Tech’s Mineral Infrastructure – Time to Emulate China’s Rare Earth Policies

Tech’s Mineral Infrastructure – Time to Emulate China’s Rare Earth Policies

    A century ago cars were manufactured using essentially five materials: wood, rubber, steel, glass, and brass.  Today a car is built from 39 different nonfuel minerals.  For a hybrid, that mineral mélange includes some particularly critical elements, especially dysprosium.

Dysprosium is important and irreplaceable.  It doesn’t come from the planet Pandora, like the “unobtanium” in the movie Avatar.  But for some overly excitable analysts it might as well.  Chinese mines provide 95+ percent of the world supply.  Dysprosium is one of a tightly related family of 16 other similar and similarly oddly named “rare earth” elements.  Thirty years ago America was the world’s primary supplier of rare earths (and many other non-fuel minerals).  We chose, by action and inaction, to abandon this and other similar aspects of our industrial infrastructure.  China chose to expand theirs.  So now we worry.

During the pre-Christmas news-vacuum, the Department of Energy quietly released a long-awaited Critical Materials Strategy report unveiling dysprosium as the poster child of the periodic table’s group of critical materials for our high tech, and in particular for DOE, our clean-tech economy.  Dysprosium sits at the apex of a critical ranking system that blends a rating of an element’s importance with our dependence on imports for that element.  Dysprosium and the entire family of “rare earth” elements are irreplaceable ingredients in a wide range of tech products, including those the DOE is particularly interested in: wind turbines, electric vehicles, windmills, solar cells, and energy-efficient lighting.

That America might choose not to undertake the dirty business of mining (or oil drilling, etc.) within our borders does not diminish the importance of minerals.  Today, $2 trillion of the U.S. tech-centric economy is dependent on rare earth minerals, itself a mining ‘commodity’ business that is a mere $2 billion global industry – but it’s $2 billion worth of stuff you can’t do without.  Trace quantities of vitamins occupy the same essential phenomenological niche in our food that trace amounts of rare earths occupy in our technologies.

A typical one-ton hybrid car contains mere ounces of dysprosium (in the high-performance electric motors), and just a few pounds of other rare earths like neodymium and lanthanum.  Lasers, LED lights and iPads all contain tiny traces of rare earths.  In most cases since the near mystical properties of the rare earths are irreplaceable, their price is far less important than their availability.  Rare-earth-enabled magnets are ten times more powerful than in your father’s era.  Rare earths also find essential roles as trace ingredients in more conventional products like catalysts, metal alloys, ceramics and glass – all products that face rising demand in a growing world economy. 

So it is perhaps no surprise that one of best performing IPOs of 2010 was Molycorp (NYSE: MCP), the company that is resuscitating the once dominant Mountain Pass, CA, rare earth mines.  Molycorp went public at about $13 in August and closed at $49.90 on the last day of 2010 giving the ~$15 million revenue company an Internet-quality valuation of over $4 billion.  This is a big dirty old mining business, not a social networking cloud app.  What are people thinking?

This past Fall, China briefly stopped shipping rare earths to Japan in response to a territorial diplomatic brouhaha.  China also announced restrictions on export quotas, and an internal movement to shut down smaller and environmentally problematic mines.  The combination sent shivers, even panic, through some parts of the mineral and geopolitical world, an over-reaction perhaps, but understandable given the essential character of these minerals.  (For insightful, lucid and non-arm-flapping analysis and coverage of the geopolitics and geology of rare earths and China’s play in particular, I highly recommend the folks at Technology Metals Research, and long time sage Jack Lifton there.  There is also the RareMetalBlog for additional perspective.  And for the engineering and geophysical bible see Extractive Metallurgy of Rare Earths by Gupta and Krishnamurthy.)  

The strange thing, and thus the opportunity, is that rare earths are not in fact rare.  The nomenclature is surely an artifact of timing.  Gold, which is rare, has been mined and used by humans for thousands of years.  The family of rare earth elements – including others like gadolinium (computers), terbiuim (lighting), lutetium (medical imaging), and yttrium (cellular communications) – are geophysically speaking roughly 1,000 times more common than gold.  But rare earth elements were not known to exist until a couple of hundred years ago, and only in more recent history have their unique properties been put to significant use.

In due course, the world-outside-of-China, even America, could start to produce more rare earths (as Jack Lifton has noted, and the Chinese have unsurprisingly suggested).  But that will take time.  These are after all mines, often big mines, and the minerals extracted require complex and challenging refining to separate the chemically similar constellations of rare earth elements that are always collocated in various mineral concentrations and combinations.  It is in short an annoyingly difficult, messy and thus capital-intensive process.  For policy makers looking for near-term geopolitical comfort, and investors looking for opportunity, you go with what exists today and may be able to scale quickly.

    Thus the investor enthusiasm for Molycorp’s re-opening of the world’s formerly largest rare earths mine in California.  The other near-term options reside in resource-rich Canada and Australia.  The southeast Australia project of Alkane Resources (AU:ALK) is of special interest in part because of an abundance of dysprosium (as are related comments from Gady Epstein, fellow Forbes’ blogger).  More prominently known is Lynas (AX: LYC) and its rich Mt. Weld, West Australia, mine and Malaysian processing facility, the latter a critical bottleneck feature in the entire rare earth food chain.  (J.P. Morgan’s June 2010 initiation of coverage report on Lynas has a particularly good backgrounder on the entire subject.)

As usual when it comes to resources, there is a coterie of Canadians with mineable deposits, including Avalon [AMEX:AVL], Great Western Minerals (TSX VENTURE: GWG-V), Quest Rare Minerals (TSX VENTURE: QRM-V), and traders and stockpilers like Dacha Strategic Metals (TSX VENTURE: DSM-V).  Neomaterials [TO: NEM] is of particular interest because of their processing, refining and manufacturing of rare-earth-based magnets.  There are a rising number of private exploration and putative mining players and promising finds in places like Kvanefjeld Greenland, or Steenkamposkraal South Africa.  But new deposits and mines, not to mention processing facilities, will take significant time to develop and open.

   Over the longer term, nanoscale engineering may replace some rare earths by emulating their properties, or at least reduce the amount needed per magnet, LED, hybrid, or computer.  Dedicated efforts and over $80 million in R&D expenditures have been underway in Japan since 2007, as well as in private and university labs around the world.  Northwestern University spin-out QuesTek Innovations has demonstrated impressive atom-by-atom computer modeling techniques to engineer alloys at the nanoscale and reduce the use of critical elements.  Companies like venture-backed NovaTorque have produced cleverly designed high-performance rare-earth-free electric motors.  But even enthusiasts believe we’re years away from widespread commercial replacements for most rare earths, and likely never for some.  So in the meantime, aside from hand-wringing about dependencies, or building stockpiles (turns out, not so easy with these materials), we’ll need to dig up the ground in places other than China.

   As perturbed as some seem by the linkage, the simple fact is the ethereal qualities of cloud-based apps instantly delivered to your iPad are firmly linked to giant mining trucks rumbling across Inner Mongolia’s massive Bayan Obo mines.  This reality is hardly isolated to tech.  Everything we use is built from basic elements dug up from the earth in big, inherently dirty processes.  Mining has always been integral to any economy; it has been thus since the ancients mined copper and gold.  It’s just that today we use a whole lot more stuff, and a whole lot more of the periodic table.

   The modern microprocessors in the early days used just a dozen minerals; 60 are needed for today’s staggeringly more powerful and cheaper microprocessors.  The DOE wasn’t the first to note or worry about strategic mineral dependencies.  The GAO issued a brief report in April 2010, as did the Congressional Research Service and the Department of Defense.  A seminal 2008 National Academy of Sciences report warned about these trends, and the general importance of minerals and mining.  Per capita, Americans need some 25,000 pounds of nonfuel minerals every year for the products we use – from aircraft and toothpaste to MRIs and iPads. 

   The National Academy report concluded that: “Over the longer term, the availability of minerals and mineral products is largely a function of investment and the various factors that influence the level of investment and its geographic allocation and success.”  Well, no kidding.  We could get more of relatively non-rare stuff by making investments, and encouraging policies that “influence” such investments.  But that’s not what we seem to want to do in modern America.

   Rather than wrestle with the challenges of economic incentives and sensible environmental solutions to U.S. mining, we choose to wring our hands about strategic dependence.  Make no mistake: these are choices, not geophysical or economic inevitabilities. 

DOE’s release of the critical minerals report just before Christmas during one of the year’s episodic news dead zones is, not to over-interpret, intriguing timing.  The report generated only a smattering of news stories in a handful of trade press and science-centric blogs.   

   The only visible Congressional attention came from U.S. Senator Murkowski’s (R-Alaska) in a December 17th ressRelease_id=682e1966-afaf-4e87-9560-f20983985898">press release noting “the challenges we face as a nation in securing the raw materials vital to the advancement of cleaner energy.”  OK, I’ll take the clean energy challenge – but it is worth noting that DOE concluded that clean-energy only accounts for about 20 percent of rare earths demand.  We should be more worried about the other products, industries and jobs that rely on the other 80 percent.

   The non-fuel mining industry employs over three times as many Americans as does the oil & gas sector. Senator Murkowski’s press release called on “the Interior Department, the Environmental Protection Agency and other agencies to play a similarly constructive role in confronting the mineral supply challenges that could derail the clean energy technology objectives that we all share.” Good luck with that.  This is mining, and not the part of “clean” tech that is so eagerly embraced.  If we were genuinely unhappy about the state of affairs of America’s infrastructure (see related comments from Loren Thompson of the Lexington Institute), and the attendant jobs and economic impacts, Congress would take the kinds of steps China has taken to encourage such fundamental industry.

   Meanwhile, investors can assume that demand for rare earths in the near future will outpace supply.  And as for prices?  The price of tiny trace quantities of rare earths has little impact on the cost of most products they contain.  Whether the dysprosium costs $10 per Prius (roughly today’s price) or $50, is self-evidently less relevant than the availability and features of dysprosium.  You might conclude that the direction of prices and some stocks is easy to predict.

   So in the element dysprosium we reveal the depths of our dystopian discontent.  (Couldn’t resist.)  Dysprosium illuminates geopolitical anxieties, and epitomizes our ambivalence about revitalizing infrastructure – it would be easier to colonize Avatar’s planet Pandora than open an American mine.  Meanwhile, in the investors’ real world, dysprosium reveals potential for outsized profits.<><>