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Mickey Fulp: Could REE Cartel Dictate Future for Juniors?

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Mickey Fulp An Americas-centric rare earth elements-processing cartel is forming to create a supply chain independent of China. In this exclusive interview with The Critical Metals Report, Mercenary Geologist Mickey Fulp points to the top companies that could be big players in the next five years.

The Critical Metals Report: The critical metals space can be very confusing. People lump all kinds of metals, including lithium, into general categories using the terms rare earth elements (REE), strategic or technology metals. What is your view on this and what should investors really be concerned with?

Mickey Fulp: Well, I'm not sure what investors should be concerned with, but the rare earth elements are very well defined: Elements number 57 through 71 on the periodic table—the elements located along the next-to-the-bottom row. They all end in -um or -ium: From lanthanum to lutetium. That's 15 metals, plus yttrium, which is above lanthanum on the periodic table and is included because it is the most abundant one that occurs with the heavy REEs. The light REEs are generally defined as the first five along the periodic table but one of those, promethium, does not occur in nature.

There is a lot of confusion among lay investors. And there's confusion even among some of the so-called experts about the "critical metals" sector. Last year they were called technology or rare metals; the year before they were called strategic metals. Historically, these metals have been called specialty metals or minor metals for a variety of reasons. They generally don't occur in standalone mines; they are often byproducts of mining or smelting; they don't trade on the world market; they have special, niche, and/or minor uses. Sometimes they are lumped all together as one.

In my opinion, "critical metals" are the ones that are a necessity for the world to function—elements like iron, copper, aluminum and nickel. I would prefer to call all the others what they have been called for many years: Minor metals or specialty metals. They would include lithium, beryllium, zirconium, niobium, tantalum, indium and the REEs. Are they critical? No. Are they essential? No, but that said, they have special uses that make our lives easier and more diversified. For instance, if it weren't for REEs, we'd all be carrying around Gordon Gekko-sized cell phones.

TCMR: We were both at the Cambridge House Critical Metals Investment Symposium in Vancouver in January. The backend of processing the REEs drew heated debate because it's extraordinarily complicated. That extraction adds a significant cost, limiting the chances of many of these mines coming into the world. You just visited one of the REE separation plants in Estonia. Can you describe how complicated this process is and how an investor should evaluate this backend process when looking at companies and potential projects?

MF: The mining and concentrating of the rare earth elements is straightforward. It's the separating and the processing into useable products that is difficult because it requires multi-stage chemical plants. Because the REEs are so similar in their properties, they are very difficult to separate into useable pure metals and chemical compounds. It's a complicated, iterative process requiring either solvent extraction and/or ion exchange to separate them into useable products. I recently visited the Silmet operation in Sillamae, Estonia, which was acquired by Molycorp Inc. (NYSE:MCP) in April. The facility separates the LREEs lanthanum, cerium, neodymium and praseodymium. It also has the capacity to separate samarium. But, they do not have the ability to separate europium from gadolinium or the HREEs. At this stage, Silmet would have to invest in an ion exchange circuit to separate europium and gadolinium. But Molycorp's been separating and producing europium for 50 years, so there's some synergy with Silmet and they are expanding its capabilities.

Molycorp is the 800-lb. gorilla on the block. The company owns two of the three separation plants outside of China for light rare earths. The third one is in Kazakhstan and doesn't amount to much. I think an Americas-centric cartel of rare earth companies is forming to create an independent supply chain outside of China. Junior exploration companies would be well served to quickly get on board with the major and minor players involved in this group to secure a place where their products can be separated and processed into usable compounds and metals.

In my opinion this is important for companies like Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF), Rare Element Resources Ltd. (TSX:RES; NYSE.A:REE), Quest Rare Minerals Ltd. (TSX.V:QRM; NYSE.A:QRM) and Tasman Metals Ltd. (TSX.V:TSM; OTCPK:TASXF; Fkft:T61), the four companies I consider to be the cream of the crop among junior explorers. In my opinion, each must form some kind of a business combination, strategic alliance, joint venture or offtake contract in order to fund the capital expense (capex) to build a mine. Therefore, each needs to find a partner to succeed in the business.

Molycorp currently is missing the heavy rare earth mine supply. Neo Material Technologies (TSX:NEM) might recover xenotime from tailings from the Pitinga Mine in Brazil, but that will not be enough to satisfy demand. In my opinion, there will be space for two to four mines in the world outside of China to supply elements Molycorp doesn't have or doesn't have enough of right now. There is limited space in this sector for companies to be successful.

TCMR: You mentioned that Avalon, Rare Earth, Quest and Tasman need some sort of strategic alliance. Does that mean working with a financial partner or technology firm, building a separation plant, striking an alliance with a battery company or some other kind of alliance?

MF: Any or all of the above. Everything's in play right now. There's a window of opportunity that will close sooner than any of these deposits will begin to be mined. Now's the time to get 'er done.

TCMR: So, how did you select these companies as the cream of the crop?

MF: These companies entered the sector early enough and had deposits that looked like they were robust enough to be mineable at some point in the future. They also had the right people at the helm and tight share structures.

TCMR: Is there a value to having some of these projects near a separation plant or is that not really a financial consideration?

MF: I think that is a serious financial consideration. Infrastructure, ability to develop and proximity to tide water could be critical in this sector. The challenge with proximity is that the only currently important separation facilities outside of China are in Mountain Pass, California, and Sillamae, Estonia. I've heard a small LREE separation plant is located in Kazakhstan, and Rhodia Group (NYSE:RHA) has a small HREE separation facility in France. Avalon's Thor Lake sits way up in the Northwest Territories, thousands of kilometers from an open ocean. Quest's Strange Lake is located in far northern Quťbec but the port at Voisey's Bay is close. Rare Elements' Bear Lodge is in Wyoming with excellent infrastructure but a light-dominate REE deposit so it may not figure into the heavy REE equation.

Tasman has the Norra Karr deposit in southwest Sweden. The project is close to tidewater and an 11-hour party boat-ferry ride to Tallinn, Estonia, within a few hours of the plant and port at Sillamae on the Baltic Sea. So of the three large, heavy REE-skewed deposits, the only one close to a current separation plant is Tasman Metals' Norra Karr deposit.

But Silmet doesn't have a heavy REE separation facility. It only separates the light REE. So there are still some missing components here. We require light and heavy REE separation plants somewhere in the Americas or Europe. Japan apparently is already going its own way; for example, Toyota has entered a joint venture in India to process monazite. There could be, in my opinion, one or two cartel-style organizations vertically integrated in the REE sector outside China. My visit to Silmet convinced me that Molycorp and its minions will be one of them.

TCMR: Earlier, you said NEO Materials is financing a project in Brazil that sends product to Silmet in Europe. Aren't there some economic problems connected to shipping product to a whole other continent to be processed?

MF: What Pitinga presently ships to Silmet are niobium and tantalum oxides for processing into very pure metals, rather than REE. NEO Materials is investigating Pitinga to see if it can recover and process the heavy REE-bearing mineral xenotime from mine tails.

TCMR: Is it economically viable to move concentrates across oceans?

MF: Oh absolutely. Mine concentrates move as bulk materials all over the world. The cheapest way to ship iron concentrates, copper concentrates and any bulk material is by boat. It's more expensive to get copper concentrates from the Andes of Chile to a coastal port than it is to ship them from the coastal port to a smelter in Japan or China.

TCMR: You mentioned in one of your musings in February that ultimate success could be created between 2011 and 2016. We're halfway into 2011. What is your current viewpoint on when some of these companies will get to the ultimate success?

MF: If you are talking about a major mine going into production, we're looking at another five to six years minimum. If you're talking about when do we expect business combinations, I opine that's going to happen sometime in 2011 to 2012. We've already seen that with Molycorp, which made four acquisitions in the last four months to facilitate their "mines to magnets" philosophy. The one thing they haven't done is purchase another deposit. I don't know if that's going to happen. I can speculate because currently there is no heavy REE equation on the Molycorp side to any extent. So, if they want to be a completely integrated REE company and a major force in the world, they need a heavy REE supply. That could come from Pitinga and/or from a recycling plant. But will those sources supply future demand outside of China? It's difficult to know because each of these deposits has its own unique distribution of the metals.

There's going to be an abundance of some metals and a scarcity of others depending on the mine that is built. But I am a proponent of "build it and they will come"—if the metal is there, uses will be found because these materials have unique qualities that can be engineered into a myriad of products to improve performance. As an example, Molycorp has plenty of cerium. So, what does the company do? It develops a new water purification system based on cerium osmosis. In 1965 in the United States, the middle class all bought color televisions. Why was that? It is because Molycorp developed europium as a phosphor, which made it possible to have red in a color TV at an affordable price so kids everywhere could watch the Beverly Hillbillies in color. Those are two examples of "build it and they will come."

TCMR: You inferred earlier in our conversation that it would take a couple of good mines coming into production and going through a separation plant to satisfy the current and growing world demand for these elements. When we look at your top four companies, will the first companies to finance be the ones that ultimately become the victors?

MF: Not necessarily. Mines are expensive to build and even more difficult to operate. The first ones that find a home for their potential products to go to, for example a guaranteed offtake contract, could have an advantage. It's difficult for me to see five years out how this sector's going to develop. There may be room for three significant heavy rare earth-skewed mines because they will produce significant amounts of other specialty metals such as zirconium, niobium, tantalum and hafnium. I don't know at this stage which companies are going to be successful and which ones aren't. I am of the opinion that the ones in early will likely be successful. And some of the later ones will probably get left out in the cold.

TCMR: So, even though one company might be first to finance, once it gets into the mine it might have some surprises. So, really the story won't be completely told until we actually have some people producing and separating.

MF: Right.

TCMR: In February, you wrote a review of Medallion Resources Ltd. (TSX.V:MDL; OTCQX:MLLOF), comparing it to the cream of the crop. Can you give us a summary of what you're thinking about Medallion now?

MF: I picked Medallion based on a new business plan. The company was a relatively young REE explorer. Medallion realized it was behind the cream of the crop and looked for a way to shortcut the usual time period of exploration, finance, develop and mine. It developed a business plan that included acquiring the monazite-rich tails from a heavy minerals deposit, one of the few minerals ever commercially processed for REE. The first REEs were produced from monazite sands in the early 1900s and it's a standard process to crack it.

An acquisition will allow the company to become a significant player quicker than the competition. I picked them on the idea that the principals, who are veterans in the REE business, are going to be successful in their business plan. If the company doesn't execute this business plan in the near- to mid-term then it will founder.

TCMR: In April, you talked about Quest Rare Minerals getting listed on the AMEX. However, when it was listed, it didn't get the same stock price jump that Avalon and Rare Elements saw. Were you surprised?

MF: I was very surprised. We haven't seen the 10 times magnitude volume we saw with Rare Element and Avalon getting an AMEX listing. If you look at the chart of Quest in 20/20 hindsight, it appears that the market factored the listing in before it occurred. It had already happened twice. We thought it was going to have a similar run up. It has not. In fact, we've seen about a 30% drop in the entire sector, including Molycorp.

But looking back to late May of last year we saw the exact same weakness in the high-flying REE stocks. Rare Element, Quest and Avalon all traded at less than $2 on or about July 1. They had lost 50% of their previous market cap highs during that period. And, then look what happened within three months. They were hitting all-time highs again. There's a cyclicity to the sector. Overall market weakness is being exacerbated now by short attacks, massive short attacks on these companies because they're very speculative, and it's especially prevalent on the ones with AMEX listings.

We've seen short attacks over the last few months really knock the best REE companies down at times. It would not surprise me to see additional weakness in the sector through the summer. But I like this group of companies. I think that the upside is still high. I personally am not buying them at present levels because my cost basis is less. Buying these stocks on weakness is a viable move if you don't currently have a position. How smart would you look if you had bought all three of the above plus Tasman, which will be the next one to get its AMEX listing, on July 1 last year? You would've been laughing all the way to the bank right now because they're all still trading at double or triple or five times what they were last July.

TCMR: So, if we've already seen a 30% pullback in Molycorp affecting the other REE potential companies, are you still expecting more pullback for the summer?

MF: I have no idea. All I know is that the market is weak right now. And we are two weeks away from the beginning of the summer doldrums. We're looking at two months of traditional down markets. This is a time I generally prefer to sit on the sidelines and watch before running in. It is very difficult to buy at the low and sell at the high. The key is to pick fundamentally strong stocks and buy when they're weak and sell when the sector recovers.

TCMR: Exactly. Mickey, thank you for your comments on the rare earth and critical metals.

Michael S. "Mickey" Fulp is author of The Mercenary Geologist. He is a certified professional geologist with a B.Sc. in earth sciences with honors from the University of Tulsa and M.Sc. in geology from the University of New Mexico. Mickey has more than 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 24 years, specializing in geological mapping, property evaluation and business development.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

1) Karen Roche of The Critical Metals Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Rare Element Resources, Quest Rare Minerals, Tasman Metals and Medallion Resources.
3) Mickey Fulp: I personally own shares of the following companies mentioned in this interview: Avalon Rare Metals, Medallion Resources, Rare Element Resources, Quest Rare Minerals and Tasman Metals. Medallion, Quest and Tasman are sponsors of my website.

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