TGR: What companies could move to fill that demand in the lithium, cobalt, copper and scandium space over that time?
CB: In the immediate term, the existing producers of these metals are going to handle the looming demand. Five years from now, we'll need additional supply and this is when the aspiring producers could benefit.
With cobalt, the large-caps are where I am focused. Freeport-McMoRan Copper & Gold Inc., Glencore International Plc and First Quantum Minerals Ltd. are all examples. To be clear, cobalt is a very small part of their business—it's essentially a byproduct of copper and nickel mining. However, I think it's an important one, given the need for cobalt in battery growth.
The cobalt value chain is not vertically integrated very well, with a majority of supply coming from one country (the Democratic Republic of Congo) and a majority of the refining taking place in another (China). Freeport-McMoRan is one of the largest refiners of cobalt outside of China, and so it's been a part of its business I pay close attention to. I have also begun looking at cobalt recycling. A company called Umicore Group is a particular focus in that area.
I think a top-down approach is also the best method to evaluating the lithium sector. I've said in the past that lithium is really an oligopoly and when you look at the major producers, they're really chemical or agricultural companies with lithium as a side business. I suppose the opportunity lies in the fact the major producers are all facing different challenges. Sociedad Química y Minera de Chile S.A. is facing political challenges in Chile and is effectively capped on what it can produce.
FMC Lithium Corp., one of the other major lithium producers in the world, has had production and political challenges. That said, companies like those can produce lithium at a low cost, so any companies looking to compete will have to meet or beat their production costs. I think this requires leveraging technology to do so.
Albemarle Corp. looks particularly well placed given its acquisition of Rockwood Holdings, which was the number one producer of lithium compounds in the world before it was taken out in a $6.2 billion deal. Lithium production also emanates from China from the likes of Sichuan Tianqui Lithium Industries and Jianxi Gangfeng Lithium, but the insane volatility of the share performance in the Chinese markets are not for the faint of heart.
On the junior side, Lithium Americas Corp. and POSCO are in discussions to mutually pursue a commercialization strategy. If Lithium Americas and POSCO can put a deal together to leverage POSCO's proprietary lithium production technology, which can increase recovery rates, lower the time to market and lower the overall environmental footprint, that is a win-win all the way around.
More importantly, it could serve as a model for other aspiring lithium producers on how to enter this rapidly growing space. There are a number of competing technologies in the lithium space that are focused on lowering costs, which I think is an exciting example of evolution in action in mining.
I also think that optionality is important in the mining sector. One company that's demonstrating this concept is Galaxy Resources Ltd. The company has a storied history in the lithium space, but one important thing it has now, relative to a lot of its peers, is cash. The company sold off its Jiangsu lithium plant in China, and struck a deal with General Mining, an Australian junior.
The deal was recently revised, but will see Galaxy sell 50% of its Mt. Cattlin lithium mine for a total consideration of AU$25M. That gives management of both companies choices and flexibility. What it will probably do is focus on bringing its Sal de Vida lithium development play in Argentina closer to production.
TGR: What about copper?
MB: Today's announcement by Quaterra Resources Inc. that Freeport-McMoRan Nevada has committed $7.1 million toward option payments over the next 12 months is certainly a welcome one for Quaterra investors. I have been associated with the company for the past 15 years and participated in its private placements. Two years ago I was elected to the Board of Directors. It appears that Yerington has the potential to become a world-class mine once again.
The Bear deposit, a large porphyry copper system on the Yerington property, will now be explored with Freeport's decision to move into phase two. This will be a $7.1 million program over the next 12 months run by Quaterra to explore the Bear. Of course Freeport, the world's largest copper producer, can opt out at any point in the future, but it can also spend up to $138 million over a period of several years to earn a 75% interest in the property.
How many companies with a market cap of $13 million have a direct investment of almost $10 million from a major mining company with little or no dilution to shareholders?
Hats off to Quaterra's CEO Steve Dischler and to Chairman Thomas Patton for their hard work in seeing this relationship with a major mining company begin to bloom. I own shares in Quaterra and in fact have never sold a share. From the viewpoint of the city of Yerington and state of Nevada, this agreement has benefits all round. Now it's time for Quaterra management to explore the Yerington property, which could become a major world-class copper resource.
TGR: Mike and Chris, you've both lived through a number of investing cycles. Where are we in terms of the rare earth (RE) cycle?
CB: We're close to the bottom. It's difficult to tell when the current down cycle will turn, as getting reliable data out of China is always challenging. It looks like China is serious about addressing its environmental challenges and demand for certain products that require REs continues to grow well above global GDP—two supportive factors for the market. Illegal mining has added excess supply to the marketplace and kept a lid on prices. Because of this, leveraging technology to ensure aspiring producers can compete with the "China price" is imperative.
I'm paying particularly close attention to advances in molecular recognition technology, ion exchange and solvent extraction, all of which are very promising. China is not going to give up its stranglehold on the market no matter what the World Trade Organization or anybody says. If you want market share in this space, you have to beat China on price. The Siemens AG deal with Molycorp is a positive sign that major end users are looking to secure REs outside of China, despite the bleak future for Molycorp. We need to see more of that to reignite investor interest.