Energy & Commodities

Rare Earths Companies that are closest to delivering

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Posted by The Critical Metals Report

on Wednesday, 21 March 2012 02:41


Winning the Rare Earth Economic War

China's sudden cuts to rare earth export quotas and domestic production marked the beginning of a Rare Earth Economic War, proposes Jacob Securities' Senior Mining and Metals Analyst Luisa Moreno. The good news is that partnerships between end-users and mining companies may just be the secret weapon to level the playing field for critical metals producers operating beyond China's borders. In this exclusive interview with The Critical Metals ReportMoreno points to the companies that are closest to delivering high-quality goods for the benefit of manufacturers and investors alike.


The Critical Metals Report: Last year you published a research report called the Rare Earth Economic War. When we talked last time, you said that China was on one side and industrialized nations were on the other, with China winning. Does China's new five-year plan with an emphasis on consumer consumption change that balance?

Luisa Moreno: China's new five-year plan as it concerns raw materials suggests that China wants to better utilize its resources primarily for its own economic development, which in part supports the concept of a raw materials economic war. China, just as most nations, would like to be self-sufficient in key mineral resources. The country has about one-third of all the total rare earth element (REE) resources, but it supplies the world with more than 95% of its rare earth needs. I believe China is in a resource-preservation mode. However, what is not so fair are the differences between China's domestic rare earths prices and international prices, which are usually much higher, and China's dramatic decrease in production and export quotas in such a short period of time. China is well aware of the critical uses of some of the rare earths and it seems that it is determined to allocate a limited amount to the world and increasingly consume most of it by attracting REE-dependent manufacturing into China. The leaders plan to manage sustainable growth of the Chinese REE sector by attracting companies that utilize these resources. That would bring jobs while developing advanced rare earth-based technologies. It is no different from what other nations would like to do. Of course, China is at an advantage because it has the largest capacity in the world for the production of these elements and the know-how to refine them. The rest of the world is left with the option of moving manufacturing to China for better access to these materials. 

TCMR: So you are saying that China is still winning?

LM: I believe so. Actually, the recent move by the U.S., EU and Japan to file a law suit against China may end up supporting that conclusion, if they are unable to persuade it to change its rare earth policies. It seems that China is increasingly consuming most of these elements and it is trying to control supply and prices. 

TCMR: Can lawsuits and political pressure really make China change its export habits?

LM: Potentially. I think a negative ruling could make leaders think twice before deciding on export quotas or other related trading policies. But China will put Chinese interests first, obviously. I don't think that the rest of the world has much leverage with what is now the second-largest world economy. I think the lawsuits bring attention to how other nations may feel, but might not necessarily be sufficient to change China's policies regarding rare earths or other critical materials. 

TCMR: China's Ministry of Commerce recently announced that the export quotas would remain essentially the same—30,184 tons (t) in 2012—but only 50% of the quota was used last year. Is that quota meaningful? 

LM: 2011 was an exceptionally bad year, the tsunami in Japan, the second-largest REE consumer, having caused a slowdown in demand, not to mention the global economic slowdown in the second half of the year, which was marked by poor economic conditions in Europe and negative economic politics in the U.S. The second half of 2011 was clearly not a favorable one for rare earths and many other commodities. Now that the rare earth element export quotas are separated into lights, mediums and heavies, I think it will become more evident where the real demand is and how tight the export quotas really are, assuming that we see some economic recovery. 

I think the new invoicing system that China is implementing to better control production and exports may decrease illegal exports of rare earths as well. Right now, official export numbers are not the total picture because so much is illegally produced and exported. I'm not sure China will be able to control all of the illegal exports, but at least reining it in a little bit will impact the supply-demand equation. 

If Lynas Corp. (LYC:ASX) comes into production and Molycorp Inc. (MCP:NYSE) ramps up production, we should see an increase in production of light rare earth elements (LREEs). That may make export quotas for LREEs less meaningful. However, China will probably maintain export quotas for some of the most critical REEs, including the light element neodymium and some of the heavy rare earths (HREEs) like dysprosium and yttrium. For the next five to 10 years, as long as there is a risk that some of these elements might be in shortfall, we may still see an REE export quota of some sort. 

TCMR: You called 2011 an exceptional year in terms of bad economic news, but could the drop in rare earths prices indicate that it had been in a bubble? Have companies' efforts to re-engineer products and eliminate their needs for rare earths been successful? Or was it just the economy in general that accounted for the price drops?

LM: Likely it was a combination of all those things. I think the current and future demand for materials such as dysprosium should be healthy, but I'm not sure if $3,000/kilogram (kg) was justifiable. Similarly, the prices of lanthanum and cerium, which are fairly common elements historically below $10/kg , were above $100/kg back in August, a level we now know is not really sustainable. Prices seem to have been in a bubble and when demand decreased, REE prices also fell significantly. Chinese officials may have wanted prices to stay high and some Chinese refiners even suspended production for a few months when prices were falling and demand was weak.

TCMR: Considering that not all REEs are created equal in terms of market value, what are some of the most in-demand elements, and could those prices break out this year?

LM: I think the critical elements identified by the U.S. Department of Energy—neodymium, praseodymium, terbium, dysprosium and yttrium—could experience a significant increase in demand; some may even be in shortfall right now. It is possible that the prices of these elements may rise, but in the short term, we might see continued decreasing prices until they stabilize. I have already seen signs that they are starting to stabilize. If there is stability, or better yet growth in the global economy, the prices for some of these elements could potentially increase this year.

TCMR: You mentioned Molycorp and Lynas. Molycorp just announced the start-up of its manufacturing facility in Mountain Pass, California. Will that produce mostly LREEs? Could those two companies make a difference in global supply in the next couple of years?

LM: Absolutely. Light rare earths are the most sold or consumed elements—particularly lanthanum and cerium. They are the cheapest, but they are the ones that are sold in the highest volume. Lynas and Molycorp could also produce significant amounts of neodymium, which is very important for the production of super magnets used in hybrid cars, computers and wind turbines. Molycorp really does not have much of the heavies like dysprosium and terbium at Mountain Pass. Lynas might be able to produce some of the most critical heavies from its plant in Malaysia, but it would be rather expensive given that it only has small percentages of heavy lanthanides. In any case, even if both companies ramp up production, it won't completely close the gap in demand that exists for some of these critical elements outside China.

TCMR: When do you see each of those companies going into production?

LM: There have been delays with the Lynas project because of permitting issues, but I think it hopes to start production in Malaysia before the end of the year. Molycorp expects to reach its phase one annualized production of 19,050t of mixed rare earth oxides by Q312 and separated products perhaps before the end of the year. It's hard to say exactly when these companies will be able to reach their target production. As you know, with mining projects delays are not unusual, but both companies are working very hard to deliver on their promises.

TCMR: What are your top picks for non-Chinese companies that could supply some of the heavy elements in the future?

LM: My top picks include Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) and Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX). I cover both companies and they both have a favorable REE distribution with high percentages of the critical elements. I think Matamec has made significant progress with its metallurgy and its partnerships. The company just announced that Toyota Tsusho Corp. (TYHOF:OTC; 8015:JP) has signed a binding memo of understanding with Matamec, which means it has priority over the development of the Kipawa. That is very good for Matamec. 

Ucore should come out with a preliminary economic assessment (PEA) in the next few weeks, and we should be able to better assess if it is an economically viable project. The project is in Alaska and we believe it is the most significant HREE deposit in the U.S. It's very interesting. 

TCMR: Could either of these companies be takeover targets for a Molycorp looking to cover the HREE space?

LM: If Molycorp wants to become the leading rare earths company, it will have to find a solution for the heavy rare earths. I think Matamec could have filled that role, but because Toyota has now the binding agreement, it will be difficult for Molycorp to approach Matamec. Besides, it seems that Toyota is interested in a 100% offtake deal with Matamec. Ucore, on the other hand, continues to be another good option for Molycorp, although the company is still working on its metallurgy and may be seen as too early stage. When the PEA comes out, hopefully we'll have a much better idea of the progress of the project. 

Another company that would also be of interest is Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE), which has the Norra Karr deposit in Sweden. It is close to Molycorp's Silmet refinery in Europe. Tasman has one of the highest percentages of heavies. Contrary to Ucore and Matamec, it actually has a very large resource. My understanding is that in terms of the metallurgy, it made significant progress but it is not as advanced as Matamec or Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A). Hopefully, it will file a PEA this year as well.

TCMR: Matamec is trading at $0.32 today and Ucore at $0.41. Could the recent news be catalysts for both of those companies? 

LM: I think so. As the market looks around for HREE alternatives to Molycorp, I think there is great potential for Ucore and Tasman to be recognized by the market as potential targets. Matamec is currently working on the details of a definitive agreement with Toyota Tsusho, to be completed by July. 

TCMR: You have commented on the importance of metallurgy and the refining process for extracting and efficiently delivering high-quality oxides for each individual mineral source because each one is very different. What companies are well on their way to doing this?

LM: Like I said, Matamec is well underway in doing this. Now, it has a fantastic partner, which is Toyota Tsusho and all the associated companies and likely universities that will be involved in developing that project. 

I think another company that has made significant progress is Montero Mining and Exploration Ltd. (MON:TSX.V). It has a deposit in Tanzania and it just announced that it has produced an oxide concentrate. That's really good. 

Rare Element Resources Ltd. is another. I visited its pilot plant last year. It has also made significant progress. The resource is mainly comprised of bastnasite mineral, which, relative to other deposits, might mean that it will have fewer processing challenges. It has been able to produce a mixed oxide concentrate and is moving towards separating the elements and producing individual elements oxides. As I said, it's already at the pilot level and completed a prefeasibility study. Rare Element is one of the most advanced projects; we believe however that the company needs to secure offtake agreements and a JV partner capable of co-financing the $375 million project. 

Another one that I like is Frontier Rare Earths Ltd. (FRO:TSX). It just published a comprehensive PEA, which included a separation plant. No other company has done that yet. Frontier has a partnership and partial offtake agreement with Korea Resource Corporation and the support of a consortium of Korean companies. 

TCMR: Could other REE companies that you're following break out in the next few years, either because of agreements with partners or as takeout candidates or because they might actually start producing?

LM: I think we should perhaps pay more attention to what is going on in Brazil. We believe that Neo Material Technologies (NEM:TSX) spent some time there before being acquired by Molycorp. It seems that the company may have been looking at recovering xenotime from tailings at the Pitinga mine in Brazil.

Another private project is owned by Mining Ventures Brasil. It seems to have a colluvial deposit with high percentages of xenotime and monazite. The distribution for the heavies may be quite favorable. It's an early-stage project; the company is moving forward with the metallurgy now. There is a possibility that things could work out pretty fast for them.

Another private project still in Brazil is the one that it is ongoing at Companhia Brasileira de Metalurgia e Mineração (CBMM). It is the largest producer of niobium but it also has rare earths in its deposit. 

Medallion Resources Ltd. (MDL:TSX.V; MLLOF:OTCQX; MRD:FSE) is a public company targeting monazite deposits around the world. Monazite, just like xenotime, has been used in the past to recover rare earths. The model is to find these monazite deposits because they represent a far easier metallurgic process than other sources. That could allow Medallion to fast-track its project. 

A lot of folks are trying to find solutions for these metals. 

TCMR: The sheer number of early-stage projects presents a challenge for potential investors. How can investors pick which companies might be successful? What should they focus on when there are so many moving parts—the management, the location, the metallurgy and the different elements themselves?

LM: To start, investors should be looking at the same factors they usually use to assess mining companies. Beyond that, the most important factors for REE projects specifically are metallurgy and industry partnerships. However, it depends what investors are looking for. Essentially, there are some names in the rare earths space that are well known and respected. Examples of that are Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Rare Element Resources Ltd. They were the first ones to publish PEAs and are still perceived by some as the frontrunners. There are, however, lesser-known companies that have received far less love from the market, despite having made significant advances. That includes Matamec and Frontier, which I still feel are somewhat under the radar. 

If investors are anticipating a bounce in rare earths stocks and would like to hold rare earths companies that have made major progress in metallurgy, with solid industry partnerships and have great potential for significant long-term upside, I think names like Matamec and Frontier might be good. They're relatively more advanced, particularly in metallurgy, which is very important because you can have 100 million tons at high grades, but if the metallurgy is complex and you are five years away from solving the processing to a level where it's economic to recover these elements, that might not be so competitive in this market. Those that are more advanced will be better positioned to secure development partners. That's very important because the PEAs coming out show that projects are capital expenditure intensive and industry partners can help finance these projects. 

Rare earths are not commodities; end users, usually through joint ventures, guide companies toward production of appropriate materials. It's a very complex space. As I said, although Matamec and Frontier have made significant progress, they consistently have underperformed some of their peers. So investors who are interested in those names will have to be really patient. We believe, however, that Molycorp is the undisputable leading non-Chinese rare earth listed company at the moment and investor interest in this space should follow and analyze this company to determine a good entry point.

TCMR: You're going to be speaking at the International Rare Earths Summit in San Francisco in May. What message will you be delivering?

LM: Seeing as a significant part of the audience is expected to be end users who are extremely concerned about the long-term availability of these elements, I'll be talking about the challenges that rare earth miners and future producers face, focusing on how end-users may better participate in the development of a global rare earths supply industry. They could surely help fast track the development of the rare earths industry outside China.

TCMR: Thank you very much for your time, Luisa.

Luisa Moreno is a senior mining and metals analyst at Jacob Securities Inc. in Toronto. She covers industrial materials with a major focus on technology and energy metal companies. She has been a guest speaker on television and at international conferences. Moreno has published reports on rare earths and other critical materials and has been quoted in newspapers and industry blogs. She holds a bachelor's and master's in physics engineering as well as a Ph.D. in materials and mechanics from Imperial College, London.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

1) JT Long conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Rare Element Resources Ltd., Medallion Resources Ltd., Frontier Rare Earths Ltd., Tasman Metals Ltd., Matamec Explorations Inc. and Ucore Rare MetalsInc. Streetwise Reports does not accept stock in exchange for services.
3) Luisa Moreno: I personally and/or my family own shares of the following companies mentioned in this interview: None. I was not paid to do this interview.


Energy & Commodities

Will Rising Oil Prices Lift Energy Stocks? Profit with Undiscovered Oil and Gas Plays

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Posted by Josh Young: The Energy Report

on Tuesday, 20 March 2012 07:23

Some companies in the oil and gas business get more appreciation in the market than they perhaps deserve. Others labor away building their assets and cash flow with little market recognition. In this exclusive interview with The Energy Report, Josh Young, founder and portfolio manager of Young Capital Management, brings us up to date on several of his favorite undervalued plays and talks about his newest discovery, which he believes to be an amazing value.

Screen shot 2012-03-20 at 7.22.09 AM

The Energy Report: When we last spoke three months ago, West Texas Intermediate (WTI) crude was trading at around $98 per barrel (/bbl). Since then we've had a spike up for a combination of reasons. Do you think that all the talk of $5 per gallon (/gal) gasoline is real or just hype by oil companies and traders; and where would the oil price need to go for $5/gal gas to become a reality?

Josh Young: Five-dollar/gal gas is a real possibility as prices are linked to the price of oil, which now seems to be driven by tight supply and demand dynamics. We saw that recently when there was an apparently false news report that a pipeline in Saudi Arabia had been blown up, affecting a couple of million barrels a day. Oil spiked $2 in the space of 15 minutes, despite the fact that the report was false. When that kind of news can cause that amount of price movement in that amount of time, it indicates that there really isn't a lot of available capacity in the event of production shortage. Supply and demand are matched pretty tightly. On the flip side, the economy is still pretty weak and high oil prices produce some demand destruction. These are two big factors that are just barely counterbalancing each other. 

TER: Do you think there's some resistance around $110/bbl oil or can the price just shoot up astronomically? 

JY: It really depends upon the scenario. I think things should be somewhat in balance around current prices, but if there is a bad economic crash, prices could come down potentially to $70 or $80 or even lower as they did in '08 or '09. If you see a big shock like a bombing in Iran for example, prices can spike. 

TER: This being an election year, if oil prices go much higher, do you think President Obama might release supplies from the Strategic Petroleum Reserve to cool down the markets?

JY: If the U.S. or Israel bombs Iran, that obviously would be a consideration, and I wouldn't be surprised if that happened. I would be surprised if there would be a release of those petroleum reserves in the absence of a world event along the lines of a major supply disruption. 

TER: With these higher oil prices, many players in the oil business are benefitting. What has been the general market performance for the whole industry group since we last spoke?

JY: I read a recent Wall Street Journal article addressing that issue, and it reported that price performance of stocks of publicly traded oil and gas companies had not followed the price performance of oil. Looking down market, smaller-cap stocks have actually moved a lot less than larger-cap stocks. It seems investors are using larger stocks to track the price of oil. The preference for liquid stocks and larger companies has left behind some of the smaller companies that I tend to focus on. There hasn't been the kind of across-the-board movement that one might expect with higher oil prices. Therein lies the opportunity; the longer oil prices stay high, the more likely there will be a small-cap oil stock rally.

TER: Can you bring us up to date on some of your favorite names that we discussed in the past?

JY: Sure. Gastar Exploration Ltd. (GST:NYSE) just reported that it is now producing approximately 1,000 barrels per day (bpd) of condensate and natural gas liquids (NGLs) in West Virginia. And that's up from almost no oil production this time last year. It seems Wall Street is just starting to see the value here—almost every analyst covering the stock had higher than market price targets and reiterated their buy ratings after the recent news. 

Gastar has drilled only a fraction of the locations it will be able to drill in West Virginia, has been adding acreage at a reasonable cost and has about $100 million (M) of capital available on its bank line, which it hasn't drawn much of yet. So it's borrowing money at 4–5% interest to drill wells that are generating in excess of 40% rates of return. Having shown that it can grow in a cost-effective manner without stock dilution, I think the company will start to attract more attention. It seems that Gastar offers investors a more cost-effective way to get Marcellus exposure, natural gas price leverage and oil production growth than larger companies, such as Cabot Oil & Gas Corp. (COG:NYSE)EQT Corp. (EQT:NYSE) and Range Resources Corp. (RRC:NYSE).

TER: Is that reflected in the price?

JY: Absolutely not. Gastar has been drilling these excellent wells in West Virginia, growing its production, and proving up the value of an asset that is worth a multiple of what the whole company is trading for, yet the stock has been drifting lower. Also, Encana Corporation (ECA:TSX; ECA:NYSE)drilled a well adjacent to Gastar's East Texas properties that came on at an initial production rate of 750 bbl/day. That well's production flattened out at about 250 bbl/day, which is very exciting. There is the potential that Gastar is right in the middle of a highly economic oil shale play. Gastar's West Virginia Marcellus play is worth roughly $5 per share. If the East Texas oil play and the recently announced new mid-continent oil play work out, there could be substantial upside to $5, versus a recent stock price of ~$2.75.

TER: How about some of the other companies you've been following?

JY: Molopo Energy Ltd. (MPO:ASX) is another company I've talked about before. The stock is still stuck in a morass, despite an exciting deal in the works. Its CEO has been telling investors that he expects an ongoing asset sale process that the company has been involved with in Queensland, Australia to close in March. There are a number of reasons to expect a high sale value for the Australian asset. The price of liquid natural gas (LNG) in Japan, which is the primary market for Australian natural gas, has seen prices as high as $18 and $20 per thousand cubic feet (mcf). A nearby competitor in Queensland recently announced an offer that would imply a very high value for Molopo's assets—as much as $150–200M. I don't expect the assets to sell for quite that much, but could come in at a higher price than people expected. 

TER: Where is that stock trading these days?

JY: Molopo trades around $0.70, with a market cap of around $150M. The company has $100M in cash, no debt and is currently producing net around 500 bbl/day. Combining the current production value plus its cash, you get everything else for free. It could easily sell the Queensland asset for $80M, plus it has development locations across 20,000 net acres in the Permian basin and a potential Bakken play on 50,000 net acres in southeast Saskatchewan. Analysts covering the stock estimate its value at $1.00-1.50. 

TER: What about some of the other ones we talked about?

JY: Another company we've talked about is Sonde Resources Corp. (SOQ:NYSE). It's a Canadian oil and gas company with an oilfield offshore North Africa. Sonde hired Bank of America Merrill Lynch to sell or joint venture its offshore North Africa assets. The local political situation is still a mess, but international oil companies seem to have acclimated to the situation. There are a lot of unstable countries where companies drill for oil and pay high valuations for reserves in the ground. Management has guided to a sale value of the North Africa assets of $2-5 per recoverable barrel of oil in the ground, which could yield $140-350M, versus the company's current market cap of $150M. Sonde sold another asset recently and it's sitting on $50M net cash. There's a lot of opportunity to deploy that cash if oil prices fall or there is some sort of economic crisis. The CEO is excellent. He's led other very successful oil and gas companies, including a position as co-CEO for Samson Investment Co, which was bought out for over $7B last year.

TER: Do you have any other companies worth talking about?

JY: I've recently found a very attractively priced, rapidly growing oil company, Gale Force Petroleum (GFP:CVE). Gale Force is trading at a 50+% discount to its Proved Developed Reserve value, is growing production by roughly 300% per year and has a small debt load. I invested in the company in a private placement, in addition to buying stock in the open market, and was retained as an advisor to help identify new deals and advise on hedging strategies and capital structure. Gale Force's micro-cap peers typically trade for their PV-10 value, and in many cases they trade for many times their PV-10 values. The potential for that valuation uplift is part of what attracted me to the situation. 

Gale Force's market cap is only $12M, it has $6M of debt, over 300 barrels oil equivalent per day (boe/d) production and management believes they're on track to produce 600 boe/d in September and 1,000 boe/d by the end of the year. And that's over 80% oil, with the rest liquids-rich gas. I've looked extensively and have not found any other companies or assets where you can buy flowing barrels of oil with an exit rate implying a $20,000 per flowing bbl price. It has already achieved tremendous growth, from under 100 boe/d a year ago, to 300 boe/d now. Yet it is still under the radar and the company hasn't been actively marketing its stock, preferring to focus on deal execution and property level operations. But as Gale Force grows production, people will start to pay attention. Even if no one ever cares about the stock, when the company grows to 1,000 boe/d, someone could come along and pay the industry standard of $100,000 a flowing bbl and you could see Gale Force being bought at the end of the year for a $100M. Other rapidly growing oil companies with similar size production have much higher valuations per flowing barrel—Voyager Oil & Gas Inc. (VOG:NYSE.A) produced approximately 420 boe/d last quarter and currently has a $180M market cap and Samson Oil & Gas (SSN:NYSE.A; SSN:ASX) produced 315 boe/d last quarter and has a $225M market cap. While not a perfect comparison, Gale Force is trading for roughly 1/10 of the value of those companies on a flowing barrel basis.

TER: Where is its production?

JY: It's primarily in East Texas and some in South Texas. Gale Force also recently did a deal in the Marcellus, funding the development of non-operated working interest right next to Gastar. My fund and an energy private equity fund financed most of the deal, and Gale Force took the rest. So far so good, as the Marcellus wells are producing twice the condensate and NGLs as we were expecting.

Gale Force Petroleum's growth opportunity and main business focus is in East Texas. It buys and operates underperforming fields, typically producing anywhere from 10 to 50 bbl/day. It reworks wells, increases their production, drills infill wells and then does it over again. Gale Force recently announced its next two acquisitions and should be up to 10 properties soon. It has a lot of production and is actually cash-flow positive. 

Most similarly sized companies have high production decline rates, whereas Gale Force's production is pretty flat because these are conventional wells with shallow decline rates, allowing Gale Force's production to be more predictable, and for cash flow to be deployed for growth rather than to replace rapidly declining production. Gale Force has been able to achieve growth similar to shale players, but with mature assets at a fraction of the capex, and in my opinion with substantially lower risk. I get the best of both worlds—lower risk and rapid growth. As more investors discover Gale Force and as it delivers on production and executes operationally, I expect the valuation to improve substantially.

TER: That's what people are looking for. Maybe this will be the next big winner. Any final thoughts you'd like to leave us with?

JY: I think there are interesting opportunities among small-cap oil and gas companies. And the smaller you can go, assuming the company is solvent and growing, and the more undervalued you can go, the higher the potential return and the lower the fundamental risk. And with high oil prices, perhaps that potential return is forthcoming.

TER: Thank you, Josh. We appreciate your insights. 

Josh Young is the founder and portfolio manager of Young Capital Management, LLC, which launched Young Capital Partners, LP in 2010. He previously served as an analyst at Karlin Asset Management, a multibillion-dollar single-family office in Los Angeles. Prior to that, he was an investment analyst at Triton Pacific Capital Partners. He was also a corporate strategy consultant at Mercer Management Consulting and DiamondCluster. He holds a Bachelor of Arts in economics from the University of Chicago.


Energy & Commodities

Have MIT Researchers Cracked Renewable Energy Bottleneck?

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Posted by OilPrice.com

on Monday, 19 March 2012 08:03

Amidst soaring oil prices, renewable energy advocates have two eyes of the needle to pass through.

The first is that their kilowatt hour of electricity production is currently higher than energy generated from more traditional fossil fuel sources, such as coal and hydrocarbons.

The second is a technological bottleneck – how to store the energy generated by wind and solar power, which depend on natural processes that are best inconsistent.

The wind doesn’t blow 24/7 and the sun goes down.

Accordingly, storage issues of electricity generated during the peak periods of optimum natural production are the second issue of renewable power generation, how to store and consistently release that energy generated during peak periods back to the grid when the evening comes.

It appears that a team at the Massachusetts Institute of Technology has found a way to address this conundrum. If so, they have a license to print money, and savvy investors should pay close attention to the news below.

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Energy & Commodities

Marc Faber on Oil, Alternatives, and Nuclear Weapons

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Posted by Marc Faber via 321Energy.com

on Wednesday, 14 March 2012 00:00

As the world economy teeters on the brink and rising oil prices threaten to de-rail the delicate roots of recovery we asked legendary investor Dr. Marc Faber to join us and give his views on high gasoline prices, the shale boom, alternative energy, developments in the Middle East and much more.



Energy & Commodities

Critical Metals: Rare Earth Bull "Bulletin" to Investors in the Rare Earth Space

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Posted by Jack Lifton, Resource Investor

on Wednesday, 14 March 2012 00:00

"Pundits keep hinting at a vast Chinese conspiracy to 'control' rare earths, but it is a natural consequence of market forces. So long as the lowest-cost REE products are obtained in China, the total supply chain and the focus of the industry will remain in China."


Rare earth deposits are not rare; they are just rarely put into production. Why is that? It is because of pricing economics driven by supply and demand. The demand for the rare earths as raw materials is today in southeast Asia, so it should not be surprising to see how the producing supply base has migrated to that part of the world. Yet pundits and politically charged writers keep hinting at a vast intentional Chinese conspiracy to "control" the rare earths. It is more than likely actually a consequence of the operations of the market forces of what we now (ironically) call free-market capitalism, as practiced today by governments following the model originated by John Maynard Keynes.

The American financial regulators are as guilty of allowing foreseeable but unintended consequences of their actions, as the Chinese regulators are responsible for maximizing the benefits of American oversight for China’s economy. There is actually no intractable problem so long as both economies practice free trade, but when Chinese self-interest is seen as a threat to American self-interest, it is the "other" rather than the "system" that is brought into ill-repute.

Rare-earth-based production (the supply) and production levels are determined by the economics of overall demand. So long as the lowest cost for rare earth products is obtained by buying such types of goods manufactured in China, the total supply chain and the focus of the rare earth industry will remain in China.

Today, in early March 2012, I am going to give one prescription for the rebirth, health and continued growth of a non-Chinese rare earth industry, and I’m also going to make one prediction about the growth of the global rare earth industry over the next ten years.

First, before I assume the mantle of the business survival specialist or of a resource-markets Nostradamus, I need to point out that the growth of demand for a rare earth element (REE) is in the case of almost all of the REEs, within a unique market for each of them individually. The demand for cerium (Ce), for example, has almost nothing whatsoever to do with the demand for lanthanum (La), or any other REE. They are not interchangeable, nor substitutable for each other, except in very few cases such as that of neodymium (Nd) and praseodymium (Pr), which in some limited applications in rare-earth permanent magnets (REPMs), are substitutable/interchangeable.

Notably the demand for Nd for use in REPMs is the principal driver of the demand for dysprosium (Dy), whereas the inverse is not true. This complex subject, the demand for individual and certain combinations of the REEs, is glossed over by pundits as if it doesn’t matter. This is a fatal flaw in creating investment strategies for developing REE supply, because what is overlooked is that the supply of the rare earths must be examined on an element-by-element basis and not looked upon simply as a "basket" containing all of the REEs.

This error of assuming that all or most of the REEs are interchangeable for marketing purposes, gives rise to the glib assumption that the same strategies will work for selling REEs to a variety of end users, whose only common interest is that their products all contain REEs.

An even more flawed assumption is the idea that the individual REEs are of equal importance to our technological economy in any of their uses, and so one simply calculates a basket price and this metric then defines an opportunity to produce a combined value. Nothing could be farther from the truth.

China appears to have unused (excess) capacity in the production of the lower-atomic-numbered rare earths (LANREs) in the amount of more than 50%. This means that China could ramp up production to twice today’s output of LANREs and, based on even old (from 1997) basically anecdotal data from the U.S. Geological Survey, keep this level of production up indefinitely.

On March 5 there was official news from China (reported in the China Daily, the English-language version of the People’s Daily, the house organ of the Chinese Communist Party) for example, that Jiangxi Copper, which has been given responsibility to consolidate rare-earth production in Sichuan province, says that it will increase production there to 50,000 tons per annum (tpa) and will target the export markets. Rare-earth prognosticators please pay attention. Jiangxi Copper is a world-class commodity-metals-producing giant. It is also state-owned and has more working capital and borrowing firepower than all of the non-Chinese rare earth ventures on Earth combined.

The domestic growth of the Chinese demand for the REEs is today without doubt the principal driver for any attempts to increase the supply of REEs. China’s domestic demand for all of the REEs today is probably at 70-80% of the world’s total supply (also, of course, today produced in China domestically).

China is openly moving to change its economy from an export-led to a domestic consumption-led model. As China does this, the domestic demand for REE-containing consumer products (the vast majority) will increase in China, apparently without decreasing outside of China. Unless there is increased production of those among the REEs that are the critical REEs, there will be shortages and price hikes—but not in China, which will simply consume more REEs domestically while reducing exports, as it has already begun to do precisely to prepare for the change of direction in its economy.

Reacting to that change and to world opinion, China has restructured its REE industry and this has resulted, for example, in Jiangxi Copper telling the world that it will ramp up production in the area under its control, so that both the Chinese domestic market and the export market can be served.

Jiangxi is a new competitor in the global REE market, and it is a large profitable company run by excellent managers. It has no competition outside of China in the REE space that can match it in resources of intellectual property, manpower resources, capital, and knowledge of world markets.

Yet in China, Jiangxi faces Baosteel and Chinalco in the newly consolidated REE production space as its competitors. Keep in mind that it will be an uphill battle to beat China at its own game inside China. So what is left for the non-Chinese REE supply wannabes is to produce something that the Chinese domestic REE market needs, and which is not produced in China in sufficient quantity, so that it will be in demand whether or not a total supply chain is ever constructed outside of China.

It seems that the higher atomic-numbered rare earths (HANREs), the so-called 'heavy rare earths,' fit this description and their number may even be joined by the LANRE Nd. There are two cultures on Bay Street (the center of junior-mining finance in Toronto, and most likely the financial world). Among the denizens of one of those two cultures, it is the share price of a company that measures its success; in the other culture, the question asked is: "How much money will it take to bring this venture into (profitable) production?" The probability of achieving profitable production is this second group’s measurement of success.

It is late in the rare-earth "boom" and so lately the line between the two cultures has begun to blur in the rare-earth "space."

Junior mining is basically the mineral data mining of the earth. The data are discovered and recorded by field geologists and then it is filtered through layers of physical and chemical analysis, until for a given volume of the earth’s crust, a picture can be drawn in three dimensions, of the distribution of specific minerals within the chosen volume. If there are known mechanical and chemical procedures for recovering any valuable metals or minerals in the defined volume, and the result of those procedures is a product, or products that can be sold for more than the cost of production in volumes above the breakeven cost of the venture then, if those factors have additionally a high probability of continuing in time, we have a mineable ore body that is economic.

The day of reckoning is upon the rare earth juniors. Those of them who have no knowledge of supply-and-demand-based pricing, or the geographic distribution of demand, or who have no knowledge of finance will be gone first. Even among those that survive this first cut, if they believe that the goal of a business is anything other than producing consistently a competitive profit from selling products produced at the lowest cost with the lowest possible breakeven threshold, then they will be gone next.

The survivors will be those ventures that can sell their products at a profit, at a place in the supply chain which their management and marketing skills can maintain.

The Vatican in Rome regularly issues statements of Catholic doctrine, which are intended to be the "correct" interpretations of questions of faith for believers. These statements are written in church Latin and the translation of the category aspect of the title of all such statements is a papal "bull." This is the short form of the Latin word bulla, used to describe the clay stamp traditionally applied to such edicts, and from which in English, we get the word "bulletin."

I consider this article to be a "bulletin" to investors in the rare earth space.

I am not, nor do I pretend to be infallible, but I recognize that much of what passes for interpretation in the mainstream media of the announcements that regularly flow from junior miners, or in some cases from companies actually running mining operations, is just plain "bull."

If a junior miner is to survive, it must either sell its ore body or develop a profitable mining operation. There has been little interest by the major mining companies in purchasing the properties of the current rare-earth juniors. Therefore to survive, the juniors will have to try to put their ore bodies into production as mines. This means that the clock is ticking. There will be no more than a dozen rare-earth ventures outside of China in actual development by the end of 2014. The global REE demand outside of China needs very little additional supply of the LANREs if it does not ramp up its metal-, alloy- and component-manufacturing supply chain. Certainly there is way too much potential and/or planned production of the LANREs chasing too small a market.

It is just the opposite for the HANREs. China is short of these very critical materials, so that even if no supply chain at all is constructed or enhanced outside of China for using such raw materials, there will be a demand for them.

The problem with the HANREs market is that it is not understood as a free-standing market by non-Chinese investors. Additionally it has turned out that the highest grades of HANREs as a proportion of total REEs, are in hard-rock ores and tin and uranium residues, the "metallurgy" (cracking) of which has not been successfully (i.e., economically) achieved to date. I believe, however, that the metallurgies of the hardrock ores have been addressed with sufficient success outside of China, by companies attempting this endeavor, to allow me to recommend to my institutional investment clients that they fund the development of the best-managed and best-sited ones.

The skills to extract the HANREs into a pregnant leach solution, and to separate the individual HANREs from that solution are in very short supply. No one, as of yet, outside of China, has addressed the commercial separation of the HANREs. Innovation Metals, a company cofounded by my TMR colleague Gareth (and to which I am an advisor), is attempting to do something about this, with its goal of creating the world’s first independent rare-earth separation facilities, to toll-treat rare earth concentrates. Do not be fooled by those who say that all you have to do is "buy" a property and "feed" the ore into an existing LANRE separation system. This is flim-flam.

I predict that at least one, perhaps two, American companies, and one European company, will be producing HANREs competitively with the Chinese within three to five years from hardrock mining. I further predict that it is these operations that will catalyze the rebirth of a non-Chinese total supply chain for the production of Dy-modified REPMs. There are a number of promising Canadian, South African, and Australian HANRE-themed junior miners, who I believe will become suppliers to the total supply chains located in the USA, Europe, Japan or even China. Their ability to do so will be based on competitive pricing.

I am not mentioning Great Western Minerals Group’s South African/UK integrated operations, because they are now in a group of one, at least with regard to the commercial production and utilization in the downstream total supply chain of the heavy rare earth Dy. As far as I know their output of Dy is fully taken up by their customers and is only a market factor in the reduction of non-Chinese demand for Dy it will cause (less than 3% of the current market).

The first step in the production of a REE is the mining of an ore containing a mineral that has REEs in its molecular or physical composition. In simple English, a rare earth mineral is one in which the REEs are either chemically bound into, or in a few cases, just physically attached (adsorbed) onto a substrate mineral. The ore at Molycorp’s Mountain Pass mine is an example of the first and the famous adsorption clays in China’s southern provinces are an example of the second.

A common pundit error at this point is to declare that the ores with the highest concentrations of the rare earths are the most valuable. The most valuable rare earth ores are those from which the rare earths can be extracted efficiently at the lowest cost per unit. In fact, the most pressing problem today in the rare-earth supply space is the fact that all of the HANREs now produced commercially, are from the very low overall grade ionic adsorption clays in China. This is because of:

    1. The fact that by ignoring (and not capitalizing) safety or environmental costs, the Chinese mining industry has been able to continue due to the high demand for their "unique" products, and


  1. The lucky situation that the ionic clays are essentially thorium and uranium free, allowing their processing by crude heap leaching in the open.

For hard rock, HANRE-enriched deposits have been found outside of China, the concentration of desired minerals is accomplished by preparing the ore (typically this involves crushing and/or grinding followed by gravity separation). Milling is the first step, with the second typically done by floatation, in which the higher specific gravity minerals are separated from the lighter "rock" by a combination of surface chemistry techniques and the differences in their densities.

When we have the ore concentrated, we come to a point in the process where mining terminology diverges from both common English and from the strict definitions of terms as they are used in modern materials science. When miners use the term "metallurgy," they usually mean only the extraction from an ore concentrate of the chemical forms of the elements desired.

In such cases, developing the metallurgy means chemically leaching the ore or ore concentrate. Leaching is a wet chemical process most often involving acids or bases), which places into solution the chemical elements present in the ore, so that they can be further chemically processed to separate them from each other.

Typically even the separated elemental chemicals must be further purified—especially in the frequent case where separation is not analytical (i.e., is not complete). The purified chemicals are then reduced by chemical/physical processes to create pure metals.

An example of straightforward mining metallurgy is the processing of common sulfide ores of copper (Cu). Their metallurgy starts with roasting (i.e., forced-air, high-temperature oxidation). The Cu oxide so obtained is dissolved in sulfuric acid, obtained in part by capturing the sulphur dioxide from the roasting, catalytically oxidizing it further to sulphur trioxide and dissolving this in water.

The Cu sulphate solution is electrolyzed so that the pure Cu collects on the cathode and the nuisance metals, such as molybdenum, gold, silver, palladium, tellurium, selenium and arsenic collect in the "mud" formed under the anode. Some of the nuisance metals contained in the Cu ore are also collected in part from the exhaust gases of the roaster, which include volatile oxide species of many of the elements also present in the mud.

The mining metallurgy of Cu ores is complex, and time- and energy- (and thus capital-) intensive, but it pales in comparison with the complexity of the separation of the individual rare earths after they have been extracted from their ores into a pregnant leach solution.

The separation of the mixed rare earths produced by the leaching of their ore concentrates into individual REEs is a labor-intensive, time-consuming operation, accomplished commercially today only via the process known as solvent extraction (SX), which is expensive to facilitate, difficult to supply with some Chinese-produced chemical reagents, slow and in need of a large body of skilled chemical engineers for its operations and quality control. Outside of China, and previously in Japan and possibly Kyrgyzstan, no one has yet constructed a SX operation with the capability to separate the HANREs.

I have been told that a HANRE-separation-capable facility is, in fact, being constructed in the Western Cape province of South Africa, by Great Western Minerals Group, but I do not know the timetable for that project. I do know that the punditry has now figured out that the HANREs are the most desirable of the REEs. But once again the highest grade, largest total ore tonnages are being mindlessly touted as "the best investments."

Of course, the best investments are the well-managed ventures that own ore bodies for which known extraction techniques work, and from which a pregnant leach solution can be made, which will be capable of being fed into a separation plant, that will produce separated, purified rare earth chemicals. All of this will have to be done at the lowest costs possible and the lowest breakeven possible.

HANREs so produced, mainly Dy and terbium (Tb), will be saleable into a market in deficit for the rest of this decade and beyond.

A total supply chain to produce Dy-modified Nd-based magnets will be built in Europe. I believe that such a project is also underway in the U.S. The successful mining ventures in the HANRE space will most likely sell their products in a magnet "bundle." In order to get Dy, the customer will also need to buy Nd in a ratio of the two that insures the total sale of both.

There are already too many contenders in the LANRE space outside of China. The survivors will be the low cost, lowest breakeven, producers.

Anyone who is going to invest in a junior rare-earth-mining venture must look at its balance sheet, for its breakeven point at reasonable prices. One must also ask exactly what market share the company needs, to break even at those prices. Next one must ask for a list of the products to be produced, which are to be sold at that point into the supply chain, and match that list with the companies expertise, or access to expertise, necessary to technically accomplish each step in the supply chain in which it will be directly involved.

Size matters in a high-school locker room. Only skills and breakevens matter in the world of mining. . .

Jack Lifton, Resource Investor


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