There is no single rare earth element market. Instead, the rare earth universe is made up of four or five distinct "critical rare earth" markets that should be the focus for investors today. Even with new mine supply and refining capacity coming on-line over the next four years, these elements will remain in short supply, with hefty price tags attached. In this exclusive interview with The Critical Metals Report, Institute for the Analysis of Global Security Senior Fellow Jack Lifton explains how investors can play a crucial role in building a supply chain outside of China.
The Critical Metals Report: Can you give us an overview of the rare earth element (REE) market today? What are the most important trends you're following?
Jack Lifton: The REE market today is going through a shakeout. We had a bubble last year—an anomalous speculative blip—that ran REE prices to the sky. It happened just as the junior miners were coming into full bloom. At that time, I would say most of the junior REE exploration companies were overvaluing their projects something fierce. Then the market herd jumped in and ran the prices way up.
Now that the speculative bubble has burst—and I think a lot of it had to do with China repositioning itself—we're back to earth. I would guess that of the 250–260 listed REE public companies, there's just one that is in production: Molycorp Inc. (MCP:NYSE). All of the valuations are coming down to earth.
Between 90–95% of the remaining junior miners will be wiped out. Investors should understand there is no single REE market. There is a market for some of the individual REEs—the critical REEs. But for at least half of the REEs, production and usage are tiny and there is no "market" to speak of.
For many REEs, production exceeds demand and will for the foreseeable future. Cerium is a good example of the fact that not all rare earth demand is equivalent. When you produce dysprosium, you are always producing much more cerium than dysprosium. That doesn't mean that there is a market for cerium. In fact, it is more correct to say that some cerium/lanthanum/neodymium deposits contain recoverable dysprosium. Saying it this way really defines the problem.
I follow four or five critical REEs that each have individual markets. One of them is neodymium, because it's the most important REE used in permanent magnets. The others are heavy rare earth elements (HREEs), including europium, terbium, dysprosium and yttrium. The latter isn't really an REE, but it's associated with them. As the market corrects to reasonable prices, people are coming to understand this.
The critical REEs will maintain strong demand and associated pricing. I disagree with people who think all REE prices will collapse, because I see no significant production of REEs outside of China. Maybe Molycorp is ramping up light rare earth element (LREE) production. Today, there's hardly any difference in the ratios of production inside and outside China compared to four years ago. I'm waiting for a producer to come on-line and make a significant difference. If both Molycorp and Lynas Corp. (LYC:ASX) were in full production by 2015, as their own projections suggest, that would bring approximately 60 thousand tons (Kt) of new production to market. Of that, only about 8 Kt would be neodymium, and none of that would be HREEs.
Annual growth projections in the REE permanent magnet market has been about 8–9%. Worldwide production of neodymium is approximately 21–25 Kt/a. Ninety percent is from China, the balance from Molycorp. If demand increases at 8% per year for three years, that's about a 30% increase, approximately 7.5 Kt of production. Demand growth will be about the same as new mine supply and that will maintain the price of neodymium.
TCMR: What other critical rare earths are you watching?
JL: The big issue in magnets is the HREE dysprosium. There is not now, nor has there ever been, any production of dysprosium from outside of China. There are several possible significant dysprosium sources coming on-line in the next two to four years from hard-rock sources outside of China.
None of the mines are at any stage where we can predict when they will be commercially producing. Two to four years out would be the earliest any new dysprosium production could occur outside of China. Dysprosium is already in short supply. The total world production of dysprosium in the last 12 months is unlikely to have exceeded 1.4 Kt. The market will be in deficit if dysprosium usage increases due to production of REE permanent magnets. The dysprosium market is in balance at 1.4 Kt. With 8% growth in demand each year, we're going to need about 100 tons (t) a year of additional dysprosium.
I don't see that happening easily. Only four or five new HREE producers could be in production in the next three or four years.
Dysprosium is going be in short supply for some time and will, therefore, maintain its price. Everybody talks about how the price dropped from $2,500–1,200/kilogram (kg) of 99.9% metal. That is comical, because the peak people are using is the speculative bubble last year. The current price of dysprosium is significantly higher than the real long-term baseline. I believe it's going to maintain its price of approximately $1,200/kg for 99.9% metal in China.
Dysprosium is the problem metal for everyone, because no hard-rock source has ever been put into production. I'm intrigued by Molycorp's statements that it will be meeting America's demand for dysprosium by the end of next year. Company officials estimate America's dysprosium demand at 7 t/a, exactly what Molycorp projects to produce with 100% recovery from its deposit. That 7 t would only be for the military, which has decided it is going to need about 160 t/year of REE permanent magnet material, of which 7 t would be dysprosium. In the world market, that is insignificant. It's an accounting error. The people at Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) tell me the company's South African mine will be in production in less than 24 months, and it will produce 34 t of dysprosium per year. This is from one of the richest REE deposits on earth. The ore ranges from 18–21% total REEs, but it doesn't have very much of it, and it doesn't have very much dysprosium. The 34 tons per year (t/a) is enough for internal consumption. It's not being sold into the market. It is being transferred internally to the company's Less Common Metals division in Great Britain, where it will be made into dysprosium-enhanced neodymium iron boron magnets.
Two large hard-rock sources of dysprosium I think will be coming on-line, when the metallurgy, separation capability and permits get worked out. These are Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) at Bokan Mountain in Alaska and Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE) in Sweden. These deposits are being developed to produce 3,900 t/a and a little less than 6,000 t/a, respectively. Bokan would produce 120 t and Tasman 350 t of dysprosium per year at those levels. These are the first two major hard-rock REE deposits that look like they're going into production.
There are other deposits that are less well known and could be sleepers. One is Lynas' Duncan deposit in Australia. When put into production, it could be a major dysprosium source. The other is the Rare Element Resources Ltd.'s (RES:TSX; REE:NYSE.A) deposit at Bear Lodge, Wyoming, which could be a significant hard-rock source of dysprosium ultimately with a longer mine life than and at least as large a production as Ucore.
There's also significant dysprosium at Hastings Rare Metals Ltd. (HAS:ASX) and Northern Minerals (NTU:ASX) in Australia, but these are quite early. No matter what we do right now, we're going to be short of dysprosium for at least the rest of this decade, if not permanently. If dysprosium supply limitations are not addressed, growth in the use of REE permanent magnet devices for rapid heating and cooling environments will be affected.
TCMR: What other new technologies are increasing REE demand?
JL: In addition to magnets, phosphors in color displays use REEs—in this case europium, terbium and yttrium. The U.S. has a little bit of europium. The Molycorp deposit has approximately 0.1%. Rare Element Resources' Bear Lodge deposit in Wyoming has 0.6%.
Terbium and europium come mainly from China. However, all of the dysprosium hard-rock deposits show significant terbium. If Ucore at Bokan Mountain were producing 120 t of dysprosium per year, it would also be producing around 20 t of terbium and significant amounts of yttrium. Rare Element Resources' second deposit at Bear Lodge is also a potential source of significant amounts of terbium and yttrium. The same situation applies in Tasman's deposit at Nora Karr, now under development, and in the two Australian companies mentioned above, although they are in early stages of development.
World terbium production is only a couple hundred tons. So, 20 t is a significant increase. Compact fluorescent lamps use terbium in the phosphors. It's so important to the lighting makers in Europe, and its largest scrap refiner, Umicore Group (UMI:BRU) of Belgium, is in a joint venture with the Rhodia Group (RHA:NYSE), which is now reactivating its plant at La Rochelle, France. Rhodia is now a division of Belgium's Solvay (SOLB:BE), which, as Rhodia, operates two joint-ventured rare earths refineries in China. The Rhodia plant in La Rochelle was built approximately 40 years ago and was one of the first solvent extraction plants in the world purpose-built to separate the rare earths, the other being the plant at Mountain Pass, California, built by the original Molycorp.
Rhodia is reactivating that plant to recover terbium and associated REEs from consumer compact fluorescent lighting scrap. Today, Europe has no active mines or sources of HREEs. The political pressure to establish local security of supply is higher there than in the U.S., where General Electric, for example, seems to have given up and moved lighting manufacturing operations to China. Europe has Philips and Siemens still manufacturing in Europe and trying to be competitive in their domestic markets.
TCMR: That is an example of REE recycling. What kind of percentage of the market could reuse supply?
JL: Not very much. I have no idea what their scrap reservoir in Europe is or how much is accessible. The Rhodia plant has around a 4 Kt/a capacity. There aren't that many HREEs in Europe in the scrap reservoir, so I suspect that Rhodia will want to enhance its feedstock volume through buying HREE concentrates, for which non-Chinese miners have no other non-Chinese home. If Rhodia dedicates La Rochelle to HREE separation, it will be the largest solvent exchange plant so dedicated outside of China and would represent sufficient capacity to refine the entire annual production of HREEs other than yttrium.
Rhodia is looking for HREE feedstock. Molycorp or even Lynas could be producing a small amount of HREEs, which they are not going to refine because their plants are not set up to process these minor constituents of their feedstock. Those minor constituents could be refined by a company with that specific capability. Rhodia could buy all those smaller REE feedstocks to get enough stuff to run a fairly large plant economically. It just makes sense. Rhodia's La Rochelle plant is the only active REE recycling facility outside China that I know about, and the only one I know of in the Western world with the capability to separate HREEs.
TCMR: You mentioned how the market reacted quickly to REE prices going straight up in bubble fashion and then coming right back down. The government moves a lot slower. Is there government support for development of domestic sources of REEs in the U.S.?
JL: The U.S. government seems to ignore industrial needs. The military seems quite content with Molycorp, because it has decided that it is going to have its small neodymium and dysprosium requirement met by Molycorp.
The latest government REE news is that the Department of Energy has just started a program to find domestic alternatives to REEs and reduce REE demand. It is a $120 million program. I had the misfortune to read this document. It's incredible how people think innovation and success can be legislated. Thomas Edison need not apply.
TCMR: You visited Lynas' new plant in Malaysia last week. What's the situation there?
JL: The Lynas plant has two phases to build 11,000 t/a of refining capacity for LREEs. Phase 1 is complete and phase 2 is half complete. If the company had a license to import ore, it would be in production. Executives told me that delivering the initial ore and getting up to full capacity of phase 1 would take between six weeks and six months. The company has never imported any ore from Australia as of this point. However, there is sufficient material ready from the mine to supply the plant for two years at full capacity.
The political issue in Malaysia is getting the license. The opposition says that this plant is a health danger. I was part of an international inspection team that the government asked to take a look at it.
TCMR: Is the opposition most concerned with health and environmental issues related to the chemical processes, or to the radioactivity in the ore? Or is something else holding up the permit?
JL: The opposition to the plants says that this will be the Fukushima of Malaysia, a potential radioactive disaster. The plant is really a big chemical plant, and nothing more. It's easy to twist words. The opposition says the plant would produce as much as 50 t of thorium per year. Sitting on 50 t of thorium could be lethal. However, the 50 t is dispersed in tens of thousands of tons of other material, so you would need a very large rear-end to sit on it.
I don't want to comment on Malaysian politics, but it's interesting to me that one of the fellows in our inspection group is a very prominent person in decommissioning nuclear reactors. His position is that the issue here is background radiation—nothing more. His calculations show at full production it would very difficult to detect any change in the background radiation between when the plant was there and when the plant wasn't there. He didn't think it was an issue.
The opposition to the plant doesn't understand that chemical plants present a unique kind of safety issue and that this plant is not a nuclear reactor—not even close. But in the public perception, it is a big deal. Why is it that California, which is enormously environmentally conscious and very anti-mining, doesn't seem to worry about Mountain Pass, which has just as much thorium? The CEO of Molycorp recently said publicly that his company is going to process monazite to recover HREEs. Monazite is usually thorium rich and radioactive. Regardless of Lynas' thorium levels, it's not a big safety issue and it can be handled. The Lynas facility is without doubt the most modern solvent exchange plant in the world. It is first class.
TCMR: Isn't Lynas producing mostly LREEs? Will this contribute to surplus or pricing weakness in the LREE markets?
JL: Lynas says it has pre-sold its output. Company executives were very up front with us about what the plant will be producing, but they didn't tell us who their customers were. They did say they had long-term contracts. Overall, the actual amount of supply could exceed demand. But that doesn't mean that a low-cost producer can't sell and make money. It's my understanding that Lynas has sold its output for phase 1.
TCMR: One company that you have watched in the past was Quantum Rare Earth Developments Corp. (QRE:TSX.V; BR3:FSE; QREDF:OTCBB) and the niobium prospect it has in Nebraska. Are you still watching it?
JL: Yes. The United States imports twice as many distinct materials as it did 20 years ago. I think the U.S. was self-sufficient in something like 25 elements 25 years ago, and now it's much less because the country shifted to outsourcing raw material production.
For example, we stopped producing manganese domestically because our ore isn't as rich as ore from West Africa. We have a lot of ore, but it is lower grade. As a country, we are rethinking whether outsourcing raw material production is a good idea. Another example is niobium; it would be a very good idea to have a domestic niobium source like the one in Nebraska. A niobium deposit is often associated with REEs. Having the two together in one deposit lowers the overall cost. It doesn't matter what mineral or metal you're talking about, the low-cost producer with the lowest breakeven will be the winner, even at the lowest point in the economic cycle.
Another factor is availability. We saw what happened when China squeezed availability. The whole REE industry is suddenly running around like Chicken Little. The sky is falling. That's why we need somebody in Nebraska producing niobium.
TCMR: In retrospect, was it China squeezing availability, or was it speculative, free market price behavior?
JL: I'm talking over the last five years. Last year was speculative. Over the long-term, when China coughed, we caught a cold, because we had moved all of our production overseas. Remember, Molycorp was the world's largest REE mine in 1984. It produced 60% of the world's output. And so how do we go from there to zero? It was easy. We just didn't bother to think about the future. Everything was this week's cost. Everything is unintended consequences—except that they're very foreseeable.
I remember when this was happening. I said, "What are we going to do if China's demand exceeds its domestic supply, or the Chinese decide they don't want to do this anymore?" I was told that it would never happen. Well, it just seems to have happened. We need domestic supplies—of everything.
TCMR: Is that the message you are trying to deliver about REE supply and demand?
JL: We need to keep government out of this, and we need private equity to finance it. If people stop worrying about tomorrow's returns, and start looking at strategic investments, we'd all be a lot better off. Government's not capable of doing that. It is just not smart enough. Private equity can do it because there is profit involved. But as long as we are thinking short-term, our problems will persist.
Strategic planning, along the lines of what the Chinese are doing, is the winning method of moving an economy forward.
TCMR: Thank you so much for your time, we look forward to speaking with you again.
