Overview of Critical Metals (John Kasier)

2011 Critical Metals Investment 2011 Critical Metals Investment

SymposiumSymposium

Vancouver, Canada

January 21, 2011

Presented by John KaiserPresented by John Kaiser

Critical Metals OverviewCritical Metals Overview

www.KaiserResearch.com

Issues with Critical & Strategic MetalsIssues with Critical & Strategic Metals

� Supply Concentration vs Diversity:

Economic logic coupled with a

skewed natural geographical

distribution of deposits encourages

the concentration of production the concentration of production

into a small number of national or

corporate producers which in turn

creates opportunity for supply

disruption.

Supply

concentration

creates price

distortions.


� Government subsidies through lax

environmental regulation encourages

supply concentration with disruptive

consequences when such policies

are reversed:are reversed:

China’s historical tolerance of

multiple small scale production and

absence or lack of enforcement of

emission controls has enabled it to

marginalize mine supply from

elsewhere in the world.

Wakeup Call for the Rest of the World:Wakeup Call for the Rest of the World:

China to stockpile key metals, consolidate China to stockpile key metals, consolidate

production & restrict exports as it focuses on production & restrict exports as it focuses on

security of supply.security of supply.

� Molybdenum

� Tungsten

� Indium

� Tantalum

� Rare Earths

� Tin

� Antimony

� Germanium

� Gallium

� Zirconium

China has become very concerned about resource depletion China has become very concerned about resource depletion

and the negative environmental and human impact of its and the negative environmental and human impact of its

historical mining practices that have underpinned its supply of historical mining practices that have underpinned its supply of

cheap metals to the rest of the world. cheap metals to the rest of the world.


� Supply concentration allows cartel

style supply management geared

toward serving domestic agenda:

China is now using export quotas

and duties to prevent itself from

being just a raw material exporter. being just a raw material exporter.

Other nations have no choice but

to be primarily a raw material

producer and will use royalties

and carried interests to minimize

exploitation.

Recent estimates have reduced China’s HREO Recent estimates have reduced China’s HREO

resource life from 20resource life from 20--30 years down to 1530 years down to 15--20 years.20 years.

Once this 15Once this 15--20 m thick “skin” of heavy rare earth 20 m thick “skin” of heavy rare earth

bearing clays is gone there is nothing to be found by bearing clays is gone there is nothing to be found by

drilling into the third dimension!drilling into the third dimension!

Why has China become anxious about its Why has China become anxious about its

heavy rare earth supply?heavy rare earth supply?

Export Restrictions & Sector Consolidation: Can China Export Restrictions & Sector Consolidation: Can China

be blamed?be blamed?

R&D into the properties of the heavy rare earth R&D into the properties of the heavy rare earth

elements are creating the possibility of new elements are creating the possibility of new

applications that can become major demand drivers applications that can become major demand drivers ––

ie “smart dust” and the brave new world of sensors. ie “smart dust” and the brave new world of sensors.

What if the crackdown closes the smuggling gap?

Chinese Chinese

Rare Earth Rare Earth

Policy in Policy in

ActionAction

Export Quota Reduction in H2 2010 creates 2 tier pricing

Export Quota Reduction encourages end users to

shift advanced component production to China and

risk transfer of intellectual property.


� Free Market Crisis for Just in

Time Procurement:

Free markets in which metals go

to the highest bidder will become to the highest bidder will become

thinner and less reliable for just-

in-time procurement strategies,

particularly if high risk

development funding is linked to

off-take agreements.

The Rise of China in the Age of GlobalizationThe Rise of China in the Age of Globalization

� Central command economy with outsourced production

� Cheap Labor – urbanization of 1 billion rural Chinese unleashed by the end of orthodox communism

� No Health & Safety for Workers

� No environmental emission controls

� No Unions to secure medical or pension benefits

� US Dollar Peg: the devil’s bargain of maintaining an undervalued renminbi by bankrolling the US trade

deficit through the accumulation of US treasury debt

� FDI: foreign direct investment and technology transfer

BRIC

Post-Industrial

Advanced Raw

Material Producers


� Policy can drive future demand

of critical metals: Efforts to

implement long term clean

energy policies that reduce

CO2 loading of atmosphere CO2 loading of atmosphere

and dependency on crude oil

as a transportation fuel impact

critical metal demand.

It’s the unprecedented COIt’s the unprecedented CO2 2 Ievels and their rapid Ievels and their rapid

achievement that matter!achievement that matter!

The World in 2099

Source: New Scientist Feb 25, 2009

Transforming the Energy Foundation of the WorldTransforming the Energy Foundation of the World

Footprint Reduction Footprint Reduction Footprint Transformation Footprint Transformation Footprint Reduction Footprint Reduction

StrategiesStrategies

Footprint Transformation Footprint Transformation

StrategiesStrategies

� Quality over quantity

� Durability

� Efficiency

� Miniaturize

� No more cost dumping

� Short term sacrifice for long term legacy

� Leveraged giving

� Reduce

� Re-Use

� Repair

� Renewables

� Recycle

� Rethink

� Relearn

DOE Critical Materials Strategy December 2010DOE Critical Materials Strategy December 2010

It’s not the rare earth demand growth in the next 5 years It’s not the rare earth demand growth in the next 5 years

that is the critical issue today, but the demand growth 5 that is the critical issue today, but the demand growth 5

years and beyond when clean energy really scales up.years and beyond when clean energy really scales up.

Source: Mineral Resource Research Group


� State controlled capital investment:

Chinese trend is for state

controlled entities to make

investments in raw material supply

around the world which often go around the world which often go

hand in hand with parallel

infrastructure investments guided

by long term security of supply

rather than profit goals.

Chinese Military Expansion seeks to secure Supply Channels

“Eyes in the Sky”

“32 million surplus males”

Petro-Dollar Recycling?

The Carrington Event

1859 Geomagnetic Storm

Security of Supply for Critical Materials is becoming Security of Supply for Critical Materials is becoming

an issue for Europe, Japan and the United States as an issue for Europe, Japan and the United States as

China moves to secure its own needs.China moves to secure its own needs.

Source: EC Commission – The Raw Materials Initiative

GAO ConclusionsGAO Conclusions� While rare earth ore deposits are geographically diverse, current capabilities to

process rare earth metals into finished materials are limited mostly to Chinese

sources.

� The United States previously performed all stages of the rare earth material

supply chain, but now most rare earth materials processing is performed in

China, giving it a dominant position that could affect worldwide supply and

prices.

� Based on industry estimates, rebuilding a U.S. rare earth supply chain may take

up to 15 years and is dependent on several factors, including securing capital

investments in processing infrastructure, developing new technologies, and

acquiring patents, which are currently held by international companies.


� Innovation vs Implementation:

New applications invented

through innovation cloud the

demand outlook worsened by

the gap between upstream and the gap between upstream and

downstream.


� Strategic Logic – measuring profit in

terms of what security of supply for

incremental upstream inputs implies for

downstream products: profits will reside

in the downstream products for which

metals are a critical but incremental input, metals are a critical but incremental input,

not in the margin between mining cost

and market price

What is your opportunity cost because you What is your opportunity cost because you

cannot commercialize an innovation?cannot commercialize an innovation?

Dodd-Frank Financial Reform bill will

require end users to document the source

of their tantalum supply for their Ipods

and cell phones among other consumer

electronics gadgets.

What is the

opportunity

cost of being

tainted by

blood tantalum

versus a higher

cost for clean

tantalum?

Jevons’ Paradox:Jevons’ Paradox:

Scarcity results in higher prices for

raw material inputs, which should

result in lower demand through

substitution, but when substitution is

not possible, a push for more efficient

Would a rare earth price shock reduce demand?Would a rare earth price shock reduce demand?

not possible, a push for more efficient

utilization of inputs is undertaken,

which, if successful, will stimulate

total demand growth, which in turn

enables raw material supply

expansion without glutting the market

and triggering a price collapse.

Rare Earth elements lend themselves well to R&D Rare Earth elements lend themselves well to R&D

aimed at developing more efficient utilization.aimed at developing more efficient utilization.


� Long term Cost Volatility &

Spot Price Opacity: Volatility

in currency exchange rates

and energy/chemical costs

rule out long term price rule out long term price

based contracts while lack of

transparency and poor price

discovery mechanisms make

spot market pricing unreliable


� Mainstream Mining Sector’s

aversion to uncertainty:

Mainstream mining companies

are unlikely to invest in

primary specialty metal mines primary specialty metal mines

such as rare earth deposits

because they cannot predict

demand driven by policy and

innovation. At best they will

add circuits for by-product

recovery.


� A new upstream role for end-

users: End users with large

downstream markets at stake

will need to make upstream

equity and/or debt investments equity and/or debt investments

in resource juniors which raise

risk capital to acquire and

advance specialty metal

deposits.


� A new downstream role for

producers: Critical metal

producers not owned and

operated by a consortium

of downstream users will

need to own downstream

operations which add value

to the mined raw materials.

Stage Exploration Cycle

Stage

Objective Time

Required

1 Grassroots Conceptual, land acquisition 1 year

2 Target Generation &

Drilling

Filtering for drill targets 1-2 years

3 Discovery

Delineation

Defining the limits of a discovery -

tonnage & grade

1-2 years

4 Infill Drilling Producing a mineral resource estimate & 1-2 years

How do we get to a mine?

4 Infill Drilling Producing a mineral resource estimate &

scoping study

1-2 years

5 Bulk Sample &

Metallurgy

Evaluating recoveries and optimal

processing method

1 year

6 Prefeasibility Produce a mineable reserve, establish a

mining plan and associated costs

1-2 years

7 Permitting,

Marketing &

Feasibility

Securing approval, negotiating offtake,

making a production decision

1-3 years

8 Construction Building the mine 1-3 years

9 Production Mining cash flow 10-20 years

Thank YouThank YouThank YouThank You

www.KaiserResearch.com

Overview of Critical Metals (John Kasier)

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