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Aging Population Puts Brakes on Economic Growth, Part 5
March 18, 2019
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March 25, 2019

These Two Key Metals Are Down, But Not Out

Motor Coil

Part 1 of this three-part series from PDAC focused on the PGM group metals platinum and palladium. Part 2 will focus on rare earths and copper. Part 3 will place the spotlight on our favorite precious metals, gold and silver.

Rare Earths

I originally wrote about rare earth metals for Seeking Alpha back in 2010. The industry was starting to get a lot of attention and prices were rising for the metals. Americans had started learning how important rare earth metals are to the global economy, and the sector experienced a fast boom. Unfortunately, the boom became a bubble and investor interest eventually died down when the market could not sustain its momentum. That does not mean, however, that rare earths are not an extremely important part of our economy. In fact, our current system could not function without them!

Here is a quote from my 2010 article on the importance of the rare earth metals.

Rare earth elements are actually not rare, with the two least abundant of the group 200 times more abundant than gold. They are, however, hard to find in large enough concentrations to support costs of extraction, and have an inhibitor in radioactive thorium which must be properly disposed of.

Uses of rare earth include phosphors in television displays, PDAs, lasers, green engine technology, fiber optics, magnets, catalytic converters, fluorescent lamps, rechargeable batteries, magnetic refrigeration, wind turbines, and strategic military weaponry. As you can see, rare earth elements are important to current and future technological applications, including the burgeoning green energies market.

Unfortunately, I did not see renewed optimism from the investment sector of rare earths at PDAC. The newsletter analysts were not talking a lot about the area. And the two companies I spoke with at the conference understood the market is down and don’t see a near term catalyst to boost investment. That, of course, does not mean companies are completely ignoring the space. It just means that investment comes over time instead of all at once.

The companies I will mention here are not stock recommendations. As my readers know, I am not high on investing in stocks for anything other than purely speculative purposes, and don’t ever base long-term wealth preservation strategies on them. I do like to speak with companies; however, because of the knowledge they provide on where the sector is going from a macro perspective.

Defense Metals

One company I spoke with is Defense Metals, a Canadian firm focused on finding and developing rare earths and uranium. The company is working on development of a rare earth property in Prince George, BC. They also hold two uranium properties in Saskatchewan’s Athabasca basin.

The company is marketing themselves as a defense oriented company, because several rare earths are critical to our advanced military technologies. If you believe, as I do, that the likelihood of military conflict will increase in the next decade, then rare earth metals are a commodity you may want to pay attention to. Not that I am advocating for war, just that geopolitical events are making it increasingly likely.

One instance is the use of rare earth magnets used in military gear, per the USGS. Here are some other uses of rare earth metals in military-based systems.

  • Guidance and Control Systems
  • Defense and Electronic Warfare
  • Electric Motors
  • Targeting and Weapons Systems
  • Communications

The recently signed 2019 National Defense Authorization Act prohibits US from procuring rare earths from certain countries, which will increase demand from North American sources. From North of 60 Mining News:

The new legislation, more commonly known as the 2019 National Defense Authorization Act, prohibits the U.S. Department of Defense from acquiring rare earth magnets – along with certain tungsten, tantalum and molybdenum products – from China, Russia, Iran, and North Korea.

“This is a turning point in the re-establishment of an independent US rare earth industry,” said Ucore President and CEO Jim McKenzie. “It is also an important inflection point for rare earth investors. Rare earth magnets, or REMs, represent a technology of critical importance to the American military.”

Comprising 15 lanthanides on the periodic table, plus yttrium and scandium, rare earths possess unique properties that make them essential to a wide gamut of high-tech, green-power generation and military devices.

For the “tree-huggers” out there, rare earths are also used heavily in hybrid and electric vehicles, particularly in the motor design. Companies like Tesla could not exist without rare earth metals. A lot of vehicle green technology that we are now taking for granted in combating pollution is predicated on a healthy supply of rare earth metals in a market dominated by China.

It is no secret that the United States has a critical minerals problem. As the Pentagon’s top acquisition official Ellen Lord said recently, “We have an amazing amount of dependency on China.” Lord called the findings of a forthcoming report on the defense industrial base “quite alarming,” and noted that China is America’s “sole source for rare earth minerals.”

According to the United States Geological Survey, the United States relies on Chinese imports for at least 20 minerals and has little or no capacity to mine, refine, and process its own minerals from start to finish. As a recent executive order on critical minerals makes clear, this “strategic vulnerability” poses a significant national security risk.

Unfortunately, China is playing hardball in the rare earth sector. Not only do they dominate the mining, but they process almost all of the world’s rare earths. And they are creating monopolies by flooding the market with rare earths, crashing prices and profits, as US and other Western companies try to get their production off the ground.

Unfortunately, America’s critical minerals problem has gone from bad to worse. The nation’s only domestic rare earth producer was forced into bankruptcy in 2015 after China suddenly restricted exports and subsequently flooded the market with rare earth elements. Adding insult to injury, the mine was then sold last summer for $20.5 million to MP Mine Operations LLC, a Chinese-backed consortium that includes Shenghe Resources Holding Co.

The good news is that rare earths aren’t really super rare. They are hard to find in concentrations sufficient for mining, but the current Chinese monopoly will eventually be broken as other countries focus on taking up the slack in rare earth production. As more companies bring rare earth’s to market, it will weaken the choke hold that China currently has on the market.

Don’t expect, due to the difficulties of finding economic deposits, this trend to happen quickly. It will take time and a lot of concerted effort on the part of the rest of the world. But for now, the US has to play nice with China on trade because they supply things we need to have the lifestyle we take for granted.

Defense Metals rare earth project at Wicheeda is still a few years away from production. The good news is the company only has about 30 million shares outstanding and hasn’t fully diluted yet in their run-up to production. However, the sweet spot, if you are inclined to speculate in the company, is in the pre-production sweet spot phase after development and right before commercial production begins.

Copper

Copper is somewhat down on its luck. Prices for the metal have fallen since the high of nearly $4.21 in 2011.

Copper Price Chart

 

Historically, copper prices are still expensive. It didn’t rise above it’s current price of $2.93 / lb until May of 2006. And during the last recession, copper dipped all the way down to $1.32. And I am not expecting to see a huge economic boom anytime soon to drive the price up in the US.

Sure we could get a weak rally on lower volume much like what we are seeing now, but economic fundamentals are almost all pointing sideways or down at the moment. And as I described to subscribers in March’s subscriber digest, the impact of several key economic cycles converging in the near future will change the way we value base metals used in production. Copper investors are likely to be disappointed in future results until the current debt bubble bursts and the world has a chance to reset to new currency and debt financing systems, of which I expect gold to play a very pivotal role.

China and other emerging economies will play new roles in the new economic arrangement, and that is when copper is very likely to shine. In the meantime, much like rare earths, copper plays a key role in military applications. What I expect to happen is that copper will be priced up when geopolitical tensions rise and wars begin, but probably not before then. And the momentum will likely carry into the next cycle of national super powers.

Kutcho Copper

I have a relationship with the VP of Corporate Communications for Kutcho. He served in a similar role for Silver Crest Metals when I toured their Mexican silver mine in the spring of 2018. We met with other company executives at the PDAC conference and talked copper.

Kutcho has a very interesting story. The company changed names in 2017 from Desert Star Resources after changing to new management earlier in the year. The company inked a deal with Wheaton Precious Metals for $100 million to develop their project. In 2017, a pre-feasibility study (PFS) was completed and indicated favorable rates of return on the mining project. And an updated resource estimate to 17.2 mt of copper makes Kutcho the owner of one of the most robust copper projects in North America. The company expects to complete their feasibility study by Q3 of 2019.

The company has robust insider share ownership, along with major chunks of shares owned by both Wheaton and Capstone Mining. Clearly, there is confidence in the project by some respected minds in the mining industry who have put a lot of money behind it. If you are an interested speculator, the company expects to finalize permitting in 2022.

Between now and then, copper should see some demand increases by countries financing both their military, and then civilian industrial expansions. So, Kutcho’s timeline appears to be aligned to what we expect to be robust market dynamics for copper in a few years.