PW: Absolutely. Mines are good at mining. The refinery is a chemical-processing plant. My company, Innovation Metals, is currently raising capital for a facility that should help address the rare earth processing bottleneck.
TMR: What are your projections for REE prices?
“REE prices are bottoming out, and customer inventories are running low.”
PW: Prices are bottoming out. We keep track of customer inventories, and they are running low. The demand for magnet-based REEs remains strong and is growing, but dysprosium and the terbium, europium and yttrium for phosphors might stay flat until we see a larger adoption of energy-efficient lighting. A lot depends on whether or not the United States weans itself off incandescent lighting.
TMR: Funding is a challenge for all juniors in this market. How are rare earth companies, which sell on a less transparent market, finding the money to move their projects forward?
PW: Traditional bank financing won’t be there because there is no way for banks to hedge out financial risk. The banks will lend off these forward contracts, but a substantial amount will need to come from traditional equity financing.
TMR: Gareth Hatch, who works with you, said in an interview last November that the vast majority of companies in the space would not go into production soon. How many are still out there, and how many can be successful?
PW: Just a handful will make it in the short term. In the long term, if the demand is there, prices will go to a point where marginal supply will meet marginal demand, and those projects will become economic. Anything could still pull a rabbit out of the hat, but investors shouldn’t depend on being lucky.
TMR: When you say a handful, how many are we talking about?
PW: Five or six.
TMR: Are there still opportunities for juniors in the light rare earth elements (LREEs), or do Molycorp Inc. (NYSE:MCP) and Lynas Corp. (LYC:ASX) have that market cornered?
PW: Just because a few large companies dominate by volume doesn’t mean a smaller player can’t compete. There are always opportunities. In the end, it will come down to cost and capital expenditures (capex). With the high cost of capital these days, companies with a low capex have an advantage over large projects and can afford to sell cheaper. More volume will encourage more transparency. Eventually, an efficient market will form and the company with the lowest cost base will set the stage, regardless of its size.
TMR: What are some examples of companies with low capex that could be successful?
PW: On the heavy rare earth element (HREE) side, Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX)and Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE). A bit further down the road is Namibia Rare Earths Inc. (NRE:TSX, NMREF:OTCQX). Having access to a refinery is key, especially for HREE projects.
TMR: Matamec has an agreement with Toyota Tsusho Corp. (TYHOF:OTC; 8015:JP) and a feasibility study coming out. Do those give it an edge?
PW: It’s one of the more advanced projects. We’re looking forward to reading the feasibility study. What makes me a little bit nervous is that, as far as I know, a third party will be pricing out the concentrate prices that Matamec will receive. Toyota doesn’t have an HREE separation plant, so I don’t know where it is going to ship this material.
TMR: Does being the first to market give Matamec an advantage?
PW: The whole first-to-market issue has been overglorified. It’s nice to be first, but ultimately, the end users will buy from anybody with the lowest price as long as their specs and quality control are consistent. So whether you’re first, second or third, there is still a large end-user market that needs the product. When you’re first, you might get access to better pricing. That is a bit of an advantage.
TMR: You mentioned Tasman, which is in Europe. Does location make a difference?
PW: Definitely. When you have infrastructure available, it lowers capex and reduces the volatility of the assumption behind it because things are better defined. Tasman has a suite of HREEs, for which demand should come from not only Asia but Europe as well, for use in things like phosphors and magnets.
TMR: What are some other companies that have a shot at being in the top six?
PW: Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX), Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) and Geomega Resources Inc. (GMA:TSX.V; GOMRF:USX), even though it’s more of an LREE project. I like the management teams that are resizing their projects. They’re looking to bootstrap their mines―to start off smaller and get to cash flow quicker. Companies like Greenland Minerals & Energy Ltd. (GGG:ASX) in Greenland and Arafura Resources Ltd. (ARU:ASX) in Australia have looked at the market environment and realized that the billion-dollar project isn’t feasible, so they’re looking at smaller projects that can fund future growth. Peak Resources Ltd. (PEK:ASX; PKRLY:OTCQX), in Australia, has low capex.
TMR: Great Western Minerals has been working with the Department of Defense (DOD) on finding yttrium. Is that partnership as valuable as working with an automobile maker?
PW: It’s not any better or worse; the DOD has the same needs as any end user. For REE products, there’s a high threshold to meet in terms of consistency and quality, whether it’s for the DOD or another end user.
TMR: Great Western’s stock price has ticked up recently. What’s behind that?
PW: Some REE stocks seem to be stabilizing. Maybe some of the speculators are looking to bottom feed and pick a trough. Great Western has a good shot at production; it was beaten down along with the rest of the sector and probably poses a better risk-reward opportunity than other stocks.
TMR: Geomega has both graphite and REEs. Is that a benefit?