The rare earth elements market has experienced a volatile period the past few years. While demand continues to rise at a rapid pace due in large part to more and more new technologies such as smartphones and electric vehicles, instability on the supply side has both created and limited opportunities for companies looking to move into production outside of China.
Medallion Resources Ltd. ($MDL:CA) (MLLOF) is one company that is leveraging this environment to its advantage. With a unique business strategy that can create low-cost production in the near term, Medallion has managed to navigate through turbulent market conditions in a way that very few rare earth companies have been able to.
www.equities.com had the opportunity to catch up with Donald Lay, CEO of Medallion Resources, to discuss current and future rare earth market trends, and how his company is positioned to execute on its opportunistic strategy.
EQ: Medallion Resources operates in the rare earth elements space, which became a very hot industry only a few years ago with all the new technologies and the demand for rare earth elements to create them. A lot of people may not be familiar with some of these materials that go into the products that they use every day. Can you tell us a little about rare earth elements and their marketplace?
Lay: Rare earth elements are 17 unique elements in the periodic table. They’ve got special properties associated with them: chemical properties, phosphoric properties, magnetic properties and catalytic. Chemically, they’re very similar to each other in many ways. So when they're found, they’re normally always bound together in deposits. That’s interesting in the sense that when you find one rare earth, you'll typically find them all, though the proportions of different rare earths you'll find in different mineral properties would vary. Also, because they’re chemically similar, it also means they're also a little bit tricky to tease apart and as well as the metallurgy can be challenging.
With that said, rare earths are becoming important because these unique properties are especially important in a number of high tech areas. They’re used in energy saving and energy producing applications, and electronics manufacturing uses significant quantities of rare earth. Their growth has been quite dramatic, and certainly faster than your basic minerals but it still remains a relatively small market at about $5 billion to $6 billion a year. The Chinese now dominate the processing and have been for the last 20 to 30 years.
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| Donald Lay, CEO of Medallion Resources |
EQ: The landscape of the rare earths market has endured quite a lot of changes to the dynamic just in recent years. What were some of the major drivers of that volatility?
Lay: The reason why rare earth became interesting to the marketplace a few years ago was that the Chinese had dominated the industry for a number of years, but decided that the rare earths were more valuable for use within their manufacturing sector. It’s now part of China’s industrial policy. They put in quotas and taxes on the exports, and limited the amount of production of rare earth within China, in effect capping it. That drove up the prices of rare earths, which then spawned a big investment cycle in junior mining companies outside of China to find rare earth element properties and opportunities
Subsequent to that, the prices for rare earths have come down. They’re still certainly well above their historic lows previous to the bubble — but well below the peaks that were reached a few years back at the height of the rare earth crisis..
EQ: Medallion’s approach has always been unique in the sense that you're leveraging the nature of the market to operate much more cost-effectively than your typical rare earth company. Can you tell us about Medallion's approach to this space and how that differentiates you from the rest of the rare earth element companies?
Lay: Most of these companies went out and looked for hard rock, rare-earth occurrences and ideally deposits they could turn into mines. Our approach was different and it was really to go after a mineral resource that was a byproduct of another mining industry. That mineral is monazite, which is found as a byproduct of the heavy mineral sands processing industry. Heavy mineral sands are basically beaches that are mined—usually through dredging operations but sometimes through truck and shovel—They’re mined principally for their heavy minerals like titanium and zircon.
Once these beaches are mined and the heavy minerals are separated, they end up with some monazite as a byproduct. The large beach sand mining operation might produce somewhere in the range of 5,000 to 10,000 tons of monazite a year. Monazite is about half rare-earth elements. In effect that beach sand mining operation is making available 2,500 to 5,000 tons of rare earths per year.
The entire rare earth market globally is about 120,000 tons. So it’s a significant quantity of rare earths available in the beach sands and one of the advantages is somebody else is doing all the mining and separating. The other big advantage of this approach is the fact that it's a by-product material. We’re looking to aggregate the supply of this and process the monazite for its rare earth elements.
EQ: What is monazite used for?
Lay: Monazite is a rare-earth phosphate mineral. It’s a compound that's comprised of rare earth, some thorium which is a slightly radioactive element that needs to be disposed of, and phosphate. When you break down monazite you end up with those particular components. Phosphate is a by-product for us and an important chemical used in the fertilizer business.
EQ: You were recently named the new CEO for Medallion, and Bill Bird is now the Chief Technical Advisor. Can you tell us some of the reasons for the management shift and how that affects the company and its shareholders going forward?
Lay: Bill Bird and I still work together closely. His focus really has always been on the technical side of the business and that hasn’t changed. The company is moving more towards getting business and financing transactions and arrangements. That’s more my area. It’s sort of a natural evolution in the change of management and we've also appointed a separate Chairman as well for the company. Bill remains a director and very active in the technical side of the company.
EQ: How does this position the company going forward to capitalize on the current market? The overall resource sector has been battered the last few years, and rare earth elements have been no exception. Can you give us an idea of some market trends right now that are depressing prices and what should investors look for when seeking quality companies in the space during this time?
Lay: Over the last few years it's become clear to the marketplace that it's always very difficult to get a new rare earth project to production. One only has to look at Molycorp. (NYSE: MCP) and Lynas (ASX: LYC). Molycorp is an American company with a world-class deposit at Mountain Pass, California. From the 1970s through the 1990s, it was the world's largest rare earth mining operation and produced about half the world's rare earth for quite a long time.
Molycorp has gotten back into production and Lynas, which is an Australian company that mines in Australia but processes in Malaysia, is getting into production as well. Those two companies are now in production but it took them a lot of capital and a lot of time to get into there. What everybody is realizing is that it's a very expensive, time-consuming process to get into production for rare earths.
We're a little bit different because we've actually got a very low capital cost to get into production and we have no chemistry problems to solve. Monazite is well understood and well known. It’s been processed for over 100 years for its rare earths. Medallion is an processing play, not a mining play. It’s about aggregating the monazite supply, finding the right place to produce the rare earth and getting into production to sell a concentrate.
EQ: So because the costs to identify properties and to begin traditional production are so high, it creates very difficult barriers to entry for potential competitors. Does this put you in a position that allows you to execute without having to deal with a lot of new competition?
Lay: We think we're in a fabulous position right now. Today it would be a burden to have a rare earth property and we don’t have a property we’re developing. We're looking to enter into long-term contracts with the suppliers of monazite, which is in effect almost as pure as rare earth ore as one could get. We then look to process that in a low-capital cost and low-operating cost environment to produce rare earths. We’re really thrilled about the place we're at, notwithstanding the depressed general rare-earth markets and our own low stock price, of course. But we're excited with our strategy and believe it's the right approach to get to significant production in the near term.
EQ: Those are very compelling factors when looking at Medallion right now, but as you said, given the market environments and the challenge that it faces, what are some obstacles that the company has to overcome to execute its strategy successfully?
Lay: One of the key things really for us are the feedstock agreements. They’re selecting the right location to process in. We have some MOUs with some parties in the Middle East for processing, but we've got an open mind about where the best place to process is.
Then it's about securing a buyer for the feedstock on the other side. When those things come together, we believe we have a very economical project and given the low financing cost, we would be well positioned to get into production reasonably quickly and be an alternative supplier outside of China.
EQ: Going forward, are there any specific milestones or benchmarks over the next 12 to 18 months that investors should pay attention to for the company?
Lay: I would suggest that the key ones are really feedstock agreements, and agreements that prove-out or create a pro-forma product concentrate with potential customers. Third would be developments on securing the financing and the location for processing. I think those are the three key areas for investors to watch out for.
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