Rare Earth Elements (REE)

[Tommy]

How to Read and Interpret an Announcement by a Junior Rare Earth Mining Company 101\

http://investorintel.com/rare-earth-intel/63083/

Posted on November 20, 2013 by Jack Lifton

Junior rare earth mining companies, which I define as those companies that own a mineral deposit which is not producing ore concentrates, regularly produce “announcements” in the form of press releases. These announcements are of two distinct types:

Reports on the junior’s timely adherence to regulatory reporting according to the laws of the country in which it is legally domiciled and/or of the country in which its mineral deposit is located, and
Reports on the hiring and/or firing of “key” personnel; the current market price of its “products;” and the future demand for those same products.

In fact the only important announcements ever issued by a junior are those of type 1 above. Let me explain this to you.

Once exploration has identified a potential ore[GH1] body containing elements of a type desired BY THE MARKETPLACE then a “junior” mining company may be formed to “develop” the potential ore body into a mine, a future producer of ore concentrates. A massive scandal in Canada 20 years ago in which a Calgary based company, Bre-X, falsified the results of a gold “discovery” in Indonesia and cost investors 6 billion dollars resulted in a total revision of Canadian regulations for the purpose of safeguarding investors. The shorthand for this set of Canadian public disclosure regulations is NI 43-101, which is the most easily remembered way to locate the appropriate section of Canada’s legal rules and regulations.

Jack-LiftonNI 43-101 rules require that Canadian-listed companies which are developing mineral deposits must go through and publish the results of a series of steps in order, the measureable details of which must be independently verified by disinterested third parties. NI 43-101 compliance means that the minerals and their contained elements are present as described.

When a Bay Street boutique investment house sells you shares in a NI 43-101 compliant junior it is telling you, the buyer of those shares, that it has done due diligence and is satisfied that the company is reporting its technical information in a fashion that is NI 43-101 compliant. If the company is in an earlier stage the seller of the shares is saying that it has confidence that the company is in the process of developing becoming NI 43-101 compliant.

The goal of NI 43-101 compliance is to minimize the risk of fraud to small investors. The regulations cannot prevent market changes that wipe out the value of the underlying commodity.

It is now traditional for regulated junior miners in Canada (and in those, mostly developed and mostly Commonwealth, countries which have adopted the Canadian regulatory scheme) to proceed in a series of steps from an initial resource estimate to “bankability,” which is simply the level of confidence in the ability of the junior to produce and market its final chosen product that allows a publicly regulated financial institution to make an investment without being liable to its shareholders for a breach of fiduciary law.

There are many steps to bankability/feasibility. A general listing would include:

Determining the precise geology of the deposit – leading to a mineral resource estimate at one or more levels of confidence, which are in terms of increasing confidence, inferred, indicated, and, finally, measured – and simultaneously determining the size (extent) and the (overall) grade of the deposit(s).
Preliminary economic assessment – A basic economic analysis to +/- 35% – mineralogy work, initial metallurgical work, piloting, recovery rate determination etc. This is known as the PEA, and it is a very important step in the verification and determination of a mine’s probability of success in becoming a producing, profitable enterprise. It is followed by the
Pre-feasibility study – +/- 25% accuracy of costs – typically doing added work in upgrading resources to indicated / measured; more advanced piloting / demo / process optimization / permitting issues identified etc., and finally by the
Feasibility study – +/- 10-15% accuracy of costs – full mine design, completed flow sheet, full facilities design, full idea of all other issues – full economic analysis that leads to conversion of mineral resources to mineral reserves – that part of the mineral resources that are deemed to be economically viable.

Note please those of you who read carefully that much of the general estimation by all of the rare earth juniors, in particular, of the market value of their chosen output products is based on descriptions and prices of forms of the rare earth metals that not only would the juniors not produce but also that they could not produce; rare earth metals, alloys, and chemical compounds sold to end user fabricators of components and devices are customer specified. This makes, in my opinion, in particular, the so-called “basket prices” of little or no value. Not only do general basket “prices” take into account the mostly useless “values” assigned to elements such as cerium they also ignore the substantial costs involved in producing even small quantities of the most useful rare earth elements such as terbium and dysprosium. The commonly used paradigm of “average” cost per kilogram to “produce” rare earths is also a fantasy.

There are some total domestic supply chain providers of rare earth products. But today these are only in China. In that country there are several large enterprises which mine, refine, separate, purify, fabricate, and build end-user components (mainly magnets). Molycorp is today the only non-Chinese entity, which might be classified as a total supply chain “in process.” The company seems to have in-house light rare earth mining, refining, and limited separation/purification (in the USA). It probably has purification operations in China to separate the neodymium it needs from didymium produced in the USA, and it does have bonded magnet alloy operations in China, and I believe other southeast Asian locations. I do not know if those Chinese or other Asian operations get their neodymium metal from Molycorp’s American metal making operations. In any case Molycorp is not specific total supply chain capable in any one country or even in any region of the world.

The point of the above two paragraphs is that in order to cost a rare earth production venture at any level it is necessary to have a great deal of information that is not available on the open market. Chinese data are always hidden by non-standard accounting even when such data is “public.” Japanese companies in the metals and magnet manufacturing business are not at all forthcoming either. The rest of the rare earth supply chain industrial companies outside of China are also not at all forthcoming on costs or processes. Thus all of the Feasibility studies done are dependent on estimates and guesses by engineering companies.

Let me close this section by saying that the senior scientist of the only large capacity total spectrum rare earth separation and purification by solvent extraction operation outside of China told me last spring in Toronto that he could not imagine from where the juniors presenting at that conference got their estimates of the cost of building and operating a rare earth separation plant. The estimates he heard, he said, were “wildly wrong and far too high.”

It is my conclusion therefore that most rare earth junior Feasibility studies result in costs that are too high if such studies include separation and purification of the individual rare earths.

I believe that we in the non-Chinese world of rare earths have now entered a phase where Chinese and Japanese and perhaps Korean companies are looking at the exploration and development that we in North America, Australia, and South Africa have done and are that they, the Chinese, Japanese, and Koreans, are trying to determine, which, if any of the exploration and/or development projects would be good to buy or to invest in to produce raw material concentrates to process in their already existing and paid-for facilities in China and Japan.

I therefore suggest to small investors as well as to institutional investors that they look carefully at the positions of the junior rare earth projects that have issued PEAs and find those that have the lowest costs of producing mixed concentrates. You, investors, will then be looking at the same juniors that the Chinese, Japanese, and Koreans are looking at. Next you should consider which, if any, of these juniors are in countries or regions that already have supply chain component industries in place and have national or regional plans to maintain independent high tech manufacturing capabilities and capacities. The competition is now between Asian countries with existing or planned downstream capacity and non-Asian countries with the will to capitalize the security of their high tech manufacturing bases.

Now, in conclusion, as to the announcements by junior mining companies that concern anything other than meeting the requirements of Canadian Regulations NI 43-101, and, after having done so, then meeting the steps to bankability/feasibility, I would pretty much ignore them.

Announcements of Phds and chartered accounts or financial masters of ledger-domain, who have previously been involved with companies that successfully made money for their shareholders are meaningless unless those individuals have previously brought junior mining companies into production and those producing mines have made money through profits on their production.

It does not matter what might be or what laboratory scale wizardry can be accomplished with the elements to be produced.

Nor does it matter than non-traditional technology might be able to produce the desired elements more cheaply than currently standard processing technologies.

The sole objective of a junior rare earth mining project is to produce marketable forms of rare earths competitively.

All announcements not measuring the company’s performance to that objective are illusions, cast them into the flames, and save your money.

[GH1]Jack – a mineral deposit is only an ore body once it is generating a profit

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About Jack Lifton
Jack Lifton is a Founding Principal of Technology Metals Research, LLC. He is also a consultant, author, and lecturer on the market fundamentals of the technology metals, the term that he coined to describe those strategic rare metals whose electronic properties make our technological society possible. These include the rare earths, lithium and most of the rare metals.
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