Mr. John Kaiser, Principal of Kaiser Research, delivers a detailed overview of the issues and concerns in the rare earth market. Presented in Vancouver, on January 21, 2011, at the Critical Metals Investment Symposium.
2011 Critical Metals Investment Symposium Vancouver, Canada January 21, 2011Presented by John Kaiser Critical Metals Overview www.KaiserResearch.com
Issues with Critical & Strategic Metals Supply Concentration vs Diversity: Economic logic coupled with a skewed natural geographical distribution of deposits encourages the concentration of production into a small number of national or corporate producers which in turn creates opportunity for supply disruption.
Issues with Critical & Strategic MetalsGovernment subsidies through laxenvironmental regulation encouragessupply concentration with disruptiveconsequences when such policiesare reversed:China’s historical tolerance ofmultiple small scale production andabsence or lack of enforcement ofemission controls has enabled it tomarginalize mine supply fromelsewhere in the world.
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 Metals Supply concentration allows cartel style supply management geared toward serving domestic agenda: China is now using export quotas and duties to prevent itself from being just a raw material exporter. Other nations have no choice but to be primarily a raw material producer and will use royalties and carried interests to minimize exploitation.
Why has China become anxious about its heavy rare earth supply?Once this 15-20 m thick “skin” of heavy rare earth 15-bearing clays is gone there is nothing to be found bydrilling into the third dimension!Recent estimates have reduced China’s HREOresource life from 20-30 years down to 15-20 years. 20- 15-R&D into the properties of the heavy rare earthelements are creating the possibility of newapplications that can become major demand drivers –ie “smart dust” and the brave new world of sensors.Export Restrictions & Sector Consolidation: Can Chinabe blamed?
What if the crackdown closes the smuggling gap?
Export Quota Reduction encourages end users toshift advanced component production to China andrisk transfer of intellectual property.
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.
The Rise of China in the Age of GlobalizationCentral command economy with outsourced productionCheap Labor – urbanization of 1 billion rural Chinese unleashed by the end of orthodox communismNo Health & Safety for WorkersNo environmental emission controlsNo Unions to secure medical or pension benefitsUS Dollar Peg: the devil’s bargain of maintaining an undervalued renminbi by bankrolling the US tradedeficit through the accumulation of US treasury debtFDI: foreign direct investment and technology transfer
Issues with Critical & Strategic Metals Policy can drive future demand of critical metals: 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.
It’s the unprecedented CO2 Ievels and their rapid achievement that matter!
The World in 2099Source: New Scientist Feb 25, 2009
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
It’s not the rare earth demand growth in the next 5 yearsthat is the critical issue today, but the demand growth 5years and beyond when clean energy really scales up. Source: Mineral Resource Research Group
Issues with Critical & Strategic Metals 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.
Chinese Military Expansion seeks to secure Supply Channels
“Eyes in the Sky” “32 million surplus males” Petro-Dollar Recycling?
Security of Supply for Critical Materials is becoming an issue for Europe, Japan and the United States as China moves to secure its own needs.Source: EC Commission – The Raw Materials Initiative
GAO ConclusionsWhile rare earth ore deposits are geographically diverse, current capabilities toprocess rare earth metals into finished materials are limited mostly to Chinesesources.The United States previously performed all stages of the rare earth materialsupply chain, but now most rare earth materials processing is performed inChina, giving it a dominant position that could affect worldwide supply andprices.Based on industry estimates, rebuilding a U.S. rare earth supply chain may takeup to 15 years and is dependent on several factors, including securing capitalinvestments in processing infrastructure, developing new technologies, andacquiring patents, which are currently held by international companies.
Issues with Critical & Strategic Metals Innovation vs Implementation: New applications invented through innovation cloud the demand outlook worsened by the gap between upstream and downstream.
Issues with Critical & Strategic MetalsStrategic Logic – measuring profit interms of what security of supply forincremental upstream inputs implies fordownstream products: profits will residein the downstream products for whichmetals are a critical but incremental input,not in the margin between mining costand market priceWhat is your opportunity cost because you cannot commercialize an innovation?
Dodd-Frank Financial Reform bill willrequire end users to document the sourceof their tantalum supply for their Ipodsand cell phones among other consumerelectronics gadgets. What is the opportunity cost of being tainted by blood tantalum versus a higher cost for clean tantalum?
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 Metals Long term Cost Volatility & Spot Price Opacity: 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 market pricing unreliable
Issues with Critical & Strategic Metals Mainstream Mining Sector’s aversion to uncertainty: Mainstream mining companies are unlikely to invest in primary specialty metal mines such as rare earth deposits because they cannot predict demand driven by policy and innovation. At best they will add circuits for by-product recovery.
Issues with Critical & Strategic Metals A new upstream role for end- users: 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 A new downstream role for producers: 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.
How do we get to a mine?Stage Exploration Cycle Objective Time Stage Required 1 Grassroots Conceptual, land acquisition 1 year 2 Target Generation & Filtering for drill targets 1-2 years Drilling 3 Discovery Defining the limits of a discovery - 1-2 years Delineation tonnage & grade 4 Infill Drilling Producing a mineral resource estimate & 1-2 years scoping study 5 Bulk Sample & Evaluating recoveries and optimal 1 year Metallurgy processing method 6 Prefeasibility Produce a mineable reserve, establish a 1-2 years mining plan and associated costs 7 Permitting, Securing approval, negotiating offtake, 1-3 years Marketing & making a production decision Feasibility 8 Construction Building the mine 1-3 years 9 Production Mining cash flow 10-20 years