A Critical Year in Review: What's Next?

Every great mining story begins from the ground up. This is as true of critical metals as it is for gold and silver. Many investors took losses by chasing the pie-in-the-sky potential every publicly listed rare earth stock seemed to promise. Since its debut 18 months ago, The Critical Metals Report has focused on the goods in the ground, striving to present valuable insights on an oft-misrepresented sector, sharing related stories as they emerged. As the year comes to a close and we prepare to extend our coverage further, we are revisiting our most popular expert interviews from 2012. Yes, it's still rough out there for miners, but when you think nothing's looking up, look down.

China's export quotas triggered the investment rush for rare earth elements (REEs). John Kaiser of Kaiser Research Online summarized the first chapter of the REE story in his no-nonsense April 24 interview, "Rare Earth Juniors Have a Five-Year Window."

John Kaiser: Historically, REE prices have been very low due to China's abundant resources and its ability to produce them very cheaply. China is aware that it could become the world's biggest polluter when its economy eclipses that of the U.S. China is very concerned about making sure it has the raw materials on hand to assure its clean-energy future. The supply restrictions China introduced a couple of years ago were part of a campaign to clean up and consolidate its high-pollution industries. Those restrictions resulted in spectacularly high REE prices for export and substantially higher prices within China. Since July 2011, the drop in demand and China's inability to control smuggling resulted in a pullback in REE prices. To some degree, I think China wants its monopoly to end. China's ambitions go far beyond squeezing a few profits out of a market it controls.

All of this was a wake-up call. Companies all over the world realized that their new technologies can no longer rely on cheap REEs from China. Toyota's deal with Matamec, which is essentially a 100% offtake agreement, is critical to Toyota's plans to continue manufacturing hybrid and electric cars over the coming decades.

What distinguishes [promising] projects is a full spectrum of rare earths from lights to heavies. China's natural rare earth abundance is skewed toward LREEs. China's bounty of HREEs are restricted to a group of rapidly depleting low grade clay deposits in southern China. While it is questionable that the world needs any more major light rare earth mines, bringing heavy rare earth supply on-stream is in the interest of everybody, including China.

The U.S. government has recently made a more meaningful investment in REE production, but the initial reaction from Washington was, some felt, belated. Michael and Chris Berry of Morning Notes explained the roots of the policy dysfunction in their Jan. 10 interview, "Solving Critical Rare Earth Metal Shortages."

Michael Berry: It's just now starting to dawn on Washington that we don't have a stockpile. We had a stockpile through World War I and World War II that was necessary to our national security. The U.S. was the biggest producer of rare earth elements in the 1970s and 1980s. But then we allowed China to undercut our prices and we shut down the Mountain Pass mine, which was one of the largest if not the largest producer of rare earths in the world. We lost not only production and access to REEs, which are critical for weapons systems, automobiles, alternative energy and a number of other applications, but we lost the processing chain that actually integrates and creates the metal, creates the alloy and magnets, and integrates it into material. China now controls these markets. There are four or five pieces of legislation pending in Washington, but it will take a decade or more to replace and rebuild these crucial supply chains.

Chris Berry: When the Soviet Union collapsed in 1991, the idea of a unipolar world came into vogue and I think the United States took its eye off the ball by selling off stockpiles of numerous metals. Security of supply was not viewed in the same light as it was during the Cold War. Labor was offshored, which minimizes costs and fattens balance sheets. But the U.S. made a strategic mistake when we offshored technology as well. Other countries around the world now have access to this intellectual property and are using it to build their own industrial and manufacturing bases. It's going to be quite a while before the United States regains its footing, but we are seeing moves recently to rectify this situation.

TCMR: How involved should the U.S. government be in the metals supply chain?

CB: There is a lot of mistrust and antipathy toward the government getting involved in what are traditionally viewed as private-sector activities. But there is a role for the government to encourage investment with respect to critical and other metals, whether or not it centers on loan guarantees or tax breaks, for instance. Government-run and private-sector defense companies require these raw materials that we are depending on foreign countries to supply us with. However, I'm not entirely convinced as to how involved government should be. It's a very slippery slope.

Hundreds of REE companies were born as the rift widened between U.S. and Chinese economic interests. Luisa Moreno of Euro Pacific Canada gave us some pointers on REE stock evaluation in her March 20 interview, "Winning the Rare Earth Economic War."

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?

Luisa Moreno: 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. There are, however, lesser-known companies that have received far less love from the market, despite having made significant advances. . .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.

The list of metals that qualify as "critical" varies, but most agree that specialty, strategic or technology metals—anything deemed vital to civilization—falls under this umbrella.