The "horse race" theme that I devised two years ago, with the winner to be the first to produce heavy rare-earth oxides (HREOs) outside of China, is now in the final lap. The smart money is on the smart management of Great Western Minerals Group (GWMG).
GWMG has brought the entire rare-earth junior mining sector outside of China to a turning point, as evidenced by its recent press release. Today is the last day of the hype-based, rare-earth-junior-mining-stock promotional "boomlet".
In November 2009 at the Hard Assets Investment Conference in San Francisco, I predicted that there was a "horse race" underway to be the first company outside of China to produce HREOs commercially. I also predicted that the winner would be GWMG, because they were the only one at that time to have taken the first steps to vertical integration, which I think is critical for REO wannabes in the REO business world as I see and understand it and have understood it for nearly five decades.
At the time I was immediately threatened with no less than three independent legal actions, due to my selections for entrants in the "horse race." One of the presumptive litigants apparently had a board member present when I made the prediction and he asked his CEO to sue me for not mentioning their company. The other two were mentioned in the "horse race" but not to win, place, or show. All three had in common that they did not have significant, commercial levels of HREOs in their ore bodies under development, which are critical for the production of, among other things, high-performance rare-earth permanent magnets. I was threatened by the CEOs of the two that I said would place out of the money, with lawsuits for defamation, for "disparaging their companies."
I myself attended the University of Detroit School of Law some 40 years ago, so I informed the men who called to threaten me, that I welcomed their actions. I said that I would of course be calling the chairman of a certain well-known investment bank as a witness, to explain why his company dropped out of both of the ventures that were threatening to sue me. "Let's add that bank to the defamation suit as a party defendant," I told them.
Unsurprisingly I didn't hear further from either one.
The proximate cause of the lawsuit threats I just mentioned was that the "horse race" talk was filmed illegally by an attendee, and it went out over the Internet (the rights to the presentation were actually owned jointly by me and Summit Business Media, the sponsor of the Hard Assets conferences). One of the aforementioned CEOs told me that this publication of the video was a slander to a third party, or a libel.
Those who threatened to sue me were rather unprofessional. They thought that they could frighten me into silence or into retracting my prediction from fear, but obviously they were wrong.
The race to be the first to produce commercial quantities of REOs outside of China has entered a new phase today.
I predict again that GWMG will be the first ever junior rare-earth miner outside of China to become a profitable producer of commercial quantities of heavy rare earth forms, beyond separated purified HREOs.
I note that GWMG's new partner is an experienced processor, which has been providing GWMG's Less Common Metals (LCM) subsidiary with pure rare-earth metals for manufacturing into rare-earth permanent magnet alloys, and other compounds, for LCM's customers. I further note that among those customers is now to be Japan's Aichi Steel, a manufacturer of rare-earth permanent magnets so large, as to be able to take all of GWMG's projected production of relevant rare earths from Steenkampskraal.
Therefore I predict that GWMG will be the target for discussion of a joint venture or even an acquisition, by many good juniors with HREOs in their ore bodies. They will all basically propose that the GWMG rare-earth separation plant be expanded, to accommodate their ores on a partnership basis. This is because the most added values available to rare earths that can be added by a mining company are done by moving downstream towards the production of pure metals. Up to that point in the value chain, we are speaking of mining engineering and chemical metallurgical engineering. When one reaches the next stage, that of producing magnet alloys and magnets, one has reached the provenance of skilled specialists in materials and physics. Such skill sets are not bought; they are earned with Darwinian ruthlessness, in the real world of high-tech product development and manufacturing.
GW's primary skill set within its core competency, has now been stated or shown to encompass:
- Ore concentration (mechanically);
- Extraction of metal values;
- Separation of the rare earths from each other and from the radioactive constituents of the ore body;
- The legal and safe disposition of the radioactive residues;
- The production of pure rare-earth metals from the purified chemical forms; and
- The production of specialty alloys of neodymium (Nd), samarium (Sm) and dysprosium (Dy) for use in the production of high quality rare-earth permanent magnets.
I sincerely congratulate Gary Billingsley, the executive chairman of GWMG, and Jim Engdahl, GWMG's CEO, for their perseverance in the face of great odds. The first time I ever heard of the "mine-to-market" strategy was when Gary Billingsley told me about it perhaps two to three years ago. I thought it was a winner then, and I think it's a winner now. After that time though, GWMG struggled to navigate in the flood of hype and promotion, aided and abetted by pundits and self-appointed experts, who believed that bigger was better, and that since, in their alternate universe, the demand for the rare earths would grow infinitely, then rare-earth mining would be most profitable to those who could mine the most material.
In fact there is no rare-earths market at all; there are markets for some of the rare earths individually, but the cost structure for any rare earth is a function of what it costs to separate and purify it from all of the other rare earths and associated metals. This is a uniquely different problem from that of any other metal.
Few outside of China, have mastered the skills required to produce an entity such as pure Nd or pure Dy chemical compounds. Fewer still, anywhere, have the ability to make pure metals from these compounds, and only a very few have the education, experience, and time-proven skills to produce rare-earth magnet alloys. Although all of this expertise was originated in the West, it is today almost all resident in China or Japan.
If the West wishes to inure its supplies of rare earth metals and alloys independently of production from China, then it can encourage through private-equity business models, such as that of GWMG, or national governments can subsidize such models.
Now that the fog of hype and promotion is clearing a little I urge investors to take note of these facts:
- There is not now, nor will there ever be an open (unlimited) demand for rare earths. Current speculation on this demand is just that, speculation. Ignore it unless it references hard data-in particular data about Chinese and Japanese demand.
- Any planned or projected production levels must be capable of being made profitably, at whatever point in the supply and value chains the mine intends to sell its product. This means that there must be a buyer (or buyers) for all of the production at the lowest profitable selling price.
- At that point the mine must be the low-cost producer if it is operating in the free market, and if it is to be competitive in that market.
- Each step in the supply chain requires a different skill set from managers and engineers than the one preceding it. Such skill sets get rarer as one goes further along the value chain towards the end product. College degrees are nice, successful experience is necessary. In particular, there is today no private jobbing of rare-earth separation outside of China, so no one is going to be able to restart the rare-earth supply chain anywhere, until there comes into existence a rare-earth separation and refining industry with proven capability and demonstrated capacity.
- Marketing is a skill that must be present from the beginning. It is one of the first steps not the last.
- Rare-earth ore concentrates can be produced as byproducts of otherwise profitable operations, such as iron-ore and uranium mining.
- In the above cases it is possible for a miner to be a low-cost producer of rare-earth ore concentrates, and to match much larger, dedicated rare-earth mines in the costs at that point on a per kilogram basis.
- Rare-earth separation plants can be built with a flow-through capacity of 2,500 tpa year for under $25 million. The scale up is not linear. A 10 ktpa plant cannot automatically be assumed to cost $100 million; it may be much more due to increased process control requirements. Note well, that the largest rare-earth solvent-exchange facility ever built, is in China, and has a yearly flow-through capacity of less than 10 ktpa. Scaling up to this level and beyond has never yet been done, and the impediments are so far unknown and are thought to be challenging.
- Thus it is possible that a relatively small, light-rare-earth mine with predominantly weathered, or easily accessible ores for which the metallurgy is well-known, such as bastnaesite, could make a profit at a much lower level of production than a larger mine, even at the separated REO stage, because of its lower startup and overhead costs.
- It is also possible that a small mine with significant HREOs could be profitable, even if it can only sell the HREOs, and perhaps Nd oxide.
- The market will buy what it needs at the lowest not the highest price.
- Boutique-metals mines based on niobium, tantalum, zirconium, and titanium, for example, individually or in combination, may be able to become profitable because of the now-higher and sustained prices of any or all of certain rare earths that are critical, such as Nd, Dy, terbium, europium and yttrium.
When future bond-rating agencies rate the producing rare-earth mines from the middle of this decade forward, for the purpose of fixing the interest rate on that corporations bonds, they will look at profitability and the ability of management to sustain profitability. Those are their only metrics.
I'm sure that GWMG will be highly rated.
Once again I congratulate the management of GWMG for a job well done. I hope that GWMG is producing metals and alloys vertically within 18 months from now.
Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).
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.