Iron miners don't make cars, so why should rare earth miners make magnets? According to longtime rare earth expert/consultant Jack Lifton, "mine to magnet" vertical integration strategies are little more than pie in the sky schemes. But Lifton just might have the perfect solution for the world's rare earth element supply problems. In this interview with The Metals Report, Lifton tells us how a non-Chinese international rare earth toll refinery would get separated rare earths downstream more efficiently, while simplifying miners' business plans. Find out which companies could be part of the solution.
The Metals Report: Recently, you have written about the strategies junior rare earth element (REE) miners need to follow to survive this tough market. What are the critical attributes of a surviving junior REE miner?
Jack Lifton: Junior REE miners need a well formulated business model. That is critical and often missing. My experience indicates that in the REE industry, many junior miners have not given any thought to their business beyond producing concentrated ores. In this business though, downstream processing is a critical part of the added value. A miner needs to produce something that customers want to buy. This revelation surprised many of the enormous number of juniors that popped up over the last five or six years. Companies that understood the supply chain had a greater chance of surviving. In REEs, profits are not derived directly from mining ore, because the concentrates are heavily discounted by the market due to the current shortage of accessible separation capacity outside of mainland China.
TMR: So greater vertical integration is the key to profitability? Is completely vertically integrated the best?
JL: You can't be totally vertically integrated. The end-use products that contain REEs are complex. For example, an iron miner with the strategy to make cars would be laughed at. Yet, when a REE miner advocates making REE permanent magnets, everybody applauds. Simplistically, it sounds like a great way to make money. But it is an example of the foolish overreach by almost all of the REE juniors a few years back. And nobody has accomplished it. Interestingly, that type of "mine to magnet" vertical integration does not exist in the Chinese industry for the simple reason that it doesn't make economic sense.
TMR: Does that mean the differentiator between the survivors and the non-survivors is technology—either proprietary technology or operational use of technology?
JL: I'm calling it "technology awareness." In other words, company survival is dependent on recognizing limits. Patented processing technology is not necessarily important. But most companies that make REE permanent magnets have quite a bit of proprietary knowledge they don't disclose. No outside company is going to get that process knowledge for free. When I heard about companies talking about their "mine to magnet" strategy, I realized they really didn't understand what REE permanent magnets were all about. To me it was Bay Street hype or Wall Street hype. It was obvious promotion. However, I noticed that small investors and even institutional investors, who should know better, were falling for this story.
I have been saying from day one—total vertical integration is not possible. Now that doesn't mean that there weren't companies like Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) or evenMolycorp Inc. (MCP:NYSE), that weren't attempting to do this by mergers and acquisitions. Great Western, for example, acquired what was an existing high-technology company, Less Common Metals Ltd. of Great Britain, which was already in the rare earth magnet alloy market making a profit. What Great Western did with Less Common Metals was an example of sensible vertical integration. However, when companies started trying to get into these technology-enabled end products on their own, this was just silly.
Companies should have been looking at each step of the process required to produce a sellable product. They needed to understand a multi-step value chain. For example, if they are able to concentrate the REE ores, what do they do with the ore concentrate? How will the company get from the ore concentrate to some kind of chemical solution or solid form that it can then further process? With the REEs, the first step to create a bulk concentrate is not much of an accomplishment. The real problem in REE processing is separation—and that is the issue that most REE juniors have not solved in a cost effective way.