- The need for a strategic rare earth reserve
- Why China owns the rare earth market
- How investors can benefit
Tom Vulcan, rare earth metals reporter for HardAssetsInvestor.com, recently had the chance to speak in Washington, D.C., with Mark Smith, CEO of Molycorp Minerals LLC. With its mine at Mountain Pass, Calif., Molycorp currently owns and runs the Western Hemisphere's only rare earth ore mining operation.
Tom Vulcan (Vulcan): Is Molycorp the only producer of the rare earth metals in the Western Hemisphere?
Mark Smith, CEO, Molycorp Minerals (Smith): Actually we don't produce metals as of today. We mine the ore out of the ground, crush and mill the ore to create a concentrate, and then we go through a very sophisticated processing step to produce the rare earth oxides. There is only one country in the world today that can take the oxides and convert them to metals, and that's China.
Vulcan: Has that always been the case historically?
Smith: No, as a matter of fact, at one point the U.S. did have rare earth metal production capacity. However, it hasn't had that capacity for probably about 10 years now. Japan had that capacity for quite some time as well. It was probably in the last three to five years that Japan stopped making rare earth metals, largely because of the high cost of electricity.
Vulcan: What would you say was the major factor leading to the demise of the U.S. rare earth metals industry?
Smith: I would suggest that the demise was due to the fact that more and more of the rare earth manufacturing supply chain moved from the United States to China, including metal production, alloying, strip casting, magnetic powder production and, ultimately, magnet production. We do not make any neodymium iron boron magnets in this country today.
Vulcan: Have we ever made any?
Smith: Yes, the U.S. actually invented the technology. It was a combined research effort between the Air Force and General Motors that discovered neodymium iron boron magnets. They created a new company called Magnaquench, which was located in Indiana. In the early 2000s, a Chinese company came in and bought Magnaquench. Within two years, they had shipped all of the manufacturing equipment over to China. That was our last capability of producing neodymium iron boron magnets.
Smith: I want to make sure, however, that we make one point absolutely clear on behalf of Molycorp Minerals, and that is that we have no hostility and no bad thoughts whatsoever about the Chinese rare earth industry. The Chinese have a wonderful rare earths resource in their country. They have done an excellent job for the last 20 years of taking the ores out of the ground, producing oxides, metals, alloys, powders and magnets.
In the last 10 years, they've taken what used to be a 40,000 tonne per year market for rare earth oxide equivalent, and turned it into what is now about a 125,000 tonne per year market worldwide.
Worldwide demand is predicted to be over 200,000 tonnes by about 2014. China has done an outstanding job of making those rare earths available and expanding the uses of rare earths. Our concern isn't the Chinese and their production capabilities, our concern is the Chinese and their consumption capabilities. Many experts have predicted that the Chinese will be internally consuming many of those rare earths, if not all of them, by about 2014.
Vulcan: So there's not going to be anything left over for anybody else.
Smith: Exactly! They've done an excellent job of increasing production, but their use has also increased and so the exports of rare earths available to the rest of the world are becoming less and less all the time. Indeed, in the first quarter of 2009, the Chinese export quotas were 25% lower than in the first quarter of 2008.
Vulcan: How much of this diminution of exports would you put down to reasons having to do with domestic consumption, or reasons having to do with the strategic nature of the materials themselves and political considerations?
Smith: I don't have a good answer for that. However, I think that we can take a look at some specific facts out there to help us. One of the stated goals of the Chinese government has been to bring more and more manufacturing into China, and they need to do that because they've got a lot of people in that country, a lot of whom are looking for jobs.
So this is about a jobs creation program that China has created. And when you have a resource that everybody needs, called rare earths, you can pull the manufacturing facilities into your country by guaranteeing that people who relocate manufacturing facilities to China will be given priority on rare earth supplies. I think it's an excellent strategic move on their part, and it has absolutely created many, many jobs in China. We think that there were probably about 900 jobs lost in the United States as a result.
Vulcan: As strategic minerals, why has there been no U.S. government policy regarding them?
Smith: Again, I do not have a good answer, but I will offer my views. A point that we have been trying to make in Washington, D.C., for about four months now, is the critical and, as we say, indispensable need for rare earths for clean energy technology, water filtration technology, multiple Department of Defense purposes and consumer electronics. All of these applications absolutely require the use of rare earth elements. There simply is no substitute. But the rare earth elements used are so far down into the supply chain that people don't realize their importance.
When someone in the U.S. purchases a part, an electronic component, say a hard disk drive, it's more than likely made in China. Although this much is probably recognized, nobody recognizes the fact that the rare earths that are needed to make the permanent magnet in that hard disk drive also came from China. Indeed, most people don't understand how indispensable the permanent rare earth magnet is in making that hard disk drive unit as small and efficient as it is.
Vulcan: Hence their use, too, in wind turbines ...
Smith: Permanent magnets are used in many clean energy technologies, like wind turbines and hybrid cars. Interestingly, today the largest use of these magnets is in hard disk drives.
Vulcan: That's their greatest use in anything at all?
Smith: Correct; that's the No. 1 use in terms of volume. We believe that may be changing as hybrid cars become more popular and the use of wind turbines becomes more widespread. Clearly, on a volumetric basis, these two new clean energy technologies could easily overtake hard disk drives in terms of the volume of permanent rare earth magnets required.
Let's take a look at wind turbines. In certain applications, two tons of rare earth magnets are required in the permanent magnet generator that goes on top of the turbine. If the permanent magnet is two tons, then 28% of that, or 560 lbs, is neodymium.
None of the supply and demand graphs that we use in Washington, D.C., takes into account the use of neodymium iron boron magnets in wind turbines, because it's so new. What concerns me is that this is a big, big use of rare earth magnets that we have not accounted for in our supply-and-demand estimates.
Vulcan: Outside their major use in hard disk drives, which currently uses more rare earths: clean energy or defense?
Smith: I would say at the moment, defense. That's because the clean energy technologies are still at the ground level trying to find their space in the market. But I also don't think that we're going to have a problem finding a space for things like hybrid vehicles, and I don't think we're going to have a problem finding a space for wind-generated power. The current administration is very, very supportive of using alternative forms of energy in conjunction with conservation to lower our dependence on hydrocarbons. What we need to be careful of is that we don't unknowingly change our dependence on foreign oil to a new dependence on Chinese rare earths. What have we really gained?
Vulcan: In which areas are rare earth metals of absolutely critical importance?
Smith: When I think of the critical importance of rare earth elements, I think of two areas in particular related to clean energy technology. One is the hybrid vehicles, and the other is wind turbines. There are two components within hybrid vehicles that we have to keep in mind when we think of the critical importance of rare earths. One is the nickel metal hydride battery, which uses lanthanum metal; and the other is the use of permanent rare earth magnets, which primarily use neodymium.
I think everybody is predicting that the battery side of the hybrid vehicle is likely going to change to lithium ion in the next 5, 10 or 15 years. However, until the lithium ion technology is fully developed, the nickel metal hydride batteries will be indispensable. Moreover, the one thing that cannot change in electric vehicles or hybrid vehicles is the use of permanent rare earth magnets in the motors and generators. There is simply no substitute for those magnets.
Vulcan: So hybrids and then wind turbines.
Smith: Yes, but there are some other uses of rare earth elements including energy-efficient lightbulbs that are also very important. Compact fluorescent lightbulbs use europium, terbium and yttrium. Without europium, terbium and yttrium, they don't work.
Vulcan: Because there's nothing to scintillate?
Smith: That's right. What is fascinating about these energy-efficient lightbulbs is that they are 70% cooler in terms of the heat they generate, and they are about 70% more efficient in their use of electricity to create the resulting light. The energy savings that you can get from these lightbulbs is tremendous.
Vulcan: Can you please tell me a little about defense uses?
Smith: I will start by using the term "dual use" electronics. When I say "dual use," that basically means both regular consumers (like you and me) and defense consumers who are utilizing the same basic devices. We all have iPods, computers, BlackBerries and cell phones; and all of those devices use rare earths, most typically the neodymium iron boron magnet. There isn't anything electronically that the Department of Defense does that does not involve the use of rare earth elements. Some other defense uses we like to talk about are guidance and control systems, smart bombs and Patriot missiles. None of these devices works without rare earths in them.
Vulcan: And please tell me a little bit more about water filtration.
Smith: In a contract that we worked on cooperatively with the Department of Defense, we were looking at how to create a system that could be put into a man-portable device that would clean and filter water for our soldiers to drink. The big concern was the Middle East and Afghanistan, which are known to have waters high in arsenic, and arsenic can be a very, very problematic element for us if we have too much of it.
Vulcan: Yes, I remember well the classic British film "Arsenic and Old Lace," in which arsenic was the poison of choice.
Smith: So we started to take a look at water filtration devices that could remove arsenic from the water and make it safe for our soldiers to drink. We passed those tests with absolute flying colors. Our material is like a sponge for arsenic. But we decided we wanted to test our materials against some additional water contaminants. The results were shocking.
Not only can we reduce arsenic levels to drinking water levels, but we also have the capability of removing viruses, bacteria, HD or mustard gas, GB or sarin gas, VX nerve agents, and phosphamidon and monocrotophos, which are pesticides. We are testing it on more and more contaminants every day because of the success we have realized to date. We're very, very excited about this new product and process our internal technology group has developed. We have the intellectual property both on the product and the process.
Vulcan: Why are there no rare earth metals in the U.S. government's strategic materials stockpile?
Smith: I wish I had a good explanation for that and I simply do not. However, in all of the educational efforts that we've been undertaking here in Washington, D.C., I have reason to believe that our U.S. government is reevaluating the purpose and intent of the strategic materials stockpile. If they reevaluate it on the basis of what I'm hearing from all the congressmen, senators and agencies in Washington, D.C., it would be based on a supply chain concept. I have every reason to believe that if we do something like that, there will be rare earth materials in the stockpile. There has to be; it's that simple.
Vulcan: As with any materials that people describe as being indispensable, how much work is being done on substitutes for them?
Smith: Very, very good question. The area that I'm most familiar with is the magnet industry, so let me talk about that. It is my understanding that for approximately 20 years, scientists around the world have been trying to find an alternative to the neodymium iron boron magnet.
Vulcan: Sans any luck?
Smith: No luck. They have literally pulled every element out of the periodic table of elements trying to formulate a different composition for a stronger, lighter magnet, and nothing has been found. What the magnet world has discovered is that if you add some additional rare earth elements, like dysprosium, they can enhance the performance of the permanent magnet in specific applications.
For example, the addition of dysprosium allows the neodymium iron boron magnet to have a wider temperature variance, which allows its use in higher temperature applications. Germanium is another rare earth element where we're starting to see that, by adding small amounts into the alloy mixture, we can get some different properties that can help particular magnets in particular applications. I've been reading more and more about rare earth magnets and their use in refrigerators and HVAC units. These are new applications being used commercially in Japan and Europe.
Vulcan: From a purely practical point of view, and from an extractive point of view, what would you say are the major difficulties in extracting the rare earths? We've heard about the fact that there is usually thorium - is that correct? - mixed up with them, which is radioactive, and people don't terribly like that. As a mining man, you have a rare earth facility, or you have a rare earth site. What are the greatest challenges in getting those rare earths out and providing them to your customers in a form that they can use?
Smith: Keep in mind that we have all the infrastructure in place, so that's not a concern, and we have one of the richest rare earth deposits in the world, so grade is not an issue for us. I think our greatest challenge is trying to maximize the recovery of the rare earths once we take them out of the ground and before we send products to the customer. Historically, this industry has only been able to achieve a 50 or 60% recovery. This means that when you pull a pound of rare earths out of the ground in the form of ore, you may only be getting half a pound that you can sell at the end of the day.
We are absolutely committed to continuing to develop our process technology, and our goal is to be up in the 90%-plus recovery rate. Hence when we pull a pound of rare earths out of the ground in the form of ore, we're going to be selling 90% or more of those rare earths to the customers. That results in a whole bunch of positive things for us. It minimizes the footprint of the mine, minimizes water use, and minimizes energy use. These are the right things to do in our business.
We firmly believe that you can have a well-run mine that is environmentally superior and have rare earth products at the same time. As a company, we are absolutely committed to a well-balanced operation. As an example, we're using approximately 75% less water today to produce the same amount of materials, on a unit basis, than we did 20 years ago.
These are the things we are concentrating on. Indeed, the large capital project we're talking about to refurbish and retool Mountain Pass currently includes over a third of the money being dedicated to water conservation and doing the right thing environmentally, so we are truly a sustainable operation.
Vulcan: If you're an investor and you're excited, as I think you should be, by the rare earths story, how can you get an exposure to rare earths, not least because you're a private company?
Smith: That's correct; we are a U.S.-based group of private investors that purchased this facility and all of its assets from Chevron Corporation. We have every intention at the right time of going public with the company. However, I think we want to watch the markets and make sure we time things right. For example, two months ago might not have been an ideal time to do an IPO.
Vulcan: Mark, thank you.
Smith: Thank you.