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The Numbers Don't Lie: Why the Industrial Minerals Sector Is Here to Stay

Wednesday February 19, 2014 11:43

Source: Brian Sylvester of The Mining Report  (1/28/14)

Luisa  Moreno There are two ways to visualize the critical metals and industrial minerals sector. Some see a hostile climate, where junior mining companies compete for scarce financing dollars. But there's a sunnier side to this story: more than ever, companies, government and academia are forming partnerships to solve a global problem—the ongoing need for scarce critical materials. In this Mining Report interview, Luisa Moreno, industrial minerals analyst with Euro Pacific Capital, discusses the challenges and the prospects for players in a sector she insists is here to stay.

The Mining Report: Let's start with some macro events in the rare earth elements (REE) space. The Wall Street Journal recently reported that Inner Mongolia Baotou Steel, the world's largest REE supplier, bought nine regional REE mining companies in a move to consolidate China's REE industry. The article called that consolidation a sign of market weakness. Do you agree?

Luisa Moreno: I don't necessarily agree. China set a domestic REE production quota of about 90,000 tons in 2011, according to United States Geological Survey (USGS) Chinese production was about 120,000-130,000 tons per year, between 2006 and 2010. The production ceiling represents more than a 25% decrease in production from the world's largest producer of REEs.

The move to consolidation in China has two aspects: First, China expects to control domestic output and prices through consolidation. Second, China wants to decrease the negative environmental impact of mining and processing. There are many artisanal miners in China across the different metals and minerals and in particular REEs. Many are working with toxic reagents and chemicals that when poorly handled and disposed off, have a very negative impact on the environment. I think consolidation is positive and bullish in the long-term for the mining space. When there is less production in China, it opens up opportunities for producers elsewhere.

TMR: A recent Euro Pacific Capital research report suggests REE demand will grow 6-10% annually through 2020. Is that enough growth to bring investment capital back into the sector?

LM: It should be. A 6–10% growth profile means that to meet demand, production should reach 175,000 tons to north of 200,000 tons by 2020. If China maintains its output at 90,000 tons, it will give new players the opportunity to come in and fill the gap.

I think that opportunity for new producers is tremendously bullish for the sector. It should attract investment capital once the capital markets understand and believe in this potential.

We may see signs of market improvement when prices stabilize or when prices of the less common REEs, like some of the heavy rare earth elements (HREEs) start increasing, as we believe they might. Rise in demand and prices over the next couple of months should give the capital markets confidence that this sector is here to stay.

TMR: Along those lines, a December 2013 Pentagon report suggested that U.S. reliance on Chinese rare earths is waning. That is a big change from a few years ago. What changed?

LM: Yes, the world's reliance on Chinese REEs may be waning with the increase in production from a number of countries, but China is still the largest producer (80–85%) and consumer, and still controls most of the supply (>95%) of HREEs. The Pentagon is likely dependent on a number of HREEs. It has been suggested that the Pentagon may be uncomfortable letting the rest of the world know that there are elements that are critical, that a shortage of these elements could affect them. It is likely that when REE prices were climbing in 2011, the Pentagon may have stockpiled at the time, like many other end-users. The Pentagon may have continued stockpiling when prices fell, to the point that it may be self-sufficient for a number of years, thanks to stockpiling, but we really don't know.

The U.S. Department of Energy (DOE) has always sent a different message. It works with a different budget and its forecasts are usually very long-term, especially those related to the adoption of emerging energy technologies that are expected to support the America energy needs and economy. It has to be thinking about the available supply of elements in sustainable amounts for long periods of time.

TMR: Reports suggest that the Canadian government wants to control 20% of the global REE market by 2018. Is this political grandstanding or is there any substance to that idea?

LM: That idea emerged from a series of workshops put together by Natural Resources Canada (NRCan) over the last two years; I was fortunate to participate. These meetings brought together a number of industry players: junior companies in the Canadian REE space, end-users and academics. They created what is called the Canadian Rare Earth Elements Network (C.R.E.E.N.). The objective is to bring the industry and academia together to fast-track solutions to the common challenges the industry is facing.

The guideline for reaching 20% of the global REE market came from C.R.E.E.N. The group met with Canada's Minister of Natural Resources, Joe Oliver, to discuss the plan ahead and seek support. As you mentioned, reports out of Ottawa seem to suggest that there is significant interest on the part of the government to support the REE industry across the supply chain, which is promising.

TMR: What could that mean for Canada-based companies and their investors?

LM: If demand does increase 6–10% annually, there will be a need for additional REE production outside China. Canada has deposits with high percentages of the less common elements. It's a unique opportunity for Canada to contribute to the global supply of HREEs in particular.

If everything goes according to plan, the miners, the end-users and the academics will be able to collaborate to fast-track solutions to some of the most pertinent issues, such as those related to chemical processing. Players like GE, Siemens and others can educate future producers as to their needs. REEs are not exactly commodities; they're specialty materials. It is important for producers to understand how to customize the materials for different applications to properly accommodate end-users' needs.

I think the industry is doing the right thing: coming together to solve the critical issues, and interacting with end-users to better understand the global market's needs.

TMR: Has that changed your analysis or your outlook on some of the Canadian REE deposits?

LM: At first, there was a great deal of competition among junior mining companies, which is not totally unusual. By coming together and combining their technical resources, there is a real opportunity for the Canadian and international companies to solve some major issues. C.R.E.E.N. will also be looking at the impact that these processes might have on the environment and how to minimize that impact.

TMR: Could you give us an overview of the lithium market in 2014?

LM: I think the market for lithium in 2014 will be very positive. Tesla recently announced that Q4/13 sales of its Model S electric cars were 20% higher than expected.

This month, the World Bank increased its estimates for global economic growth, particularly for developed countries. We might see that also reflected in an increase in demand for electric cars, tablets, cell phones—all powered by lithium. I think there will be increased demand for lithium, and potentially higher prices.

TMR: What amount of growth do you expect?

LM: Our base-case forecast is for an average of 5% demand growth per year until 2020.

TMR: Do you have any parting thoughts on the industrial metals space?

LM: Demand for industrial minerals is returning. Demand for many of these minerals is connected to demand for emerging technologies and electronic devices, including health care and biotech devices. For instance, some industry estimates show that demand for smart devices will increase 7–8% in developed markets, and 17% in emerging markets between 2012 and 2017. If these sectors continue to perform as expected, the demand for key industrial minerals should follow.

We haven't yet seen a comeback in prices, but as end-users deplete the stockpiles they built up in 2011, they will return to the market. As demand rises, we anticipate prices will go up. We anticipate this will send a positive signal to the capital markets and have a positive impact on junior mining companies, some of which are close to production. Just as importantly, it may support the many companies that are struggling with financing to advance to production.

TMR: Luisa, thanks for your time and your insights.

LM: My pleasure.

Luisa Moreno is a mining and metals analyst. She covers industry metals with a major focus on electric and energy metal companies. She has been a guest speaker on television and at international conferences. Luisa has published reports on rare earths and other critical metals and has been quoted in newspapers and industry blogs. She holds a bachelor's and master's in physics engineering as well as a Ph.D. in materials and mechanics from Imperial College, London.

Email: jluther@streetwisereports.com

1) Brian Sylvester conducted this interview for The Mining Report and provides services to The Mining Report as an independent contractor.
2) Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Luisa Moreno: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent. 
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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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