract lead and twice as much neodymium as lead. Mining is limited to places where natural processes such as the movement of molten material from the earth's mantle to the surface - such as volcanic action - has brought with it dissolved minerals, concentrated by the fact that they are soluble in the molten magma whereas those elements that are less soluble stay behind or drop out far below the surface where they are inaccessible.

Another natural concentrating process is the movement of water, especially water at high temperatures, under pressure; elements and their compounds are almost always more soluble in high pressure hot water, or in molten rock, than in cooler material, and so as the natural process cycles, such as in cooling, come into play at or near the earths surface, minerals and even metals may drop out preferentially or in chemically similar groups together at the same general place when the pressure and temperature of the water or molten rock drops below that level at which they are soluble. Thus ore bodies are created.

These natural processes may take place over thousands, millions or even billions of years. The rare earths, elements 57-71 of the periodic table, have very similar chemical properties. This means that they typically are found together in an ore body, because natural processes were not selective enough to separate them even over a very long period of time.

In fact the rare earths are found in nature in groupings that miners call the "lights" and the "heavies." This means that one type of ore body may contain primarily a mix of the rare earths from, for example, lanthanum to europium or gadolinium, elements 57 to 63, or 64, while another will consist of the elements beginning with gadolinium, for example, and continuing through lutetium, element number 71. Additionally because the chemistry of scandium, element number 21, and yttrium, element number 39, are very similar to that of lanthanum, element number 57, ores of these two metals are often found, yttrium, in particular, associated with rare earth deposits. The term 'rare earth' is usually defined today to include the 15 lanthanides (elements 57-71), yttrium (39), and scandium (21) for a total of 17 rare earth elements.

I have been told that the Soviet Union discovered, and the Russians are today mining, the rare earth element scandium from a primary scandium mine; if this is true then it is the exception that proves the rule, since scandium is a rare earth as much by convention as by chemistry.

As an aside, I will mention that the Russians either first discovered this mine and then developed uses for scandium, or they developed special uses for scandium and then, went looking for and found the world's only primary scandium mine. In either case if someone approaches you to invest in a primary scandium mine, not in Russia, or, perhaps, if in Russia, use pepper spray and then run. Next week, in an article about metals used in the aerospace industry, I will discuss light weight scandium aluminium alloys used for both wheeled or tracked armoured vehicles and for aircraft armour so you will understand why the Russians went looking for scandium or at least why they said they found it.

Now back to neodymium. Essentially the only source today of rare earths, other than scandium, is China which produces a little more than 125,000 tonnes a year in a western region of the country which is also a principal; iron mining region. China's rare earth mines in this region are in fact owned and operated by a subsidiary of Baosteel, the country's largest steel maker. As recently as 1994 the world's then largest producer of rare earths was a mining operation in Mountain Pass, California in Inyo County, I believe, which was then operated by Molycorp, which itself has now been absorbed by Chevron Mining, a wholly owned subsidiary of Chevron Oil [NYSE:CVX]. When it shut down in 1994, Mountain Pass was producing 34% of the total rare earths produced in the world and it was then providing 100% of the rare earth demand generated by OEM American heavy industry. In other words the U.S. was self-sufficient in rare earth metals in 1994!

Chevron states that Mountain Pass was shut down in 1994 because its cost of materials mined was more than their selling price. Today, in 2008, Mountain Pass has resumed limited operations, mainly refining, based on the residual ore left above ground in 1994. Mountain Pass is today producing didymium, a trade name for mixed rare earths (oxides, I believe, in this case), which in the case of Mountain Pass, consist of a mix primarily of the lights, neodymium and praseodymium. At this time Mountain Pass is the only mining operation (technically it is actually a refining operation) in the world outside of China that is producing neodymium.

At the Society for Mining Engineering and Exploration (SME) in Salt Lake City last month it was pointed out during a special session on rare earths that the current global demand for neodymium (98% supplied from China) is around 20,000 metric tonnes per annum, and that this could double to 40,000 tonnes per annum by 2014. However, it is likely that even if the Chinese could accomplish an increase in their total rare earths output by an additional 40,000 tonnes per annum by 2014 for a total of 160,000 tonnes per annum, this is projected to be their domestic economy's demand in 2014. There will therefore be a global shortage of rare earth metals in general, and perhaps a shortage of as much of 15,000 tonnes per annum just of neodymium in a world that may demand, on present trends, a total of 185,000 tonnes per annum of rare earths in 2014.

Neodymium today generates more than 25% of the gross revenues from all rare earth dependent end-use products being manufactured. It is projected that by 2014 this figure will be at least 50%. Economically then it is clearly the most valuable and the most important rare earth metal.

Chevron Mining says that it plans to bring Mountain Pass back into full operation as a light rare earth producer by 2012-3. Chevron has yet to say what percentage of its production will be neodymium, but it must be noted that Mountain Pass may well be the site of America's largest rare earth deposits cumulatively; it certainly was in 1994. I say may be, because, at the SME, Thorium Energy, Inc., a private company, showed data on the resources, reserves and distribution of rare earths in its Lemhi Pass in Idaho that if validated would make those reserves as large as those of Mountain Pass. If the qualitative spectrographic data presented are representative of the total then the Lemhi Pass may be the location of the largest deposits and reserves of neodymium in North America.

I cannot overemphasize that in order to have the most value, a rare earth mine today must contain neodymium that is accessible and can be separated from the other rare earths found in the deposit by economical processes that are basically already known.

So now, finally, what's so important about neodymium? In 1984 a joint research program run by Sumitomo and General Motors discovered that an alloy of neodymium, iron and boron could be processed to form the highest strength permanent magnet so far known on a strength-to-weight ratio. This meant that electric motors small enough to be placed in the narrow confines of the door of a car, or outside the car in a side view mirror or in a retractable headlight, which were nonetheless very light, could be easily produced. In addition larger motors, such as starter motors, could be reduced in weight while their power output was actually increased. Some scientific devices based on powerful magnetic fields for health purposes or inspection could also be reduced in weight (and volume).

Keep in mind that by 2010 100 million cars and trucks will be built annually, and you see that neodymium demand just for magnets is going to climb. You should also know that today in the U.S., all magnet scrap is exported mainly to China where the rare earth element neodymium (and samarium) is recovered to be sold back to us once again.

So here's a list of questions to ask of the person or institution that wants you to invest in neodymium:

  1. Since there is no such thing as a primary (i.e., one from which only the metal under discussion is found) neodymium mine, what will be the cost of separating and refining the neodymium from the other 'light' rare earths with which it is normally found?
  1. Where is the mine which will produce neodymium? Is it in a politically friendly country?
  1. Will any of the other elements produced along with the neodymium have economic value exceeding their cost of recovery?
  1. Neodymium has quadrupled in price in the last 18 months. How high can its price go before substitution, thrifting, or a return to previous non-neodymium technologies begins?
  1. At what stage of development is the mining property in question?
  1. Based on the answer to questions 4 and 5, above, how long should I expect before getting a return on my investment not from speculative bidding on the stock but from a stock price based all or in part on the company's earnings?

Naturally it goes without saying that you will want to see a prospectus on the company showing exactly how its reserves (proven material) and resources (estimated additional material) were determined and showing the feasibility of the mining operation (nearness to roads or rail, and availability of labour and equipment) and an independent evaluation of the process chosen to concentrate the particular ore(s) to be raised.

Once you have done all that or your financial advisor has done, your investment can become a calculated risk rather than a ninja neodymium investment. Good luck.

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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