The first speaker, Chris Berry, founder of research firm House Mountain Partners and co-author of Morning Notes by Dr. Micheal Berry, shared an index of 21 companies in the different phases of graphite exploration and development.

Berry used a slide to illustrate his index's progress since June 2011.

After some heady spikes in July and August, the index sunk to around 2.7 in mid-September and then started a relatively consistent climb upward until it peaked at 10.089 on March 29, 2012. But by the time another month had passed, the index had slipped to 7.9118—nearly a 22% hit. Was the first wave of the latest graphite boom over?

"I think it is. We hit a high at the end of February, then things took a slight breather, and then it shot up again right around March 29th," Berry explained. "It has slowly trended downward since then. So we've been in a downward trend in graphite junior share prices for about the last five weeks."

Others aren't quite as convinced. Simon Moores, a graphite market specialist with London-based Industrial Minerals and the conference's other keynote speaker, said that while it was a quiet April, the cycle still has lots of momentum left.

"It's still rising," Moores said. As of May 2, 37 publicly traded graphite companies were working on 98 different projects. The sector has added an average of 12 graphite projects a month since November 2011, which would seem to indicate the early stages of the cycle, the sector watcher concluded.

Recent rises in graphite prices are what's underpinning the sector's frothy growth. The price for large-flake graphite, coveted for its nominal weight and resistance to high temperatures, has soared since about mid-2009, when prices dipped to about US$1,000/ton (1,000/t) from US$1,500/t a year earlier.

A ton of large flake graphite now fetches about US$2,500, a price that has remained fairly flat since about May 2011. Amorphous graphite, or low-quality graphite, is selling for around US$600/t, up from about US$300–U$400/t a couple of years ago.

Moores pointed to the opportunity in graphite fines, a powdery byproduct that can account for as much as 70% of a graphite mine's production. It generally fetches a US$200–$300 premium above amorphous graphite prices.

But both retail and institutional investors are wary. They witnessed this type of commodity price growth in the rare earth elements (REE) space and watched helplessly as their shares in REE companies gave back their gains and more in the fall of 2011. Many are still licking their wounds.

Kiril Mugerman, an analyst with Industrielle Alliance in Montreal, one of a growing group of analysts covering the graphite space, said the comparison between what's happening in graphite and what happened in rare earths is invalid. "Rare earths collapsed because the prices collapsed due to what was happening in China. The [REE] prices were not sustainable, so they dropped. I think graphite will stabilize at around US$2,000/t. It's not going down," Mugerman said.

He added: "(The boom) is not over because it can't be over. You're going to have some companies that will succeed, some companies that will be bought by those guys and there will be a big percentage that will just fail, that won't be able to advance to anything."

Berry said that the graphite space holds one other key advantage over other recent "critical metal" bull runs. "Graphite is unique in that it's much easier to understand than rare earths or some of the other recent investment phenomena like lithium and vanadium," Berry said.

Industrial Minerals reports that graphite demand in 2011 totaled 1.14 million tons (Mt) but is expected to dip slightly to 1.01 Mt this year. However, that goes against a decade-long pattern. Graphite demand has grown by roughly 5% per year over the last 10 years and the worldwide market is now not much smaller than that of nickel, which boasts annual production of about 1.3 Mt.

Junior Lomiko Metals Inc. (LMR:TSX.V) estimates that the worldwide graphite market in 2011 was worth about US$12 billion, which has it and other juniors scrambling to get a slice of the pie.

The Graphite Express Plays

Focus Metals Inc. (FMS:TSX.V), soon to be Focus Graphite, was first out of the gate at Graphite Express. Focus owns the high-grade Lac Knife graphite project in Quebec and plans to be the world's lowest-cost producer at US$350/t. It's also trying to become a large-scale commercial producer of graphene, an ultra-thin single layer of graphite that is 200 times stronger than steel and carries 1,000 times the density of electrical current versus copper.

Next was Lomiko Metals, which owns the Quatre Milles graphite property in Quebec. The property has seen some historical drilling, most of which occurred within 100m of surface. Quatre Milles is close to infrastructure, imperative for a bulk commodity, and should have its maiden resource estimate by December 2012.

Standard Graphite Corp. (SGH:TSX.V), number three on the list, has a 13-property portfolio, the most recent of which is the Mouseau East graphite deposit near TIMCAL Graphite and Carbon's (private) Lac des Iles graphite mine in the Mont Laurier area of Quebec. The company also has some much-needed graphite experience in geologist Antoine Fournier, who helped discover the Lac Knife deposit, and Benoit Gascon, who spent about 20 years working for TIMCAL, a division of Imerys.

Galaxy Capital Corp. (GXY:TSX.V), which will soon morph into Galaxy Graphite, owns the Sun Graphite project in Quebec. The property boasts several large-flake graphite targets that were first identified by Finland's Outokumpu in the late 1990s. It has just over 13 million shares outstanding.

Strike Graphite Corp. (SRK:TSX.V) has a couple of projects in Saskatchewan: Deep Bay East and Simon Lake, where it will soon start drilling. The company hopes to have its first resource estimate at Simon Lake by the end of the year.

First Graphite Corp. (FGR:TSX.V) also has a graphite project in northeastern Saskatchewan. The company's flagship Henry project was explored by Hudson Bay Exploration and Development in the 1970s and has a non-43-101 compliant historical resource. Moreover, First Graphite owns the Mt. Heimdahl graphite property in British Columbia and the Montpellier property in Quebec.

Zenyatta Ventures Ltd. (ZEN:TSX.V) is the only company at the show that had found graphite in a vein/breccia deposit. The Albany project is 175 miles north of Timmins, Ont., and one hole into the property hit eight separate breccia zones consisting of "variably sized granitic clastic sediments set in a black matrix containing graphite." A bulk sample has been sent to the lab for assaying. Zenyatta has about 39.5 million shares outstanding.

The other Z-company was Zimtu Capital Corp. (ZC:TSX.V), which holds equity positions in several mineral exploration companies, including Strike Graphite, Standard Graphite, Lomiko Metals, Galaxy Capital, First Graphite, Big North Graphite Corp. (NRT:TSX.V), Pinestar Gold Inc. (PNS:TSX.V) and Olympic Resources Ltd. (OLA:TSX.V). The company is led by the bombastic David Dodge, who deserves a spot among the industry's great promoters.

Amseco Exploration Ltd. (AEL:TSX.V) owns the North Shore graphite project, which includes the Tetepisca Lake and Guinécourt Lake properties near the Manicouagan Reservoir in Quebec. The property is about 135 miles from the deep sea port of Baie-Comeau, Quebec, and is accessible via logging roads. The company has 61 million shares outstanding.

Energizer Resources Inc. (EGZ:TSX.V; ENZR:OTCBB) is one of the few companies working on a graphite project outside of Canada. Energizer is developing the Green Giant graphite project in southern Madagascar and plans to publish a PEA in October.

Another company working outside of Canada is Graphite One Resources Inc. (GPH:TSX.V). Its early-stage Graphite Creek property is on Alaska's Seward Peninsula. The junior hopes to have a 43-101-compliant resource by December 2013.

Organizers evidently left the most advanced graphite junior until the end. Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) CEO Gregory Bowes told the audience that he plans to build the Bissett Creek graphite project in central Ontario into the biggest graphite mine in the world. Bissett Creek is ridiculously close to infrastructure and a bankable feasibility study on it should be published in May. The company has 45 million shares outstanding.

Experience Is Key

Predicting which graphite play will move farther faster can often prove difficult, if not impossible, but experts at the conference provided some suggestions.

Mugerman, who was not among the presenters, divided the sector into three categories: Advanced companies with National Instrument 43-101-compliant resources, early-stage explorers who have done some drilling and perhaps some trenching; and companies that are still compiling data and flying electromagnetic surveys. In other words, very early-stage work. "If you separate (the sector into) the three levels, the companies in the midtier that are about to start drilling are still growing—they did not start crashing," Mugerman noted meaningfully.

Moores believes that you need to look at more than just a certain segment of the graphite companies. "I like to see companies with graphite experience, particularly graphite processing experience," Moores said. "The first thing a company has to do is get the raw graphite up to anything between 85% and 95% carbon. Those are your brackets of what people are going to buy. And to do that it's a basic question of grinding, which is all mining, and then you've got your flotation. And those things are pretty well understood. These companies just have to master those steps and they will have a graphite product they can sell. That's very important but that's very doable. It's not like rare earths, where there is this really complex system that separates light and heavy elements. In that case, it's often unclear where these materials are going to. Whereas with graphite, if you can produce a consistent product, people will buy it."

The market is also difficult to gauge. The price for graphite is not set on a transparent bourse like the London Metals Exchange or the NYMEX. Graphite prices are negotiated between the supplier and the buyer, a back-and-forth process that's been going on for more than 100 years.

"There's a reason many people haven't gotten involved in (graphite mining) because it's very complicated. The most complex thing is making a consistent product and finding people to buy it. You don't have one customer that buys everything, you have a lot of customers who are used to getting graphite from one mine for generations. It's a relationship," Moores said.

Berry echoed Moores' comments. "If I'm a retail investor, I want to know how much specific graphite experience a management team has. Yes, there's dearth of graphite experience out there but are you going to invest your money in these uncertain markets with people that are staking a claim but that don't have any graphite experience? No," Berry said. "The other thing that I'm looking for is as much detail as possible around a given deposit. . .all graphite deposits aren't created equal. Just because a certain flake size trades at US$3,000/t, for example, does not mean that is the price that you will get (for it)," Berry explained. "Maybe you'll get a little more, maybe you'll get a little bit less, but that makes it very difficult to nail down what the economics of a given deposit might be."

The price for good-quality flake graphite is hovering around US$2,500/t and Moores said that price should remain relatively stable in the near term.

"Even though demand softened this year, the price is still staying at a high level, which means graphite is keeping its value. That's very important because if the situation (changes) and (companies) are producing too much graphite, then the price should collapse or trend down. But it's not; it's remaining pretty flat. We'll see by the end of the year if it does come down or if there's more (supply) squeezing and it goes up," Moores said.

He added that companies applying methods that usually work in other mining sectors isn't necessarily a recipe for success when it comes to graphite. "I don't think a lot of companies understand the complexity of it because they're just focusing on the resource, which is what they do. They look at the basics like 'Do we need more? 'Yes' so let's drill some more, get the resource up, publicize it and go from there. But they don't look at whether or not they actually have a product and how to sell that product and who to sell it to. One of the biggest gaps is marketing and that's where they're going to have a problem. That's where they should employ some big graphite traders who specialize in this."

Graphite Production

Graphite production is basically split between amorphous graphite (micro-crystalline) and flake graphite, with less than 1% coming from vein production—nature's purest form of graphite. Moores said that about one-third of all graphite is used in refractory materials, which must be chemically and physically stable at high temperatures.

Graphite has tremendous heat-absorbing qualities, which make it ideal for lining bricks in the ultra-hot furnaces used to make steel. Anything molten steel touches needs to be lined with some form of refractory or the liquid metal will burn through it. Industrial Minerals estimates that between 380,000 and 430,000 t of graphite are used annually to make refractories.

Moores said graphite is the anode material of choice for battery makers and that about one-quarter of the world's graphite is used in batteries. It is estimated that there is between 10% and 20% more graphite in a lithium-ion battery than there is lithium. Even the average smartphone battery uses 15 grams of graphite. The graphite used in these batteries is high-purity, crystal flake graphite, which is in short supply at the moment.

Perhaps the greatest potential use of graphite lies in electric cars. A Chevrolet Volt uses around 28 kg of graphite, whereas the 24kWh battery pack in a Nissan Leaf uses roughly 38 kg of graphite and 19 kg of lithium carbonate. The slender Tesla Roadster, meanwhile, uses more than 100 kg of graphite. With as many as 3 million electric vehicles expected to be on the road by 2017, the United States Geological Survey says that fuel cells have the potential to use as much graphite as all other uses combined.

Another potential demand driver is the Pebble Bed nuclear reactor. In April 2011, China started building a fourth generation 210-megawatt nuclear reactor using high-temperature, gas-cooled pebble-bed technology. Each Pebble Bed reactor would use about 3,000 t of graphite and China plans to boost its nuclear power capacity to 150 gigawatts by 2030. Its current capacity is less than 50 gigawatts.

Other uses include lubricants, brake linings and, of course, pencils.

Industrial Minerals says the top graphite flake and amorphous graphite producing country is China, which accounts for roughly 79% of global production. The other significant graphite-flake-producing countries are Brazil, India, Canada and, somewhat surprisingly, North Korea.

China has remained in the driver's seat for graphite supply since the early 1990s, when it boosted graphite output to eliminate much of its competition. Almost overnight graphite prices fell by half and the companies developing graphite deposits as part of the last graphite boom were left holding the bag. Those without cash went out of business and the handful with cash shifted their focus to other commodities.

What to Expect from Here. . .

Berry expects China to continue to quietly tighten the reins on graphite supply through higher export taxes and by keeping more flake graphite inside its borders. That could boost prices some, but Berry believes other catalysts are required for a big price spike. "To really push graphite higher, you need to see a couple of different things," Berry said. "You need to see more economic growth coming out of China and you need to see some sort of black swan event where China really tightens the reins and all of a sudden all this supply that the end-users thought was going to be there, isn't there anymore."

What About Consolidation?

"I think it's a ways off," Berry predicted. "A lot of these companies are still learning about what they have. If there's any consolidation to be had, I think it would come from the end-users that want to be an entire supply chain and not have to worry about security of supply." He added: "If you look at industrial production data in the U.S., in the Eurozone and in China, it seems to be slowing down. It's not increasing and with graphite you're dealing with an industrial mineral. So if you've got industrial demand that is slowing or stagnant, you need to be extremely cautious about where you invest in the junior graphite space."

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Source: Brian Sylvester 

DISCLOSURE:

1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Northern Graphite Corp., Big North Graphite Corp., Energizer Resources Inc., Standard Graphite Corp, Lomiko Metals Inc. and Focus Metals Inc. Streetwise Reports does not accept stock in exchange for services.
3) Those interviewed within the article were not paid by Streetwise Reports for their participation.

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The Critical Metals Report: Carolyn, you caution that the rare earth elements (REE) business is still a very nascent industry. Do you sense a gap between investor expectations and market realities?

Carolyn Dennis: There is still a gap for some. Investors have learned a lot over the last couple of years about how complicated the sector is. These are not your average mining investments. Even with the increase in analyst and media coverage of the sector, it's easy to underestimate the risks and the required timelines for projects. For example, while most investors do know that metallurgy is a key risk, companies often explain their metallurgy as being a simple process when, in fact, it may still be an untested theory.

TCMR: In your coverage of companies in this space, you use four screens to separate the pretenders from the contenders: 1) rare earth oxide (REO) distribution; 2) mineralogy, metallurgy and processing; 3) mineability and 4) marketability. Please take our readers through each of those filters.

CD: First of all, I should clarify that at this point, we believe the light rare earth (LREE) market is going to be largely satisfied by Molycorp Inc. (MCP:NYSE) and Lynas Corp. (LYC:ASX), among a few others. The real crunch is going to be in the heavy rare earths (HREEs) neodymium and praseodymium, based on expectations of growing demand for permanent magnets and phosphors.

In our first screen, we look at the REO distribution by generating an index number that sums up the grades of the critical elements neodymium, praseodymium, dysprosium, terbium, europium and yttrium. We divide that by the sum of the grades of cerium and lanthanum. That determines which deposits have more of the "right stuff" and less of the elements that will be in oversupply, in our opinion. It's important to understand which REEs the companies will be exposed to in order to determine the long-term revenue assumptions and the viability of the project.

Next we look at metallurgy, starting with mineralogy. That's a determining factor, not only in the distribution of the rare earths, but in the economic viability of processing the deposit. The minerals in the deposit determine how long it's going to take to extract them. We also look at how far along the companies are in their engineering studies and whether or not they've started a development pilot plant. That's the key step to solving the metallurgy. Even if it's believed to be simple, we still have to test it. All companies deal with this hurdle, even if they have minerals that have already been processed commercially. Our analysis indicates that there are only five companies that have full-scale pilot plants, including Molycorp and Lynas. That underscores the risk in the sector. The other three companies with full-scale pilot plants include Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and two Australian companies, Alkane Resources Ltd. (ALK:ASX) and Arafura Resources Ltd. (ARU:ASX). Greenland Minerals & Energy Ltd. (GGG:ASX) also has a development pilot plant on a smaller scale.

The third screen is mineability, which is basic mining logic. It looks at capital and operating expenditures, deposit size, grade and the mining plan.

For the fourth screen, we look at the downstream supply chain and marketability. Industrial minerals are not commodities and are generally sold on contract. Therefore, companies with partnerships or those that are vertically integrated should realize value for their product.

TCMR: Some rare earth deposits include uranium and thorium byproducts and, if a company is not recovering those, it needs to dispose of them. Is that a challenge most REE miners face?

CD: It's a real risk across the board for rare earth companies. Each deposit, depending on the type of mineralogy, will have varying grades of uranium and thorium. The jurisdiction the deposit is in and how it approaches dealing with the uranium, thorium and radioactivity will dictate how much of an issue it is for the project. It can be a problem in processing as well. In a lot of cases, the thorium should be removed from the concentrate earlier in the process in order to improve processing downstream. Beyond that, radioactive waste material needs to be disposed of.

TCMR: What are some other yellow caution flags to watch for?

CD: Falling prices, especially if new projects come online. That's probably more of a caution for the LREE projects that have more cerium and lanthanum, which could be in oversupply. Today's prices can't be used in determining the economic viability of the project.

Some companies have had some financing issues recently. It could have a potential impact on companies looking to come to market to raise money because investors do look at comparables in the sector.

Also, there have been some offtake partnerships that have been announced. Some have not given enough details that investors like and some have been at net valuations that are lower than expected.

TCMR: But you can't sell the farm.

CD: No. If investors feel that it's not an appropriate valuation, at the end of the day, that's who these companies are serving.

TCMR: This is a race to production and to secure the right partners to make that happen. What companies are ahead of the curve?

CD: There are actually a number of companies that are still competing, but only a few checkered flags will be handed out. Molycorp and Lynas are at the front of the pack. In terms of engineering and pilot plant work, there's Avalon, Alkane and Arafura. There are a number of early-stage companies that are potential come-from-behind cars that could move through the pack and take a checkered flag at the end. We place those in four groups.

Our first group is what we call the zirconosilicates. These deposits typically contain a high portion of heavies. The main mineral in this group is eudialyte. That has yet to be commercially processed, but advancements are being made. The companies in this group are Quest Rare Minerals Ltd. (QRM:TSX; QRM:NYSE.A), Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE), Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) and a private company in Greenland, TANBREEZ. There potentially could be gains in the advancement of the metallurgy there, and these companies could move ahead of the pack in supplying the market.

The second group is the ionic clay deposits. For the most part, that type of deposit is found in China, although Tantalus Rare Earths AG (TAE:FSE; TAE:XETRA) has a project in Northern Madagascar. In China, these deposits have hosted the heavy rare earths. It's really low grade, but the processing has been relatively simple.

The third group is what we call the byproduct producers. These are companies focused on other metals that have also announced rare earth resources, including IAMGOLD Corp. (IMG:TSX; IAG:NYSE), MBAC Fertilizer Corp. (MBC:TSX), Orbite Aluminae Inc. (ORT:TSX) and Pacific Wildcat Resources Corp. (PAW:TSX.V). If these companies can produce rare earths as a byproduct, they could be very economically viable operations.

The last group is projects in Greenland. The government now allows for exploration of radioactive elements, like uranium and thorium, on a case-by-case basis. Originally, there was a moratorium. This group includes Greenland Minerals & Energy and Hudson Resources Inc. (HUD:TSX.V).

Of the companies in those four groups, most of them would supply heavies except for the byproduct producers, which are typically light-weighted deposits.

TCMR: Quest is one of the companies in your "group one" category. Its CEO, Peter Cashin, recently said that the company is a month away from solving its metallurgy riddle at its flagship Strange Lake project. Up until this point, that has been the primary hurdle to attracting a development partner. Where does this place Quest in the REE race?

CD: Metallurgy is the key risk for Quest. Cashin gave an update at the annual general meeting indicating that the company has made progress on the flow sheet, which is expected midyear. We're definitely encouraged by this. More importantly, he did note that it has plans to construct a pilot plant by the end of 2012, test its process and produce sample product to take to potential customers. It is still early in the process, but it's in line with other projects.

TCMR: Quest is also involved in a prefeasibility study on Strange Lake. What does that study need to tell the Street in order for Quest to remain in the race?

CD: In February, Quest announced that it changed the scope of the Strange Lake project. That resulted in a delay in the prefeasibility study. Investors and analysts assume that the costs are going to be higher than the original preliminary economic assessment (PEA). It's very important that the costs are in the expected range. Costs are going up at other projects. We do expect cost inflation and that's fair, but hopefully it's in the expected range. We're estimating over $800 million (M) for construction. The study also needs to be delivered on time. Quest said it would be done by the end of 2012.

TCMR: How does Strange Lake fit into that first filter of REO distribution?

CD: It ranks second of all of the companies in the sector. It definitely has potential to deliver a significant portion of critical rare earths when it's up and running.

TCMR: There is little infrastructure in northern Quebec, but the provincial government recently announced Plan Nord, which will provide some spending for infrastructure projects. Would those help Quest at all?

CD: Absolutely. We're not assuming that Quest will get any of that spending, but it could benefit from the potential infrastructure. It needs a road to get from the site to port. Assistance with that would be helpful.

TCMR: Most people know about Quest's Strange Lake project, but not nearly as many know about its Misery Lake project. Does it add value for shareholders?

CD: I've been to Misery Lake, which is about 120 kilometers (km) south of Strange Lake, and it's beautiful. It has a bit of a different distribution. It's potentially a source of neodymium, but it's very early stage. Most of Quest's value is at Strange Lake. It has such a big resource and the value is in the high-grade zone it will mine first. Having another project may add some value one day, but we currently determine the value from Strange Lake.

TCMR: What are some other Canadian companies that you're following?

CD: There are many rare earth projects in Canada. Some are more advanced than others. Avalon and Matamec are among the more advanced projects. I've been to both properties. Avalon owns the intermediate-stage Nechalacho project in the Northwest Territories. It has a published prefeasibility study and it has a development pilot plant.

Matamec owns the Kipawa project in Quebec, which is a smaller project. It's only a 13-year mine life but, it's in our first group of potential come-from-behind cars. It has about 36% heavies and has attracted Toyota Tsusho Group (TYHOF:OTCPK) as a strategic partner. The main risk with Matamec is the metallurgy. The main mineral is eudialyte, which has yet to be commercially processed. However, the company has made a number of advancements.

TCMR: And is Matamec advancing toward a pilot plant?

CD: It is starting that this year as well. It has indicated that it would be doing that midyear.

TCMR: Some people on Bay Street have been critical of the 100% offtake deal between Matamec and Toyota. I think the biggest criticism about the deal is that it gave up too much.

CD: I've asked it about that. I can understand why selling 100% of the product and negotiating a project sale for less than the net present value in your PEA has caused concern for investors. The company's position is that the price was right and it is getting access to technical expertise. It has a small project with a 13-year mine life. It has costs to get that mine into production. It's more expensive to run a smaller mine. And not having a partner to be able to sell product is one of the major problems that a lot of these companies are facing.

TCMR: It's better to have 50% of something than 100% of nothing.

CD: Exactly. At the end of the day, if a company doesn't know who it's selling to, it's taking a chance. There are specifications that need to be met. Unless you know what they are, how are you going to make the product? It's a chicken-and-egg scenario. There was a big gap between what its PEA suggested and the value that it "sold" the project to Toyota for. It put more emphasis on having a partner. This is a lesson that all the rare earth companies are learning from.

TCMR: You also cover Tasman Metals and its Norra Karr REE project in Sweden. This is a story about location, location, location. What other advantages does Tasman have on its competitors?

CD: Tasman has a number of advantages besides being in mining-friendly Sweden and strategically located close to able and willing markets and infrastructure. The Norra Karr deposit ranked No. 1 on our critical elements list (Quest was No. 2). The deposit has about 54% heavies, which should maintain their value over time and remain in demand. The deposit also has very low thorium and uranium contents and the potential to benefit from byproduct economics, including zirconium, which it is working on.

TCMR: One issue is processing. There is a processing facility in Estonia that's owned by Molycorp, but it doesn't have the capacity at the moment to process heavy rare earths. How is Tasman tackling that problem?

CD: It is doing a lot of testing and is in discussions with a variety of end users, from those that create a component to a midstream-type customer that would take in the chemicals, process them and sell them to an end user.

TCMR: You're saying it would produce a concentrate versus an oxide?

CD: Yes. Its PEA said that it was going to produce a mixed REE carbonate. We believe it can sell it to either an end user that is a component manufacturer or potentially a midstream player that could process it and sell it to end users. Given Tasman's location, there are a number of chemical companies in Europe that could be interested. Germany has a consortium of companies looking to source resources. Part of the partnership equation is sharing the margins for developing a project.

TCMR: A few years ago, the only rare earth story that was getting any ink was Avalon's Nechalacho project, but now it has a number of competitors in the space. Does Norra Karr face similar competition in Europe?

CD: Given its proximity, Greenland could be Tasman's competition. Some of Greenland's projects are on the tidewater and could easily get to Europe. However, Tasman still has an advantage because it's down the road from major markets that are looking for these types of resources.

TCMR: Who is the frontrunner in Greenland?

CD: Let's differentiate between them first of all. Hudson is more of a light-based project. It is bastnasite and monazite. It's a bit different than Greenland Minerals and TANBREEZ, which are next to each other. Greenland Minerals is steenstrupine mineral, which is about 12% heavies. TANBREEZ is eudialyte, which is about 27% heavies.

TANBREEZ has done a fair bit of work and has requested its mining permit, but the last news I saw was that there was a delay. Greenland Minerals plans to produce uranium as a main product. That requires a fair bit of work with the Greenland government. Both companies are still working on permitting, have flow sheets and are doing testing. Greenland Minerals has a pilot plant and is advancing its metallurgy.

TCMR: Does Tantalus, which is in Madagascar, face an uphill battle in terms of developing a rare earths mine in a pristine, protected natural environment?

CD: Definitely. That's one of the big risks Tantalus has. It is in a jurisdiction that would require a lot of work from an environmental perspective. It's a low-grade project. Its heavy distribution is about 20%. When people think of ionic clays, they think of the South China clays that are geared more toward the heavies but this could also be a source.

TCMR: Frontier Rare Earths Ltd. (FRO:TSX) and Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) are both operating in South Africa, but Great Western is a bit broader than that in scope. Let's start with Frontier. What is the grade distribution there?

CD: Frontier's deposit hosts a monazite carbonatite. It is 8% heavies, but because it is planning on producing 20,000 tons (Kt)/year from that mine, it actually would be contributing a decent amount of heavies to the market. Monazite is a mineral that has been commercially developed before. It naturally contains more heavies than bastnasite. Some argue that monazite could be a source of heavies given the metallurgical issues with a number of the minerals that haven't been commercially developed like eudialyte. Frontier has a flow sheet, but it needs to work through the pilot plant.

TCMR: It has an end-user agreement with KORES. Does that give it an advantage over some of the other companies out there?

CD: Yes, it does. Having a partner providing an end market and that potentially is going to help provide financing is definitely solving part of the equation to create a viable rare earth company.

TCMR: Molycorp is well known for its magnets-to-mine strategy, but Great Western pretty much has that already working for it. What are your thoughts on what that company is doing?

CD: It has the less common metals in the United Kingdom and some facilities in the U.S. to produce magnets. It is trying to secure a supply of rare earths for production and to supply the rest of the world. It just raised money, which it will put towards the Steenkampskraal project. It has talked about extending the mine, which currently has a life of fewer than 10 years. At some point, it is going to have to find another source.

TCMR: Would Frontier and Great Western make a good potential merger?

CD: It definitely crossed my mind when I analyzed their deposits. They both have monazite and are not far away. But I am not sure how that would be facilitated.

TCMR: What parting thoughts on the REE space would you like to share with investors?

CD: It's really important for investors to know their risk tolerance because most of the companies in this sector are very early stage and there is a high-risk profile. For risk-tolerant investors, it's a space that could offer significant returns, especially from our come-from-behind cars.

TCMR: Investors in this space saw some glorious returns from 2009 through the middle of 2011, then things started to head south last summer as the market saw the capital requirement for a lot of these projects and got cold feet. Is there another wave coming that investors can look forward to?

CD: It's a different world today than it was. It was a bit of a wild ride, and stocks appreciated as much as tenfold or more in some cases. That is not the reality now. There is a lot more information in the market. The market is differentiating between light and heavies and between the risks of the companies. It's more of an investment now, whereas before it was momentum driving the market. Some people refer to it as a bubble. We're not going to see those days. Investors have learned. The market has learned. Catalysts are going to move the stocks, but it's going to be stock-specific. That's why it is very important to continue watching the sector because you can't look at any of these stocks in isolation. You have to look at the entire space and what the other companies are doing because they will impact your investment.

TCMR: Thanks for sharing your expertise.

CD: My pleasure.

Carolyn Dennis covers rare earths, industrial minerals and, more recently, fertilizers. Dennis joined Dundee Capital Markets in February 2010 with over 10 years of experience in equity research. Most recently, she was a ranked analyst at a bank-owned dealer covering consumer/industrial companies and income trusts. Previously, she worked at an independent investment dealer covering primarily industrial technology companies. Dennis earned a Bachelor of Science in civil engineering from Queen's University and a Master of Business Administration from the Ivey School of Business, University of Western Ontario. She holds a Chartered Financial Analyst (CFA) designation and is a member of Professional Engineers Ontario.

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Source: Sally Lowder 

DISCLOSURE:
1) Sally Lowder of The Critical Metals Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Frontier Rare Earths Ltd., Matamec Explorations Inc., Quest Rare Minerals Ltd. and Tasman Metals Ltd. Streetwise Reports does not accept stock in exchange for services.
3) Carolyn Dennis: I personally and/or my family own share(s) of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports to do this interview.
4) Companies under coverage by Carolyn Dennis are Quest Rare Minerals Ltd. and Tasman Metals Ltd. All other companies mentioned in this interview are not rated by Carolyn Dennis.
5) Carolyn Dennis beneficially owns, has a financial interest in, or exercises investment discretion or control over, companies under coverage: None.
6) Dundee Securities Ltd. and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by, companies under coverage: None.
7) Dundee Securities Ltd. has provided investment banking services to companies under coverage in the past 12 months: None.

All disclosures and disclaimers are available online at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Securities Ltd. The policy of Dundee Securities Ltd. with respect to Research reports is available on the Internet at www.dundeecapitalmarkets.com.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The Critical Metals Report: You once called graphite the perfect mineral. Why?

Simon Moores: It's conductive; it's a lubricant; it's resistant to high temperatures and it's a strong mineral. This means it doesn't have just one major market; it has an abundance of markets and uses. It's key to existing technologies that have been around for 100 years as well as new technologies, like lithium-ion batteries.

But despite what many think, it's not a niche industry. Rare earths and lithium are niche industries. Each year, 1.1 million tons (Mt) of graphite is produced. It's bigger by volume than molybdenum, vanadium, cobalt, tungsten, rare earths and lithium combined.

Graphite miners operate all around the world in Canada, Brazil, Europe, India and, of course, China, which accounts for 80% of production. That's a new figure that our research at Industrial Minerals has just uncovered for the new Natural Graphite Report 2012. China's grip on graphite production is greater than people thought previously.

TCMR: What is China's next move in the graphite market? Do you think there will be more quotas and export restrictions?

SM: There are no rare-earth style quotas at the moment. China doesn't say, "We are only allowing 400,000 tons (t) of graphite to be exported every year." But the country is doing things that could restrict the raw materials supply. The government doesn't like exporting raw materials that other people make money from. It is trying to build a value chain to unlock the value in its natural resources.

For example, China exports flake graphite to Japan. Japan turns it into battery-grade graphite, which is then used to make anodes, which is then used to make batteries, which Japan then ships for a much higher cost than the raw graphite. Now China is trying to build those finished products domestically. As a result, less raw material will come out of the country. In addition, China is trying to control its sprawling mining industry by forcing consolidation. Graphite is a perfect example of a sprawling Chinese mining industry.

TCMR: China is already encouraging foreign companies who depend on rare earth elements (REEs) to set up shop in the country. Do you see the same story unfolding in the graphite industry?

SM: The difference with rare earths is that China is the only place you can get good supply. It operates the world's only mine in Inner Mongolia until Molycorp and Lynas truly get underway.

China is aware that companies can get graphite elsewhere. It is also aware that at the moment it makes good business sense to sell quality raw material at high prices for the short term. Longer term, the story is different.

TCMR: China's had environmental problems with some of its rare earth operations. You visited some graphite mines in China. Are the graphite mines environmentally problematic?

SM: No, it's basic mining that has been around for centuries—extracting from the ground, crushing and grinding. You then put it in a floatation tank with reagents. This part of the process requires chemicals, but these are well known chemicals used in many other industries. Finally, graphite processors dry it and bag it. Graphite is an inert mineral, so it's not harmful. There are no underlying environmental problems in graphite mining.

The only area that holds some controversy is processing into spherical graphite, which requires additional chemical and physical treatment. Acid treatment is quite intensive and there could be future controversy surrounding the disposal of acids used.

TCMR: Are the Chinese mines primarily producing large-flake graphite or a lower-end product?

SM: It's almost a 50-50 split. Flake graphite mining exists all the way down the country's spine. This is good-quality material suitable for both domestic and international refractory and battery markets.

The Hunan province, in the south, is home to amorphous graphite, the old-style graphite people first started mining around the world. Amorphous is more common because the graphitization is lower and closer to coal, whereas flake graphite is closer to diamonds. Amorphous graphite supplies lower-end markets that produce products like pencils and lubricants.

TCMR: You describe the graphite market as having "layers" of demand. What does that mean?

SM: When graphite first came into use, it was mainly employed in lubricants and pencils. Those were the primary demands until after World War II, when the steel industry, driven by construction, became an additional end user, forming a second layer that boosted demand by about 30%. In the 1960s, the auto boom and car construction, especially in North America and Europe, formed yet another layer. Throughout graphite's industrial history, new technologies keep emerging while demand from traditional industries hasn't dropped off. This has built graphite into the 1.1 Mt industry it is today.

TCMR: Are there any graphite substitutes for these new technologies?

SM: Synthetic graphite is a substitute. Cost is still prohibitive, and people prefer flake graphite's properties. Batteries, for example, require a good porosity and surface area so the lithium ions can flow through the anode and generate the charge. Man-made graphite doesn't really provide that.

TCMR: What are some characteristics of an economic graphite deposit?

SM: The carbon content throughout the deposit is very important. A lot of companies are reporting the top range of carbon content, but because mining needs to stretch over many years, carbon content needs to be consistent throughout and not just good for three months.

The type of graphite is critical—flake and vein graphite are the best. Flake is the good stuff. Vein graphite is even better—it is found in lumps in the ground and is "cooked" by long geological processes. It is the form closest to diamond mineralization, and for this reason is much rarer, only found in Sri Lanka today.

A third key factor is infrastructure. Transportation makes up a large portion of the costs of large-scale graphite production. Currently, graphite is going through a high price peak, so existing producers are enjoying themselves. Producers have to prepare for the worst: If the price comes back down to perhaps half of its current market value, a producer's logistics are critical because that's where it either spends a lot of money or saves a lot of money.

TCMR: We didn't hear much about graphite even a year ago, certainly not from publicly listed companies. Are we still going to be talking about graphite in three years?

SM: We will. Lithium is a perfect comparison, because, in 2009, it had the same boom graphite is now having. In 2010, it reached a peak. Lots of juniors entered the industry. Everyone got excited about it. In 2011, nearly all of the juniors fell away, and the remaining players were focusing on their projects and not making as much noise. This year, we're seeing consolidation in the industry. Graphite will follow the same pattern.

TCMR: Has the boom in the price of high-quality graphite over the last year or so surprised you?

SM: Not really, because you have to look at the fundamentals. Graphite supply has been neglected for a generation yet it's still used in a lot of growing markets. Graphite's demand security is in its diversity: when one market drops off, another steps up.

When you only have this situation with a handful of active mines and no new operations planned, then there's only really one outcome: Eventually prices are going to rise, because there's going to be a supply squeeze. China adds a huge element of future supply uncertainty as well.

TCMR: The last graphite boom was in the 1990s. But then prices fell, and a number of mines were mothballed. Who's to say that won't happen again?

SM: It could happen again. That's always the risk, when you have so many potential mines coming online.

China caused the bust in the 1990s. New producers flooded the world market and put a lot of people out of business with low-cost production. Today, in a twist of fate, China could now be the cause for making these mines viable again. We have to look at how much production China controls, and its long-term goals, what it wants to do with its economy and its raw materials. Any new bust, however, is not going to be as drastic as the one in the early 1990s.

TCMR: One of the graphite derivatives that is very misunderstood is graphene, which is a single layer of graphite that is created in labs. How close is the industry to commercial-scale graphene production?

SM: The industry is some way off. A Google search will throw up many companies claiming they can produce graphene. But I wouldn't call it graphene—I'd call it nano-graphite. There may be three, four, five layers of graphene in their products.

Graphene is used in intelligent inks, for example, which are used for security systems on bank cards. That's its first market, and others may emerge in the next few years. But I believe the production of true graphene is many years away—commercially producing true graphene one-molecule thick—is extremely challenging, one of the biggest materials scientists will face. But if they crack it, the possibilities for its use are almost endless and it would revolutionize they way we live our lives. But to get graphene's super properties we all read about, you need to peel away and isolate a one-molecule layer. It's almost impossible to do that on a commercial scale. In terms of serious large-scale commercial use, it's at least 15 years away, and predicting 15 years into the future is like trying to predict 1,500 years into the future.

TCMR: Will the steel and battery industry end users drive another layer of graphite's growth?

SM: Yes. The steel industry uses refractories, which are protective layers for vessels that hold molten steel. If you pour molten steel into metal, it's going to melt through. So refractories are lined with bricks that can handle extreme temperatures. A big component of brick is graphite—up to 15% per brick. The steel, cement, petrochemical, glass and ceramics industries all use graphite in this way.

TCMR: What about lithium-ion batteries for electric cars—that's a significant amount of graphite in those products, too, correct?

SM: Electric vehicles are not a big demand driver today. But that's where the potential lies. In an electric car battery 1.8 kilograms (kg) graphite is used per kilowatt hour (KWh). Then take a battery pack equating to 24 KWh (like Nissan's LEAF), that's 38kg natural graphite per battery. It's a long way off, but if a manufacturer were to sell a million of these cars, that amounts to 3.8 Mt natural graphite. The natural graphite market is 1.1 Mt a year at the moment. So you can see why people are excited about it.

TCMR: What are some companies with graphite projects that could fill the supply gap for natural graphite, especially large-flake graphite?

SM: I'd look first at the companies that are actually producing graphite now. There's Timcal Ltd., which is publicly traded by Imerys (NK:PA), based in Paris. Imerys is a big minerals company; graphite is just one small area of its business. But its mine in Quebec is the only major active mine in North America. In December, Imerys announced plans for three new mines in the area, which shows that existing companies have the ability to do it straightaway.

TCMR: Canada in general seems to have a lot of potential for economic graphite deposits.

SM: Exactly. It's got a handful of leading juniors: Focus Metals Inc. (FMS:TSX.V), Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX), Ontario Graphite Ltd. (private) and Mega Graphite Inc. (IPO expected by the end of Q112).

Focus Metals' primary graphite operation is the Lac Knife deposit in Quebec. The deposit is famous and has been on our radar for more than 20 years. It's a large, high-quality graphite deposit with about 8.1 Mt flake at 16% average carbon content, which is strong. And the company is investing in technology to make graphene, which sets it apart.

TCMR: How close is that project to production?

SM: It's at least two years from production, the same as any other new junior. Building a new mine anywhere in the world is never a quick process.

TCMR: Let's move on to Northern Graphite, the darling of the industry. It was publicly listed last year, and the trajectory has been steadily upward.

SM: Its Bissett Creek project in Ontario is great. Northern Graphite has been around for a while, under different names. Bissett Creek has also been on our radar for a long time – before others were interested in graphite, work was being conducted on the deposit which says a lot for its quality even in down times. The company has ramped up drilling and marketing activities in the last two years.

Northern Graphite's selling points with its project are the size of the flake and the purity of the carbon content. The company, like many others, still needs the funding to build the mine. That's the challenge for all these juniors in Canada. Bissett Creek is still a very good project. You can't deny that.

TCMR: Northern Graphite is also doing some research on graphene—what do you make of that?

SM: It's a new battleground for some of these juniors. They're battling not only for funding but for share of the headlines. Any company with a high-quality graphite deposit naturally lends itself to mechanical exfoliation production of graphene.

TCMR: The other junior you mentioned is Ontario Graphite, which has a project not far from Bissett Creek.

SM: Ontario Graphite is a bit different, because it's a mine-reactivation project. For that reason, I would think that it will be quicker to bring production onstream. The company will need a new plant and new equipment, which is relatively straightforward to install. It is scheduled for commissioning in September this year. I could see Ontario Graphite processing product within 2012. The resource is also a good size—43.5 Mt Measured and Indicated resources, 12.3 Mt Inferred resources.

TCMR: Are there enough metallurgists available to create the end product?

SM: Yes. It's not like the rare earth industry, in which North America lost all its intelligence and skilled workers. Graphite has been a consistent, worldwide mainstay, which means the knowledge base has been retained thanks mainly to U.S.-based companies like Asbury Carbons and Superior Graphite. The challenge may lay with higher-value graphite grades for the battery market. Spherical graphite is a key raw material for battery anodes and this is still a new process for everyone.

TCMR: You also mentioned Mega Graphite.

SM: Mega Graphite bought an Australian company called Strategic Energy Resources Ltd. (SER:ASX) and that gave it a fast track route into the graphite industry. Its Uley Mine is actually a big stockpile of processed and unprocessed material because, similar to Ontario Graphite, back in the early 1990s the mine was closed. It wasn't economical enough to compete with cheaper products from China.

Mega Graphite has upgraded the plant with modern equipment and is reprocessing the stockpiled material to make the various grades of graphite. It has the potential to produce about 20,000 tons good-quality graphite from that stockpile over the next three years. But it will need to start mining to replenish these stocks.

TCMR: Is there a significant mining industry in Australia? Will Mega Graphite and Strategic Energy face some competition?

SM: At the moment Australia has no graphite mining industry. Zimtu Capital Corp. (ZC:TSX.V) is buying up a lot of deposits there and has an impressive portfolio of assets around the world. Archer Exploration Ltd. (AXE:ASX) is another company that has a project as part of a larger portfolio of mineral assets. But Mega Graphite is far more focused on producing graphite so the company shouldn't encounter much production competition in the near term.

TCMR: What's the infrastructure like at Uley?

SM: It's fine. Australia is mining friendly. It is used to this kind of industry.

TCMR: It's not going to face any mining royalties there? Australia has implemented one on iron ore and coal.

SM: Australia will try to target its big businesses like iron ore and coal. Graphite is never going to be a comparatively big business there. If Australia heavily taxes the smaller mining companies, then it won't have much of a mining industry left. It needs to encourage these. Mining is the sole reason Australia didn't slip into recession.

TCMR: What advice would you give to investors who are interested in the graphite story?

SM: The resource is everything. The larger the flake and the higher the purity of carbon the more critical it will be to high-tech applications. Also look at what the company's plans are for selling this material and if it is targeting specific markets—co-operation with Japan and South Korea will be key here. Traders from these countries are usually the most savvy of long-term investors.

The most interesting graphite plays are those that are focused on technology end uses. Producing high-tech-compatible materials for emerging markets, like spherical graphite for batteries, will add the serious value.

Industrial Minerals is working on the Natural Graphite Report 2012, which should be out in the next two months. It's an extensive world overview of production, prices and demand and should answer any more questions readers may have.

TCMR: Thank you for speaking with us today.

SM: My pleasure.

Simon Moores has been reporting on, researching and analyzing the non-metallic minerals sector since 2006, when he joined London-based publishing and research house Industrial Minerals. He has specialist knowledge in critical and strategic minerals including graphite, lithium, rare earths and titanium.

He led the research and publication of the market study, The Natural Graphite Report 2012: data, analysis and forecast for the next five years. One of the study's key findings was China's dominance of production was significantly higher than previously thought, accounting for 80% of supply. He has chaired conferences and given keynote presentations around the world. He has also been interviewed by international press including London's The Times regarding Chinese control on world graphite production, and The New York Times with regard to rare earths after breaking the story that China blocked exports to Japan in 2009.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

DISCLOSURE:
1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned are sponsors of The Critical Metals Report: Focus Metals Inc., Northern Graphite Corp. and Strategic Energy Resources Ltd. Streetwise does not accept stock in exchange for services.
3) Simon Moores: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The Critical Metals Report: China recently announced it is maintaining its rare earth export quotas of 31,130 metric tons (t), but the U.S., the EU and Japan filed a claim at the World Trade Organization (WTO), saying that the restrictions are illegal. What will this controversy mean for rare earth prices?

Siddharth Rajeev: One of the main reasons for the run-up in rare earth prices is the export quotas set by China, which controls 97–98% of the supply. End users started looking for alternatives to rare earths, which is resulting in lower demand. As for the WTO case regarding China's export quotas, Chinese officials think they are in line with WTO regulations. The WTO had previously ruled against China for restricting exports of bauxite, magnesium, zinc, etc., so it is possible the WTO might go against China here as well, which would negatively impact rare earth prices. In addition, companies outside China now nearing production, including Molycorp Inc. (MCP:NYSE), Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) in South Africa and Australia's Lynas Corp. (LYC:ASX), may alleviate supply constraints, thus driving prices down. Still more projects are expected to come online in the next two years, which would further add to supply.

TCMR: When do you expect the WTO to decide on a ruling?

SR: It's going to be a long process, but it's something that could potentially affect long-term rather than short-term prices.

TCMR: Because rare earth materials are so varied, you use a fair-value metric instead of target prices when you evaluate these stocks. But how do you determine the intrinsic value of a critical metal stock when there is all of this uncertainty?

SR: Every commodity is priced based on expected long-term demand and supply. To forecast commodity prices, we project long-term demand based on the potential growth of the major demand drivers. Supply is projected based on the projects that may come onstream over the next 10 years. But as you mentioned, the forecast demand for critical elements is harder than, say, forecasting demand for copper or zinc. Demand for critical elements can be a moving target. We mitigate this problem by constantly updating our models to capture this variable. For example, major lithium demand drivers are expected to be lithium-ion batteries. Precisely forecasting demand for lithium-ion batteries depends on other growth drivers, such as electric vehicle proliferation. So we constantly update our models as to reflect projected demand in related sectors. That's how we calculate price forecasts for all the commodities in the rare earth and critical metals space.

TCMR: You recently released a report on graphite and its uses for everything from brake linings to batteries and nuclear power. Graphite prices have jumped as much as $500/t in the last year for certain grades. How high could that price go, and what's driving that?

SR: Over the long term, we are bullish on graphite. The main reasons are the following: First, we think the main demand growth drivers of graphite could be new applications, such as lithium-ion batteries, fuel cells and nuclear power. Natural graphite might take away a significant market share from the synthetic graphite market, because high-purity, high-grade graphite is required for these technological developments. Synthetic graphite currently trades at four to six times the price of natural graphite.

Second, on the supply side, China accounts for more than 70% of production. The U.S. imports its entire graphite consumption. So, again, we are seeing a highly concentrated supply in one area. Another thing, the blue-sky potential for graphite involves a product called graphene, which is made by chemically processing graphite. Graphene is very unique because it's highly flexible, like rubber, yet stronger than steel, and it's a very good conductor of heat, 10 times more effective than copper. It's a recent technology and there is a lot of research going on in the sector. All things considered, we have a bullish outlook on graphite.

TCMR: What companies outside of China are you watching in this space?

SR: We'll be initiating coverage on Focus Metals Inc. (FMS:TSX.V) in the next month or so. Its project, which it acquired from IAMGOLD Corp. (IMG:TSX; IAG:NYSE) in 2010, is located in Quebec. I have not seen any other project with such high grades of graphite in the deposit. Focus Metals has a grade of 16%, whereas most of the graphite deposits out there are less than 3%. It has large-flake material, which is highly in demand for applications such as lithium-ion batteries. Focus Metals recently completed a resource estimate. It's working on a scoping study now. It's a low-capital expenditure project, less than $75 million (M). The company has an extremely strong cash position, $16M. Market cap is just over $80M.

Another story we like is Flinders Resources Ltd. (FDR:TSX.V), a brand-new company. It started trading on the Toronto Stock Exchange Venture a few weeks ago. Its project is the Kringel project. A lot of historic work has been done on the project. It has a historical resource of 7 million tons (Mt) at 9% graphite, which is a high-grade material. It has a lot of catalysts coming up over the next 12 months, one of the biggest being its plans to convert the historic resource to an NI 43-101-compliant resource. It has a fully permitted mine that can be put into production in the next 18–24 months. It has a strong cash position of $5M, and its market cap is $60M.

Another company is Lomiko Metals Inc. (LMR:TSX.V). It's a very early-stage project. It just acquired a project in Quebec. Some historic work has been done on the property. As for near-term catalysts, it is working on an NI 43-101 technical report [released 3/27/12], and it is going to commence an exploration program on the property.

TCMR: Lomiko is historically a gold company that just diversified into the graphite space. Is that common? Are a lot of companies following suit?

SR: Because of graphite's highly attractive fundamentals and growing investor interest, we have been seeing a lot of new companies pop up or switch their focus to graphite, which is normal in the commodities sector. We saw the same pattern a few years ago when the rare earth boom started. The same has been the case with lithium. This is common, but bear in mind that a lot of companies might not survive the boom period.

TCMR: Do you see Lomiko's stock going up because of the diversification?

SR: Our last report on Lomiko's graphite came out a few months ago. The stock had doubled since the initial report. It's dropped since then. As long as the graphite market stays in its current space, where I expect it to stay for a while, and if Lomiko's exploration program produces positive results, that should reflect in the stock price. In other words, it's too early to tell.

TCMR: You also focus on niobium, which is used in the technology, aviation and steel industries to make metals lighter and stronger. The price for ferro-niobium has come down from more than $46/kilogram (kg) to about $43. Is that a function of more supply or less demand?

SR: Niobium demand is highly correlated with steel demand, and steel demand is highly correlated with global gross domestic product (GDP) growth. The recent slowdown in global GDP growth, especially from China, has resulted in a softening of prices for commodities that service the steel industry.

TCMR: How does that price action affect your outlook for niobium suppliers, particularly in North America?

SR: The U.S. produces very little niobium. That's been the case for a long time. Brazil is the number-one producer of niobium, accounting for about 92% of global production. Canada comes in a far second. We cover two North American companies in the space. The first is Quantum Rare Earth Developments Corp. (QRE:TSX.V; BR3:FSE; QREDF:OTCBB). It has the Elk Creek project in Nebraska, of which it owns 100%. In March 2011, it came up with an Inferred resource of 80 Mt at 0.62% niobium oxide, which is a significant deposit. This company has quite a few catalysts expected this year. In Q112, it expects a new NI 43-101 resource report, and in Q212 it expects some results of its metallurgical testing. These two numbers should give it enough information to commence a preliminary economic assessment (PEA) later this year.

TCMR: If those reports come out positive, could that override any niobium price challenges?

SR: Definitely.

TCMR: What other companies do you follow in that space?

SR: Another company is Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX). It has the Tantalum niobium project in British Columbia. It recently completed a PEA of the property, but its main asset now is its rare earth project in Quebec, which has produced a lot of positive news for the last 6 to 12 months. It recently came out with a huge increase in its resource estimate, and its initial estimate was one of the largest outside of China. The newer resource has doubled the figures, so that's a significant development. It identified middle rare earths (MREEs) and heavy rare earths (HREEs), which are more valuable than light rare earths (LREEs),close to the surface of the property.

TCMR: Are the price dynamics different for HREEs and LREEs due to respective export quotas?

SR: Yes, exactly. Prices of light and abundant rare earths dropped much more than other rare earths that are more scarcely available. So there's been a wide fluctuation, and different commodities in the rare earth sector have reacted differently. But overall, the rare earth market has been hit significantly in the last 6 to 12 months.

TCMR: Commerce has, as you mentioned, both MREEs and HREEs. Do you expect those prices to remain high or perhaps escalate?

SR: Overall, we saw significant price increases in the rare earth market, increasing as much as five- or tenfold in some cases over the last few years. We've since seen sort of a correction. But even at these relatively lower prices, a lot of projects are economic. So we wouldn't need to see an increase in prices to make these companies look favorable.

TCMR: What other factors might impact this sector, particularly in an election year, that investors should take into consideration when considering critical metals companies?

SR: Global economic growth and price levels of critical metals are not directly linked. Critical metals are more influenced by new technologies. Any commodity that can be used for viable and efficient new technologies is going to see good growth and demand. This would include commodities like lithium and graphite, which are used in lithium-ion batteries. We have a strong outlook on lithium-ion batteries for electric cars. Those are the kinds of technologies that can be viable in the long run, and all the associated technologies are likewise going to see a significant increase in demand. Critical materials that figure into these developments will be less affected by shorter-term developments like the U.S. presidential election or a slowdown in the Chinese economy because many of these new technologies have a lot of room for upside, even before demand stabilizes.

TCMR: Thank you for speaking with us today.

SR: My pleasure.

Siddharth Rajeev is vice president and head of research at Fundamental Research Corp., the largest independent equity research firm in Canada. He holds a bachelor of technology in electronics engineering from the Cochin University of Science & Technology and a Masters of Business Administration in finance from the University of British Columbia. He is also a CFA charter holder. He is ranked as a four-star analyst in the energy and mining sectors by Deutsche Asset Management.

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Source: JT Long

 
DISCLOSURE:
1) JT Long of The Critical Metals Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Focus Metals Inc., Lomiko Metals Inc., Quantum Rare Earth Developments Corp. and Commerce Resources Corp. Streetwise Reports does not accept stock in exchange for services.
3) Siddharth Rajeev: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid to do this interview. FRC has been paid by some companies mentioned in this article to initiate coverage.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The Critical Metals Report: Last year you published a research report called the Rare Earth Economic War. When we talked last time, you said that China was on one side and industrialized nations were on the other, with China winning. Does China's new five-year plan with an emphasis on consumer consumption change that balance?

Luisa Moreno: China's new five-year plan as it concerns raw materials suggests that China wants to better utilize its resources primarily for its own economic development, which in part supports the concept of a raw materials economic war. China, just as most nations, would like to be self-sufficient in key mineral resources. The country has about one-third of all the total rare earth element (REE) resources, but it supplies the world with more than 95% of its rare earth needs. I believe China is in a resource-preservation mode. However, what is not so fair are the differences between China's domestic rare earths prices and international prices, which are usually much higher, and China's dramatic decrease in production and export quotas in such a short period of time. China is well aware of the critical uses of some of the rare earths and it seems that it is determined to allocate a limited amount to the world and increasingly consume most of it by attracting REE-dependent manufacturing into China. The leaders plan to manage sustainable growth of the Chinese REE sector by attracting companies that utilize these resources. That would bring jobs while developing advanced rare earth-based technologies. It is no different from what other nations would like to do. Of course, China is at an advantage because it has the largest capacity in the world for the production of these elements and the know-how to refine them. The rest of the world is left with the option of moving manufacturing to China for better access to these materials.

TCMR: So you are saying that China is still winning?

LM: I believe so. Actually, the recent move by the U.S., EU and Japan to file a law suit against China may end up supporting that conclusion, if they are unable to persuade it to change its rare earth policies. It seems that China is increasingly consuming most of these elements and it is trying to control supply and prices.

TCMR: Can lawsuits and political pressure really make China change its export habits?

LM: Potentially. I think a negative ruling could make leaders think twice before deciding on export quotas or other related trading policies. But China will put Chinese interests first, obviously. I don't think that the rest of the world has much leverage with what is now the second-largest world economy. I think the lawsuits bring attention to how other nations may feel, but might not necessarily be sufficient to change China's policies regarding rare earths or other critical materials.

TCMR: China's Ministry of Commerce recently announced that the export quotas would remain essentially the same—30,184 tons (t) in 2012—but only 50% of the quota was used last year. Is that quota meaningful?

LM: 2011 was an exceptionally bad year, the tsunami in Japan, the second-largest REE consumer, having caused a slowdown in demand, not to mention the global economic slowdown in the second half of the year, which was marked by poor economic conditions in Europe and negative economic politics in the U.S. The second half of 2011 was clearly not a favorable one for rare earths and many other commodities. Now that the rare earth element export quotas are separated into lights, mediums and heavies, I think it will become more evident where the real demand is and how tight the export quotas really are, assuming that we see some economic recovery.

I think the new invoicing system that China is implementing to better control production and exports may decrease illegal exports of rare earths as well. Right now, official export numbers are not the total picture because so much is illegally produced and exported. I'm not sure China will be able to control all of the illegal exports, but at least reining it in a little bit will impact the supply-demand equation.

If Lynas Corp. (LYC:ASX) comes into production and Molycorp Inc. (MCP:NYSE) ramps up production, we should see an increase in production of light rare earth elements (LREEs). That may make export quotas for LREEs less meaningful. However, China will probably maintain export quotas for some of the most critical REEs, including the light element neodymium and some of the heavy rare earths (HREEs) like dysprosium and yttrium. For the next five to 10 years, as long as there is a risk that some of these elements might be in shortfall, we may still see an REE export quota of some sort.

TCMR: You called 2011 an exceptional year in terms of bad economic news, but could the drop in rare earths prices indicate that it had been in a bubble? Have companies' efforts to re-engineer products and eliminate their needs for rare earths been successful? Or was it just the economy in general that accounted for the price drops?

LM: Likely it was a combination of all those things. I think the current and future demand for materials such as dysprosium should be healthy, but I'm not sure if $3,000/kilogram (kg) was justifiable. Similarly, the prices of lanthanum and cerium, which are fairly common elements historically below $10/kg , were above $100/kg back in August, a level we now know is not really sustainable. Prices seem to have been in a bubble and when demand decreased, REE prices also fell significantly. Chinese officials may have wanted prices to stay high and some Chinese refiners even suspended production for a few months when prices were falling and demand was weak.

TCMR: Considering that not all REEs are created equal in terms of market value, what are some of the most in-demand elements, and could those prices break out this year?

LM: I think the critical elements identified by the U.S. Department of Energy—neodymium, praseodymium, terbium, dysprosium and yttrium—could experience a significant increase in demand; some may even be in shortfall right now. It is possible that the prices of these elements may rise, but in the short term, we might see continued decreasing prices until they stabilize. I have already seen signs that they are starting to stabilize. If there is stability, or better yet growth in the global economy, the prices for some of these elements could potentially increase this year.

TCMR: You mentioned Molycorp and Lynas. Molycorp just announced the start-up of its manufacturing facility in Mountain Pass, California. Will that produce mostly LREEs? Could those two companies make a difference in global supply in the next couple of years?

LM: Absolutely. Light rare earths are the most sold or consumed elements—particularly lanthanum and cerium. They are the cheapest, but they are the ones that are sold in the highest volume. Lynas and Molycorp could also produce significant amounts of neodymium, which is very important for the production of super magnets used in hybrid cars, computers and wind turbines. Molycorp really does not have much of the heavies like dysprosium and terbium at Mountain Pass. Lynas might be able to produce some of the most critical heavies from its plant in Malaysia, but it would be rather expensive given that it only has small percentages of heavy lanthanides. In any case, even if both companies ramp up production, it won't completely close the gap in demand that exists for some of these critical elements outside China.

TCMR: When do you see each of those companies going into production?

LM: There have been delays with the Lynas project because of permitting issues, but I think it hopes to start production in Malaysia before the end of the year. Molycorp expects to reach its phase one annualized production of 19,050t of mixed rare earth oxides by Q312 and separated products perhaps before the end of the year. It's hard to say exactly when these companies will be able to reach their target production. As you know, with mining projects delays are not unusual, but both companies are working very hard to deliver on their promises.

TCMR: What are your top picks for non-Chinese companies that could supply some of the heavy elements in the future?

LM: My top picks include Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) and Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX). I cover both companies and they both have a favorable REE distribution with high percentages of the critical elements. I think Matamec has made significant progress with its metallurgy and its partnerships. The company just announced that Toyota Tsusho Corp. (TYHOF:OTC; 8015:JP) has signed a binding memo of understanding with Matamec, which means it has priority over the development of the Kipawa. That is very good for Matamec.

Ucore should come out with a preliminary economic assessment (PEA) in the next few weeks, and we should be able to better assess if it is an economically viable project. The project is in Alaska and we believe it is the most significant HREE deposit in the U.S. It's very interesting.

TCMR: Could either of these companies be takeover targets for a Molycorp looking to cover the HREE space?

LM: If Molycorp wants to become the leading rare earths company, it will have to find a solution for the heavy rare earths. I think Matamec could have filled that role, but because Toyota has now the binding agreement, it will be difficult for Molycorp to approach Matamec. Besides, it seems that Toyota is interested in a 100% offtake deal with Matamec. Ucore, on the other hand, continues to be another good option for Molycorp, although the company is still working on its metallurgy and may be seen as too early stage. When the PEA comes out, hopefully we'll have a much better idea of the progress of the project.

Another company that would also be of interest is Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE), which has the Norra Karr deposit in Sweden. It is close to Molycorp's Silmet refinery in Europe. Tasman has one of the highest percentages of heavies. Contrary to Ucore and Matamec, it actually has a very large resource. My understanding is that in terms of the metallurgy, it made significant progress but it is not as advanced as Matamec or Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A). Hopefully, it will file a PEA this year as well.

TCMR: Matamec is trading at $0.32 today and Ucore at $0.41. Could the recent news be catalysts for both of those companies?

LM: I think so. As the market looks around for HREE alternatives to Molycorp, I think there is great potential for Ucore and Tasman to be recognized by the market as potential targets. Matamec is currently working on the details of a definitive agreement with Toyota Tsusho, to be completed by July.

TCMR: You have commented on the importance of metallurgy and the refining process for extracting and efficiently delivering high-quality oxides for each individual mineral source because each one is very different. What companies are well on their way to doing this?

LM: Like I said, Matamec is well underway in doing this. Now, it has a fantastic partner, which is Toyota Tsusho and all the associated companies and likely universities that will be involved in developing that project.

I think another company that has made significant progress is Montero Mining and Exploration Ltd. (MON:TSX.V). It has a deposit in Tanzania and it just announced that it has produced an oxide concentrate. That's really good.

Rare Element Resources Ltd. is another. I visited its pilot plant last year. It has also made significant progress. The resource is mainly comprised of bastnasite mineral, which, relative to other deposits, might mean that it will have fewer processing challenges. It has been able to produce a mixed oxide concentrate and is moving towards separating the elements and producing individual elements oxides. As I said, it's already at the pilot level and completed a prefeasibility study. Rare Element is one of the most advanced projects; we believe however that the company needs to secure offtake agreements and a JV partner capable of co-financing the $375 million project.

Another one that I like is Frontier Rare Earths Ltd. (FRO:TSX). It just published a comprehensive PEA, which included a separation plant. No other company has done that yet. Frontier has a partnership and partial offtake agreement with Korea Resource Corporation and the support of a consortium of Korean companies.

TCMR: Could other REE companies that you're following break out in the next few years, either because of agreements with partners or as takeout candidates or because they might actually start producing?

LM: I think we should perhaps pay more attention to what is going on in Brazil. We believe that Neo Material Technologies (NEM:TSX) spent some time there before being acquired by Molycorp. It seems that the company may have been looking at recovering xenotime from tailings at the Pitinga mine in Brazil.

Another private project is owned by Mining Ventures Brasil. It seems to have a colluvial deposit with high percentages of xenotime and monazite. The distribution for the heavies may be quite favorable. It's an early-stage project; the company is moving forward with the metallurgy now. There is a possibility that things could work out pretty fast for them.

Another private project still in Brazil is the one that it is ongoing at Companhia Brasileira de Metalurgia e Mineração (CBMM). It is the largest producer of niobium but it also has rare earths in its deposit.

Medallion Resources Ltd. (MDL:TSX.V; MLLOF:OTCQX; MRD:FSE) is a public company targeting monazite deposits around the world. Monazite, just like xenotime, has been used in the past to recover rare earths. The model is to find these monazite deposits because they represent a far easier metallurgic process than other sources. That could allow Medallion to fast-track its project.

A lot of folks are trying to find solutions for these metals.

TCMR: The sheer number of early-stage projects presents a challenge for potential investors. How can investors pick which companies might be successful? What should they focus on when there are so many moving parts—the management, the location, the metallurgy and the different elements themselves?

LM: To start, investors should be looking at the same factors they usually use to assess mining companies. Beyond that, the most important factors for REE projects specifically are metallurgy and industry partnerships. However, it depends what investors are looking for. Essentially, there are some names in the rare earths space that are well known and respected. Examples of that are Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Rare Element Resources Ltd. They were the first ones to publish PEAs and are still perceived by some as the frontrunners. There are, however, lesser-known companies that have received far less love from the market, despite having made significant advances. That includes Matamec and Frontier, which I still feel are somewhat under the radar.

If investors are anticipating a bounce in rare earths stocks and would like to hold rare earths companies that have made major progress in metallurgy, with solid industry partnerships and have great potential for significant long-term upside, I think names like Matamec and Frontier might be good. They're relatively more advanced, particularly in metallurgy, which is very important because you can have 100 million tons at high grades, but if the metallurgy is complex and you are five years away from solving the processing to a level where it's economic to recover these elements, that might not be so competitive in this market. Those that are more advanced will be better positioned to secure development partners. That's very important because the PEAs coming out show that projects are capital expenditure intensive and industry partners can help finance these projects.

Rare earths are not commodities; end users, usually through joint ventures, guide companies toward production of appropriate materials. It's a very complex space. As I said, although Matamec and Frontier have made significant progress, they consistently have underperformed some of their peers. So investors who are interested in those names will have to be really patient. We believe, however, that Molycorp is the undisputable leading non-Chinese rare earth listed company at the moment and investor interest in this space should follow and analyze this company to determine a good entry point.

TCMR: You're going to be speaking at the International Rare Earths Summit in San Francisco in May. What message will you be delivering?

LM: Seeing as a significant part of the audience is expected to be end users who are extremely concerned about the long-term availability of these elements, I'll be talking about the challenges that rare earth miners and future producers face, focusing on how end-users may better participate in the development of a global rare earths supply industry. They could surely help fast track the development of the rare earths industry outside China.

TCMR: Thank you very much for your time, Luisa.

Luisa Moreno is a senior mining and metals analyst at Jacob Securities Inc. in Toronto. She covers industrial materials with a major focus on technology and energy metal companies. She has been a guest speaker on television and at international conferences. Moreno has published reports on rare earths and other critical materials 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.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.
Source: JT Long

DISCLOSURE:
1) JT Long conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Rare Element Resources Ltd., Medallion Resources Ltd., Frontier Rare Earths Ltd., Tasman Metals Ltd., Matamec Explorations Inc. and Ucore Rare MetalsInc. Streetwise Reports does not accept stock in exchange for services.
3) Luisa Moreno: I personally and/or my family own shares of the following companies mentioned in this interview: None. I was not paid to do this interview.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The Critical Metals Report: It's been over two years since you last spoke with us. How have macroeconomic events affected your investment strategy?

James Passin: I am not going to discuss specific investment strategies. But it's interesting to take a careful look at the current environment, in which there remains a huge amount of fear regarding the solvency of the world financial system. At the same time, there's clear evidence of growth returning to the USA and certain other regions, although interest rates are near zero and central banks continue to print money. So, I see a situation in which powerful opposing forces at are work, a situation which may continue to manifest itself in violent, short-term fluctuations in asset prices.

I think that the global risk appetite is in a recovery process and that this will gradually lead to more stable capital markets, which should, generally, be positive for equity valuations. But the fear of black swans has kept a lot of cash in the sidelines. There is a danger in remaining out of the market in the current negative interest rate environment.

TCMR: What are you expecting with commodity prices in the next year or so? Will China's growth continue, or is the country in a bubble?

JP: China has attempted to engineer what the media is calling a "soft landing," to try to weaken real estate prices and restrain inflation. To some extent, it seems that its policies have been successful. If inflationary pressures in China continue to moderate, then the central bank should have room to loosen credit conditions. This should help to offset economic weakness.

When you look at the strength in copper, the Australian dollar and other leading or coincident indicators of Chinese economic activity, it's very hard to take a bearish outlook on China. Major Chinese stock indexes have held at support levels and are starting to bounce. So, overall, I expect China's economy to be somewhat constructive for commodity prices.

TCMR: Do you anticipate any significant potential disruptions to the global economy?

JP: I think we are going to see mergers and acquisitions in the commodity space following the recent high-profile merger of two very large affiliated companies, Glencore International plc (GLEN:LSE) and Xstrata PLC (XTA:LSE). Companies that work closely with governments are in a position to implement strategic industrial policy, which may trigger a wave of consolidation in the commodity space and a struggle for control of a limited universe of valuable mineral assets. That environment would create a very positive scenario for the prices of mining companies’ securities in general.

TCMR: Would you say the giant majors and governments of developing nations are competing for assets at the lower end of the food chain?

JP: There's a lot of evidence to support this view. Indian companies now seem to be on the hunt and there are a lot of buyers for world-class resources. A number of companies that control world-class resource projects seem to have very compelling valuations, following the horrendous equity market in fourth quarter of 2011. I suspect we are going to see a huge number of merger deals, hostile takeovers and various forms of consolidation, reducing the supply of commodity shares.

TCMR: You are invested in critical and strategic metals. What looks attractive to you in those investment areas?

JP: One area we're focused on is fluorspar, which is an important mineral used in a number of metallurgical processes, such as aluminum production. It's also the raw material necessary for the production of hydrofluoric acid, which is the precursor to all hydrofluoric chemicals and a number of products containing fluorine or made through the process of fluorination. It's an obscure commodity, but it is critical to modern life and to the world economy. In fact, it's so strategic that the EU put it on the list of critical commodities. There has been a lot of government angst about the availability of fluorspar because China controls approximately 50% of world fluorspar production. China was once a fluorspar exporter, but the country is moving more toward exporting value-added chemicals and consuming the raw chemicals itself. That means the rest of the world has to look for non-Chinese sources for fluorspar. There are very few sources of fluorspar from operating mines and not many deposits can be brought into production in the near future either.

TCMR: What are some companies focusing on fluorspar production?

JP: I would suggest taking a look at Fluormin Plc (FLOR:AIM), listed on the AIM Market of the London Stock Exchange. Fluormin owns the producing Witkop fluorspar mine in South Africa as well as 20% of a producing Kenyan fluorspar company. It has other fluorspar exploration projects in various African countries and a joint venture with a fluorspar trading company. Fluormin is a significant producer and trader in the global fluorspar industry. The company is controlled by Firebird and I serve with another colleague on the board of directors.

TCMR: Last time we met, you discussed IBC Advanced Alloys Corp. (IB:TSX.V; AALF:OTCQX). What's going on with that company?

JP: The stock has been somewhat stagnant, but IBC Advanced Alloys has been growing its revenue. We're intrigued by the company's Beralcast business, which involves an aluminum-beryllium composite material with unique characteristics that make it attractive in defense aviation platforms and, potentially, in various commercial aviation applications. It could be a game-changer when you look at the market for beryllium-aluminum composite materials. The company is also exploring for beryllium in Utah, with some promising recent results. I should note that IBC was co-founded by Firebird and Firebird remains a significant shareholder in the company.

TCMR: You cover a wide range of investment arenas both geographically and in terms of commodity type. What looks promising in the energy arena?

JP: Since we started following East African oil in 2003, there have been a number of very large, important discoveries, the most famous of which was Heritage Oil Corp. (HOC:TSX; HOIL:LSE) discovery in Uganda, which proved the existence of world-class oil basins in the Great Rift Valley, precipitating a wave of strategic interest in East Africa. At the same time, evolving geopolitical dynamics are now supportive to East African oil development. For example, South Sudan's independence created momentum for a new pipeline that can potentially link offshore East African oil fields to export markets, creating a platform for monetization of otherwise stranded oil deposits.

TCMR: What companies in this space are you considering?

JP: I am the Chairman and Interim CEO of Vanoil Energy Ltd. (VEL:TSX.V), which has two blocks in Kenya. Given the amount of interest in Kenya now and the number of deals that we can point to in East Africa, I think it's worth considering independent companies with acreage in Kenya and the surrounding countries. Vanoil has had some encouraging results from its seismic program and we look forward to advancing further work on our Kenyan properties under the terms of our Production Sharing Contracts. Firebird's East African holdings include Africa Oil Corp. (AOI:TSX.V), a Lundin company. It has a number of interesting oil exploration projects in East Africa, and the company is currently drilling on two properties, one in Kenya and one in the Puntland Province of Somalia. I've been to the Somalian oil concession—it has the potential to prove the existence of Yemen-size oil basins in the Horn of East Africa.

TCMR: You also mentioned Mongolian coal. What's going on there?

JP: Mongolia has a host of remnants of the sea that vanished when the Indian and Asian subcontinents collided a long time ago. Those remnants formed a vast sedimentary basin that has been transformed into one of the world's largest undeveloped coal provinces, with both thermal and coking coal. Mongolia's thermal coal story is quite interesting. China is now the world's largest importer of thermal coal, while India has very limited supplies of thermal coal. Mongolia will inevitably emerge, in my view, as an important regional thermal coal supplier.

Also, Mongolia is the world’s fastest-growing economy. This is creating a growing need for new electricity generation capacity. The country's large thermal coal deposits have an important role to play in providing domestic energy. There's a wave of new interest in Mongolia from strategic and financial investors. We think that the country's real 2011 gross domestic product (GDP) is probably going to end up 18% higher than the prior year. We believe this GDP is going to keep compounding at a very high rate over the next 10–20 years.

TCMR: How can investors participate in the market in Mongolia? There is a stock exchange there, but not many companies, and liquidity is low. What's the story there?

JP: We're very active investors in the Mongolian Stock Exchange (MSE). Certainly the market is not liquid, but there are no restrictions on foreign ownership of shares, and the currency is freely exchangeable. It is very easy to open and fund a brokerage account. The hard part is sourcing shares. The London Stock Exchange (LSE) is now managing the MSE under a three-year contract. We're quite optimistic about the potential for liquidity on the MSE to increase in the future. Some thermal coal stocks are listed on the MSE, such as Sharyn Gol JSC (SHG:MSE), a coal producer controlled by Firebird. There are other coal companies with assets in Mongolia that are listed on other major exchanges, although we don't have a particular view on those companies.

TCMR: Let's switch to nuclear. The U.S. Nuclear Regulatory Commission (NRC) granted some licenses in the last few weeks—the first ones in nearly 35 years. What effect is that going to have on the nuclear fuels and related industries and equipment suppliers?

JP: Although I've generally reduced my focus on the nuclear industry following our broad exit from the space during the uranium bubble in 2006, we remain long-term bulls on nuclear power. It is the only economic means of producing electricity without producing vast amounts of carbon. Many government policies will most likely continue to provide at least some economic inducement for nuclear power generation. China will continue to build new nuclear reactors irrespective of the changing political sentiment in some countries following the Fukushima disaster. My focus is mainly in companies that are providing essential services to the nuclear industry and are positioned to benefit from the continued long-term growth in nuclear power generation capacity.

TCMR: What service companies appeal to you?

JP: A U.S. company, International Isotopes Inc. (INIS:OTCBB), is seeking a Nuclear Regulatory Commission (NRC) permit to build the first and only uranium de-conversion and fluorine extraction plant in the world. This plant will take depleted uranium hexafluoride, the toxic waste byproduct of uranium enrichment, and convert it into a stable form of depleted uranium, while extracting the commercially valuable fluorine content. The resulting waste material is far safer and cheaper to store and transport than depleted uranium hexafluoride. If this plant is financed and built and operates successfully, it should significantly reduce the environmental impact of the nuclear fuel cycle.

TCMR: How much commercial value is there in the fluorine? Will the company see substantial profits from producing safer uranium?

JP: I expect the company to have two major revenue streams. The first would be the payment it receives for de-converting uranium hexafluoride, as this provides a direct benefit to the producers of depleted uranium hexafluoride. The second revenue stream will come from extracting the fluorine content and producing fluorine gases and other fluorine products, which it can sell commercially.

TCMR: How large is the fluorine gas market and what kind of sales could International Isotopes expect?

JP: I don't want to get into financial projections, but the fluorine market is quite large. If you look at all of the fluoride chemical products, especially fluorine gases and products made through the process of fluorination, it is an immense market. I would note that Firebird is a significant shareholder in International Isotopes.

TCMR: We appreciate your time and thoughts today.

JP: My pleasure.

Source: Zig Lambo

James Passin joined Firebird in 1999. James is a graduate of St. John's College, where he majored in philosophy and classical literature. James serves on the board of directors of several Mongolian and Canadian companies, including Sharyn Gol JSC, Baganuur JSC, BDSec JSC, National Investment Bank of Mongolia, Vanoil Energy Ltd., Undur Tolgoi Minerals Inc. and Fluormin PLC, a UK fluorspar mining company.

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DISCLOSURE:
1) Zig Lambo of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: IBC Advanced Alloy Corporation. Streetwise Reports does not accept stock in exchange for services.
3) James Passin: I personally and/or my family own shares of the following the following companies, either directly or through indirect ownership through funds and related business entities, mentioned in this interview: Vanoil Energy, Ltd., Fluormin PLC, Sharyn Gol JSC, International Isotopes Inc., IBC Advanced Alloy Corporation and Africa Oil Inc. I personally and/or my family am paid by the following companies mentioned in this interview: none. I was not paid by Streetwise for participating in this story.
Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The Critical Metals Report: In the last five years, investors discovered lithium and the rare earths. What will be the next big thing?

Jack Lifton: The answer is graphite. Graphite has traditionally been considered a boring, mundane industrial mineral, evoking thoughts of pencils, golf clubs and tennis racquets. Investors should think again. Traditional demand for graphite in the steel and automotive industries is growing 5% annually, and graphite prices have tripled. New applications such as heat sinks in computers, lithium-ion batteries, fuel cells, and nuclear and solar power are all big users of graphite. These consumers are beginning to place substantial demands on existing production—and over 70% of that production is from China, which is no longer selling this resource cheaply to the rest of the world as the country's easy-to-mine, near-surface deposits are becoming exhausted.

Graphite's criticality and potential scarcity has been recognized by both the United States and the European Union, which have each declared graphite a supply-critical mineral. Recently, the British Geological Survey ranked graphite right behind the rare earths and substantially ahead of lithium in terms of supply criticality. Clearly, there is much more to graphite than pencils.

TCMR: What about graphite makes it so important to all these end-users?

JL: Graphite and diamonds are the only two natural polymers of carbon. Both are very strong, can withstand extreme heat, and resist attack from chemicals and corrosion. While a diamond is a three-dimensional crystal structure of carbon, graphite possesses a two-dimensional flake crystal structure. Graphite is also a very good conductor of heat and electricity. Due to its amazing chemical and physical properties, new industrial, commercial and high-technology uses for graphite are constantly being discovered.

The lithium-ion battery is one of the fastest-growing uses of graphite. Each one actually contains greater than 10 times more graphite than lithium. These batteries are already widely utilized in the consumer electronics industry in devices like mobile telephones, laptop and tablet computers, and media players.

Other new technologies like fuel cells, will also drive demand. Fuel-cell-powered forklifts are in use in American warehouses. Some fuel-cell-powered taxis and buses are already found on city streets, and most major car companies will join Hyundai in producing fuel cell vehicles by 2015. To be clear, electric and fuel cell vehicles will not replace the internal combustion engine, however, they are part of the solution to reducing dependence on non-renewable energy resources and make a great deal of sense in many applications. Telecommunications companies are employing fuel cells around the globe for primary or backup power at cell phone towers and substations. A range of facilities, including stores, universities and business parks, are also using this clean, efficient technology for low-cost power that works independent of the grid.

Fuel cells convert chemical energy from a fuel source, often hydrogen but also natural gas or even an alcohol like methanol, that chemically reacts with an oxidizing agent like oxygen to create electricity. Because they operate at relatively low voltage, fuel cells are typically placed in series or parallel circuits to increase voltage and current. Fuel cells generate fairly low levels of emissions, as well as water and heat. In large installations, this heat can be captured and used for climate control and to produce additional power through cogeneration.

General Motors has already invested more than $2 billion in automotive fuel cell research and development, and is believed to be seeking additional investment from industry peers in exchange for rights to use the technology. German automotive companies BMW and Volkswagen both own stakes in SGL Carbon SE, the world's largest maker of carbon and graphite products. Just how much graphite will be required for fuel cells? The proton exchange membrane fuel cells being developed for use in cars would require 100 pounds of graphite per vehicle. The U.S. Geological Survey noted in 2010 that "large-scale fuel cell applications are being developed that could consume as much graphite as all other uses combined."

Graphite is also projected to be a key component in next-generation nuclear reactors, which are expected to reach temperatures of 1,000 degrees Celsius—triple the temperature inside today's commercial reactors. Graphite is one of the few substances that can resist such heat, with initial tests by researchers at the Idaho National Laboratory indicating that it can actually absorb heat as high as 3,000 degrees Celsius. Pebble bed nuclear reactors are small, modular reactors that are safer than conventional reactors because they "die" on their own when shut down. They are fueled by tennis-ball-sized graphite spheres with uranium embedded in them. Substantial amounts of graphite are required to charge the reactor at startup, and a percentage of the balls must be replaced each year as the fuel is spent, which creates ongoing demand for graphite. China has an operating prototype and is now building the first two commercial units, with plans to have 30 by 2020. These reactors are one of the top 16 priorities in China's 2020 strategic plan.

The vanadium redox battery, which offers great potential for storing excess energy generated by renewable energy sources like wind turbines and solar cells, is another notable emerging technology that would require significant amounts of graphite to produce. These batteries, which offer significant storage capacity, long life, low maintenance requirements, and a nominal environmental footprint, require some 300 tons (t) of flake graphite per 1,000 megawatt of storage capacity.

TCMR: Isn't there plenty of graphite in the world to go around?

JL: Natural graphite deposits can generally be characterized as one of three types: crystalline flake, amorphous or lump, also known as vein graphite. Total annual global graphite production increased substantially in the 1990s as China dumped graphite on world markets. Prices crashed and exploration and development in the rest of the world ceased. Production has now held steady for several years at approximately 1.1 million tons (Mt) as China appears to have reached the limit of its productive capacity and the commodity super cycle has soaked up excess supply. Since 2005 prices have basically tripled, and supply is tight.

Graphite mining and processing is currently limited to a small handful of countries, with China, India, Brazil and Canada the leading suppliers. Only 40% of world production yields flake graphite, the most desirable type for its suitability in high-value, high-growth applications. Only flake and synthetic graphite, which is made from petroleum coke through a very expensive process, can be used in lithium-ion batteries, the current demand driver for this crucial substance.

321energy.com owner Bob Moriarty recently commented, "If you believe in lithium-ion batteries, you would do far better by investing in a good graphite company than a good lithium company. . .With demand for graphite growing at 50% per year and prices reaching $2,500-3,000 a ton, the future for graphite companies with actual projects is excellent."

TCMR: What about the introduction of graphene, single-atom-thick sheets of crystalline flake graphite? How will the use of this material in phones and touch screens impact demand?

JL: Professors Kostya Novoselov and Andre Geim of the University of Manchester were awarded the 2010 Nobel Prize in Physics for their work with graphene. British Chancellor of the Exchequer George Osborne recently committed ~$80 million (M) to graphene research, a quest embarked on by almost every major research center and university as well as hundreds of companies, from IBM and Intel to Silicon Valley startups.

Graphene is being studied for use in ultra-high-speed microprocessors, as it conducts electricity at a rate 30 times faster than silicon. IBM is examining whether graphene's magnetic traits will allow it to be utilized in medical devices to spot diseases in their earliest stages. The company is also working with the U.S. Department of Defense's Defense Advanced Research Projects Agency to investigate whether graphene can improve mobile phone efficiency, wireless signal clarity and radar quality. Nokia is researching graphene's potential use in cell phones and touch screens, with the latter usage expected to become commercialized relatively soon, potentially in a foldable phone. One U.S. Department of Energy researcher believes that graphene's energy storage potential will lead to the development of batteries that will triple the range of today's electric vehicles without increasing battery size or weight.

In collaboration with South Korea's Sungkyunkwan University, Samsung researchers have created a flexible touchscreen several feet wide from "printed" graphene that could eventually be commercialized in strong, lightweight, flexible solar cells, touch sensors and flat-panel screens, perhaps maybe even directly integrated into clothing. While research-and-development activity is moving from university labs to corporate workplaces, scientists estimate that the first commercial applications of graphene technology are 5 to 10 years away.

TCMR: If the price goes too high will manufacturers simply engineer graphite out of their products?

JL: At the recent Graphite 2011 conference in London, Colin Cooper of Graphexel Ltd. said "new technologies [are] unlikely to overtake the graphite market demand for traditional end uses—such as refractories, metal casting, and lubricants—as the fundamental need for graphite in these lower value sectors [is] not going away." However, these traditional industrial users will find themselves competing for supply with those producing new technologies as there are very few, if any, economically feasible alternatives available and very little recycling of graphite.

The main technology that these traditional uses will be competing with in the near term is rechargeable lithium-ion batteries. Graphite serves as the anode in lithium-ion batteries, and there is no substitute for it in this application. Due to their advantages relative to other battery types—including their comparatively light weight, lack of memory effect, slow self-discharge rate and environmental safety—the lithium-ion battery industry is growing 30 to 40% annually as products such as power tools, consumer electronics, and hybrid and all-electric vehicles switch from other, inferior battery technologies.

Already, plug-in electric vehicles like the Chevy Volt, Nissan Leaf and Tesla Roadster rely on lithium-ion batteries, and the gasoline-electric hybrid models that have used nickel-metal hydride batteries for the past decade are making the transition to lithium-ion technology. The electric vehicle market is expected to grow as much as 20% annually by 2020, with expectations that between 3–6M such vehicles will be manufactured in 2020, each of which will require approximately 40 pounds of graphite for the battery system alone. Both U.S. President Barack Obama and Chinese leaders have stated that they want to see 1 million electric vehicles on the roads by 2015. An estimated 1 Mt additional graphite will be needed annually by 2020 for electric vehicles and other emerging applications.

TCMR: If current annual flake production is around 400,000 tons, where will all this new production come from?

JL: This booming demand will require more than a doubling of current global graphite production to meet the needs of traditional markets like North America and Europe, as well as such emerging markets as China, India, Russia and Brazil. Total graphite production across the globe has been consistent in recent years at approximately 1.1 Mt annually.

China's production is suitable only for industrial applications such as steelmaking and lubrication rather than high-tech uses like batteries and graphene. China already imports a significant amount of the graphite mined in North Korea.

Fortunately, graphite reserves are present around the world, though many sites would require several years of development and significant investment to begin production. Countries known to have reserves of highly valuable flake or crystalline graphite include Austria, Norway, Germany, Italy, Madagascar, Sri Lanka, Russia and Canada.

Governmental bodies have shown increasing concern about graphite's importance. The U.S. Department of Homeland Security's Critical Foreign Dependencies Initiative lists Chinese graphite mines as essential sites that would damage American interests if attacked. Graphite was also determined to be high in terms of both economic importance and supply risk in a 2010 European Commission study of 41 raw materials.

TCMR: What mining companies could fill this growing demand in the coming years?

JL: There is only a handful. Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX) is, in my opinion, the leading public graphite company. Northern Graphite has the "three Ps" of investing in junior resource companies: people, property and price.

Seven members of Northern Graphite's board and management team have significant senior management experience with mining and exploration companies and are widely known and respected in the mining and investment communities. CEO Gregory Bowes was senior vice president of Orezone Gold Corp. (ORE.TSX) and Ron Little, a director, is Orezone's CEO and founder. Orezone drilled off a 5 million ounce gold deposit in Burkina Faso, Africa, completed a bankable feasibility study and permitting, and started construction before its Essakane project was taken over by IAMgold Corp (IMG.TSX) in a $350M transaction. Iain Scarr, another Northern Graphite director, was commercial director of Rio Tinto's (RIO:NYSE; RIO:ASX) industrial minerals division for many years and is now vice president of corporate development at Toronto-based Lithium One Inc. (LI:TSX.V). Jay Chmelauskas, a director, is CEO and a director of Vancouver-based Western Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX). Don Baxter, president, was mine superintendent at the Kearney Graphite mine in Ontario when it operated in the 1990s and was CEO of Ontario Graphite, which is presently attempting to reactivate the mine, before being lured away by Northern Graphite. George Hawley, technical advisor, started in the graphite business more than 40 years ago and is a leading minerals industry expert.

Northern Graphite's Bissett Creek graphite project has a number of significant advantages over other graphite deposits. It is located about two hours east of Ottawa, the nation's capital, and 10 miles from the TransCanada highway and associated natural gas pipeline, power lines and small communities where workers can live. It is five hours by truck from the port of Montreal and less than one day by truck from the major steel and automotive centers in the northeast United States.

Bissett Creek itself is a very large, low-grade deposit that is located right at the surface, which means it will be mined by simple open pit methods and will have a very low waste-to-ore ratio. It is also very flat lying and therefore production can be expanded by moving laterally rather than going deeper, which is much more expensive. North Graphite's original NI 43-101 report contemplated an operation producing 20,000 tons of graphite per year for over 40 years. Since that time, the resource has more than doubled and it is still open to the north and down dip. This indicates the deposit could support production of 70-80,000 tons per year and still have a mine life of more than 20 years. We do not know of any other graphite deposit in the world that has this degree of scalability and believe that at this production level it would be the largest graphite mine in the world. This feature should make it very attractive to potential strategic partners that want to secure a stable source of long-term supply to meet growing demand.

Another feature that makes Bissett Creek quite unique is that almost 100% of production will be large-flake (+80 mesh), high-purity graphite. Recent metallurgical test results have shown that 50% of production will be even larger, +48 mesh jumbo flake, which will result in premium pricing. We believe Bissett Creek will produce concentrates that have the highest average value per ton in the industry. While Bissett Creek will not be the lowest cost operation due to its relatively low grade, its near-surface nature and low strip ratio will help to balance this disadvantage out, meaning that costs will be in the middle of the pack. Bissett Creek should generate the highest margin per-ton of concentrate in the industry.

Northern Graphite expects to complete a bankable feasibility study in the first quarter of 2012; full permitting should be completed shortly thereafter. It will take approximately $80M and one year to build the mine, so Bissett Creek could potentially be in production in mid-2013. With the bankable study and permitting near at hand, Northern Graphite has a substantial head start on many other companies that have yet to commence either.

Northern conducted its IPO in April of 2011 at CDN $0.50 per share and closed the year at $0.94, which is fairly good performance considering that the TSX Venture Exchange was down about 40% over the same time period. However, with only 37.4M shares outstanding and 45.8M fully diluted, the company has a market capitalization of less than $40M. We consider this very cheap considering the quality of both management and the asset itself, as well as the advanced stage of the project. The company has a minable, diluted resource of over 1.3 Mt of graphite in the indicated and inferred categories, and almost all is large flake, high purity. Accordingly, the market is valuing the company at less than $30 per ton for a product that sells for close to $3,000 per ton and has a margin well over 50%. As the bankable feasibility study and permitting are completed in the near term and the investment profile of graphite goes mainstream, we expect the share price to move substantially higher.

Other possible future graphite suppliers include Focus Metals Inc. (FMS:TSX.V). It owns the Lac Knife graphite deposit near Fermont in Northern Quebec. Lac Knife has measured, indicated and inferred resources of approximately 8 Mt grading 15.6% graphite and is still open. Strategic Energy Resources (SER:ASX) is a junior Australian resource company that has interests in a number of mineral and oil & gas projects, including 100% of the Uley graphite deposit. Uley operated in 1993 and has a 14,000 ton per year (t/year) plant on site that is intact but will need to be refurbished. A recent Joint Ore Reserves Committee compliant resource estimate totals 6.6 Mt grading 8.7% graphitic carbon in the indicated and inferred categories.

Burke Resources Ltd. is a private Canadian company that intends to complete a qualifying transaction that will involve acquiring and reopening the Woxna graphite deposit in Sweden. The deposit has a resource of 6.9 Mt grading 8.8% (non NI 43-101) and a fully permitted 13,000t/year plant. It is anticipated that production could restart in two years.

TCMR: Any other advice for investing in a commodity that has doubled in price in three years?

JL: I expect prices to increase further. Mines old and new will accelerate their production efforts. Both existing mining and processing companies and startups will require investment; those who get in earliest will profit the most from the Great Graphite Rush.

Jack Lifton is an independent consultant and commentator, focusing on market fundamentals and future end-use trends of the rare metals. He specializes in sourcing nonferrous strategic metals and due diligence studies of businesses in that space. He has more than 47 years of experience in the global OEM automotive, heavy equipment, electrical and electronic, mining, smelting and refining industries.

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DISCLOSURE:
1) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Northern Graphite Corporation and Focus Metals Inc.
2) Jack Lifton: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The Critical Metals Report: Ryan, as someone who knows the graphite business, what would you recommend to investors?

Ryan Fletcher: The space should be on investors' radars. Demand for graphite is increasing quite rapidly. Not only are historic uses growing, but new applications are adding demand. A number of professional investors, analysts and researchers have studied the fundamentals, and they see the potential. But it's not yet front and center on the investment community's radar. It should be.

TCMR: In terms of graphite's historic uses, it's used in tennis rackets, golf clubs and is important to the steel industry. What are some of graphite's properties and historic applications?

RF: Graphite is an excellent conductor of heat and electricity and is corrosion and heat resistant. It's a strong substance. It's light. All of those qualities make it valuable. It's used in the steel industry. The automotive industry is also a major consumer. Because of its heat resistance, it's also used in crucible liners and so forth. Those are big applications.

TCMR: Would you say that demand in these historic markets is increasing?

RF: Absolutely. The historic markets are still growing and you can't forget about them. The demand from these markets is increasing, say, at a rate of 3–5% per year, based largely on global economic growth fueled by Asia, India, Russia and Brazil. But now we are seeing graphite's application in lithium-ion batteries, fuel cells and nuclear technology, and in plastics and composite frames that find their way into products such as Boeing Co.'s (NYSE:BA) new Dreamliner as well as wind mills. These applications will add a big, incremental demand push to the market. This is all new demand.

TCMR: How does graphite figure into energy storage applications?

RF: The most important applications in energy storage are lithium-ion batteries and fuel cells. A lithium-ion battery needs 20 to 30 times more graphite by weight than lithium. Based on that, the number of end user transactions, the amount of capital and the level of interest in the graphite space should be about 20 to 30 times more than in the lithium space, but graphite has been flying under the radar.

TCMR: Maybe that's partly because the lithium-ion battery isn't called the graphite-lithium-ion battery.

RF: True. These batteries have two parts—the cathode and the anode. Lithium is the cathode. The anode is graphite. It's become clear that these batteries will power not only electric vehicles but also our tools, our phones, our laptops, our electronics, our toys. They all use these batteries, and that's going to be a big demand driver.

TCMR: How about in fuel cells?

RF: In the same way, graphite is used in plating and is an important component of a fuel cell. A lot of the same things I said about lithium-ion batteries also apply to vanadium redox batteries. Vanadium's been getting a lot of attention. It takes a lot of graphite to produce these batteries as well.

TCMR: Are the batteries used in vehicles such as the Chevy Volt, Nissan Leaf and Tesla Roadster lithium-ion-graphite batteries?

RF: Yes. There was some debate whether a nickel-metal hydride battery would be the key driver for electric vehicles, and the original Volt was based on that technology. But the Leaf, the new hatchback version of the Volt, and the Tesla are now all based on the lithium-ion-graphite battery.

I've been speaking with a lot of the bright and experienced people who closely follow battery technology, such as the crew at Byron Capital, which has done a lot of good work in this space. Battery technology goes through phases and a certain technology typically can reign for some 10–20 years. It appears that the mass adoption of lithium-ion batteries has just started to take shape and will dominate for a long time. Graphite is so critical for that.

TCMR: Those changes in automotive technologies seem to moving faster than ever before. Consumers want the most current technology, whether it's a cell phone, a laptop or a vehicle, and it's exciting to watch demand pushing these new technologies into manufacturing.

RF: Yes. The natural graphite market is about 1.2 million tons per year (Mtpa) right now. Broadly speaking, that market consists of two different forms of graphite. The historic applications primarily use the amorphous graphite, whereas some of these emerging technologies and applications use flake graphite. About 40% of that 1.2-Mt market is flake and 60% amorphous, so the flake graphite market is just over 400,000 tons per year. Some of the players in the industry anticipate that just one application alone, the lithium-ion battery, could use well over 1.6 Mt of flake graphite per year by 2020, which is more than threefold the entire current market. Even if the market doubles, that's 800,000 tons of graphite per year by 2020. A large-scale producer puts out only about 20,000 to 40,000 tons per year, which means a lot of new mines and a lot of opportunity.

TCMR: And is it China that dominates this market?

RF: Yes. China controls 70% of the current graphite supply. Over the last 10 years, China has become dominant in a number of commodities, based on blessings of geology and other circumstances. Behind China on the supply side is India, Canada and Brazil. Over the last couple of years, China has imposed value-added taxes, export taxes and licenses.

North America has been aggressively seeking solutions to weaning itself off oil production and reducing consumption of fossil fuels. China is trying to do the same and will conserve the resources it will require for this to build its own internal industries, its own green growth and its own economy.

TCMR: Where can we expect to find new sources of graphite? Where is it most abundant, and in what types of geology?

RF: You have to look to geological terrains with metamorphic activity. Canada, particularly Ontario and Québec, has some great terrain, as do Brazil and India. Because graphite prices have been kept low over the past decade or so, there had been almost zero incentive to explore for, fund or develop new graphite projects. That's all changing right now, prices have increased threefold in the last few years. I think the best graphite deposits have yet to be found. There's potential for new discoveries in many jurisdictions.

An interesting thing about the market right now is not only that only a handful of players are exploring and developing projects but that they view each other more as "co-petition" rather than competition because demand necessitates many new mines, even if current development projects all move to production. There's also a premium for deposits outside of China, which will be more valuable to end users from Japan, Korea, Europe and the U.S.—all major consumers.

TCMR: So for investors who want to participate in the upswing of demand and the compelling future for graphite, who are some players worth investigating?

RF: The two most well known public companies, both of which have projects in Canada, are Focus Metals Inc. (FMS:TSX.V) and Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX). Great teams are leading these companies.

Focus acquired the Lac Knife Graphite Project from a subsidiary of IAMGOLD Corp. (IMG:TSX; IAG:NYSE). This was a known deposit located in northern Québec, with feasibility work completed prior to NI 43-101. The project was discovered in the 1980s and at one point was being evaluated through a joint venture between Graftech International Holdings Inc. (GTI:NYSE) and Ballard Power Systems Inc. (BLDP:NASDAQ), which designs and manufactures clean energy hydrogen fuel cells. Focus has now come out with an NI 43-101 resource that shows an attractive grade—about 16%.

Another intriguing thing about Focus is its work with end-users on the technology side. The company's longer-term business plan is pretty intriguing—to become not only a producer of graphite but also developing end use markets, somewhat of a mine-to-market strategy.

TCMR: What about Northern Graphite?

RF: Northern Graphite, which just went public in April 2011, holds a 100% interest in Bissett Creek, a graphite project located close to infrastructure in southern Ontario. The interesting thing about the Bissett Creek deposit is that a large proportion of it is large- or jumbo-flake graphite—the stuff that gets end-users and the battery manufacturers excited. The company announced the plan for a bankable final feasibility study in June, and recently reported positive pilot plant results. The market seems to really be getting behind the company and for good reason.

TCMR: Do you expect Northern Graphite to develop end-user agreements?

RF: Sure. It's important for everyone looking at this space to remember that graphite isn't like gold or copper or oil—commodities that you produce and sell into a big global market at the market price. With minor and industrial commodities, such as graphite, the explorers, developers, and producers work with end-users. So all the companies that are moving these projects forward will be working with industry end-users, intimately. I can assure you that the end-users from Korea and Japan will be eager for these types of partnerships, just like the Europeans and the Americans are. They're all dependent on China right now.

TCMR: Are there any other names in this space?

RF: As I mentioned, I figured the best graphite deposits haven't been found yet. The disincentive of low prices meant that not much money has been raised nor dollars spent looking for graphite. That's starting to change. One company that I quite like is Orocan Resource Corp. (OR:TSX.V), which has acquired a portfolio of projects in Ontario and Québec. But more importantly, the company added Antoine Fournier to the team. A geologist, he was part of the field team that discovered the project that Focus is advancing, Lac Knife.

Orocan, which intends to propose a resolution to change its name to Standard Graphite Corporation later this month, has a market cap of about $5M, in comparison to the $30–60M for some of the bigger players. There's a lot of leverage for investors and a lot of opportunity when you take something that has a bit of information with the right team and make a new discovery. You can create a lot of value under those circumstances. Orocan will be working to do just that.

Also, early this month, Lomiko Metals Inc. (LMR:TSX.V) acquired 100% interest in the Quatre Milles Graphite Property in southwest Québec, a project that Graphicor Resources explored in the late 1980s. And in Saskatchewan, Strike Gold Corp. (SRK:TSX.V) is moving forward on a project where Superior Graphite had done drilling and geological and metallurgical work 20 years ago. These assets—the ones that had been worked and then had to halt when China took its grip on the market—are being snapped up right now. The market has changed and they are attractive again. Additionally, Eagle Graphite Corp. is a private company mining graphite in southeastern British Columbia, and TIMCAL Graphite & Carbon produces graphite at its Lac-des-Iles Mine in Québec. Both of them are operating, producing and selling to end-users. Both of the mines are in Canada.

TCMR: Except for Strike, all of the companies you've talked about are exploring in Québec or Ontario. Are there graphite projects elsewhere that you can tell us about too?

RF: There's an interesting past producer in Sweden that's being acquired. A capital pool called Tasex Capital Ltd. (TAX.P:TSX), which will become Flinders Resources once the transaction is complete, is acquiring 100% of this Swedish property—the Woxna Graphite Project. There's a quality management team on this, influential financiers involved, and I expect to see a lot of success there.

TCMR: It looks as if the graphite space is developing some traction, especially with all of the new applications you've talked about. It's been called one of the "quintessential wonder materials."

RF: I agree. It's very early, but with all the factors we discussed at play, I see a lot of opportunity for the investment community.

TCMR: Thank you so much, Ryan.

Ryan Fletcher is a director of Zimtu Capital Corporation, a Vancouver-headquartered public investment company that creates, invests in and grows resource companies. Fletcher has been responsible for identifying and sourcing projects, structuring companies and investments, marketing group companies and business development. He is a graduate of the University of British Columbia Okanagan with a Bachelor of Arts in economics. Before joining Zimtu in 2009, Fletcher worked as a consultant for publicly listed mineral exploration and development companies and a boutique private investment firm focused on the mineral exploration sector.

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Source: Sally Lowder 

DISCLOSURE:
1) Sally Lowder of The Critical Metals Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Northern Graphite Corporation, Orocan Resource Corp. and Focus Metals Inc.
3) Ryan Fletcher: I personally and/or my family own shares of the following companies mentioned in this interview: Northern Graphite Corp., Orocan Resources Corp., Strike Gold Corp., Lomiko Metals Inc., and Zimtu Capital Corp.. I personally and/or my family am paid by the following companies mentioned in this interview: Zimtu Capital Corp.

Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The Critical Metals Report: Before we get into rare earths, let's discuss Europe's investment landscape and how resource plays figure in. Marcel, one of your responsibilities is running a fund that takes positions in junior resource plays. How have those holdings performed over the past five years?

Marcel Fuhrer: Including 2011, the average rate of return over five years was 7% per annum. In 2011, it was down 30%.

TCMR: Is the sustained volatility in global markets causing you concern?

MF: Yes, absolutely. It hurts the development of companies that need to raise capital to go forward with their projects. Such long periods of volatility also make investors shy away.

TCMR: In a previous life you were with Dexia Bank, so I would like to ask you about the European Central Bank's (ECB) offer of bank loans totaling $640 billion (B) to European banks in late December 2011. While those loans may stabilize banks and make it easier for them to lend to businesses, they will do little to solve the root problems of Europe's financial woes—heavily indebted nations facing unsustainable borrowing costs. What is your perspective on the ECB's action?

MF: My opinion is that the ECB has to continue to provide the liquidity needed by the banking system because the ultimate goal must be to avoid a liquidity crunch like we saw in 2008, which led to a very deep and fast recession worldwide.

I think other central banks, and not only in Europe, will continue to work on liquidity and to buy time for the Europeans to solve their issues.

TCMR: Do you believe the actions taken by the American government in 2008 artificially propped up Europe's economy? It might be said that the European economy is now experiencing what it should have experienced a few years ago.

MF: It is likely that the subprime crisis in the U.S. has given us some insight into the troubles that are now apparent in Europe, such as the big differences between the countries in the south and those in the north.

Germany, for example, was not forced to prop up its liquidity or put money into its economy during 2008 and 2009. The weaker economies, however, had to do that and that load has now exploded. This is what led to the European debt crisis, in which we are now living. For a long time, the European Union was able to hide these divergences. That is not the case anymore.

TCMR: What's your view on the Eurozone? Do you believe it will last? Was it a good idea?

MF: The idea actually is good, but there should have been more unification before the currency went into effect. They put in a unified currency thinking that would unify a lot of different cultures and different ways of doing business. Other types of unification should have come first. So, the idea is good but the timing was not.

TCMR: Given sovereign debt problems in the Eurozone and widespread investor uncertainty there, is it now more difficult to manage a fund based in Europe than it was a few years ago?

MF: Given the markets and investor behavior, it is more difficult. But that is really a global phenomenon, not the result of the European situation. The real issues are financial globalization and the higher correlations we have to live with. That is what gives us a harder time managing money.

TCMR: Can you point to anything specific that you are dealing with now that you did not have to deal with prior to 2008?

MF: We have to be very keen on making sure that the companies we invest in, particularly in the exploration space, have sufficient capital or access to capital to meet important milestones on their projects. They cannot run out of cash and go away. This timeframe has shortened a lot in the last couple of years.

The other thing, as we discussed earlier, is the huge volatility, particularly to the downside. That is obviously not helpful at all.

TCMR: Has the cycle of turning fiat currencies into hard assets run its course or is there significant momentum left?

MF: It still has a ways to go. With the current uncertainties in the financial markets, the European debt crisis and the risk aversion that has come back the last couple of months; the strength of the U.S. dollar has basically stopped the process. I assume this will be only temporary, because the U.S. dollar is a fiat currency itself and it will take its course.

TCMR: Are you sitting with a large cash position right now?

MF: Yes, for the time being, we have a larger cash position than usual.

TCMR: What sort of opportunities are you seeking in the rare earth metals space?

MF: We are seeking companies that have projects or products that fit in with what we see as future developments or trends; companies we believe in and that offer a certain value given where they are priced by the market. Even if a company fell off a lot, if we see that there is a floor given its cash position or the valuation of its resource in the ground, we see it as an opportunity.

TCMR: What are some major trends in the sector?

MF: We see, for instance, a transition in the Chinese resource space. We believe that given the more strict regulations, there is a trend toward lower outputs from China. That is a trend that will last.

We also are looking at the battery market, where we see a big jump for the resources linked to the production of these batteries.

TCMR: More and more, resource companies listed on the TSX and TSX Venture, are now dual listed on the DAX, the Frankfurt Exchange. It is becoming popular for junior mining companies to conduct European road shows to raise capital in London, Frankfurt and Zurich. Why is this happening now? Are these juniors just learning that investors have strong appetites for resource plays?

MF: I have been doing this now for 15 years in the resource space; there were always companies visiting here, although obviously not as many as today. In general, I think the fight for capital has increased a lot. Companies are engaging marketing people; they have investor relations managers. European financial centers are places of interest to these companies. The third driver is the commodity prices themselves, which have been very good in recent years.

TCMR: How much of the $150 million fund that you run is allocated to resource plays?

MF: It probably is around 15% allocated to resource plays, so quite a lot.

TCMR: And which commodities are represented in that 15%?

MF: We have a number of gold stocks in our portfolio and some copper. We also have American Manganese Inc. (AMY:TSX.V; AMYZ:OTCPK; 2AM:FSE). I also like lithium a lot as a resource.

TCMR: Why did you choose American Manganese?

MF: We believe this is quite a unique project, located in Arizona. It is a proven resource that was widely used during the Second World War. Given that Chinese output of manganese is going to decline, there is a good chance that American Manganese can take over some of that market share. We are pretty close to the company and are well informed. We believe management does a good job and the infrastructure looks very easy to access. These are the main reasons we believe in this story.

TCMR: Worldwide demand for electrolytic manganese, which is what American Manganese is slated to produce from its Artillery Peak Project in Mohave County, Arizona, is going to double during the next decade. Is that reason enough to own that company?

MF: No, I do not think so. Obviously, that is of great importance. But, even if the growth is not that big, I believe the low-cost structure of American Manganese's project can easily compete with Chinese producers and deliver its electrolytic manganese to American steel producers.

TCMR: Are there other resource plays you would like to tell us about today?

MF: One that we have just started to get involved in is Talison Lithium Ltd. (TLH:TSX). It is the largest producer of lithium. The company has one project in Australia already in production and another one in Chile. Our interest here goes along with the trend of battery-powered cars, which are on their way now and will last for many, many years to come.

TCMR: How did you learn about Talison and what is the catalyst for taking a position?

MF: I first got interested in the battery field through a company called Polypore, which actually transforms the lithium into the form needed to produce these batteries. Polypore is a great success story.

I dug a little further to see where the lithium was coming from and found Talison. Talison is not diversified, is already in production and has very good partners in Japan to buy its lithium.

TCMR: Is there another metal or rare earth element (REE) that you see as part of a demand trend over the next 10 years?

MF: We got into rare earths quite early, and actually started to sell some of those positions last year. But I am still am very much looking at Neo Material Technologies (NEM:TSX). This company is not a producer; it is more like a Polypore. It transforms the rare earths into the alloys that then go on to the end-user. It is really a separation company. It is based in Canada, but its facilities are in China.

TCMR: Are you invested in any other REE plays?

MF: We have been with Talison Lithium for many, many years. It is a solid project, quite advanced now. However, issues remain about getting the metals processed and about raising capital. Avalon has a very high capital expenditure. The good thing is that it is mostly a heavy rare earth project, and we believe prices will be more sustainable in the heavy rare earths. If I were to invest again in that space, I would focus on such a project.

TCMR: We saw a pullback across the board in equity prices among the juniors throughout the latter half of 2011. The REE sector was one of the harder hit. Are you looking to take some positions in other companies as these shares languish near their all-time lows?

MF: One has to be really careful; there are probably a bunch of projects out there that will never be realized. It is important to get to know the projects and the management very well. Investors need to feel very comfortable nowadays to really get involved in such companies. So, I believe I would rather increase my position in Neo Material or Avalon.

TCMR: You are right; it is best to look at a company's fundamentals, at its management team and its track record. What is your forecast for junior resource plays going into 2012?

MF: I believe 2012 will be a pretty OK year for the world economy and for commodities. The European debt crisis will probably be prominent in the first half of the year, given the huge need for financing. If European countries are able to get all the money they need, I think the market will normalize and the focus will go back to fundamentals.

I believe the resource projects all look pretty good. They will all stand and fall with the risk aversion that characterizes financial markets. So, let's say I am partly optimistic.

TCMR: Marcel, thank you for your time and your insights.

Marcel Fuhrer, partner, is responsible for the technical portfolio management and the strategic analyses at Bamert & Partner. After training at the SUISSECredit Suisse Group, he acquired further experience as a securities trader at an asset management company in Zurich, followed by a 15-year period as portfolio manager with Dexia Privatebank (Switzerland). Fuhrer acted also as a member of Dexia's Investment Committee. He has a diploma degree as a Chartered European Financial Analyst.

Source: Brian Sylvester 

DISCLOSURE:
1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: American Manganese and Talison Lithium. Streetwise Reports does not accept stock in exchange for services.
3) Marcel Fuhrer: I personally and/or my family own shares of the following companies mentioned in this interview: American Manganese Inc. and Avalon Rare Metals. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story.

Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

China's tight grip on rare earth elements supply may loosen as other deposits around the world come to fruition in 2012. In this exclusive interview with The Critical Metals Report, Jon Hykawy, head of global research with investment bank Byron Capital Markets, discusses the supply and demand fundamentals that are driving his predictions for the New Year.

The Critical Metals Report: Many analysts, including you, expected a shortage of heavy rare earths (HREES), especially dysprosium, in the medium term. You no longer believe that's true. What changed your outlook?

Jon Hykawy: Dysprosium is used to increase the temperature range in which rare earth magnets can remain active. In high-power applications, dysprosium is used to make a motor that will be useful across a much broader range of climatic conditions and power outputs. Demand is going to be reduced to some extent by new engineering developments in the automotive and wind industries.

On the flipside, we were surprised by the announcements from Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) regarding the simplicity of the metallurgy and the low-cost nature of its deposit. There are also as many as four deposits outside of China—in Africa, former Soviet states and in North America—that appear to be similar to the clay deposits that the Chinese leach to produce their HREE supply. Together, these could provide a sufficient supply of dysprosium, and we do not see other HREEs being in short supply beyond 2014.

We expected to find these clay deposits outside of China. There is no reason why they should be confined to China. The fact that four of these deposits have already been tentatively identified suggests that an awful lot more will be found as we look harder.

Tantalus Rare Earths AG (TAE:Fkft), for instance, has a deposit in Madagascar located in old volcanic calderas. It's a large deposit in its early days, and one Chinese state-owned enterprise has confirmed that it is analogous to Chinese ionic clays.

TCMR: You recently revised your price deck in October. In that new price deck, many of your long-term prices for rare earth elements (REEs) witnessed a decline, but many of your near-term prices witnessed increases. Is this a byproduct of the global economic situation, or is there more to it?

JH: It's a little more complex than that. All of our price decks, whether they reflect long- or short-term projections, are mediated by basic rules of economics. The fact that there is a slightly weaker economy now didn't really have any impact on our price deck as we move toward 2020. The supply situation that we envision has a much greater impact.

There will continue to be a very high availability of some of the light rare earths (LREEs) like lanthanum and cerium, bordering on dramatic oversupply. There could be as much as double what the world really needs in available capacity. The heavies coming into reasonable supply will push the long-term prices of those rare earths down. They'll still remain near the top of their historical ranges, but they certainly won't dramatically exceed those ranges.

The long-term prices we are projecting for some of the core magnet materials, like neodymium and praseodymium, actually rose because demand is being driven largely by the price that the wind industry is willing to pay. That break-even price for the wind industry is somewhere between about $80–90/kilogram (kg) of neodymium.

TCMR: What did you find most shocking in those price revisions?

JH: The one thing I had always thought that I would see is neodymium prices trending over time into the historical range and settling at around $40–50/kg.

A three-megawatt turbine can require two tons (t) of magnets. Companies can't market hundreds of these turbines without being very certain of the magnet supply. It will be necessary for the wind industry and rare earth companies to sign supply agreements that make availability concrete.

If there are supply agreements reached, our assumptions about $40–50 neodymium are shot to pieces. We forecast that neodymium prices could be in the $85–90 range towards 2020. Between our lowering some of the heavy rare earths prices and our raising of neodymium prices, that has a dramatic impact on the net present values (NPVs) of some of the companies in the space.

TCMR: You make the case that lower prices for REEs are ultimately good for juniors that are years away from production because high prices for REEs often mean that end users work even harder to find substitutes, which you define as demand destruction. Tell us a little bit about that.

JH: There's a saying in the commodities: "The best cure for high prices is high prices." There's not a single example in economic history where higher prices led to people wanting to buy more of something. It always drives the consumption down. It's happened in just about every one of the rare earths to date, particularly in some of the light rare earths because they've been the most affected by quotas from the Chinese and the resulting price increases.

For example, lanthanum is a decent catalytic material largely because it's been historically cheap. When lanthanum oxides are selling below $5/kg, companies use a lot of it because, for the money, it's the best you can find. It's been used in many different areas from automotive catalytic converters to fluid catalytic cracking catalysts that turn heavy oils into reasonable quantities of gasoline and diesel.

One of the companies that leads that space is W.R. Grace & Co. (GRA:NYSE), along with BASF Corp. (XETRA:EUR53.17) and the largest producer in North America, Albemarle (ALB:NYSE). Grace & Co. management said in a conference call recently that the company had moved away from using lanthanum in its catalysts for the petroleum industry and had moved back to formulations that contain almost no rare earths. The reason it was transitioning its customers to this product as quickly as possible was because it was a much higher margin product at the prices that it was paying for lanthanum at the time, which were quite high.

The good news from the point of view of the rare earths industry is that as prices come back down to something more reasonable and supply becomes more reliable, especially outside of China, there will be no reason for W.R. Grace and others not to move back toward formulations that contain lanthanum.

We've seen neodymium demand and prices decreasing as well. A good example is Toyota. Toyota uses rare earth magnets in the motors of its Priuses, but it has made the decision recently that its Rav 4 Electric will be built using induction motors that don't contain rare earths in a drive train that's been co-designed by Tesla. We believe the decision is less related to the price of the rare earths than the supply reliability. It's hard to rely on a material that has an uncertain delivery schedule.

TCMR: Companies are circumventing the rare earths to avoid not just pricing spikes, but also supply unpredictability?

JH: Absolutely. They are designing them out entirely. However, Toyota is working with Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) and recently said through Toyota Tsusho America Inc. that it's negotiating a joint venture with Matamec. It is working very hard to guarantee the availability of rare earths to its supply chain. Do we expect it to move back toward the use of motors containing rare earths? Absolutely.

TCMR: Why did Toyota choose Matamec, which is a relatively new player in the space, over other more advanced Canadian REEs plays?

JH: We believe that the primary reason is the quality of Matamec's deposit and the simplicity and inexpensive nature of its metallurgy. Similar deposits have required very large quantities of high-concentration acid to dissolve the rare earths and to crack the eudialyte that was contained in these deposits and allow for the extraction of the rare earths. Matamec doesn't have that issue.

Toyota Tsusho established the value of its 49% stake in Matamec in November. Toyota will be responsible for financing the entire Kipawa project in southwest Quebec. Matamec will then pay back its 51% portion of that in a manner to be determined over time. That is a huge plus for the company because it pushes a $180 million (M) capital expenditure off into the future. That's always very positive for NPV.

TCMR: Especially in the current market.

JH: Exactly. It also reduces the risk of the project considerably because a very large Japanese company will bring the required debt and equity to the table and be paid back out of cash flows in the future.

TCMR: What's your 12-month target on Matamec now?

JH: It's $0.95.

TCMR: In August, Frontier Rare Earths Ltd. (FRO:TSX) said an offtake agreement with Korea Resources Corp. (KORES) for the rights to buy up to 40% of rare earth production from the Zandkopsdrift mine in South Africa. Have the terms of offtake agreements become more favorable for larger end-users since the KORES agreement?

JH: No, the terms seem to still be largely market driven. The surprise for me, given the discussions of offtakes that are going on, is that there really has never been any willingness on the part of the large end users to contemplate paying a premium above market for guaranteed supply. In essence, they're coming in and they're providing financing and expertise, and that is buying them the right of first refusal on large quantities of material. That seems to be acceptable to the more-advanced juniors in the space. Juniors are taking the idea to heart that they need to be in production as rapidly as possible with an established partner and are forming the offtake agreements that they believe they need to make that happen.

TCMR: Is there one company that has what we might call the sweetest offtake agreement?

JH: Of the offtakes that are roughly finalized, the most favorable to the junior involved is the Frontier-KORES agreement. A good chunk of the value of the Zandkopsdrift project and Frontier stake that may be acquired will be established by NI 43-101 studies. Feasibility studies tend to overvalue the project to some extent. Frontier has done itself a service by keeping value within the company itself.

TCMR: What's your target on Frontier?

JH: We have a $3.25 target on Frontier.

TCMR: Great Western Minerals is Byron Capital Markets' top pick in the REE space. The firm recently participated in a financing for the company. Does that limit your objectivity on that name?

JH: That's a fun question, but no. We make our picks and do the work on a fundamental basis irrespective of our involvement with a company.

For example, I had a Buy recommendation on Molycorp Inc. (MCP:NYSE) when it did its initial public offering. However, I transitioned to a Sell when I felt the value of Molycorp had gone too high. Now that things have fallen off, we've transitioned back to a Buy recommendation because there's value there.

There is no direct drive between what I do on the research side and what our bankers do. If my clients believe that my objectivity has been spoiled and that I'm touting deals for the sake of pushing some revenue through the door, we quickly would have no clients at all.

We participated in the Great Western deal because Great Western is our top pick in the space, because we do believe there's a great deal of value there and because we would be happy to have our clients own a stock where we are fairly certain that the returns are not going to embarrass us.

TCMR: In a Dec. 1 research report on Great Western, you noted that the company's latest round of financing was not sufficient to complete mine construction and required processing plants. However, you expect additional non-dilutive financing. What form will that financing likely take?

JH: There are two possibilities. GWG's prospective partner, Aichi Steel of the Toyota Group, may provide financing in the form of debt. There's also the prospect for non-dilutive financing in the form of offtake agreements—cash payments up front for guaranteed supplies of material and even perhaps material at a discount later.

TCMR: Who are the likely players to come forward for those agreements?

JH: It could be an entity like Toyota Tsusho that will take the material and sell it within the Toyota group and to outside entities. It could be a group like Albemarle or a BASF, which needs lanthanum and cerium for its catalytic materials, but have been buying those materials from Ganzhou Qiandong Rare Earth Group Co. Ltd. (GQD) (which GWG has partnered with on a solvent extraction joint venture). Knowing that the quality of material out of GWG will be the quality of material that GQD has always produced, there may be a number of offtake partners emerging soon.

TCMR: You recently raised your 12-month target price on Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A) to $18.75 from $17. What informed that decision?

JH: Our price deck was the sole motivation. Understand that Rare Element has a "light" deposit so it produces a fairly large quantity of lanthanum and cerium. We have decreased our long-term prices on lanthanum and cerium because of what we believe is building supply. But Rare Element has a deposit that is probably one of the better, if not the best, sources of neodymium and other magnet materials in the world. As a result of us raising our long-term prices on neodymium, the NPV of the company came up substantially. Rare Element is being ignored to some extent by the rare earths market and investors, but that probably won't persist. Someone's going to notice relatively soon that this is a very cheap way to secure a long-term magnet materials supply.

TCMR: Is there an update on its Bear Lodge project in Wyoming?

JH: There will be updates coming. It certainly completed drilling and we're waiting on some drill results and resource updates shortly.

TCMR: Your price deck changes led to you halving your 12-month target on Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) to $0.65 from $1.30. Nonetheless, you still have a Speculative Buy rating on the junior. Tell us about that dramatic revision.

JH: That was motivated by the fall in our HREE prices and the belief that dysprosium and terbium will potentially be in oversupply in the future because of new types of deposits and technological changes.

Ucore wasn't the only company that suffered that change. In fact, our Matamec price at the time was halved as well. We still think that Ucore has the right address. It is an HREE deposit in the U.S. We think the U.S., specifically the Department of Defense, has a very vested interest in making sure that there is a heavy rare earths supply within its borders. State and federal governments are very supportive of this project. It's a straightforward project in the sense that access is good, capital expenditures should remain reasonable and it's more than economical, even with our long-term price deck.

TCMR: What themes do you expect will dominate the REE space in 2012?

JH: There's an interesting beginning of the year shaping up. Chinese quotas will be announced in the early part of 2012. We don't expect dramatic changes in the supply. If anything, the quotas will likely be ratcheted down, but the driving argument there will be that we have not used all of the 2011 quotas. In fact, there still remains substantial export quota for use in 2011. We might even see the export quotas on lanthanum and cerium rise to some extent to try to bring those prices back into a more reasonable range and encourage their use.

The rare earth industry will build up outside of China in 2012. I expect the re-establishment of mining operations in South Africa at Steenkampskraal and the startup of operations at Molycorp. Hopefully, there will be the eminent approval of the Malaysian facility for Lynas Corp. Ltd (LYC:ASX) early in 2012. I think it's going to be a very interesting year.

TCMR: Fascinating. Thanks, Jon.

Jon Hykawy is currently with the research team at Byron Capital Markets, with a specialized focus in the lithium and clean technology/alternative energy industries. Jon holds both a Ph.D. in physics and an MBA from Queen's University and has been working in capital markets as a clean technologies/alternative energy analyst for the last four years. He began his career in the investment industry in 2000, originally working as a technology analyst. His current area of focus is the lithium sector, ranging from availability and production to lithium battery technology. He has extensive experience in the solar, wind and battery industries, conducting significant research in the areas of rechargeable batteries—ranging from rechargeable alkaline to lithium-ion to flow batteries.

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DISCLOSURE:
1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or her family own shares of the following companies mentioned in this interview: None.2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Frontier Rare Earths Ltd., Matamec Explorations Inc., Rare Element Resources Ltd., Ucore Rare Metals Inc. Streetwise Reports does not accept stock in exchange for services.
3) Jon Hykawy: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. Jon Hykawy was not paid by Streetwise for participating in this story.

Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

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Source: Brian Sylvester 

The Critical Metals Report: In your Alfidi Capital investment research blog, you talked about the wild ride rare earth element (REE) prices had in 2010, as well their the general drop this year. What are you predicting for 2012?

Anthony Alfidi: I believe rare earth elements prices will continue to fall. They had a run-up until this summer, primarily based on Chinese export restrictions and the enthusiasm that some speculators had for the sector. But those conditions are both absent now. I believe that economic fundamentals are weakening around the world and the resulting credit crunch will hurt trade, finance and manufacturing. Demand for rare earth elements is derived from demand for finished goods. Therefore, it's very much dependent on the overall health of the manufacturing sector. I expect prices for rare earth elements to fall further in 2012.

TCMR: China is both enforcing export quotas and moving to transition from REE producer to REE importer. How will this affect the market, and how much credence to you give to China's policy goals in this sector?

AA: I believe China will not be able to enforce additional export quotas to support rare earth prices. The coming global market slowdown will tie China's hands policy-wise. The country needs to keep exports up because it still has a primarily export-driven growth policy. Many analysts were predicting stronger economic growth up until late this summer, when China announced its most recent export quota targets.

TCMR: So you expect the sector to be based on free-market, supply-and-demand principles?

AA: Yes, absolutely. And, my outlook reflects weakness in the global economy, which is beyond Chinese influence.

TCMR: Some rare earths are much rarer and have significant market demand. Do you expect better performance in 2012 for these metals, and which REEs are at the top of your list?

AA: If I had to pick one, it would be dysprosium, one of the heavy rare earth elements. Demand for dysprosium will remain fairly healthy as long as the market for wind turbines remains healthy and is supported by government subsidies and stimulus spending.

TCMR: How is dysprosium used in wind turbines?

AA: It's used in the generator magnets and, when combined with neodymium, it helps neodymium retain its magnetism at high temperatures.

TCMR: You spoke at the Hard Assets Rare Earth Investment Summit in San Francisco on November 29th along with John Thomas, Jeb Handwerger and Mickey Fulp. Was there a consensus opinion for industry prospects?

AA: I'm not sure if there was a consensus from the panel. The other panelists seemed to think that rare earth elements had a healthy future of growth due to constrained supply and a lack of substitution, technology-wise. I'm not nearly as bullish as John and Jeb were. I think it has a future out to about 2016. By then, demand weakness due to the renewed recession in the developed world is going to run headlong into new supply coming online. Also, technology innovations by manufacturers could reduce demand for rare earths.

So, putting it all together, all those factors will put a long-term price ceiling on the rare earth elements. Only the lowest-cost producers are going to survive. In the long-term, REE substitutes will eventually become available, thanks to some long-overdue research and current development underway.

TCMR: The big play is the mining stocks, which have offered more opportunity than the price of the metals themselves. Some analysts anticipate major gains as projects come online. Furthermore, demand for electric vehicles is expected to be the governing factor in REE markets. What's your take?

AA: I think electric vehicles will play an enormous role. Lanthanum is important because it's useful in batteries, but not nearly as powerful as lithium-ion batteries. Lithium-ion batteries are going to be used in the 2012 Honda Civic hybrid, the Nissan Leaf and the Chevy Volt. That's an important distinction because the range of a hybrid or electric vehicle is a significant issue for buyers, due to the lack of charging stations that will limit that range. So, lithium-ion battery technology has a competitive advantage over nickel-metal hydrides with lanthanum.

TCMR: In your November 28th post, you wrote that miners that were previously digging for uranium, cobalt, gold and other prosaic metals were rebranding themselves as rare earth explorers in order to gain cache from nervous investors. Then you warned that finding trace amounts of rare earth elements in a large ore body doesn't make an exploration company viable as a rare earth producer. How can investors separate the rare earth posers from the actual junior miners that have a reasonable chance of making money in this market?

AA: As I said at the Hard Assets Panel, I'd like to see operating geologists as CEOs and senior managers because geologists know how to pull rocks out of the earth's crust and turn them into metals. Venture capitalists in Silicon Valley call that betting on the jockey, not the horse. I would apply the same methodology to the mining sector. I would also add that in addition to the quality of management, I would look for the logistics trifecta. Besides an economic ore body, water, power and roads are what make a project economically viable. A water source is needed for a mine to use heap leaching, which is the predominate method for ore recovery today. A power source is needed to run the operations and good road access connects the mine to national infrastructure.

Most junior mining companies experience net losses until they go into full production. They're spending money in startup mode and management has to know the burn rate. If management tells you the burn rate is x and I do my own calculations based on publicly available financial statements that tell me something different, that tells me that management doesn't understand their own cost of exploration and production and they're going to have problems down the road.

Evaluating projects on these criteria helps me quickly eliminate companies that have poor prospects.

It's also important to remember that some concepts that apply to judging larger resource companies don't work very well in evaluating rare earth element producers. That's because there are a much smaller number of mines operating worldwide and those that are, primarily in China for example, are not necessarily financially transparent.

TCMR: What are some individual investment opportunities you'd like to comment on?

AA: Sure. I've looked at Quest Rare Minerals Ltd. (QRM:TSX.V; QRM:NYSE.A) and actually had a blog post about them a couple of weeks ago. The deposit at Strange Lake looks like it has some really high-quality ore. The problem I have with Quest is that this property has never been viable because it has always lacked a road network connecting it to the outside world. But Quest has a plan to build a 75-mile road through the Québec wilderness to Voisey Bay at a cost of $135M. If the Québec Government is willing to subsidize the cost of that road then that will certainly make Quest's prospects that much more viable and the company won't have to raise as much money.

TCMR: What else looks interesting?

AA: I'm fairly optimistic about Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A). All of its executives and directors have mining backgrounds, not just the CEO, who is a geologist. That's really good. The results of its drilling program this year are very encouraging and it does have an NI 43-101 report. Its Bear Lodge Property has the logistics trifecta, big bonus points in my book. And, I also think that its adaptation of gravel washing techniques to the type of ore it found on site is truly outside-the-box thinking. That demonstrates why it's beneficial to have a CEO who is a geologist running the company. However, I do have some caveats about RES. I think its most expensive deposits, according to what it publishes on its website, are cerium and lanthanum. Cerium suffered a big price collapse this year, going from $170 per kilogram (kg) to about $45/kg. As I already noted, automakers are looking at lithium-ion as an alternative to lanthanum in hybrid batteries. So, maybe demand for lanthanum won't be as strong as the company is hoping.

TCMR: What's your appraisal of where the company is in the development process?

AA: It looks like the company has one more drill program to go next year. If the results next year are just as encouraging, that should be the last exploratory program it needs before it can estimate what it needs for full production. I think it will be ready to produce in a couple of years. It's much more mature than any of the other comparable companies I saw at the Hard Assets Summit.

TCMR: Any others you like?

AA: Dacha Strategic Metals Inc. (DSM:TSX.V; DCHAF:OTCQX) is an interesting company. It has a unique business model. The way it stockpiles metals means it functions more like an ETF than an operating company. The company has done a very smart thing in locating its three warehouses in Korea, Singapore and Shanghai, close to manufacturers who will need the inputs. It's good that its inventory is primarily heavy rare earths (HREEs), which are the more valuable ones. I would say the value of its metals inventory would have to be higher than its market capitalization for Dacha to be a buying opportunity. So, tracking this stock, the question for investors then becomes whether they're willing to track the weekly report of metal inventories on Dacha's website. The company is unique. It stands out as a business model.

TCMR: Any other ones that you think people ought to consider for some sort of positive market reaction next year?

AA: I'm doing my homework on Pele Mountain Resources Inc. (GEM:TSX.V) and a couple of others that I saw at the Hard Assets Conference. So, I may have something to blog about in the next couple of weeks.

TCMR: What was the mood like at the Conference?

AA: It was as lively as ever, and the Rare Earth Summit was definitely fascinating. Attendees were primarily individual and accredited investors. I would've liked to see more sell side analysts from investment banks. I think the rare earth metal sector is tracked mainly by Canadian investment banks. This sector needs publicity both from a bull standpoint, meaning people who want to get into the sector and a bear standpoint, meaning people like me who are cautious. We need more debate, analysis and transparency of this sector. The Rare Earth Summit was a step in the right direction.

TCMR: Do you have any parting thoughts or tips for investors that are thinking of getting into the critical metals space?

AA: I think investors should read articles published by leading analysts such as Jack Lifton, Mickey Fulp and Gareth Hatch. They were all present at the Conference and the Rare Earth Summit. These are independent analysts who've been evaluating mining companies their entire careers. Investors should also develop a simple checklist similar to mine, which they can use to run through many companies to find the ones that have the best prospects for success. They should also realize that rare earth prices are extremely volatile, partly due to political decisions outside of the marketplace, like China's export policies. Finally, I also think investors should be skeptical of so-called bonanza mother lode stories from places that have had very little exploration or development.

Afghanistan jumps right out at me. The U.S. Government has publicized some studies claiming that there are trillions of dollars worth of metals in Afghanistan. That may be true, but going back to the logistics trifecta, where are the roads in Afghanistan to take all this stuff out? When you look at emerging markets or markets that have never emerged, like Afghanistan or other places in Africa that have had questionable political histories, you have to really question any company that claims that it can operate successfully in those areas. I would take that with a big grain of salt.

TCMR: Thanks for your interesting, useful input. We'll look forward to talking to you again in 2012.

AA: Great.

Anthony Alfidi is the founder and CEO of Alfidi Capital, an investment research firm in San Francisco, California. Alfidi Capital publishes free investment research with honesty and humor. Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame and an MBA in finance from the University of San Francisco. He is a life member of Beta Gamma Sigma, an academic honors society for business majors. He has been a private investor since the 1990s.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

Source: Zig Lambo

DISCLOSURE:
1) Zig Lambo of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Quest Rare Minerals Ltd., Dacha Strategic Minerals Inc. and Rare Element Resources Ltd. Streetwise Reports does not accept stock in exchange for services.
3) Anthony Alfidi: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. Anthony Alfidi was not paid by Streetwise for participating in this story.

Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The Critical Metals Report: Luisa, in a recent interview, you called the rare earth space "the modern Bronze Age played in the capital markets." Could you expand on that?

Luisa Moreno: The Bronze Age was the first period of human civilization in which metal was used. This rare earth period is similar in that investors are learning about new elements and their applications, which are fairly critical for our modern lifestyle. At the same time, investors have the opportunity to create profits in the space. The analogy is an exaggeration, but we are discovering these new elements.

TCMR: You published a report called "Rare Earths Economic War." Is there really a war in the rare earth space? If so, who's winning?

LM: There is an economic war over the rare earths, with China on one side and other industrialized nations on the other—Japan, the United States and the E.U. China is probably winning. It has decreased exports in the last few years and increased protection. It has attracted a great deal of the downstream business and it is positioning itself well. At this point, it produces most of the world's rare earths, and prices are at record highs. Japan and the other countries have been left with few options, and those options are more expensive, such as substitution, recycling and adapting production lines to use less efficient materials.

However, the capital and equity markets have been depressed for various global economic reasons. If the global economy recovers, stocks should go up—and hopefully investors will gain from that as well, because rare earths are still needed and we need to develop these projects.

TCMR: You have said that China may gradually phase out rare earth elements (REE) exportation and keep them for itself, to attract businesses and because mining them is a toxic business. So why doesn't China get behind some REE projects, to get one into production and get the world off its back?

LM: China is concerned with its own demand, and my forecast indicates it will likely become a net importer. But to answer your question, China tried to buy Molycorp Inc.'s (MCP:NYSE) Mountain Pass project as well as the Lynas Corp. (LYC:ASX) project. It wasn't able to, due to lack of support from local governments. China (and by China, I mean some individual companies and perhaps its government) would like to control most of the REEs and be able to supply the rest of the world, but the rest of the world is not ready to be dependent on the nation for such critical elements.

TCMR: A post on raremetalblog.com talks about China's growing relationship with Wal-Mart, the world's biggest retail company, and how it is trying to get Wal-Mart suppliers to be more sustainable. Another post talks about growing demand for LED light bulbs. They are expensive, but they more than pay for themselves in the long run. These items mean a greatly increased demand for REEs—so are we underestimating future demand?

LM: We may be. Chinese demand is better defined because China has the REEs and it can produce and consume them internally. It is different, however, in Japan, which has to decide now if it is going to develop and build production lines that are dependent on REEs. If it doesn't feel comfortable with that, it might decide to use different elements instead of making products using these elements; it might choose to produce hybrid cars with fewer REEs.

At this point, there is great potential for REEs—but at the same time, if the supply is uncertain, some industrial nations might come up with a plan B. Assuming the global economy does well, there is great potential usage and demand growth, not just in China, but also in other nations' energy strategies. So many risks are attached to supply that it is hard to accurately predict what the real demand will be.

TCMR: Does Japan have any leverage with China that can stabilize the flow of rare earths to its manufacturers?

LM: Japan might have some leverage, but not enough to change Chinese policies. You might remember the fishing dispute a few months ago; China stopped exporting to Japan until it felt comfortable the dispute was resolved. You could say Japan has almost no leverage—and that is true of the U.S. and EU as well. Japan has been talking to China for a long time, and the World Trade Organization is aware of the struggles, but no one has been able to persuade China to change its policies.

TCMR: China has attempted to curb illegal and small-scale rare earths mining. Are the Japanese sourcing the REEs through these kinds of means now? Do you think Japan will resort to the gray market?

LM: That is not something its government would disclose or announce, but I think Japan is trying to purchase the REEs through other nations—and it is possible that Vietnam, Thailand and neighboring countries are buying illegal rare earths. But based on its culture and what I have been told by Japanese traders and businessmen, Japan will avoid buying illegal rare earths directly from China. It would rather do business with the surrounding nations.

TCMR: Your report says the biggest obstacle to developing deposits is metallurgy, or the ability to recover and process the REEs. Is it true that no two REE deposits are identical, and therefore there is no standard process for extracting and refining REE-bearing minerals?

LM: Yes; no two deposits are identical, so the process will differ from project to project. The refining process of each element is performed using solvent extraction or ion exchange processes that are well known, but the balance of chemicals used and the design of the processes depend on the composition of the feedstock REE concentrates. It is definitely not one size fits all, so companies have to determine how to economically extract their REEs, which is complicated and expensive. My understanding is that solvent extraction is commonly used for the lights, while companies with high percentages of heavies may have to use the ion exchange process as well, and that tends to be equally expensive. So it is an expensive endeavor for a company that wants to extract anywhere from six to 10 elements. That is a lot of elements.

TCMR: We should also consider production of concentrates versus oxides. It is easier to produce concentrates, but concentrates reap only about 20% of the value oxides offer, correct?

LM: Potentially, yes. It depends on the percentage of the most expensive elements. For example, if the REE distribution in a company's concentrate has high percentages of dysprosium and terbium and other expensive elements, then that could be a motivation for them to separate and refine the elements and realize the individual values. Those with more of the lights will realize less value for the individual refined elements. Some concentrates have more of the high-priced elements than others, but I'm not sure if a company can realize that price; the market for the concentrate is not very well known outside of China.

TCMR: Many companies are talking about producing oxides instead of concentrates, in hopes the market will attribute greater value to their projects, share prices having dropped from where they were in summer. Do you have any comments on that?

LM: Either way, companies will always realize less of a price if they sell it as a concentrate instead of as individual elements. And yet, from concentrate to the individual elements, a lot of capex is needed—in some cases, it is justified, depending on the prices, but in others, it might not be. Meanwhile, time will tell where the prices of these elements will end up, and that will give a much better picture of these projects' economics.

TCMR: What are the top four or five projects that are most advanced in terms of being able to economically recover and process the REEs and their respective deposits?

LM: Molycorp is well positioned. Another one is Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A). Some say it is similar to Molycorp because it has high percentages of bastnaesite minerals, but the deposit is somewhat different. Again, no two deposits are identical. I had a chance to visit the lab that is performing its pilot study, and it seems Rare Elements Resources is the most advanced project at Hazen Research Labs. It's the one that is in pilot scale, so it may be fair to say that is closer to production.

Another project making significant progress is Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX ), which is working with SGS Canada on its Kipawa deposit, and in the last few months the company has disclosed detailed information about the metallurgy. It is very confident about the results, and a pilot study should happen next year. Matamec should be disclosing details of its PEA in the next couple of days; relatively speaking, it has made significant progress in communicating its project advancement to the market. Hopefully the PEA will show some positive economics.

TCMR: That is primarily because of eudialyte, the mineralization hosting the REEs?

LM: Correct.

TCMR: Is that easier to process?

LM: Not historically. Eudialyte has always been problematic because silica gel formation was an issue in the processing and recovery of REEs. But working with SGS and other private consultants, Matamec has solved that problem, according to what the company has disclosed.

TCMR: Is there news regarding a possible offtake agreement there?

LM: It has not officially been disclosed, but Matamec has attended different conferences and it appears that Japanese and other Asian interest parties have approached the company numerous times. So, my perception is that there is significant interest in the Kipawa deposit, and that could materialize in an offtake or a memorandum of understanding or something like that.

TCMR: And you have a Speculative Buy rating on Matamec with a 12-month target of $1.50? It's currently trading at about $0.26.

LM: Correct.

TCMR: Do you expect that will go lower before it goes higher?

LM: It depends on how the overall market performs. I wouldn't expect it to go much further down, especially when the company is just days away from a PEA. Between that and the potential for an offtake agreement, things look positive for the stock.

TCMR: Another company you have a spec buy on is Frontier Rare Earths Ltd. (FRO:TSX). You had a 12-month target of $9.83 in July, but now that is down to $5.90. Why the 40% drop?

LM: Right after I did my first forecast, I was surprised to see the prices growing in increments of 300% and higher, and then it all collapsed. I did not predict that behavior at all, so I had to go back and adjust. I was also expecting to hear more details about the metallurgy, but I didn't have access to those. At the same time, I continually try to understand the mineralogy and its potential challenges. All this led me to lower the recovery rates and prices, which reflected that decline.

TCMR: How does Frontier Rare Earths Ltd., with 532 thousand tons (Kt) of contained total rare earth oxides (TREO) in the indicated category and 415 Kt contained TREO in the inferred category, compare to other deposits in the space?

LM: Compared to other light deposits, it is a good size. Frontier plans to produce 20 Kt per year, and just based on the indicated resource of 22.9 million tons (Mt), it should be able to do that for 20 years. According to the company, it also has the potential to extend it further.

TCMR: The prospecting rights for Zandkopsdrift, Frontier's main project in South Africa, are held by a subsidiary called Sedex Minerals. Frontier owns 74% of that project, and a black empowerment group owns the other 26%, according to the South African ownership laws. Does that hurt Frontier, not owning the project outright?

LM: A few investors are not comfortable with that, and those are investors who just don't invest in South Africa because of that policy—they don't know what the South African government's next move will be. Thus, it may hurt Frontier a little. But since that is South Africa's law, it also affects other companies operating there. For example, most platinum comes from South Africa and Russia, and there are still good investment opportunities there. So, it doesn't make a project less relevant or important. I have met James Kenny, Frontier's president and CEO. He is competent, very passionate about the project and very active. He is working hard to bring value to the project and bring partners to the table—and he has managed to bring Korea Resources Corp. (KORES) and a consortium of Korean companies in. He has been successful so far.

TCMR: Last time you spoke with The Critical Metals Report, you introduced our readers to Montero Mining and Exploration Ltd. (MON:TSX.V). Any updates on it?

LM: Montero has an established resource for the rare earths of about 5 Mt, and the company is working on expanding that. But Montero tells me that bastnaesite is the main mineral in the deposit, which is similar to the Molycorp deposit, Mountain Pass. Montero has been able to produce a mineral concentrate, and it has been really aggressive in terms of being able to get to the market first. There is hope that, by the end of next year, it will be able to sell either a concentrate or even individual oxides. That is very positive.

TCMR: Montero also increased its interest in Wigu Hill, its REEs project in Tanzania, by 10%, to 70%. Do you think the company will eventually buy it outright?

LM: If it becomes successful. That is probably the company's plan.

TCMR: One other major issue right now is financing. Investors are becoming increasingly skeptical about companies' abilities to produce returns. What companies have enough money to continue with their development plans for at least a year, and that don't need further dilution any time soon?

LM: Molycorp has been very successful in raising money. Frontier has about $50 million (M), and it only needs about $20M to finish its feasibility study by next year. Rare Element Resources is also in a very good cash position. It has about $74M in cash, and it needs a fraction of that to complete its feasibility study by the end of next year as well; it can even extend it. Hypothetically, even if there were a recession for the next two years, I think these companies would have enough cash to complete their studies. Other companies that probably have sufficient cash for a year: Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE), Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) and even Matamec. More than 12 months would probably not be possible for those three, however.

TCMR: What about the opposite? What are some companies that are looking to finance in a market that's hostile to small-cap REE companies?

LM: I did hear that Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) just raised $15M recently. The company has plans to build a concentration facility and is trying to produce as early as 2013. It will need more money as it moves from exploration into construction and to production of oxides and metals. It will be interesting to know how far the $15M will take the company and when it will need to come back to the market.

TCMR: In your report you write, "The Swedish government has declared Tasman Metals' Norra Karr deposit as a strategic resource of national interest, and a consortium of rare earth end-users in Europe are closely monitoring the progress of the project. The project has the potential to generate significant volumes of all the key major rare earths." With some of those key European players behind Norra Karr, is there any way that project can be fast-tracked?

LM: Only if there is a significant direct interest from the local government and perhaps even the Swedish government. The Europeans are generally conservative in terms of their mining policies, so they will want to ensure all the environmental studies are in place and that a mine development in the region will be done properly. So, while Sweden is eager to have the project going forward, they will probably stay cautious, avoiding extreme fast tracking because of the risk of pollution or other troubles. I hear that the European Union is interested in seeing this project develop, but I don't think the European Union has enough influence over Sweden's local government; those governments still operate independently. I think Sweden will take its time and make sure the work is done properly.

TCMR: Is metallurgy the main hurdle for fast tracking project development?

LM: Yes. Environmental studies are important and they take time, but not usually five years. The metallurgy is very important, making sure all the tests are done—and many of the tests are done by the same labs, which are testing or analyzing multiple deposits from multiple companies, and that causes delays. So metallurgy is definitely an important aspect in the timing to market.

TCMR: Any advice for investors in this space?

LM: Examine the same factors you would for any mining company: the exploration, the potential success, potential resource growth, infrastructure and exploration results—pay attention to the project's minerals, and any radioactive elements. They might have bastnaesites or monazites, or some other minerals that have been processed commercially. Understanding different minerals, the metallurgy and how they are processed is key. Management and the team are also important: experience, delivery, starting and finishing projects. These are all important aspects for consideration.

TCMR: Thank you, Luisa. It's been a pleasure.

Luisa Moreno is a senior mining and metals analyst at Jacob Securities Inc. in Toronto. 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. Moreno 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.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

DISCLOSURE:
1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Ucore Rare Metals Inc., Tasman Metals Ltd., Rare Element Resources Ltd., Matamec Explorations Inc., Frontier Rare Earths Ltd. and Montero Mining and Exploration Inc.
3) Luisa Moreno: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The Critical Metals Report: The Chinese government is now enforcing environmental standards at its rare earth element (REE) mines. Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co. Ltd., China's biggest rare earths producer, even halted production earlier this year. Yet the scarcity of these metals continues to provide China with unprecedented economic opportunity. Which side wins and for how long?

Anthony Young: For the time being, China will continue to dominate the industry, but it may become a net importer of rare earths after 2015. As it cuts back on supply, prices are likely to remain elevated for an extended period of time.

TCMR: Do you think we'll see the day that China stops producing rare earths altogether?

AY: No, that is an unlikely outcome. China likes the manufacturing and jobs associated with rare earths: high-tech applications, cars, windmills and electric bicycles. Its goal is to keep rare earths affordable within the borders of China in order to incentivize manufacturers to move within its borders. China will never completely shut down the rare earths industry, but it will look to control supply as much as possible.

TCMR: The great irony of this sector is that while mining these elements has been far from environmentally friendly, rare earths are used for "green" technology like electric cars, hybrid cars and wind turbines. Can rare earths be mined in an environmentally responsible manner?

AY: Yes, they can. Molycorp Inc.'s (MCP:NYSE) asset in Mountain Pass met all of California's requirements, which are some of the strictest environmental standards across the globe. Maintaining high environmental safety standards is more costly for companies, but they have the opportunity to make attractive long-term returns after a large initial investment given the current pricing environment.

TCMR: Why are rare earths not being mined in environmentally sustainable ways in some jurisdictions?

AY: It's a matter of making the investment. China is getting there. Rare earths can be produced through brute force, which has been China's solution in the past, but the technologies that newer companies like Molycorp and Lynas Corp. (LYC:ASX) are employing can greatly reduce the environmental impact.

TCMR: In some cases, these deposits contain radioactive elements like thorium and uranium. Can rare earth deposits with those two elements be responsibly mined?

AY: Yes. Once those elements are extracted, they don't contain the radioactive materials that are present in the waste rock. If companies deposit waste rock in the region where it is mined, it doesn't impact the radioactive footprint of the area.

For example, there is a certain amount of radioactivity at Mountain Pass. Material has been mined from Mountain Pass with no impact to the broader California-Nevada population with respect to radioactivity. As long as companies mine, mill and separate rare earths in one location, they can extract rare earths without disturbing the radioactivity.

TCMR: As the environmental concerns associated with rare earth mines become more widely known, will they become more important than financing and metallurgy?

AY: I don't believe so. Regulators are extremely aware of the issues that have occurred in China and they understand there is a radioactive element to many deposits. Companies know that they have to address these concerns up front. In this environment, a company employing environmentally detrimental practices would not fly under the radar.

TCMR: The Financial Times of London recently reported that the development of a U.S.-based stockpile of rare earths was more likely after China's Baotou Steel stopped production earlier this year. What's your take?

AY: The U.S. government is closely analyzing the feasibility and relative benefits of establishing its own stockpile. However, I expect the elements that figure in military applications would be the top priority; I don't think that it would contain a broad basket of metals.

TCMR: Will other countries follow suit?

AY: It's likely. The U.S. government is being extremely deliberate, but not extremely aggressive about this—otherwise it would have started stockpiling in 2006, when China started implementing quotas. In all likelihood, the rare earth market will loosen up a little bit as Molycorp and Lynas commence production.

It takes the U.S. government an extremely long time to put procedures in place and determine exactly what's needed, how materials will be stored, what sort of databases will be required and so on. The process has already taken so long, the tightness of these markets may have been alleviated by the time it is ready. Nevertheless, given the critical nature of these metals in defense applications, the U.S. may still want some sidelined for inventory.

TCMR: Dacha Strategic Metals Inc. (DSM:TSX.V; DCHAF:OTCQX) is a small company that stockpiles rare earths mainly for Asian manufacturers. Could Dacha's business model be negatively impacted if more countries start stockpiling rare earths?

AY: It could certainly have an impact on its business, but not necessarily a cataclysmic impact.

TCMR: In an interview with Bloomberg, you said Molycorp was the best stock in the rare earths space based on commercial production at its Mountain Pass mine slated for next year. However, most of the production will consist of the light rare earths (LREEs), which are fetching much lower prices than the heavy rare earths (HREEs).

AY: It comes down to margins and cash flow for companies. Even if rare earth prices were to come down another 50–60%, Molycorp would still have tremendous margins. It would be generating great amounts of cash flow compared to exploration companies that are developing HREE assets with no cash flow until 2016. Investors are taking on a substantial amount of risk by investing in development-stage companies compared to a company like Molycorp, which will have significant production in 2012 and be fully ramped-up in 2013. There is a certainty in its earnings power that companies developing HREEs don't have. Any number of risks could sideline a development-stage project or result in its cancellation.

TCMR: In early October, Dahlman Rose slashed its 12-month target price on Molycorp from $120 to $70 a share. Why did you revise your target?

AY: The reason for the target cut wasn't Molycorp-specific. It was an acknowledgement of what had occurred in the broader markets. There was a sharp selloff in all of the commodity stocks in August as valuations and multiples contracted. Investors essentially weren't willing to pay the same multiples for commodity stocks as they had three months earlier. From a macro-perspective, we remain extremely positive on rare earths. But given what had happened in the broader commodities sector—and across the markets in general—we adjusted that price target to something that was more realistic in the current environment.

TCMR: Molycorp, which is currently trading around $34, recently lowered its production guidance for 2011. What are your thoughts on its guidance?

AY: The reduced guidance is related to the fact that Molycorp is in the middle of an almost $900 million (M) construction project that it's building in a little over a year. It started in December 2010 and will finish in March. Given all the development underfoot, with some trucks pouring cement and others moving REEs for processing, the company downshifted and said, "Let's determine guidance we can achieve without putting our workers, who are building and processing two complete flow charts at the same time, at any risk. How can we balance production and expansion most efficiently?" In our view, this was the reason for the decreased guidance.

TCMR: There is increasing chatter about more offtake agreements forming with junior REE development companies. Are you expecting more offtake deals?

AY: Molycorp and Lynas need to sell out first. The willingness of manufacturers to enter into offtake agreements with smaller companies further from production is an indication of how tight the REE market is. If there is material from Lynas or Molycorp available, why would manufacturers wait five years for a junior producer to deliver?

TCMR: But Lynas already has an offtake agreement.

AY: Molycorp and Lynas both have offtake agreements, but they're not completely sold out. They still have some material available for sale.

There's a fear among manufacturers prompting them to lock up through offtake agreements now, especially if the market continues to tighten. It is a trend that will continue to drive development of these projects. Mining companies need to take offtake agreements to the bank when they are seeking a loan to fund construction. These small-cap companies have $200M–300M in market cap, but their projects are sometimes two to three times that amount. There's a disconnect on how those will be financed. Offtake agreements will help close that gap.

TCMR: One of the companies that is expected to sign an offtake agreement soon is Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX), a junior operating in central Quebec.

AY: Matamec has an interesting deposit. It's likely that they are in conversations because big manufacturers like to have supply from several sources. At points in time, they will leverage these companies against each other and say, "Mining company X-Y-Z is offering me these terms; can you match those?"

TCMR: You have buy ratings on Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX), Hudson Resources Inc. (HUD:TSX.V) and Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A), in addition to Molycorp. Can you talk about those names?

AY: Avalon will be a producer of HREEs dysprosium and terbium once it finishes its project in the Northwest Territories of Canada. Avalon has been doing exploration and development a little bit longer than some of the other companies out there. However, the project is a little more remote and the metallurgy is a little more difficult. Nevertheless, I still think this is a name that, if it's able to get the financing and construction going in the time frame it envisions, will have pretty tremendous cash flows.

TCMR: How does Avalon compare to Quest Rare Minerals Ltd. (QRM:TSX.V; QRM:NYSE.A), which is cheaper to develop, has a very similar grade and is closer to seafaring ports?

AY: Quest is an interesting name. When I initially started looking at REE companies a year and a half ago, Quest wasn't as far along as Avalon, so I rated it a Hold. Its chief executive, Peter Cashin, has been very aggressive in his development of Quest's project and there is recognition in the industry that it has made good progress. People like to play Quest against Avalon as if it's some sort of competition. It isn't. If you're looking for exposure to HREEs, Avalon and Quest would be the go-to names. Investors don't have to buy one or the other. They can buy both and have good odds of one or the other succeeding and making some outsize returns, possibly in both equities.

TCMR: Rare Element Resources in Wyoming has capital costs that are substantially lower than most because of its close proximity to infrastructure.

AY: Rare Earth Element's location is going to prove to be a real advantage—that and its simple metallurgy. It's a metallurgy that's been processed into REEs before, so there is off-the-shelf technology that it can obtain to make its processes work, while some of the other rare earth companies will have to do some work on the chemistry side of things to ultimately crack their ore into the various components.

TCMR: Could Hudson's location in Greenland be a setback?

AY: Investors get very nervous about any sort of deposit in Greenland. What's really attractive about Hudson is that it's right on the coast in a fairly temperate area. I visited this asset in May. It is actually relatively close to infrastructure and not too far from a former military base. We also like the fact that it has a lot of leverage to neodymium, a key magnet-making material.

TCMR: Lynas had a number of delays at its plant in Malaysia. Have you heard any updates?

AY: No. I don't have a Buy rating on Lynas because its outcome is dependent on the Malaysian government's decision. The valuation of its shares is relatively attractive, but it's uncertain when the Malaysian government will allow it to enter production.

TCMR: In an interview with CNBC, you said that you expect a rollup in the sector within a few years. Can you talk about that?

AY: As Molycorp and Lynas begin to experience cash flow from their two deposits, they will begin to pick off the attractive ore bodies with equity or cash flows from operations. Lynas has Mount Weld and another project in Africa, which it is attempting to develop despite some regulatory problems. Molycorp has the Mountain Pass project. Neither company has a clear second project to work on after its flagship project. They could very well pursue mergers and acquisitions in order to develop additional projects.

TCMR: Molycorp is not hurting for cash and juniors across the board are at some of their lowest prices of the year. Why wouldn't they just do it now?

AY: Molycorp and Lynas are both turning on a significant amount of production. Molycorp has 20,000 tons (Kt) next year and an additional 20 Kt in 2013. Lynas is bringing on 10 Kt and possibly 20 Kt in the future. The prudent step is to see how this additional supply impacts prices. If prices come down sharply, it's going to make sense to have waited because they may be able to purchase other equities at even lower prices. If the market is well supplied, equities will stay in their current range. Molycorp hasn't lost anything by waiting.

TCMR: Do you have any final thoughts?

AY: I remain extremely bullish on the rare earths sector over the next three to five years. With prices lowering for these materials, demand is going to remain extremely strong. There will be a global need for more rare earth mines beyond the two that are currently under development.

TCMR: Thanks, Anthony.

Source: Brian Sylvester

Anthony Young joined Dahlman Rose in February, 2008 as a member of the metals and mining team. He started his career in finance at Natexis Bleichroeder, before joining the metals and mining team at Bear Stearns. Prior to working in finance, he was an engineer for Hughes Electronics and AT&T. Mr. Young received his Bachelor of Science in electrical engineering from the University of California, Los Angeles. Mr. Young also has advanced degrees in electrical engineering from the University of Southern California, and in business administration from the University of Texas, Austin.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

DISCLOSURE:
1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Dacha Strategic Metals Inc., Matamec Explorations Inc., Quest Rare Minerals Ltd. and Rare Element Resources Ltd.
3) Anthony Young: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

 

Continue reading at Critical Metals Report

The Critical Metals Report: At Byron Capital, you look at different battery-related materials as well as rare commodity products. Can you give us a little overview of these lesser-known products, like vanadium and graphite?

Jonathan Lee: About 85%–90% of vanadium usage is as an alloy to increase the tensile strength of steel. It also has other alloying applications such as in titanium alloys. People are trying to commercialize its newer applications in redox batteries and lithium vanadium phosphate batteries.

TCMR: So, at this point, there isn't a big spike in vanadium demand because it's closely tied to steel production?

JL: Yes, but steel production has been increasing approximately 6% per year, so that's still a pretty healthy growth rate, higher than gross domestic product (GDP) growth. We expect continued growth in the vanadium industry as higher amounts of vanadium are produced.

TCMR: Is new technology on the horizon that calls for the use of vanadium?

JL: People are contemplating using the vanadium redox battery as a portion of power grid storage. Whether or not that takes hold is yet to be decided, but one distinct advantage is its long life, given that vanadium is on the anode and cathode side of the battery. It is a fairly unique technology, and if it could be commercialized on a larger scale it would definitely increase demand for vanadium significantly.

TCMR: Who is developing that technology and how close is it to commercialization?

JL: Well, they've done it on a couple of pilot scales operating in Japan and Europe. Some of the companies involved in vanadium redox are Prudent Energy and Cellstrom GmbH and I believe Sumitomo Corp. (8053:TKY; SSUMF:OTCPK ) is looking at it.

TCMR: Is this still in the semi-experimental stage or are they already in use?

JL: It is being used at a couple megawatts, but nothing on large scale.

TCMR: How far is it from commercialization on a larger scale?

JL: We think there is potential, but some of it comes down to government interaction with utility companies regarding energy and grid storage and how those laws and policies develop.

TCMR: Would that involve government subsidies or licensing?

JL: It comes down to a couple of things. The government is mandating that certain percentages of electricity production must be sourced from renewable energy. So it's really determining how those policies will ultimately be implemented because other technologies are competing with vanadium redox. Within the redox, zinc bromide battery and lithium-ion batteries for grid storage are competing for market share. At this point, the biggest storage form is pumped hydro. Determining the scalability of these technologies, and the price differential between peak and off-peak pricing are key concerns. A slew of different government policies will determine whether vanadium redox can actually go forward.

TCMR: What are the main sources of vanadium and who dominates the market?

JL: China has a big piece of production. Russia has a big piece of it, as well as South Africa.

TCMR: Is this somewhat of a negotiated market between supplier and user, or is there a trading market?

JL: Everything is negotiated on a contract basis. It's much like lithium. It's traded over the counter because the market is roughly 60,000–70,000 tons per annum tpa. There is no London Metal Exchange market.

TCMR: So what is it selling for these days?

JL: Roughly $26–$27/kg. vanadium.

TCMR: In about the same range as moly?

JL: More expensive than moly, but cheaper than, say, niobium.

TCMR: The last time you spoke with The Energy Report in April, you talked about several companies that were developing vanadium deposits. Those included Largo Resources Ltd. (LGO:TSX.V), which is in Brazil; and American Vanadium Corp. (AVC:TSX.V), which has a property in Nevada. Can you give us a little update on what's happened with these companies in the past six months?

JL: We have a "Strong Buy" on Largo, and a "Speculative Buy" on American Vanadium. Largo is progressing nicely at its Maracas project, where it already has a significant reserve. It's drilling right now to increase that resource. It's the highest-grade vanadium deposit in the world and even more so after magnetic separation. Right now, it's finishing its financing on the debt side for construction. It has spent some money on construction on the equity side. It's in the midst of finalizing the debt portion and getting an installation license, which is much like a construction license. It still expects to start producing in 2013 and, given that it already has a pay off-take with Glencore International (GLEN:LSX) for all of its production, we think this is a big development story that has a lot of legs in the near future. Once it finalizes that debt, it's on to construction, and it's really just about executing on the plan.

TCMR: You're calling that one a Strong Buy basically because you think it has all the right ingredients here to make it big?

JL: Yes, it has a strong management and technical team. Construction financing is about to be completed. It is also the highest-grade deposit in the world that has expansion potential. Average grade is roughly 1.3%, but with physical upgrading, it goes to about 3%. With vanadium, there is a roasting process involved. When you upgrade it to 3% by doing magnetic separation, you put less material into the kiln and reduce the operating costs. That will definitely make it a low-cost producer in the industry. We look forward to it producing vanadium in 2013.

TCMR: So what's it going to cost to get into production?

JL: The capital costs are roughly about $220M. It recently raised $115M in March through equity financing, and it's finalizing a debt financing of roughly $150M. We think it will close fairly soon. With the capital on the debt side and the equity side, it should have more than enough cash to go to production. Really it's just about execution of the plan right now. Once the debt financing comes in and Glencore is a customer, it's off to the races for them. That's why we have a Strong Buy on the company.

TCMR: It sounds like it has all the right ingredients.

JL: We also cover American Vanadium and classify it as a Speculative Buy. It's a different deposit. It's a sedimentary deposit out in Nevada. It just came out with its feasibility study less than a month ago and showed positive economics. It could potentially be another low-cost producer using a different technology—a solvent-extraction technology without any roasting or grinding. This makes the project economic. It's a simple heap-leach and solvent-extraction process.

TCMR: Like copper.

JL: Exactly—copper or gold. It is still making headway to get to production as well. Because there is less equipment needed for this project, its capital costs are in line around $100M. Obviously, that's significantly lower. It's a smaller deposit but there is potential for expansion on adjacent hills. Its main property is Gibellini Hill, but it also has claims on nearby hills that have shown the same mineralogy. It will be looking at that to expand its resource and mine life. With a low capital cost, low operating cost potential, we think American Vanadium has legs as well.

TCMR: So what would its yearly production be like compared to Largo?

JL: It's going to be producing different material. Largo is going to be producing about 5,000 tpa of ferrovanadium. So on an 80/20 basis, that's roughly 4,000 tons (t.) of vanadium contained. American Vanadium is looking to produce about 11 Mlb. of vanadium pentoxide a year. Those are the numbers that they are targeting right now. They are two different products, both containing vanadium, but one is in the form of vanadium pentoxide, and one is in the form of ferrovanadium.

TCMR: Is the pentoxide more of a chemical-type product vs. the ferrovanadium, which is more of a metal?

JL: Ferrovanadium has the iron. Typically, because it's in a magnetite, there is iron associated with that product and ferro is the iron portion of the vanadium.

TCMR: And the pentoxide is basically an oxide of vanadium—vanadium bonded to oxygen.

JL: Exactly.

TCMR: So, generally, there is ongoing growth and demand for vanadium and the big catalyst here might be a good viable battery application, which might kick the demand up stronger.

JL: Yes. We like to think of the battery applications as a free call option with strong underlying demand from the steel industry.

TCMR: Switching to the other area that you cover—hardly anyone uses pencils anymore and that's probably about the only place people have ever heard of graphite being used. But, obviously, there's a bigger market for it. Where is graphite used these days?

JL: When you felt graphite as a school kid, you noticed it was very slippery. That's just the way it's structured. It is sheets of carbon. That is useful in lubricants, which are actually a big portion of graphite use. Another big portion is refractories. Because the melting temperature of graphite is over 3,000 degrees Celsius, it can be used as a crucible in steelmaking to hold the liquid steel. Those are the main uses. It's also used in various other applications such as brake linings and in batteries. The graphite-to-lithium ratio in lithium-ion batteries is roughly 10:1. There's actually a lot more graphite in a lithium-ion battery than lithium on a mass basis.

TCMR: So, basically, increased graphite demand is going to be relatively proportional to the demand for lithium batteries.

JL: We believe so. You can use synthetic graphite, which is made from petroleum coke, but because the melting temperature is so high and you have to restructure the configuration of the carbon molecules at a higher temperature, it is a more expensive method of producing graphite.

TCMR: How big is the annual market for graphite?

JL: Right now it's about 1.1 Mt./y, and it's been growing significantly over the last couple of years with prices also increasing significantly over the past year. China owns 75% of the market, which is why graphite supply could potentially be critical. During the 1990s, China reduced prices to where other producers could not compete. So a lot of companies went out of business. Because of that, most graphite ended up being produced there. The other big areas for graphite production are Mexico and Brazil. Most of them are privately owned companies.

TCMR: So it would be considered a critical material because of the limited monopoly sourcing of the product. What does it sell for?

JL: It varies. Like all these other critical or minor metals, it's sold over the counter or on a negotiated price basis. Prices range from $800–$2,500/t. The big pricing discrepancy is due to a couple of factors. One is the size of the flakes or powder. If it's in powder form, it's less expensive relative to the larger flakes of graphite, which demand a premium. Then there are also different carbon contents. So a lower carbon-content material, which is a less pure version of graphite, will sell for a cheaper price than a 96%–97% carbon-content graphite. The pricing is variable.

TCMR: You've come out with a Speculative Buy recommendation on Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX). Can you tell us a little bit about that one and why you like it?

JL: It's an advanced development stage project that already has a large resource, enough for 40,000 t. at 20 years. What we really like about the project is its strong management team. Don Baxter is the president of the company. He previously worked at Ontario Graphite Ltd., which is nearby, and he knows that deposit and its metallurgy very well. When it was developing the project, he had a lot of say on how the metallurgy should work.

Looking at this project, the metallurgy is already known. The company did additional work this year, and it should be doing its pilot study soon, as well. This is really just proving up the process. This is a large-flake deposit. So the metallurgy right now is to crush, grind and float to remove the graphite flakes from the deposit. Sometimes when you crush it and grind it, you reduce the size of the graphite. In this case, their metallurgy maintains that large flake size. 70% of the material that's going to come out is going to be large-flake graphite. Additionally, without chemical upgrading, it's been able to achieve more than 95% graphite content. When we were talking about the pricing difference between all the different types of graphite, most of the material that Northern is going to be producing is high-carbon, large-flake graphite, which will generate a premium on a revenue basis. That's really what we like. A lot of the flow sheet risk is removed because it's been done before.

TCMR: What kind of capital costs is it looking at and how much is it going to be producing once it goes into production?

JL: Capital costs are roughly $70–$80M to produce 20,000 tpa.

TCMR: And it should be getting closer to the $2,000/t. range?

JL: On most of its material, I think it can get somewhere between $2,000–$3,000/t. That's what we like about the story.

TCMR: That sounds like a pretty attractive deal compared to a lot of other metals mining projects you look at that cost five times as much to get into production and forever to get there. Anyway, as far as competition in this business, it's pretty much China and a few smaller producers around the world?

JL: Well, Brazil has a bunch of larger private, family-owned businesses. Of 1.1 Mtpa production globally, if roughly 70% is run by China, that's 770,000 t. The balance of that is in Brazil and Mexico with some smaller operations in North Korea. There is a mine in Sri Lanka, but yes, the bulk of it really is in China.

TCMR: So Northern Graphite has a pretty good chance of establishing itself as a decent-size producer?

JL: We believe so. It has the ability to scale up if the market warrants it, as well. Its deposit is large enough for it to go from 20,000 t. to 40,000 t. if the market is there.

TCMR: That's definitely one to watch if somebody's looking for something a bit more exotic.

JL: Exactly. We're pretty high on that story as well.

TCMR: Do you have any closing thoughts that people should consider in looking at the vanadium and graphite markets?

JL: What we really think is driving the graphite market is the possible explosion of lithium-ion batteries and the use of graphite within them. Demand looks strong for the future.

TCMR: That's a positive note we can leave on. We appreciate your thoughts and your insight. Thanks for joining us today.

JL: Great. I appreciate it.

Jonathan Lee is a battery materials and technologies analyst with Byron Capital Markets in Toronto. As a member of Byron's research department, Lee's primary focus is on the battery materials sectors, which includes lithium, vanadium and cobalt.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

DISCLOSURE:
1) Zig Lambo of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: American Vanadium Corp., Largo Resources Inc. and Northern Graphite Corp.
3) Jonathan Lee: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.