Clint Cox: Digging for Opportunities in Rare Earths

The Energy Report: Clint, can you please clarify the difference between rare metals and rare earth?

Clint Cox: Rare earths are a subset of rare metals. Rare metals is the overarching definition of a bunch of these smaller-market metals — such as tantalum (Ta), niobium (Nb), rhenium (Re), gallium (Ga), germanium (Ge), and more—that are just now starting to hit their stride with the technology boom. Rare earths, however, are specifically the lanthanides from the periodic table. Look near the bottom of the periodic table from your old high school textbook. The lanthanides include everything from lanthanum (La) to lutetium (Lu) and also includes yttrium (Y). So it's 16 altogether, although promethium (Pm) is never found in nature because it's radioactive and it has such a short half-life. Those are the rare earth elements. The rare metals would include all of these rare earth elements plus all the other rare metals.

But, then, even within the rare earths there is some division and that is between the lights and the heavies.

Allanite, Hoidas Lake

TER: Does the weight differential equate to a different end user usage of light vs. heavy metals?

CC: The division is fairly arbitrary, and there are many different definitions of “light” and “heavy” used by the industry – even long-time veterans in the rare earth business disagree on where the division is between the two. But there's usually less “heavy” rare earths found in most deposits.

TER: So the heavier rare earths are found less frequently?

CC: For the most part, yes, but each site is incredibly different. There are no two sites that are alike. Some rare earth minerals have a distribution that favors the heavies, some the lights. And sometimes you'll have lights and heavies together in the same deposit, but concentrated in different minerals, but for the most part, you're either going to have a light deposit or you're going to have a heavy deposit.

Rare Earth Minerals
TER: Any input for potential investors on how to approach investing in this complex market?

CC: From an investor standpoint, when you look at rare metals and investing in a rare metals company, you have to know what market you're looking at. For example, if you're looking at tantalum, you're probably going to be looking at the capacitor market because that's one of the key uses for tantalum. If you're looking at the niobium market, you're going to be looking at alloys. Lithium, you're going to be very cognizant of what's happening in the battery industry and what direction lithium is taking there. If you're going to invest in rare earths, you have to understand 15 to 16 different markets and it's very complex.

TER: Precious metals and certain oil and gas stock are on an upswing. But there seems to be a lot of buzz about rare earth or rare metals. Why?

CC: Yes, it's really been a hot topic in the last couple of weeks. It's interesting because there are a number of companies that are rare earth companies and they've been looking for rare earths, drilling and making an effort to be part of the rare earth industry for years. But they haven't got much publicity or traction with the investor community because it's so difficult to explain and so complex. But several newsletter writers have recently recommended the rare earth industry, and several mentioned rare earth from the podium at the recent investor conference in Vancouver. That's giving it traction.

TER: It's been reported that 95% of the rare earths comes from China. What should investors be aware of as they're looking at this and are there really investment opportunities here?

CC: It's a very interesting question, because China does control 95% of the output in production, so they're a very key and important player. One of the things to keep in mind is, as an investor, there are different ways to make money in this market. I think that if you had invested in these rare earths before these recent reports came out or before the Vancouver conference, you would have done very well. Your stocks would have popped a little bit. So I think you can make money in this industry without ever producing a single kilogram of rare earths. You can make plenty of money, so that's one of the things to keep in mind is that's speculation.

If you're investing for the long term, you really want to look for companies that can get the stuff out of the ground and turn it into a concentrate and then process it or give it to a processor that'll put it into and one of the many forms to be consumed by end users. There are two different styles of investing, and I'm the latter version. I try to look for the long term, who's going to get to production and who's going to provide end users with product. In the short term, there's going to be a lot of Johnny-come-latelies who try to make money off of the fact that there's a big buzz in the rare earth industry.

As a word of caution to investors, you are competing with China. Keep in mind that approximately 50% of the rare earths that are produced come out of an iron ore mine as a byproduct up in Bayan Obo—it's in Inner Mongolia, China —and you're competing with a byproduct mine. They're getting this rare earth stuff very, very cheaply and that's where you get 50% of the rare earths, so you have to think about how you're going to compete with that cost. It's very cheap for them to compete. You have to look at the costs here and the costs are very high, very high, especially when you're doing it from a hard rock or from a mineral that's never been processed before.

TER: The sense I'm getting is that people are concerned about China's current dominance of the market. They think they're going to start doing something like increase the cost of the rare elements or force companies that make hybrids to produce their motors in China and then export them. If I were Toyota, why wouldn't I pay four times more and not be reliant on China?

CC: That's a great question. That is what's being held out as one of the key reasons why to invest outside of China. China has increased their taxes to take rare earths out and they have decreased the export quotas and they are using and consuming more rare earth within China. I don't want to mislead. Part of that is because so many companies from overseas have moved production facilities to China so that they can be guaranteed rare earths. And that's basically what China has said. If you bring your production facilities here, you will be guaranteed whatever rare earths you need for your production. And that's smart, and great for them because it creates jobs, it creates stability, it puts the ball in their court. But China has the tricky task of trying to balance the preservation their own resources while maintaining their position in the market. But remember, it is in China's best interest to grow and protect the industry on a worldwide basis.

The question is— and I think the market has not answered this yet because there are no major facilities outside China—how much premium will an end user pay for a guaranteed supply outside China? We don't know that yet and that's going to be the question. 10%, 15%, 25%? Because if it's 100%, then you've got a lot of companies that might be feasible. If it's 10% or 25%, you have to be very cautious because the market is extremely volatile and China can always put more product out there. I don't think China wants to use up all their resources and they're encouraging sources outside of China right now. In fact, two Chinese companies have bought into two Australian companies recently, so, obviously, they're watching the market outside China. But I think that's the big question—what will the premium be?

TER: These rare elements are used in military technology. As an investor, should I be looking at the government subsidizing the difference in production costs?

CC: There are a lot of uses for rare earths all over the defense industry, everything from missile guidance systems, SONAR, RADAR, to high-tech alloys. There is a realization that they need to have security of supply.

TER: Are there enough rare earth potential mine sites in North America to satisfy the U.S.' strategic needs?

CC: Absolutely, if there's no cost constraint— that's the caveat. If there was a defense need and they were willing to pay any price, then you could have plenty of production in North America. But it would be difficult at today's prices, and with the current mining restrictions. There has to be some changes in order for these rare earths to come to market, and even then it would take some time.

TER: So this gets us back, in essence, to the hype vs. reality. Everyone's hyping up the rare earth elements. But, in the end, it gets down to what's the cost of production and who's going to pay for it?

CC: It all comes down to economics. You're absolutely right. Can you get it out of the ground? I love hearing a lot of these guys talk about, hey, we've got $500 rock in the ground and that's great. But if it costs you $3,000 to take your $500 rock out, it's not very helpful. So you have to know how much it costs to produce a rare earth concentrate. Most companies have no idea. They're still working on the metallurgy and that's great; that's what they should be doing. But I think you have to be careful because a lot of companies put the hype out before they have reality and the reality is you have to know how much it's going to cost to process what you have.

Each rare earth mineral has its own percentage of rare earths, its own distribution of the elements, and its own metallurgical issues. This affects your costs and can change the economics dramatically.

There's a big difference between lights and heavies; there's a big difference between a mineral that has been processed like bastnaesite, monazite and xenotime. These things have been processed. We know that there are ways to do it vs. some of these other minerals that are being looked at that have never been processed before. We don't even know if it can be done. And if it can be done, it may be way out economically and not even feasible.

TER: How does an investor who is not a geologist know they have a company that could viably bring rare earth production into reality?

CC: That is about the scariest question right there. I've been working full-time on this for several years. All I do is focus on rare earths and I still have yet to come up with a method that's foolproof. It is so complex and I've worked with so many people in the industry to try to understand how the industry works and what it takes to get a mine to production. For the average investor I would say it's incredibly complex—and dangerous.

There are literally hundreds of questions you can ask an exploration company. What is your distribution of the elements? What percent rare earth oxide (REO) do you have? What mineral do you have? But these are just the basics, and even these answers can mislead. I haven't even learned to ask all the right questions and this is all I do. I'm still learning every week.

You're really dealing with 15 to16 different markets and the most complex metallurgy I know of all at once. Plus , the majority of production and end users are overseas. So, unless you spend time with people in the industry there's really no way to know what questions to ask. Like I said, I'm still trying to learn.

I don't think there's any way to do anything but speculate with the exception of a few companies that are actually making money in this industry that aren't junior exploration companies, but they're processors. With that exception, there are no non-speculative plays in this industry. I think it's all speculative on the junior exploration side and I don't know if anyone can dispute that. It's so complex. So, a word of caution. Be careful. Do your research. Be very, very careful.

TER: Any newsletter writers you'd recommend who know the rare earth investment world?

CC: You can meet with folks and talk with them. Find out what they know about the market because there are some guys that are writing about this market that actually understand it fairly well. There's some that don't. I'm not going to differentiate between those in public. There's always going to be speculators and people are always going to throw their money at stuff that they sometimes don't fully understand. And, like I said, I include myself in that number. David Morgan really helped me get started in this business, so I write for him several times a year. But I'm still learning, so I invite investors to do their research and question all of us.

TER: Any final comments you have for investors who are beginning to look at the rare earth area?

CC: Just be very, very careful. It's a fun industry; I love it. I find it extremely exciting. There's tons of new stuff going on all the time. Somewhere around 25% of new technologies use rare earths, so it's very exciting. No doubt about it. But be very, very careful and learn as best you can how to separate the hype from reality. I think that's the key.

You just have to learn step by step. Where did past production come from? Mountain Pass in California used to be the largest rare earth mine in the world. A private company now owns it, but they used to dominate the market. So what caused the shift? How come China took over the rare earth market? What has happened in-between and who have the players been? If you do some research on the history, it becomes very interesting.

I'll leave you with an anecdote. In 1966 Dr. Karl J. Strnat developed the samarium cobalt magnet and that changed the magnet industry and all of our lives forever. It changed the way things are done. And, of course, samarium became very much in demand. Everything was great and everything was going fine for the samarium market until 1982 when two different teams developed the neodymium iron boron magnet—then the samarium market tanked, and neodymium became the dominant new hot item in the rare earth industry and it shifted the entire industry towards where it is now. So things can happen and change this market so quickly. Everyone is focused on certain elements today, but there might be a shift three or four years from now. You don't know. So I would say that's the thing. It changes on a dime; you have to be very alert and very clear minded about how you research this stuff in trying to understand it.

Clint Cox formed The Anchor House, Inc. in 1995. He began writing about REEs several years ago, and has since immersed himself in the market. The rare earth market is now the primary focus of his work. Clint also publishes a rare earth blog (www.theanchorhouse.com) and writes periodically for The Morgan Report .