Jack Lifton: North America Doesn't Need China's Rare Earths

The Gold Report: Jack, since our first interview over a year ago, the rare earth space has received a lot of ink. You were one of the first to talk about these minor metals and their strategic importance to manufacturing and electronics. Could you give our readers a little refresher about some of these metals and their uses?

Jack Lifton: I define a rare metal by its production rate, because it doesn't matter how much of a metal there is in the earth's crust-or even how much of it is concentrated enough in accessible ore deposits to be, theoretically, recoverable. The only thing that matters is the amount of metal that is produced each year, because that's all we have available to us use now, period. That production rate depends, of course, on a combination of economics and technology.

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The cost of producing the metal from any particular source must be less than its selling price, and the technology must exist before the extraction project (mining) to produce the metal from that particular ore deposit.

The following chart singles out the rare earth metals in red (the lanthanides, plus scandium and yttrium) from all other metals and rare metals by their 2009 production rate. It also identifies the 2010 rare metals as those beginning with, and including, silver, as well as all of those produced at a rate less than that of silver in 2009.

As of today, June 16, 2010, I think the future-use trends for those rare metals critical for mass-produced, consumer-use technology must be differentiated from future-use trends for the rare metals critical for military technology. These future-use trends may be qualitatively alike. For example, they may require small, powerful, permanent magnets; but their quantitative requirements for each category-civilian and military--are different by orders of magnitude.

Forging technologies for the military, which began in World War II, created a supply chain for the rarest metals critical for military applications. But, once military demand was understood-and, thus, limited-there came into existence a surplus of metals that had never before been available to civilian scientists and engineers. This resulted in a revolution in the creation and miniaturization of technologies for mass-produced civilian (i.e., consumer, markets, etc.).

Today, the quantitative demand for rare metals by the military and civilian sectors of the economy has inverted. The civilian sector dominates the demand for rare metals critical for use in technologies; I call this subset of rare metals technology metals. For now, I'll concentrate on just those selected metals because increasing production from existing mines-or developing new ones-is so extremely capital-intensive and time-consuming, the probability of doing that declines rapidly as costs and expensive-to-fix technological issues mount. In fact, the stock market pundits like to gloss over technological impediments to increasing the supply of technology metals. And the stock market is woefully ignorant of the economic obstacles-from lack of mine profitability to increasing the production of almost any metal other than iron.

You may note from the previous chart that no tantalum was produced in 2009 even though tantalum is a critical technology metal for all electronics. This was an issue of economics and politics largely ignored by the world's stock markets.

The world's largest producer, Australia's Talison Tantalum (private company), shut down production in late 2008 because the selling price for its mine concentrates was below its costs. Unethical trading companies covered the shortfalls-demand in excess of inventory-by procuring tantalum ore concentrates from places like the Democratic Republic of the Congo where illegal mining using child, and even slave, labor is rampant. Such ores were 'baptized' as being of ethical origin or disguised as previous inventory to circumvent UN, U.S., European and Chinese laws against the use of materials of such heinous origin.

The total volume of the tantalum trade worldwide is tiny compared to any base metal, such as iron, aluminum, copper, zinc or lead; so markets have generally ignored this issue, but I think it is a major issue. There is a good opportunity here for investing in North American domestic junior tantalum opportunities, such as Commerce Resources Corp. (TSX.V:CCE; Fkft:D7H; PK SHEETS:CMRZF), because the American government is realizing that the only way to ensure the survival of its high-tech industry is to ensure there is a domestic natural-resources supply chain that begins in every instance at the mine. I use tantalum as an example to emphasize that rare earths aren't the only technology metals for which self-sufficiency is important.