2011 Critical Metals Emergency Conference Toronto, Canada March 8, 2011Presented by John Kaiser Critical Metals Overview www.KaiserResearch.com
Critical Metals Definition Molybdenum Cobalt Selenium Tungsten Lithium Indium Niobium Tellurium Tantalum Vanadium Graphite Germanium Chromium Rare Earths Gallium Rhenium Antimony Zirconium Beryllium Platinum/PalladiumA metal is critical if it uniquely bestows an essentialfunctionality to an application whose commercial value issubstantially higher than the cost of the critical metal input.
Key Issues with Critical MetalsSupply Concentration due to deposit nature and locationSupply Concentration due to government subsidiesCartel style supply management – quotas and stockpilesResource nationalism – domestic downstream beneficiationLong term cost volatility & price uncertaintyComplex recovery processes – chemical plantsState controlled capital investmentSmall size of market for some metals & the dread of over-supplyEnd product Innovation as demand driverPolicy as disruptive demand driverEfficiency innovation & Jevon’s ParadoxSubstitution as demand destroyerFailure of just-in-time procurement strategyOpportunity Cost: geopolitical, domestic, end-userThe Upstream SolutionThe Downstream Solution
Issues with Critical & Strategic MetalsSupply Concentration due to depositnature and location: a skewed naturalgeographical distribution of deposits orthe existence of a few large high gradedeposits results in lack of supplydiversity which creates a vulnerabilityto supply channel disruption unrelatedto mine economics such as labor, civil,environmental or geopolitical conflict.
No lack of rare earth deposits in rest of world
Issues with Critical & Strategic MetalsSupply Concentration due togovernment subsidies:China’s historical tolerance of multiplesmall scale production and absence orlack of enforcement of emissioncontrols has enabled it to supply cheapmetals against which mines elsewherein the world cannot compete. China’smove towards more efficient and lesspolluting production has created a trapfor the rest of the world.
Infrastructure drivendemand spike China Cleanup
Issues with Critical & Strategic MetalsCartel style supply management : China isnow using export quotas, duties andstockpiling to change itself from being just araw material exporter. It is doing so in thename of resource conservation,environmental cleanup, and long termdomestic strategic interest. WTO complaintswill have a hard time sticking. The unofficialagenda is to transfer downstreamintellectual property from the west intoChina where it has a hard time stayingproprietary. China is also eager to get abetter grip on its supply data.
Export Quota Reduction encourages end users toshift advanced component production to China andrisk transfer of intellectual property.
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.
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.
Issues with Critical & Strategic MetalsLong term Cost Volatility & Spot PriceOpacity Long term cost volatility &price uncertainty : Volatility incurrency exchange rates andenergy/chemical costs rule out longterm price based contracts while lackof transparency and poor pricediscovery mechanisms make spot andfuture market pricing unreliable.
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.
$13 billion market cap for $500 billion plus in situ value at FOB
Issues with Critical & Strategic MetalsState controlled capital investment:Chinese trend is for state controlledentities to make investments in rawmaterial supply around the worldwhich often go hand in hand withparallel infrastructure investmentsguided by long term security of supplyrather than profit goals. This createsan unfair playing field for independentcompanies.
Issues with Critical & Strategic Metals 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.
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)
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
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.
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
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.
Issues with Critical & Strategic MetalsSubstitution as demanddestroyer:New solutions can destroydemand for a metal in particularapplications, but generally thesubstitute is an inferior andpossibly more expensivesolution.
Issues with Critical & Strategic MetalsFree Market Crisis for Just inTime Procurement:Free markets in which metals goto the highest bidder will becomethinner and less reliable for just-in-time procurement strategies,particularly if high riskdevelopment funding is linked tooff-take agreements.
Issues with Critical & Strategic MetalsOpportunity Cost & Strategic Logic - geopolitical, domestic,end-user: measuring profit in terms of what security ofsupply for incremental upstream inputs implies fordownstream products. Profits will reside in the downstreamproducts for which metals are a critical but incrementalinput, not in the margin between mining cost and marketprice. The profits also reside in the flexibility afforded bygeopolitical and economic security that is not vulnerable tocritical input supply channel disruptions.What is your opportunity cost because you cannot commercialize an innovation?
NiMH battery based hybrid is a no braineras a huge seller during the transition toelectric cars if Toyota can cut the cost.
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.
Issues with Critical & Strategic Metals 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.
Issues with Critical & Strategic Metals 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.