There are two ways to visualize the critical metals and industrial minerals sector. Some see a hostile climate, where junior mining companies compete for scarce financing dollars. But there's a sunnier side to this story: more than ever, companies, government and academia are forming partnerships to solve a global problem—the ongoing need for scarce critical materials. In this Mining Report interview, Luisa Moreno, industrial minerals analyst with Euro Pacific Capital, discusses the challenges and the prospects for players in a sector she insists is here to stay.
The Mining Report: Let's start with some macro events in the rare earth elements (REE) space. The Wall Street Journal recently reported that Inner Mongolia Baotou Steel, the world's largest REE supplier, bought nine regional REE mining companies in a move to consolidate China's REE industry. The article called that consolidation a sign of market weakness. Do you agree?
Luisa Moreno: I don't necessarily agree. China set a domestic REE production quota of about 90,000 tons in 2011, according to United States Geological Survey (USGS) Chinese production was about 120,000-130,000 tons per year, between 2006 and 2010. The production ceiling represents more than a 25% decrease in production from the world's largest producer of REEs.
The move to consolidation in China has two aspects: First, China expects to control domestic output and prices through consolidation. Second, China wants to decrease the negative environmental impact of mining and processing. There are many artisanal miners in China across the different metals and minerals and in particular REEs. Many are working with toxic reagents and chemicals that when poorly handled and disposed off, have a very negative impact on the environment. I think consolidation is positive and bullish in the long-term for the mining space. When there is less production in China, it opens up opportunities for producers elsewhere.
TMR: A recent Euro Pacific Capital research report suggests REE demand will grow 6-10% annually through 2020. Is that enough growth to bring investment capital back into the sector?
LM: It should be. A 6–10% growth profile means that to meet demand, production should reach 175,000 tons to north of 200,000 tons by 2020. If China maintains its output at 90,000 tons, it will give new players the opportunity to come in and fill the gap.
I think that opportunity for new producers is tremendously bullish for the sector. It should attract investment capital once the capital markets understand and believe in this potential.
We may see signs of market improvement when prices stabilize or when prices of the less common REEs, like some of the heavy rare earth elements (HREEs) start increasing, as we believe they might. Rise in demand and prices over the next couple of months should give the capital markets confidence that this sector is here to stay.
TMR: Along those lines, a December 2013 Pentagon report suggested that U.S. reliance on Chinese rare earths is waning. That is a big change from a few years ago. What changed?
LM: Yes, the world's reliance on Chinese REEs may be waning with the increase in production from a number of countries, including Molycorp Inc. (MCP:NYSE) in the U.S. and Lynas Corp. (LYC:ASX) in Australia, but China is still the largest producer (80–85%) and consumer, and still controls most of the supply (>95%) of HREEs. The Pentagon is likely dependent on a number of HREEs. It has been suggested that the Pentagon may be uncomfortable letting the rest of the world know that there are elements that are critical, that a shortage of these elements could affect them. It is likely that when REE prices were climbing in 2011, the Pentagon may have stockpiled at the time, like many other end-users. The Pentagon may have continued stockpiling when prices fell, to the point that it may be self-sufficient for a number of years, thanks to stockpiling, but we really don't know.
The U.S. Department of Energy (DOE) has always sent a different message. It works with a different budget and its forecasts are usually very long-term, especially those related to the adoption of emerging energy technologies that are expected to support the America energy needs and economy. It has to be thinking about the available supply of elements in sustainable amounts for long periods of time.
TMR: Reports suggest that the Canadian government wants to control 20% of the global REE market by 2018. Is this political grandstanding or is there any substance to that idea?
LM: That idea emerged from a series of workshops put together by Natural Resources Canada (NRCan) over the last two years; I was fortunate to participate. These meetings brought together a number of industry players: junior companies in the Canadian REE space, end-users like General Electric Co. (GE:NYSE) and academics. They created what is called the Canadian Rare Earth Elements Network (C.R.E.E.N.). The objective is to bring the industry and academia together to fast-track solutions to the common challenges the industry is facing.
The guideline for reaching 20% of the global REE market came from C.R.E.E.N. The group met with Canada's Minister of Natural Resources, Joe Oliver, to discuss the plan ahead and seek support. As you mentioned, reports out of Ottawa seem to suggest that there is significant interest on the part of the government to support the REE industry across the supply chain, which is promising.
TMR: What could that mean for Canada-based companies and their investors?
LM: If demand does increase 6–10% annually, there will be a need for additional REE production outside China. Canada has deposits with high percentages of the less common elements. It's a unique opportunity for Canada to contribute to the global supply of HREEs in particular.
If everything goes according to plan, the miners, the end-users and the academics will be able to collaborate to fast-track solutions to some of the most pertinent issues, such as those related to chemical processing. Players like GE, Siemens and others can educate future producers as to their needs. REEs are not exactly commodities; they're specialty materials. It is important for producers to understand how to customize the materials for different applications to properly accommodate end-users' needs.
I think the industry is doing the right thing: coming together to solve the critical issues, and interacting with end-users to better understand the global market's needs.
TMR: Has that changed your analysis or your outlook on some of the Canadian REE deposits?
LM: At first, there was a great deal of competition among junior mining companies, which is not totally unusual. By coming together and combining their technical resources, there is a real opportunity for the Canadian and international companies to solve some major issues. C.R.E.E.N. will also be looking at the impact that these processes might have on the environment and how to minimize that impact.
TMR: What are some companies with projects in Canada that you have Speculative Buy ratings on?
LM: I cover Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX). We have a Speculative Buy recommendation for $0.22/share. Matamec is one of the most developed companies in the REE junior mining space. The company is developing the Kipawa deposit in Quebec, which contains the HREE-enriched eudialyte mineral. Matamec has completed its bankable feasibility study and is optimizing its flow sheet.
Matamec has a collaboration with Toyota Tsusho Group (TYHOF:OTCPK), a partner that is co-funding the development of the project and is providing technical support. Matamec expects to complete optimization in H1/14 and start working on the financing to build the mine and processing facilities.
Because this project reaches into the HREEs, it will give Toyota and potentially other end-users a supply of elements in addition to the light rare earth elements (LREEs). It should be noted that Molycorp and Lynas both produce predominantly LREEs, and do not refine individual HREEs.
TMR: Do you have other companies with Speculative Buy ratings that you would like to talk about?
LM: We cover Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE). Tasman operates in Sweden. We have a Speculative Buy recommendation and $1.70/share target price. Eudialyte is also the main mineral at its Norra Kärr deposit. If Matamec can develop an economic process, it will be highly positive for Tasman as well. Infrastructure around the Norra Kärr deposit is very good.
Tasman plans to merge with Flinders Resources Ltd. (FDR:TSX.V), a company with an advanced graphite project in Sweden. Tasman's strategy is to become a diversified industrial minerals company. It already has a REE deposit and a tungsten deposit; it will have a graphite deposit after the merger. The stock performed well after the announcement of the merger negotiations.
TMR: Does the merger make Tasman more or less attractive to investors?
LM: More attractive—I think the stock's good performance indicates that. It seems that the market sees a diversified portfolio of REEs, graphite and tungsten as a positive. A business combination with Flinders may be seen as a liquidity merger, as Flinders is relatively well cashed at the moment. The merger will strengthen the combined company's balance sheet.
TMR: Is it likely that Tasman will be the name of the new entity?
LM: Yes. The surviving company is going to be Tasman. Flinders will cease to exist.
TMR: What else do you have a Speculative Buy rating on in the REE space?
LM: We have a Speculative Buy on Frontier Rare Earths Ltd. (FRO:TSX) at $1/share. The company has advanced the metallurgy at its Zandkopsdrift deposit in South Africa. The deposit is rich in monazite, a mineral that has been processed in the past to recover REEs, and thus the expectation is that there are less metallurgy challenges. Frontier is working on the prefeasibility study right now and has already issued a very comprehensive preliminary economic assessment (PEA).
It's important to note that Frontier has KORES as a partner. Frontier and Matamec are the only companies in the REE space listed in Canada that have been able to secure strategic partners for project development.
TMR: We last spoke in detail about REEs nearly a year ago, in your April 2013 interview. Can you give us an update on some of the newsworthy events among the companies you talked about then?
LM: The financing market has been quite tough. As a result, a number of the junior mining companies, including those in the REE space, have slowed down their projects. Companies that had good cash positions were able to advance. Quest Rare Minerals Ltd. (QRM:TSX; QRM:NYSE.MKT) is an example. The company has completed a positive prefeasibility study, supported in part by the potential to recover a number of desirable byproducts, including zirconium and niobium.
Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) also moved its project forward. The company started a metallurgy study after defining the resources in 2012. Earlier this month, Great Western announced that it had produced a rare earth carbonate product. The market reacted well to that. The company is moving with caution and minimizing expenses as much as possible, given that it has more than $90 million ($90M) in financial liabilities.
We also follow Northern Minerals Ltd. (NTU:ASX) in Australia. Its deposit contains xenotime, a rare mineral that is very high in HREEs, such as yttrium. Xenotime sometimes has as much as 90% HREEs. The company is continuing to define the resource. It has attracted a number of partners and investors, and has raised $30M in the last 12 months—which is positive, given the market conditions.
Namibia Rare Earths Inc. (NRE:TSX, NMREF:OTCQX)also has a xenotime deposit under development. Namibia's Lofdal REE project is also attractive, as it has the potential to produce large amounts of these less common elements.
TMR: Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) recently put out numbers on its total rare earth oxide concentrate and recovery of REEs on its Ashram REE deposit. What did you make of those results?
LM: I think they're very positive. Being able to produce a mineral concentrate 43.6% TREO usually means using less reagents in the next processing step. That accomplishment is very positive, but it is not enough, on its own, to reach conclusions as to the economics of the whole project. The next step is to produce, for instance, a mixed REE carbonate product. Individual REEs may then be recovered in a separation plant (e.g. by solvent extraction). I noticed that in the production of the mineral concentrate, Commerce introduced what is described as a weak HCl step after floatation and before the magnetic separation. We don't yet know the cost benefit of using a leaching step before magnetic separation. I am sure we will learn more when the new economic study results are released, giving investors a better idea of the economics of Commerce's Ashram project. It seems that the company is happy about the project's metallurgical improvements and the impact on operating and capital costs, which is encouraging.
TMR: Is there any news of a strategic partner for Commerce?
LM: I think the company is actively looking. I think there is less worry now than in early 2011, when many end-users thought China was going to further decrease exports. As demand increases and prices start to rise, end-users will start reconsidering their options and might be more willing to collaborate again. I expect that to happen between now and 2020.
TMR: Another noteworthy merger is Canada Lithium Corp.'s (CLQ:TSX; CLQMF:OTCQX) takeover ofSirocco Mining Inc. (SIM:TSX), which means Canada Lithium will become a supplier of both lithium and iodine. Are these mergers simply a result of market forces or is there a deeper theme at play?
LM: I think there is a combination of factors behind these mergers. When well cashed mining management teams look at the market, they may find interesting projects. Current valuations are attractive and it is a good opportunity to start consolidating some of these industrial mineral companies.
Sirocco, perhaps more so than Canada Lithium, might have seen that opportunity as well. Some have suggested that this business combination is almost a reverse takeover. The surviving company is indeed Canada Lithium, but the surviving management team is from Sirocco. Sirocco's CEO, Richard Clark, will replace Peter Secker as CEO of Canada Lithium. Sirocco's CFO will be CFO of Canada Lithium. The Sirocco team has a strong connection with Lundin Mining Corp. (LUN:TSX), and the company is partially owned by the Lundin Group.
From what we understand, this could be a vehicle for the Sirocco management team to consolidate projects in the industrial or energy minerals space. It already has the iodine; it has the lithium. We believe management may be looking to attract other projects, such as graphite, vanadium, manganese, you name it. That may be the theme for this management team. By the way, the new proposed name for Canada Lithium upon completion of the merger will be RB Energy Inc. (or Énergie RB Inc.in French).
TMR: Could you give us an overview of the lithium market in 2014?
LM: I think the market for lithium in 2014 will be very positive. Tesla recently announced that Q4/13 sales of its Model S electric cars were 20% higher than expected.
This month, the World Bank increased its estimates for global economic growth, particularly for developed countries. We might see that also reflected in an increase in demand for electric cars, tablets, cell phones—all powered by lithium. I think there will be increased demand for lithium, and potentially higher prices.
TMR: What amount of growth do you expect?
LM: Our base-case forecast is for an average of 5% demand growth per year until 2020.
TMR: What lithium companies do you cover with Speculative Buy ratings?
LM: We really like the to-be-formed RB Energy, meaning Canada Lithium, most of the revenues will still come from lithium.
We also like Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX). It has a good-sized, high-grade deposit in Québec. The company is working on its feasibility study and is looking to raise funds to build the first module commercial plant. Nemaska has an agreement with Phostech Lithium (private), which will take 100% of the production from its first plant. Sichuan Tianqi Lithium Industries Inc. (002466:Shenzhen), the leading Chinese lithium company, owns 16% of Nemaska shares.
Nemaska is targeting the hydroxide market, rather than the carbonated market that Canada Lithium is in. Lithium hydroxide sells at higher price than lithium carbonated. This story has great potential.
TMR: Do you have any parting thoughts on the industrial metals space?
LM: Demand for industrial minerals is returning. Demand for many of these minerals is connected to demand for emerging technologies and electronic devices, including health care and biotech devices. For instance, some industry estimates show that demand for smart devices will increase 7–8% in developed markets, and 17% in emerging markets between 2012 and 2017. If these sectors continue to perform as expected, the demand for key industrial minerals should follow.
We haven't yet seen a comeback in prices, but as end-users deplete the stockpiles they built up in 2011, they will return to the market. As demand rises, we anticipate prices will go up. We anticipate this will send a positive signal to the capital markets and have a positive impact on junior mining companies, some of which are close to production. Just as importantly, it may support the many companies that are struggling with financing to advance to production.
TMR: Luisa, thanks for your time and your insights.
LM: My pleasure.
Luisa Moreno is a mining and metals analyst. She covers industry metals with a major focus on electric and energy metal companies. She has been a guest speaker on television and at international conferences. Luisa has published reports on rare earths and other critical metals 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.