Critical Materials Overview by John Kaiser


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John Kaiser's presentation of Critical Materials at the Critical Materials Investment Symposium in Vancouver, June 3 (

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Critical Materials Overview by John Kaiser

  1. 1. 2011 Critical MaterialsInvestment Symposium Vancouver, Canada June 3, 2011 Presented by John KaiserCritical Materials Overview
  2. 2. Critical Materials Definition Molybdenum  Cobalt  Selenium Tungsten  Lithium  Indium Niobium  Tellurium  Tantalum Vanadium  Graphite  Germanium Chromium  Rare Earths  Gallium Rhenium  Antimony  Zirconium Beryllium  Platinum/Palladium  PotashA material is critical if it has no source other than physical extraction, itsconcentrated form has a skewed geographical distribution in the earth’scrust or it does not occur in sufficiently concentrated form to allow primaryexploitation, and it uniquely bestows an essential functionality to anapplication whose commercial value is substantially higher than the cost ofthe critical material input.
  3. 3. Three Critical Crises How does the biggest economy stay relevant in the age of globalization? What will ensure energy security of supply? What if the per capita footprint of emerging nations approaches that of the west?
  4. 4. ?
  5. 5. How does the biggest economy stay relevant in the age of globalization? Retain its edge through innovation by restoring a manufacturing base for the domestic economy. Reject Wall Street’s infatuation with a hyper-capitalism that seeks short term profit through optimization strategies such as offshoring and outsourcing that create supply chain vulnerability. Make the inherent stability of complex ecosystems with internal redundancy an overarching policy goal.
  6. 6. “Eyes in the Sky”
  7. 7. What will ensure energy security of supply?  Reduce dependency on imported energy fuels by developing renewable energy resources, exploiting those in local abundance, and adopting transformational technologies.
  8. 8. Transforming the Energy Foundation of the WorldFootprint Reduction Footprint Transformation Strategies Strategies  Quality over quantity  Reduce  Durability  Re-Use  Efficiency  Repair  Miniaturize  Renewables  No more cost dumping  Recycle  Short term sacrifice for long  Rethink term legacy  Relearn  Leveraged giving
  9. 9. What if the per capita footprint of emerging nations approaches that of the west? North Americans, Europeans and other industrialized nations have no choice but to adopt strategies which directly reduce their per capita energy consumption footprint and indirectly their emission footprint. The goal is reduce their footprint as the emerging market footprint grows, leading by example. This can be done through a willingness to sacrifice short term benefit for a long term benefit that is in effect a form of “saving” because it gives to the future. It requires total cost accounting and acceptance of full responsibility for all costs, not dumping some on others. The apparent decline in standard of living can be offset through a quality of life enhancement achieved by dematerializing prosperity which pays a spiritual dividend.
  10. 10. 5 Footprint Reduction Strategies with Critical Material Links Postpone depletion of fossil fuels and slow emission growth by innovating more efficient extraction of energy from fuels. Reduce energy consumption by making products lighter and smaller. Develop renewable energy sources such as solar and wind as long term replacements for fossil fuels. Cultivate transformational technologies such as the electric car which shift the energy foundation. Extend the life cycle of goods and processes by making them more durable.
  11. 11. Key Issues with Critical Materials Supply Concentration due to deposit nature and location Supply Concentration due to government subsidies Cartel style supply management – quotas and stockpiles Substitution as demand destroyer Resource nationalism – domestic downstream beneficiation State controlled capital investment Small size of market for some metals & the dread of over-supply Long term cost volatility & price uncertainty Complex recovery processes – chemical plants End product Innovation as demand driver Policy as disruptive demand driver Failure of just-in-time procurement strategy Opportunity Cost: geopolitical, domestic, end-user The Upstream Solution The Downstream Solution
  12. 12. Issues with Critical Materials Supply Concentration due to deposit nature and location: a skewed natural geographical distribution of deposits or the existence of a few large high grade deposits results in lack of supply diversity which creates a vulnerability to supply channel disruption unrelated to mine economics such as labor, civil, environmental or geopolitical conflict.
  13. 13. Issues with Critical Materials Supply Concentration due to government subsidies: China’s historical tolerance of multiple small scale production and absence or lack of enforcement of emission controls has enabled it to supply cheap metals against which mines elsewhere in the world cannot compete. China’s move towards more efficient and less polluting production has created a trap for the rest of the world.
  14. 14. No lack of rare earth deposits in rest of world
  15. 15. Wakeup Call for the Rest of the World: China to stockpile key metals, consolidate production & restrict exports as it focuses on security of supply.  Molybdenum  Indium  Tungsten  Tantalum  Rare Earths  Germanium  Tin  Gallium  Antimony  ZirconiumChina has become very concerned about resource depletionand the negative environmental and human impact of itshistorical mining practices that have underpinned its supply ofcheap metals to the rest of the world.
  16. 16. Infrastructure drivendemand spike China Cleanup
  17. 17. Issues with Critical Materials Cartel style supply management : China is now using export quotas, duties and stockpiling to change itself from being just a raw material exporter. It is doing so in the name of resource conservation, environmental cleanup, and long term domestic strategic interest. WTO complaints will have a hard time sticking. The unofficial agenda is to transfer downstream intellectual property from the west into China where it has a hard time staying proprietary. China is also eager to get a better grip on its supply data.
  18. 18. Export Quota Reduction encourages end users toshift advanced component production to China andrisk transfer of intellectual property.
  19. 19. Issues with Critical & Strategic Metals Substitution as demand destroyer: New solutions can destroy demand for a metal in particular applications, but generally the substitute is an inferior and possibly more expensive solution.
  20. 20. Would a rare earth price shock reduce demand? Jevons’ Paradox: Scarcity results in higher prices for raw material inputs, which should result in lower demand through substitution, but when substitution is not possible, a push for more efficient utilization of inputs is undertaken, which, if successful, will stimulate total demand growth, which in turn enables raw material supply expansion without glutting the market and triggering a price collapse.Rare Earth elements lend themselves well to R&D aimed at developing more efficient utilization.
  21. 21. Issues with Critical & Strategic Metals Resource nationalism – domestic downstream beneficiation: Political unhappiness about being unable to compete in the global economy in terms of goods production which create domestic jobs is pushing resource rich nations to embrace resource nationalism and insist that downstream beneficiation be done domestically.
  22. 22. Issues with Critical Materials State controlled capital investment: Chinese trend is for state controlled entities to make investments in raw material supply around the world which often go hand in hand with parallel infrastructure investments guided by long term security of supply rather than profit goals. This creates an unfair playing field for independent companies.
  23. 23. Issues with Critical Materials Small size of market for some metals & the dread of over-supply: legacy of over-production and predatory pricing has created an embedded aversion to being set up for a “gotcha”. This inhibits capital markets and major mining companies from funding and developing critical metal projects.
  24. 24. Issues with Critical Materials Long term Cost Volatility & Spot Price Opacity Long term cost volatility & price uncertainty : Volatility in currency exchange rates and energy/chemical costs rule out long term price based contracts while lack of transparency and poor price discovery mechanisms make spot and future market pricing unreliable.
  25. 25. Issues with Critical & Strategic Metals Complex recovery processes make critical metal supply more akin to chemical plants than conventional mines: delineating a resource is the easy part, figuring out the optimal recovery process and mapping out the internal mineralogy of a rare earth deposit so as to develop a mining plan with ore control suited to the recovery process is the hard part.
  26. 26. Issues with Critical & Strategic Metals End-product Innovation as demand driver: New applications invented through innovation represent unpredictable potential future demand. Technologies on the shelf could be commercialized if reliable future supply becomes apparent: “if you build it they will come” (Field of Dreams)
  27. 27. Even the most mundane and abundant of the rare earths, cerium,may have astonishing demand growth thanks to new applications. Molycorp’s proposed restart of Mountain Pass by 2013 would yield 19,000 tonnes of REO, half of which would be cerium. Molycorp believes its water filter will generate demand several times its production capacity. Caltech’s Sossina Haile is working on a cerium based process that uses solar energy to convert H2O & CO2 into hydrogen and carbon monoxide that in turn can be converted into fuels. Innovation Demand Driver
  28. 28. Issues with Critical & Strategic Metals Policy as disruptive demand driver: Efforts to implement long term clean energy policies that reduce CO2 loading of atmosphere and dependency on crude oil as a transportation fuel impact critical metal demand.
  29. 29. Issues with Critical Materials Opportunity Cost & Strategic Logic - geopolitical, domestic, end-user: measuring profit in terms of what security of supply for incremental upstream inputs implies for downstream products. Profits will reside in the downstream products for which metals are a critical but incremental input, not in the margin between mining cost and market price. The profits also reside in the flexibility afforded by geopolitical and economic security that is not vulnerable to critical input supply channel disruptions. What is your opportunity cost because you cannot commercialize an innovation?
  30. 30. United States consumes half of world’s fluid cracking catalyst demandwhich is also 68% of its rare earth import. FCCs boost refinery recoveriesby 7%, which represents $28 billion saving which cost $64 million toachieve in 2008 and today costs $600 million at lanthanum spot prices.
  31. 31. Issues with Critical Materials Free Market Crisis for Just in Time Procurement: Free markets in which metals go to the highest bidder will become thinner and less reliable for just- in-time procurement strategies, particularly if high risk development funding is linked to off-take agreements.
  32. 32. Issues with Critical Materials The Upstream Solution: End users with large downstream markets at stake will need to make upstream equity and/or debt investments in resource juniors which raise risk capital to acquire and advance specialty metal deposits.
  33. 33. Issues with Critical Materials The Downstream Solution: Critical metal producers not owned and operated by a consortium of downstream users will need to own downstream operations which add value to the mined raw materials.
  34. 34. Thank