Earlier today the Chinese Ministry of Commerce announced an update to the 2012 allocations of rare-earth export quotas that were first issued in December 2011 (you can see my original article on this topic here). This follows a number of other recent announcements from China, of relevance to the export quotas. The following article summarizes the quota situation as of today, May 17, 2012, and provides updated numbers and allocation information.

In the original first round of allocations, a total of 24,904 t of export quotas were allocated to companies that were divided into two groups. The first received confirmed quota allocations, while the second received only provisional allocations. Companies were placed into one of these groups based on their progress towards the implementation of new pollution-control measures, with the latter group being told that they would get their allocated quotas if they met the various requirements by July 2012. They were further told that failure to meet the new requirements by this date would result in their quotas being re-allocated to other companies.

On May 10, 2012 the Chinese Ministry of Environmental Protection published a list of 41 rare-earth companies that had passed the pollution-control inspections mandated by that Ministry last year. Included on that list were most (but not all) of the companies previously allocated provisional export quotas, by the Ministry of Commerce.

Today’s announcement from the Chinese Ministry of Commerce included some minor adjustments to the quotas allocated in this second batch of confirmed allocations, resulting from the subsequent inclusion of data relating to the last two months of 2011, that was not included in the original calculations for quota allocations. In addition, the Ministry announced the consolidation of the quota allocations for three separate companies (Changshu Shengchang Rare Earth Smelting Co., Funing Rare Earth Industry Co. and Jiangsu Geo Quin Nano Rare Earth Co.) into a single allocation for their parent company (Chalco Rare Earth (Jiangsu) Co.).

So as it stands today, the updated first round of quota allocations totals 25,150 t. Assuming that the Ministry of Commerce sticks with its December 2011 plan for the first round of allocations to represent 80% of the quota allocations for 2012, then the total for 2012 will be an estimated 31,438 t of rare earths, slightly higher than last year.

Here’s how the three groups of allocations break down, as of today:

Let’s now break this down further – first, here are the companies that have received confirmed quota allocations, either in the first batch issued on December 27, 2011 (shown in green), or the second batch issued on May 17, 2012 (shown in red). They are further divided into sub-lists for Chinese and Chinese / non-Chinese joint-venture (JV) companies. The two sub-lists are sorted from highest-to-lowest total allocation:

* Part of China Minmetals Group, which was allocated a confirmed total of 2,457 t.
** Part of Baogang Group, which was allocated a confirmed total of 1,447 t.

Next, are the companies that received quota allocations on December 27, 2011, which were provisional on them meeting the new pollution-control standards, and which were not converted to confirmed quotas in the May 17, 2012 announcement. The list is again divided into sub-lists for Chinese and Chinese / non-Chinese JV companies, which are sorted from highest-to-lowest total allocation:

** Part of Baogang Group, which has a remaining provisional allocation of  1,984 t in total.

Finally, here is a comparison of the quota allocations for the past three years (compare to the projected total of 31,438 t of quota for 2012):

The most prominent companies still in the provisional category are two rare-earth enterprises that are part of the Baogang Group (Inner Mongolia Baotou Steel Rare Earth Hi-Tech Co and Inner Mongolia Baotou Hefa Rare Earth Co.) and one of the enterprises operated by Neo Material Technologies (Zibo Jiahua Advanced Material Resources Co.).

Given the individual adjustments made when converting provisional to confirmed quota allocations, we might expect to see slight changes to the remaining provisional quota allocations, if and when these companies are approved by the Ministries of Environmental Protection and Commerce, and finally receive their allocated quotas.

When the subject of quotas for the Chinese rare-earth industry comes up, we’re generally talking about export quotas, which control (in theory at least) how much material may be shipped out of China, in any given period, and by which companies. Such quotas are controlled by the Chinese Ministry of Commerce (MOC) and their existence is at the heart of the recent WTO complaints filed by the USA, Japan and the EU, against China.

There are, however, at least two other sets of quotas that affect the rare-earth industry in China. The first concerns the separation and smelting of rare-earth products, controlled by the Chinese Ministry of Industry and Information Technology (MIIT); the other concerns mining quotas, controlled by the Chinese Ministry of Land and Resources (MLR). Of the two, the mining quotas are usually the more prominent, and each year, usually sometime in March, the MLR publishes a list of the mining quotas that have been allocated to each province or region in China.

Each year that is, until this year.

For 2012, the MLR has taken a different approach to the allocation of mining quotas. The first difference is that the Ministry does not appear to have published a single list of mining quotas allocated to the provinces and regions, as it has in previous years. Instead, individual departments for land and resources within the provincial and regional governments were apparently sent a notice roughly titled “2012 Tungsten, Antimony And Rare Earth Mining Quotas (First Batch)” (a copy of which is not available online) indicating the mining quota allocated, and the companies to whom those quotas were to be assigned.

This latter point is also something of a change; it is my understanding that previously the provincial / regional government department got to decide which companies received the mining quotas. I’m going to assume that the MLR has stepped in here to ensure that only companies that meet the pollution control standards as overseen by the Chinese Ministry of Environmental Protection (MEP), may receive mining quotas. This is a similar situation with the allocation of export quotas by the MOC. Sources within China have confirmed that getting quotas of any type for rare-earth production these days, very much depends on being on the MEP’s list of approved companies.

The other significant difference to previous practice, is the allocation of only a first batch of mining quotas to the provinces and regions for 2012. While this batching approach has been normal for rare-earth export quotas for years, to my knowledge this is the first year that it has been applied to the mining quotas. The associated provincial and regional announcements on the mining quotas generally reference the MLR’s desire to reduce over-production of rare earths, and to maintain rare-earth price “stability”.

Just like the split of export quotas by the MOC into light and medium / heavy rare earths for 2012, it is likely that this batching was done in anticipation of the WTO complaint, and gives China some options for the second batch for 2012 in terms of quantities (probably to be announced sometime at the end of Q3 2012). There is almost certainly significant excessive inventory of all finished rare earths in China at present, so even if the MLR decides to reduce the mining quotas for the second part of 2012, this would have little effect on actual availability (though the effects of the new invoicing system that has been mooted for months, may).

Reducing overall mining quotas for 2012 would bolster any response to the WTO complaint that relies on exceptions relating to pollution control and to protecting “exhaustible natural resources”, as the Chinese could now justifiably point out that the overall restrictions that they have implemented, affect both domestic and foreign companies.

Of the 7 out of 9 provinces and regions that have announced their mining quotas to date, all but one have received a quota that is 50% that of their total allocation for 2011, with the 7th not far off. 2 of the provinces, Sichuan and Shandong, do not yet appear to have published any information on their mining quotas for 2012. Whether this is because the mining companies to whom such quotas would be allocated, have not yet passed the pollution control standards, or if it is simply because there has been a delay in publishing the numbers, I am not sure.

The numbers that I was able to obtain can be found in the table below, which also shows the allocations in previous years, for comparison.

It should be noted that in previous years, the estimated actual mining production of rare earths in China has been significantly higher than the total mining quotas allocated; in 2010, for example, Chinese sources estimated a total production of around 119,000 t, compared to the 89,200 t of total mining-quota allocations.

As and when we get hold of the numbers for Shandong and Sichuan, I’ll update the table.

I recently updated the list of projects on the TMR Advanced Rare-Earth Projects Index, to reflect one new rare-earth mineral-resource estimate that was announced recently. I also made some other updates. The specifics:

• Greenland Minerals and Energy Ltd. (ASX:GGG, PK:GDLNF) announced a JORC-compliant mineral-resource estimate for its Zone 2 project in Greenland, on March 21, 2012. According to the associated press release, 242 Mt of the resource is at the Inferred level @ 1.10% TREO, at a cut-off grade of 0.015 wt% U₃O₈).

I have also updated the pricing used in the Index data, to reflect the average monthly prices for April 2012 and the moving three-year average price for separated rare-earth oxides.

FYI, TMR is now tracking a total of 429 rare-earth projects under development associated with 261 different companies in 37 different countries.

You can access the updated details via the Index page.

Disclosure: at the time of writing, Gareth Hatch holds no shares or stock options in any of the companies mentioned in this article, or in any publicly traded rare-earth company, nor is he doing paid consulting for any such company.

Today we announce the launch of the TMR Advanced Graphite Projects Index, an objective tool for tracking the leading new exploration & development projects in the graphite sector. This follows a number of requests to create such an Index, similar to the one that we maintain for the rare-earth sector.

You can visit the new Index page by clicking here or using the short cut: www.graphiteindex.com.

While graphite appears to have come out of nowhere to become the new darling of the junior-mining investment community, it is an important industrial material with a wide range of uses.

Graphite has long been used as a lubricant, as a liner for furnaces, crucibles and lades in the steel industry, and in fire retardants, heat shields and brake pads. It is also used in pebble-bed nuclear reactors, photovoltaic cells for solar panels, carbon fibers, fuel cells and in so-called lithium-ion battery cells (which, the graphite project developers are always quick to tell us, contain far more graphite than they do lithium).

It is this latter application, plus the potential of the next-generation wonder material graphene (produced from sheets of carbon atoms just a single atom thick), that is driving the interest in new sources of natural-graphite supply. Graphite can be synthesized from coal and petroleum products, and synthetic graphite is used for a variety of the above applications. However, batteries and other growing uses of graphite frequently require the type of morphology only found in naturally occurring forms of graphite.

Three forms of natural graphite are of industrial interest: flake, amorphous and lump (or vein). So-called large-flake, high-purity graphite is of greatest interest to graphite junior-mining companies – analogous in some ways to the desire to find rare-earth deposits rich in the heavy rare earths. Large-flake graphite is of particular interest for the production of lithium-ion batteries.

In creating the TMR Advanced Graphite Projects Index, we took some cues from our Index for rare earths. You should note that we are primarily interested in graphite and other materials from the strategic point of view – i.e. in the furtherance of the needs and demands of the overall technology supply chain. We are less interested in finding “five bagger” investments and more interested in projects that are going to actually produce metals and materials. I make no apologies for this fact.

The TMR Advanced Graphite Projects Index consists of natural-graphite projects currently underway around the world, which have been either:

• formally defined as mineral resources or reserves under the guidelines of a relevant scheme such as NI 43-101 or the JORC Code; or
• are past-producing mines, with historical estimates that are actively being updated to comply with a relevant scheme.

The first iteration of the Index consists of 7 advanced graphite projects, associated with 8 different companies and located in 3 different countries:

• Bissett Creek in Ontario, Canada is being developed by Northern Graphite Corporation (TSX.V:NGC, OTCBB:NGPHF). The company recently completed a Preliminary Economic Assessment (PEA) of the project. It has a NI 43-101-compliant mineral-resource estimate, with 26.0 Mt of the resource at the Indicated level @ 1.81 wt% CG and 55.0 Mt at the Inferred level @ 1.57 wt% CG (both at a cut-off grade of 0.99 wt%);
• Kearney in Ontario, Canada is being developed by Ontario Graphite Co. The Kearney mine previously produced graphite until 1994. The project has a NI 43-101-compliant mineral-resource estimate, with 18.3 Mt of the resource at the Measured level @ 2.35 wt% CG, 25.7 Mt of the resource at the Indicated level @ 2.33 wt% CG and 12.3 Mt at the Inferred level @ 2.42 wt% CG (each at a cut-off grade of 1.5 wt%);
• Kringel in Gävleborg, Sweden is being developed by Flinders Resources Ltd. (TSX.V:SGH). The Kringel mine previously operated between 1996 and 2001. The project has a historical mineral-resource estimate of 6.9 Mt @ 8.8 wt% CG, at an undisclosed cut-off grade and its present owners are in the process of upgrading those resources to be compliant with NI 43-101;
• Lac Knife in Quebec, Canada is being developed by Focus Metals Inc. (TSX.V:FMS, OTXQX:FCSMF, F:FKC), which will soon change its name to Focus Graphite Inc. It has a NI 43-101-compliant mineral-resource estimate, with 0.64 Mt of the resource at the Measured level @ 15.6 wt% CG, 4.3 Mt of the resource at the Indicated level @ 15.7% CG and 3.0 Mt at the Inferred level @ 15.6 wt% CG (each at a cut-off grade of 5.0 wt%);
• Nunasvaara in Norbotten, Sweden is being developed by Talga Gold Limited (ASX:TLG) and a subsidiary of Teck Resources Limited (NYSE:TCK), on which Talga has an 100% purchase option. The project has a JORC-compliant mineral-resource estimate of 3.6 Mt at the Inferred level @ 23.0 wt% CG, at a cut-off grade of 5 wt%;
• Raitajärvi in Norbotten, Sweden is being developed by Talga Gold Limited (ASX:TLG). It has a JORC-compliant mineral-resource estimate of 0.5 Mt at the Inferred level @ 10.8 wt% CG, at a cut-off grade of 5 wt%;
• Uley Main Road in South Australia, Australia is being developed by Strategic Energy Resources Ltd. (ASX:SER), which has signed an Implementation Deed with Mega Graphite Inc. for the acquisition by Mega Graphite of the project. The Uley mine previously operated until 1993. The project has a JORC-compliant mineral-resource estimate, with 4.3 Mt of the resource at the Indicated level @ 9.4 wt% CG and 2.3 Mt at the Inferred level @ 7.5 wt% CG (both at a cut-off grade of 3.8 wt%).

(N.B. all project information summarized above originates from the respective project owners). 

We’ll update the Index on a monthly basis, as information on new projects becomes available. At present we are aware of an additional two projects in Canada and one in Australia that may be eligible for inclusion on the Index; more to follow on those. Feel free to use the sign-up box above, or on the Index page, to subscribe to free updates to the new Index, and to get notifications on new commentary and analysis from TMR, on the graphite sector.

FYI, in addition to those projects on the Index, TMR is now tracking over 100 other graphite projects under development, associated with a similar number of companies in over a dozen countries outside of China.

You can access the Index page here.

Disclosure: at the time of writing, Gareth Hatch is neither a shareholder of nor a consultant to any of the companies mentioned above.

Earlier today Molycorp announced that the estimated proven and probable reserves at its Mountain Pass rare-earth deposit in California have increased by 36%, based on the SEC’s Industry Guide 7 for making such estimates. The company reported that its mining consulting firm estimates that the Mountain Pass ore body now contains the equivalent of 1.3 Mt in reserves of in-situ rare-earth oxides, with an ore grade of 7.98%.

The company’s press release included the following statement:

The SEC Guide 7 standard of measurement used by SRK measures proven and probable reserves. This standard differs from the NI-43-101 standard, used by virtually all other rare earth companies, in that the NI-43-101 standard measures a potential ore body in terms of “measured, indicated and inferred resources.” Under SEC Guide 7, “inferred” material is treated as waste and is not included in the measurement of reserves, while NI-43-101 standard allows for the inclusion of inferred material as part of a potential resource.

The press release goes on to state:

Inferrred [sic] resources is typically a much larger number in these estimates than measured and indicated resources.

A few comments:

• While it is indeed the case that Canada’s NI 43-101 standard uses the terms “measured“, “indicated” and “inferred” with relation to mineral-resource estimates, it also includes guidelines with regard to mineral-reserve estimates, providing for such estimates to be placed into the “proven” and “probable” categories, similar to those used under the SEC’s Industry Guide 7.
• Measured and indicated resource estimates (referred to collectively as ‘demonstrated’ resource estimates) may be converted to proven and probable reserve estimates if the parts of the mineral deposit that they describe, are found to be economically viable after rigorous investigation and analysis. Inferred resource estimates may not be included in the calculations used to convert demonstrated resource estimates into reserve estimates.
• Australia’s JORC code has similar guidelines for estimating mineral resources and reserves.
• Inferred resource estimates are indeed typically larger than demonstrated resource estimates, because the latter require more extensive drilling and subsequent analysis so that they can be determined. Indicated resource estimates give interested parties a higher degree of confidence in the associated data; measured resource estimates greater still.
• It is the case that there are very few rare-earth deposits out there, with a mineral-reserve estimate that conforms to a recognized standard. In addition to Mountain Pass, the only others of which I am aware, at the time of writing, are Bear Lodge (owned by Rare Element Resources), the Dubbo Zirconia Project (owned by Alkane Resources), Mount Weld (owned by Lynas Corp) and Nechalacho (owned by Avalon Rare Metals).

Companies trading on the Toronto Stock Exchange (TSX) are required to use the NI 43-101 guidelines when publishing their reports, and such reports are required to enter the public domain within a certain time period. Other companies operating in the junior-mining sector, but not listed on the TSX, may voluntarily write technical reports to the NI 43-101 standard; a number do, in order to enhance the credibility of their efforts. Molycorp has in the past had its consultants produce high-quality technical reports that would meet the NI 43-101 standards, which included mineral-resource estimates.

I have always preferred the NI 43-101 approach to mineral-resource classification over that of other schemes, because it seems to provide greater transparency on the early stages of mineral-resource project development, via a rigorous framework for the reporting of mineral resources that is missing under the SEC guidelines. I also prefer NI 43-101 to the Australian JORC Code, which companies trading on the Australian Securities Exchange (ASX) use for mineral-resource classification. This is not because of the technical standard for JORC (on which much of the original NI 43-101 was based), but because companies on the ASX are not required to publicly disclose the associated technical reports.

I’ve long felt that the SEC should amend its guidelines to incorporate language relating to mineral-resource classifications, similar to that contained within NI 43-101, to give US investors valuable early visibility into new projects being operated by US companies.

Disclosure: at the time of writing, Gareth Hatch is neither a shareholder of, nor a consultant to, any of the companies listed above.

The China Daily, the official newspaper of the Communist Party of China, publishes an English-language version each day, to which I am a subscriber. I just now received my Sunday edition – it is still Saturday evening in Detroit as I write this. I ask you to read this story in its entirety and then I will make few comments. I have outlined some sections in red (a good color for reporting from China) for emphasis…
—–

Rare earth association ‘to launch next month’

Updated: 2012-03-31 08:07
By Zhou Yan (China Daily)

China’s long-awaited rare earth industry association is due to be established early next month and will cover the majority of companies in the industry chain, in the latest move to consolidate the ill-regulated sector.

The association, which will have more than 100 members, will be formally launched in Beijing on April 8, according to people with direct knowledge of the situation, who declined to be named.

Several rare earth exploring and processing companies confirmed they have received notification to attend the launch ceremony in April, without elaborating.

There has been widespread market speculation for years that the government would set up an official organization to strengthen ties among the industry’s players.

Such rumors have been escalating in recent years as rare earth prices have experienced heavy volatility amid rampant illegal exploration.

For example, neodymium oxide, one of the major rare earth oxides, rose by as much as 82.7 percent since early 2011 due to speculation, but its price has plunged about 70 percent within the past six months, said Chi Weishan, a researcher at Shanghai Metals Market.

The association will be supervised by the Ministry of Industry and Information Technology, according to a report in the National Business Daily, citing anonymous sources.

The major functions of the organization will include providing production guidelines, market research and channels of communication between companies and the government, the newspaper said, adding that the association will play a role in influencing rare earth import and export quotas.

China, which accounts for about 97 percent of the world’s output of the strategically important minerals, faces pressure from the European Union, the United States, and Japan, which filed a joint cased to the World Trade Organization against China over its alleged unfair controls on rare earth exports.

Minister of Industry and Information Technology Miao Wei was quoted by Xinhua News Agency as saying that China’s policy on rare earths exports does not target any specific country.

China holds about 36 percent of the world’s total reserves of the minerals and has paid the environmental cost for its largely unregulated and heavy exploration of rare earths.

Facing possible trade disputes between China and Western countries on rare earths, one of the industry association’s pressing tasks should be to proactively deal with the disputes and guarantee the interests of the Chinese, said Yuan Zhibin, an analyst at the Beijing-based CIC Industry Research Center.

Other responsibilities will include strengthening communications among companies, and also encouraging mergers and acquisitions in the industry, he added.

The State Council issued a document in May to develop China’s rare earth industry, in which it said the government aims to consolidate 80 percent of the heavy rare earth mining assets in southern China in the three biggest companies in the next one to two years.
—–

This announcement is really about the heavy-rare-earth elements (HREEs) extracted today from the so-called ionic-clay deposits in southern China, by the method of heap leaching. First of all, please note that the Chinese government seems to feel that the cost of environmental remediation has not yet been realized. This means that the HREEs have been produced far too cheaply. I predict that China will not increase its production of HREEs until the environmental issues have been dealt with.

Since Chinese domestic demand for consumer goods utilizing rare-earth-containing components in general, and HREEs in particular, is growing and may well be the fastest growing market in any one nation or even region for such goods, this means that Chinese HREE prices in the short term will immediately come under pressure and then trend upwards. However I think that when China is finished consolidating and remediating the environmental damage caused by the HREE extraction techniques used and by illegal mining it is possible that China may make the decision that it should seek to source HREEs from outside of China, because it may not be possible to increase, or even maintain, current HREE production rates and levels safely from the ionic clays.

I note that this edict covers the supply “chain” and that “exploration” companies in the rare-earth sectors have been “notified to attend.” I suspect that such notifications are identical to “offers” that can’t be refused in Hollywood speak.

I don’t know if there are any hard-rock deposits in China that compare to those in North America, Europe, Australia, and Southern Africa in having relatively high ratios of heavy rare earths to light rare earths. I have never heard of any, but I also know that  legal exploration geology in China is highly regulated, and that no licenses will be issued for rare-earth exploration until this June at the earliest, after a nearly two-year hiatus in their issuance.

Most (but not all) of the hard-rock HREE  deposits outside of China are of the type that contains significant thorium and/or uranium, so, in those cases, their production technologies must conform to very strict health and safety rules. They have also turned out to be mostly of the types of minerals that form silica gels when “cracked” with ordinary reagents, so their further treatment is a chemical engineering challenge that has been little researched up until the critical nature of these specific metals was recognized, just in the last few years.

I am aware of very significant progress in the cracking chemistry for hard-rock HREE minerals, and I am aware of the existence of large deposits of such hard-rock deposits that are essentially thorium/uranium free.

Japanese heavy industry and Chinese commodity powerhouses are now on the hunt worldwide for these deposits, because of the above-discussed impediments to any increase in their production in China at least for the next few years.

The United States has discouraged Chinese investors from buying control of American rare earth, or indeed of any mineral commodity, deposit or mine. Canada is I believe less reluctant, and, in the case of Japan’s Toyota Tsusho, may in fact be encouraging foreign ownership if it leads to the development of mining and refining jobs in Canada. I note that that the Toyota group has invested tens of billions of dollars in Canada and annually produces nearly ten billion dollars of products within Canada.

The European Union is, like the USA, not so eager for Chinese direct investment, but the heavy industry of the European Union, like Japanese heavy industry, has recognized the security of supply problem specifically with regard to the HREEs. Europe is well on the way to having a total domestic (EU) supply chain in place to produce HREEs by mid-decade. Japan, like Europe, needs only a mine to complete its existing total domestic supply chain.

Note that the world’s largest producers of the light rare earths in Inner Mongolia do not seem to be mentioned in this press release. This is not, I think, because their production has been free of environmental or safety problems, but because such consolidation has already occurred to a great extent under the aegis of BaoSteel’s subsidiary. This is not a good sign for light-rare-earth producers outside of China, because the Inner Mongolian rare-earth deposits are the largest known in the world, and are mined at less than 50% of capacity.

Small investors and the American government need to pay attention to the list of HREE  juniors I noted elsewhere last week. A far larger percentage of them will survive the current market cull and go on to profitable production than will survive of the more than 225 light-rare-earth-themed companies.

The American government has done an abysmal job of securing its supply of HREEs and of supporting the re-creation of a total domestic American supply chain.

The Chinese are clearly worried about their domestic security of supply of the heavy rare earths. They are, as the official article above states, going to be proactive in solving that problem. These movements by the Chinese were set in motion long before anyone in the US government finally learned how to spell WTO. The Chinese will not be deterred from their long term goal.

We need to re-learn how to compete not just to whine.

Introduction

As those who follow the rare-earths sector will know, on March 13, 2012, the United States, the European Union and Japan (the complainants) filed simultaneous and near-identical complaints with the World Trade Organization (WTO), in which they requested consultations with China (the respondent) on the measures that it has in place related to restrictions on the export of rare earths, tungsten and molybdenum.

The following article presents an overview of the WTO dispute process, the specific details of the rare-earths-related complaints, and looks at how China might respond to the specific complaints made. It also looks at various criticisms of the complainants for filing the disputes. In addition, the article looks at the consequences of the various potential outcomes of the disputes, once they have been concluded, and looks at clues as to how things might actually turn out, gleaned from a similar WTO trade dispute.

The WTO Dispute Process

The precursor to the WTO (and later subsumed into it), the General Agreement on Tariffs and Trade (GATT) had a mechanism for dispute resolution, but it had significant limitations. The Marrakech Agreement (also known as the Uruguay Round agreement) in 1994 established the WTO itself, as well as the WTO’s Dispute Settlement Body (DSB). The WTO describes the rationale for the process thus:

WTO members have agreed that if they believe fellow-members are violating trade rules, they will use the multilateral system of settling disputes instead of taking action unilaterally. That means abiding by the agreed procedures, and respecting judgements.

Much of the recent commentary on the disputes has accused the complainants of cynical motives for their initiation (perhaps understandably so, depending on one’s perspective). The fact remains, however, that the four parties involved are all members of the WTO, and have all formally agreed to the above process for dispute resolution. It is thus far from inappropriate for the complainants to use the legal mechanisms at their disposal in order to further their collective interests.

Under the normal rules of the DSB (which actually consists of all members of the WTO in general session), the first stage of any dispute is the consultation process, which may last up to 60 days. If these consultations fail, then the DSB will appoint a Dispute Panel, whose final report can only be rejected by the consensus of the DSB. Rejection is thus highly unlikely. This is the opposite of the old GATT approach, in which rulings could only be adopted by consensus, which meant that the objection of a single member (such as the respondent in the dispute) could block such a ruling.

Either side may appeal the findings of the Dispute Panel, primarily on the basis of the way that existing rules have been interpreted. No new evidence may be presented at that time. Such appeals are heard by a subset of the permanent Appellate Body, which can uphold, modify or reverse the findings of the Dispute Panel. The DSB is required to accept or reject the report of the Appellate Body within 30 days. Again, rejection of the findings requires full consensus of the DSB, so is highly unlikely.

Under normal circumstances, disputes are expected to be concluded within 12 months of initiation. Any appeals are expected to be concluded within a further 3 months, so that the whole process is supposed to be completed within 15 months of initiation. The process does allow for flexibility in these timelines, and in reality, disputes often take longer. A recent dispute (that we’ll come back to later in this article) initiated by Mexico, the European Union and the United States in August 2009, concerning the export of bauxite, coke, fluorspar and other materials from China, was finally deemed to have been settled in February 2012, some 30 months after initiation.

Details of the Recent Complaints

The complainants each filed near-identical requests for consultation with China, “with respect to China’s restrictions on the export of various forms of rare earths, tungsten, and molybdenum.” The requests made reference to numerous Harmonized System (HS) codes (used for classifying products, materials and services for international import and export) for specific rare-earth, molybdenum and tungsten products and compounds. In the case of rare earths, forms referenced in the documents include (but are not limited to):

• Rare-earth ores;
• Thorium ores & concentrates (presumably by virtue of their rare-earth content?);
• Individual rare-earth metals, including so-called “battery-grade” rare-earth metals;
• Individual and mixed rare-earth oxides, carbonates, chlorides, fluorides and other compounds (including cerium hydroxide & cerium cyanide);
• Rare-earth-containing phosphorescent powders;
• Rare-earth-containing ferroalloys; and
• A variety of rare-earth-containing magnetic powders and alloys.

Yttrium and scandium are included in the HS code classifications for rare earths, alongside the lanthanides.

With respect to “various forms of rare earths, tungsten and molybdenum“, the complainants specifically alleged the following actions by China are not in line with current WTO trade provisions:

• The imposition of export duties;
• The imposition of export quotas and other quantitative restrictions;
• The imposition of other restrictions such as the right to export based on licenses, prior export experience, minimum capital requirements, and “other conditions that appear to treat foreign invested entities differently from domestic entities“;
• The maintenance of minimum export prices, through the examination and approval of contracts and offered prices, and through the administration and collection of the export duties, “in a manner that is not uniform, impartial, reasonable, or transparent“;
• The imposition and administration of restrictions through unpublished measures.

The trade provisions with which the complainants allege that the aforementioned measures do not comply include:

• GATT Article VII: ‘Valuation for Customs Purposes’;
• GATT Article VIII: ‘Fees and Formalities connected with Importation and Exportation’;
• GATT Article X: ‘Publication and Administration of Trade Regulations’;
• GATT Article XI: ‘General Elimination of Quantitative Restrictions’;
• Various commitments within the Protocol on the Accession of the People’s Republic of China (including specifically Paragraph 11.3); and
• Various commitments within the Report of the Working Party on the Accession of China.

To summarize the proceedings then, the complainants allege unfair treatment of non-Chinese entities via export restrictions, discriminatory commercial operating rules within China, the setting of unofficial minimum export prices (what some might call price fixing) and an overall lack of transparency concerning the implementation of the measures in question.

The Chinese Response

These are early days for the disputes. At the time of writing, the Chinese delegation has not yet officially responded, through the WTO, to the request for consultations by the three complainants. There have, however, been some initial responses from official and unofficial Chinese sources outside of the WTO arena, with some having been published prior to the request for consultations, in anticipation of the WTO action. These responses mostly refer to allowable exceptions that are embodied within the GATT that, such sources contend, allow WTO members to put measures in place to control exports. Let’s take a look at some of the cited exceptions and other responses.

GATT Article XX: ‘General Exceptions’ begins with the statement:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

before going on to list a variety of the aforementioned measures, some of which are likely to be referenced in the Chinese response to the complaints. These include measures:

“(b) necessary to protect human, animal or plant life of health;“

This obviously relates to measures meant to protect the environment, and to mitigate pollution. Sources both Chinese and non-Chinese have frequently cited the environmental damage caused by rare-earth mining and processing, as a justifiable reason for restricting the export of rare earths. There is certainly significant evidence to suggest that rare-earth operations have previously caused widespread pollution and damage to local ecosystems, have contaminated water sources and have caused health problems in local populations, livestock and plant life.

However, it is difficult to see how controls on the ultimate destination of rare-earth materials once out of the ground and processed, have any effect on the practices used to get them out of the ground and processed in the first place. Recent estimates indicate that approximately 65-70% of demand for rare earths comes from end users within China. A more persuasive argument could be made if overall production levels of rare earths were reduced, as a means of reducing the environmental impact of rare-earth mining, instead of restricting their export. However, overall production levels of rare-earth ores have remained steady or have actually increased in recent years.

There are indications that excess rare-earth processing capacity in China is being taken offline, with an emphasis on the closing of facilities that have the most egregious track records when it comes to pollution. New standards for pollution mitigation have also made a positive contributed here. Only the most skeptical of observers would deny that at least recently, China is taking the pollution problem associated with rare earths seriously.

There is no explicit language in this clause of Article XX that relates to or requires the application of measures to domestic production or consumption, in order for them to be legitimately applied to exported materials as well. China may therefore be able to use this measure to successfully justify the export quotas and licensing processes, even if non-domestic customers are disadvantaged by them, if they can demonstrate that such actions are not a “disguised restriction on international trade“, as stated in the pre-amble for Article XX.

“(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;“

Another oft-cited argument for the implementation of rare-earth export restriction relates to the disparity between the proportion of rare-earth supply that originates in China (around 95% these days), and the proportion of global rare-earth resources located within China (approximately 30-35% depending on who you talk to). Proponents of this argument say that this places an undue burden on China, which is unfairly expected to meet the demand for rare earths out of proportion with its resources, which are rapidly being depleted.

There are a number of issues with these arguments:

• The first is that again, over two-thirds of overall demand is coming from end users located in China, and thus the comparison should perhaps be between proportion of supply (95%+) to proportion of demand (65-70%), rather than to proportion of resources (30-35%). Granted, a significant fraction of those end users are exporting end products back out of China to the rest of the world. Those end users would of course argue that they were ‘forced’ to locate their operations in China in order to be competitive with Chinese market participants. We can also be pretty sure that the Chinese authorities didn’t resist the opportunity for the creation of jobs and tax revenues, when those foreign companies set up shop in their country.
• The second issue relates again to the fact that it is difficult to see how controls on the ultimate destination of finished rare-earth materials through export restrictions, have any effect on efforts to conserve China’s rare-earth resources, since overall rare-earth production levels have not decreased in recent years, and numerous companies which previously received rare earths outside of China, have relocated operations to be within China.
• The third issue relates to the question of whether or not the rare-earth resources in China can be deemed to be “exhaustible”. Of course, any specific finite natural resource deposit that is removed from the ground, will at some point be exhausted. In the case of the rare-earth deposits in northern China however, where the vast majority of the world’s light rare earths come from, estimated mine lives in the hundreds of years are frequently quoted, with little disagreement.
• In contrast, the ion-adsorption clays in the southern part of China, from where the world’s heavy-rare-earth supplies originate, are frequently referred to as being rapidly depleted, with mine lives estimated by the authorities to be in the order of anything from 6-20 years. While I am aware of more than one source that privately disputes these numbers, nevertheless, there would appear to be legitimate concern in China regarding potential exhaustion of the southern deposits.
• This contrast in depletion rates between deposits in the north and south of the country, is perhaps one reason why this year, for the first time, the authorities in China divided the export quotas into separate allocations for light and for medium + heavy rare earths, in anticipation of the WTO trade dispute. Unlike for medium + heavy rare earths, significant new sources of light rare earths are expected to come on-stream in the next 12 months, from outside of China, and it is likely that the allocations by the Chinese for the export of light rare earths will be adjusted accordingly. In addition though, having a separate allocation for the rarer medium + heavy rare earths could well make for a strong fall-back position for China, if it fails to make the “conservation of exhaustible natural resources” argument for the rare earths as a whole.
• The fourth issue (and frankly the most problematic) relating to reliance on clause (g) above, is the explicit expectation that any measures taken with respect to foreign consumers, will only be deemed valid if those measures are also applied to domestic consumers as well. In my mind, this is the single biggest flaw in any attempt by the Chinese authorities to use the ”conservation of exhaustible natural resources” argument to justify export restrictions, since by their very definition, they apply only to foreign consumers. It may smack of a technicality, but it’s a pretty significant one, and frankly will undermine any attempt by China to use clause (g) to counteract the complaints filed.

“(j) essential to the acquisition or distribution of products in general or local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist [...].”

In some ways, this clause is a variation of the previously discussed clause (g) of Article XX. While it would not hold much water with respect to the northern light-rare-earth deposits, it is possible that it might be used with respect to the supply of heavy rare earths, although it would be a bit of a stretch to equate the future potential exhaustion of deposits, with “general or current local short supply.” I therefore think that it is unlikely that China will use this clause in its arguments, and that such a claim is even more unlikely to stand up to scrutiny if it does.

In addition to Article XX of the GATT, Article XXI: ‘Security Exceptions’ might, in theory, come into play as well. Commentators have noted that during the Rose Garden press conference of March 13, 2012 to announce the request for consultations, President Obama did not make mention of the importance of rare earths to the defense supply chain (and, incidentally, did not mention tungsten or molybdenum at all). While it is true that the largest volumes of anticipated rare-earth demand are likely to be in the green-technology applications mentioned during the President’s announcement, rare earths are deemed by many to be critical to a range of defense applications. This, despite a dominant group within the US Department of Defense not agreeing with this assessment (or at least, declining to acknowledge that there is a risk of disruption to their supply, despite the best efforts of certain members of Congress to persuade them otherwise).

It is possible that these defense applications were deliberately not mentioned by the President, to avoid giving the Chinese WTO delegation an incentive to use part of Article XXI in a future response to the WTO action, specifically the sub-clause that states:

“Nothing in this Agreement shall be construed [...] (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests [...] (ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;”

This sub-clause is the (legitimate) basis for numerous countries placing restrictions on trade, where such trade could impact national security. In the USA, a good example would be the restrictions on the export of dual-use technologies, as outlined in the Defense Federal Acquisition Regulation Supplement (DFARS). I’ve never heard anyone on the Chinese side use this as an argument for export restrictions on rare earths, and it is unlikely to start doing so. Still, we can be pretty sure that the US in particular will avoid bringing the topic up during the subsequent consultations.

Criticisms of the Recent Complaints

In anticipation of a WTO trade dispute concerning rare earths and subsequent to its initiation, various commentators have criticized the complainants for taking such actions.

One common criticism is that the United States in particular, is trying to use the WTO action to ‘force’ China to mine materials that it is not prepared to mine itself, because of the environmental problems that such mining can cause. The argument goes that the non-Chinese market for rare earths was happy to enjoy the low costs of these materials until relatively recently, but that such costs were only possible because of the lack of pollution mitigation in China.

While I can empathize with this latter viewpoint to an extent, I am not convinced that anyone is trying to ‘force’ China to mine anything, since a positive finding for the complainants in this particular instance would not lead to such an outcome.

There is a range of other criticisms of the WTO action that would be similar to the anticipated responses from China, as detailed above. Such criticisms can get quite heated and emotional; however, they invariably fail to acknowledge that ‘rules are rules’; that at the end of the day, each of the parties involved voluntarily signed up to be held accountable to the rules and regulations of the WTO, and to be subject to its processes.

Moving away from criticisms that can be directly argued on the basis of some of the exceptions discussed above, an additional criticism is that the filing of these actions on behalf of downstream end users of rare earths, by the complainants (each a government entity), enables the continued shortsightedness and even belligerence of commercial end users who continue to value profit margins over the strategic concerns of the jurisdictions in which they operate.

The end users continuing to focus only on their own commercial goals, so the thinking goes, without acknowledging possible obligations beyond that, inhibits the potential growth of an upstream supply chain outside of China. After all, Adam Smith himself once stated that “defence is of much more importance than opulence“, condoning preferential treatment for industries deemed to be of strategic importance, since, as he wrote in The Wealth of Nations,

“[i]f any particular manufacture was necessary, indeed, for the defence of the society, it might not always be prudent to depend upon our neighbours for the supply; and if such manufacture could not otherwise be supported at home, it might not be unreasonable that all the other branches of industry should be taxed in order to support it.”

The argument therefore goes that instead of filing WTO disputes on their behalf, the US and other governments should instead be encouraging the rare-earth sector to become independent of China, through the creation of an upstream industry.

Of course, these latter issues are only indirectly linked to the WTO action, and we should not try to infer too much from such actions. As stated above, regardless of what people think that companies and markets should or should not be doing from a commercial or even a strategic perspective, if one believes that governments should adhere to the agreements to which they sign up, then the WTO dispute process is a perfectly legitimate method of asserting the rights of individual members, independent of all other arguments.

One other point that gets raised in the context of the WTO dispute, is that since the Chinese authorities started to impose rare-earth export quotas, there has not been a year where the official actual export numbers came close to meeting or exceeding the quotas set. However, the reduction in export quotas for 2010, by 40% compared to the previous year, caused a surge in price increases that did not abate until the summer of last year, regardless of the actual supply situation ‘on the ground’.

The massive differences between domestic and export prices for rare-earth materials in the latter half of 2010 and much of 2011, further exacerbated issues of competitiveness between enterprises located within China and those located without, and led to demand destruction. It would be one thing if these fluctuations were the result of normal market activities; such would be life in the commercial jungle. But if those price differences were caused by the imposition of unofficial minimum export prices, as alleged in the WTO complaint, then this is a whole other ball game, clearly in contravention of WTO rules and being played on anything but a level playing field.

Potential Outcomes of the Dispute

There are a number of possible permutations for the end result of the collective disputes. If we take the complaints collectively, we can speculate on the consequences of what those outcomes might be, should a dispute panel be formed, and the process comes to a conclusion. Let’s look at some scenarios:

• China is found to be in contravention of the WTO rules on all counts: there are a number of consequences to this ruling. China would be required to remove export restrictions, which would probably lead to a fall in export rare-earth prices, and increased demand as a result. This would likely reduce the incentive for companies to relocate their operations to China if they have not done so to date. However, purely in commercial terms it would also reduce the need, for additional sources of supply outside of China, and could make it harder for the new non-Chinese sources of light rare earths to compete – but purely on (now fair) commercial terms.
• An alternative action, that could happen instead of or in addition to the first, would be the enforced reduction in production levels of rare earths in China, such that both Chinese and non-Chinese end consumers get to ‘share the pain’.  This would lead to shortages of newly mined and produced rare earths, especially heavy rare earths, which could increase prices. This would further increase the incentive for the development of an upstream supply chain outside of China.
• Which of these two alternatives would come to dominate, should they both be put into action, is hard to say at this point.
• China is found to be in contravention of the WTO rules as they relate to light rare earths, but not heavy rare earths: this would be an interesting outcome because although the previous points would apply to light-rare-earth production, the production of heavy rare earths would be exempt, and further restrictions would be possible. It would almost certainly lead to increased prices, and a further widening of the gap between export and internal prices for these materials. This would provide an incentive for end users of heavies to continue to relocate operations to China, but would simultaneously boost the case for the development of heavy-rare-earth projects outside of China. This is particularly the case if the overall demand for heavies continues to grow, especially within China.
• China is found to be justified in its export restrictions, and the WTO finds in its favor: if the WTO rules that China’s export restrictions are justified, and does not require internal consumers to be subject to similar requirements as non-Chinese consumers, then the most obvious outcome would be a greater incentive for foreign end users to move operations to China, or to buy semi-finished or finished products from China, since it is likely that the price differential between domestic and export rare-earth materials will continue to be significant.  Such a ruling would provide significant incentive to develop the external upstream supply chain. If China comes out on top with the disputes and if it really is running out of heavy rare earths, then it would still need to ‘play nice’ with the complainants (although with the possible exceptions of the Norra Kärr project in Sweden and the Bokan project in Alaska, the leading potential new sources of heavy rare earths are not to be found in the jurisdictions of the initial complainants), since at some point in the future, China might become a net importer of heavies.

Looking at the Outcomes of Other Cases

It is reasonable to ask if the outcomes of previous WTO trade disputes can be used as precedents for the current set of complaints. The WTO makes it clear that each case is supposed to be considered on its merits, and on the evidence presented. However, if similar complaints have been made in the past, and similar evidence is presented, then it is not unreasonable to look to the outcomes of such disputes to give an indication of how the rare-earth case might turn out.

A particularly relevant case that recently concluded, concerned export restrictions on “various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc“. The original complainants were Mexico, the European Union and the United States, who were subsequently joined by Argentina, Brazil, Canada, Chile, Colombia, Ecuador, India, Japan, South Korea, Norway, Saudi Arabia, Taiwan and Turkey.

Initiated in August 2009 and concluded February 2012, the complaint featured similar allegations to the present rare-earths case. According to the WTO summary of the case:

The complainants argued that the use of export restraints creates scarcity and causes higher prices of the raw materials in global markets. They also provide Chinese domestic industry with a significant advantage by way of a sufficient supply, and lower and more stable prices for the raw materials.

It went on to state that

In one of its key findings, the Panel found that China’s export duties were inconsistent with the commitments that China had agreed to in its Protocol of Accession. The Panel also found that export quotas imposed by China on some of the raw materials were inconsistent with WTO rules.

The Panel found that the wording of China’s Protocol of Accession did not allow China to use the general exceptions in Article XX of the GATT 1994 to justify its WTO-inconsistent export duties. The Panel also considered that even if China were able to rely on certain exceptions available in the WTO rules to justify its export duties, it had not complied with the requirements of those exceptions.

In particular, China had argued in its defence that some of its export duties and quotas were justified because they related to the conservation of exhaustible natural resources for some of the raw materials. But China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials so as to conserve the raw materials. The Panel acknowledged, however, that China appears to be heading in the right direction in adopting a framework to justify its quotas under WTO rules, but that the framework is not yet WTO-consistent as it still has to be put into effect for domestic producers.

As for other of the raw materials, China had claimed that its export quotas and duties were necessary for the protection of the health of its citizens. China was unable to demonstrate that its export duties and quotas would lead to a reduction of pollution in the short- or long-term and therefore contribute towards improving the health of its people.

Furthermore:

Regarding the administration and allocation of its export quotas, China successfully defended its practices in claims brought by the United States and Mexico whereas the European Union succeeded in its separate claim that it brought against China.

The Panel also found that certain aspects of China’s export licensing regime, applicable to several of the products at issue, restrict the export of the raw materials and so are inconsistent with WTO rules.

Not unexpectedly, China appealed against the findings of the Dispute Panel. Interestingly, the United States also filed appeals concerning certain aspects of the original findings. Some of the key findings of the Appellate Body’s report:

The Appellate Body upheld the Panel’s recommendation that China bring its export duty and export quota measures into conformity with its WTO obligations such that the “series of measures” do not operate to bring about a WTO-inconsistent result.

The Appellate Body upheld the Panel’s finding that there is no basis in China’s Accession Protocol to allow the application of Article XX of the GATT 1994 to China’s obligations under Paragraph 11.3 of the Accession Protocol. In upholding the Panel’s finding, the Appellate Body examined the text of Paragraph 11.3 and found that the provision does not suggest that China may have recourse to Article XX to justify a breach of its obligation to eliminate export duties.

The Appellate Body further upheld the Panel’s conclusion that China did not demonstrate that its export quota on refractory-grade bauxite was “temporarily applied” to either prevent or relieve a “critical shortage”, within the meaning of Article XI:2(a) of the GATT 1994. The Appellate Body found that an export prohibition or restriction applied “temporarily” in the sense of Article XI:2(a) is a measure applied in the interim, to provide relief in extraordinary conditions in order to bridge a passing need. The Appellate Body agreed with the Panel that such a restriction must be of a limited duration and not indefinite.

It can be seen then that China will have to do a better job of demonstrating the validity of its export restrictions on rare earths, than it did for bauxite, fluorspar and the other minerals and materials referenced in the recent dispute.

Next Steps

As previously stated, at the time of writing China’s WTO delegation has yet to formally respond to the request for consultations, and the consultations are yet to take place. We’ll keep you informed as significant events occur in relation to the case – but it could be a while…

I recently updated the list of projects on the TMR Advanced Rare-Earth Projects Index, to reflect one new rare-earth mineral-resource estimate that was announced recently. I also made some other updates. The specifics:

• Peak Resources Ltd (ASX:PEK) announced a JORC-compliant mineral-resource estimate for its Ngualla project in Tanzania, on February 29, 2012. According to the associated press release, 29 Mt of the resource is at the Measured level @ 2.61% TREO, 69 Mt is at the Indicated level @ 2.43% TREO and 72 Mt is at the Inferred level @ 2.24% TREO (all at a cut-off grade of 1 wt% TREO).

I have also updated the pricing used in the Index data, to reflect the average monthly prices for February 2012 and the moving three-year average price for separated rare-earth oxides.

FYI, TMR is now tracking a total of 426 rare-earth projects under development associated with 259 different companies in 36 different countries.

You can access the updated details via the Index page.

Disclosure: at the time of writing, Gareth Hatch holds no shares or stock options in any of the companies mentioned in this article, or in any publicly traded rare-earth company, nor is he doing paid consulting for any such company.

Rare-earth deposits are not rare; they are just rarely put into production. Why is that? It is because of pricing economics driven by supply and demand. The demand for the rare earths as raw materials is today in southeast Asia, so it should not be surprising to see how the producing supply base has migrated to that part of the world. Yet pundits and politically charged writers keep hinting at a vast intentional Chinese conspiracy to ‘control’ the rare earths. It is more than likely actually a consequence of the operations of the market forces of (what we now ironically call) free-market capitalism. as practiced today by governments following the model originated by John Maynard Keynes.

The American financial regulators are as guilty of allowing foreseeable but unintended consequences of their actions, as the Chinese regulators are responsible for maximizing the benefits of American oversight for China’s economy. There is actually no intractable problem so long as both economies practice free trade, but when Chinese self-interest is seen as a threat to American self-interest, it is the ‘other’ rather than the ‘system’ that is brought into ill-repute.

Rare-earth-based production (the supply) and production levels are determined by the economics of overall demand. So long as the lowest cost for rare-earth products is obtained by buying such types of goods manufactured in China, the total supply chain and the focus of the rare-earth industry will remain in China.

Today, in early March 2012, I am going to give one prescription for the re-birth, health and continued growth of a non-Chinese rare-earth industry, and I’m also going to make one prediction about the growth of the global rare-earth industry over the next ten years.

First, before I assume the mantle of the business-survival specialist or of a resource-markets Nostradamus, I need to point out that the growth of demand for a rare-earth element (REE) is in the case of almost all of the REEs, within a unique market for each of them individually. The demand for cerium (Ce), for example, has almost nothing whatsoever to do with the demand for lanthanum (La), or any other REE. They are not interchangeable, nor substitutable for each other, except in very few cases such as that of neodymium (Nd) and praseodymium (Pr), which in some limited applications in rare-earth permanent magnets (REPMs), are substitutable/interchangeable.

Notably the demand for Nd for use in REPMs is the principal driver of the demand for dysprosium (Dy), whereas the inverse is not true. This complex subject, the demand for individual and certain combinations of the REEs, is glossed over by pundits as if it doesn’t matter. This is a fatal flaw in creating investment strategies for developing REE supply, because what is overlooked is that the supply of the rare earths must be examined on an element-by-element basis. and not looked upon simply as a ‘basket’ containing all of the REEs.

This error of assuming that all or most of the REEs are interchangeable for marketing purposes, gives rise to the glib assumption that the same strategies will work for selling REEs to a variety of end users, whose only common interest is that their products all contain REEs.

An even more flawed assumption is the idea that the individual REEs are of equal importance to our technological economy in any of their uses, and so one simply calculates a basket price and this metric then defines an opportunity to produce a combined value. Nothing could be farther from the truth.

China appears to have unused (excess) capacity in the production of the lower-atomic-numbered rare earths (LANREs) in the amount of more than 50%! This means that China could ramp up production to twice today’s output of LANREs and, based on even old (from 1997) basically anecdotal data from the US Geological Survey, keep this level of production up indefinitely.

On March 5, 2012, there was official news from China (reported in the China Daily, the English-language version of the People’s Daily, the house organ of the Chinese Communist Party) for example, that Jiangxi Copper, which has been given responsibility to consolidate rare-earth production in Sichuan province, says that it will increase production there to 50,000 tpa and will target the export markets! Rare-earth prognosticators please pay attention! Jiangxi Copper is a world-class commodity-metals-producing giant. It is also state-owned and has more working capital and borrowing firepower than all of the non-Chinese rare-earth ventures on Earth combined.

The domestic growth of the Chinese demand for the REEs is today without doubt the principal driver for any attempts to increase the supply of REEs. China’s domestic demand for all of the REEs today is probably at 70-80% of the world’s total supply (also, of course, today produced in China domestically).

China is openly moving to change its economy from an export-led to a domestic-consumption-led model. As China does this, the domestic demand for REE-containing consumer products (the vast majority) will increase in China, apparently without decreasing outside of China. Unless there is increased production of those among the REEs that are the critical REEs, there will be shortages and price hikes – but NOT in China, which will simply consume more REEs domestically while reducing exports, as it has already begun to do precisely to prepare for the change of direction in its economy.

Reacting to that change and to world opinion, China has restructured its REE industry and this has resulted, for example, in Jiangxi Copper telling the world that it will ramp up production in the area under its control, so that both the Chinese domestic market and the export market can be served.

Jiangxi is a new competitor in the global REE market, and it is a large profitable company run by excellent managers. It has no competition outside of China in the REE space that can match it in resources of intellectual property, manpower resources, capital, and knowledge of world markets.

Yet in China, Jiangxi faces Baosteel and Chinalco in the newly consolidated REE production space as its competitors. Keep in mind that it will be an uphill battle to beat China at its own game inside China. So what is left for the non-Chinese REE supply wannabes is to produce something that the Chinese domestic REE market needs, and which is not produced in China in sufficient quantity, so that it will be in demand whether or not a total supply chain is ever constructed outside of China.

It seems that the higher-atomic-numbered rare earths (HANREs), the so-called ‘heavy rare earths’ fit this description and their number may even be joined by the LANRE Nd.

There are two cultures on Bay Street (the center of junior-mining finance in Toronto, and most likely the financial world). Among the denizens of one of those two cultures, it is the share price of a company that measures its success; in the other culture, the question asked is: ‘how much money will it take to bring this venture into (profitable) production?’. The probability of achieving profitable production is this second group’s measurement of success.

It is late in the rare-earth ‘boom’ and so lately the line between the two cultures has begun to blur in the rare-earth ‘space.’

Junior mining is basically the mineral-data mining of the Earth. The data are discovered and recorded by field geologists and then it is filtered through layers of physical and chemical analysis, until for a given volume of the Earth’s crust, a picture can be drawn in three dimensions, of the distribution of specific minerals within the chosen volume. If there are known mechanical and chemical procedures for recovering any valuable metals or minerals in the defined volume, and the result of those procedures is a product, or products that can be sold for more than the cost of production in volumes above the break-even cost of the venture then, if those factors have additionally a high probability of continuing in time, we have a mineable ore body that is economic.

The day of reckoning is upon the rare-earth juniors. Those of them who have no knowledge of supply-and-demand-based pricing, or the geographic distribution of demand, or who have no knowledge of finance will be gone first. Even among those that survive this first cut, if they believe that the goal of a business is anything other than producing consistently a competitive profit from selling products produced at the lowest cost with the lowest possible break-even threshold, then they will be gone next.

The survivors will be those ventures which can sell their product at a profit, at a place in the supply chain which their management and marketing skills can maintain.

The Vatican in Rome regularly issues statements of Catholic doctrine, which are intended to be the ‘correct’ interpretations of questions of faith for believers. These statements are written in church Latin and the translation of the category aspect of the title of all such statements is a papal ‘bull.’ This is the short form of the Latin word bulla, used to describe the clay stamp traditionally applied to such edicts, and from which in English, we get the word ‘bulletin.’

I consider this article to be a ‘bulletin’ to investors in the rare-earth space.

I am not. nor do I pretend to be infallible, but I recognize that much of what passes for interpretation in the mainstream media of the announcements that regularly flow from junior miners, or, in some cases from companies actually running mining operations, is just plain ‘bull.’

If a junior miner is to survive. it must either sell its ore body or develop a profitable mining operation. There has been little interest by the major mining companies in purchasing the properties of the current rare-earth juniors. Therefore to survive, the juniors will have to try to put their ore bodies into production as mines. This means that the clock is ticking. There will be no more than a dozen rare-earth ventures outside of China in actual development by the end of 2014. The global REE demand outside of China needs very little additional supply of the LANREs if it does not ramp up its metal-, alloy-, and component-manufacturing supply chain. Certainly there is way too much potential and/or planned production of the LANREs chasing too small a market.

It is just the opposite for the HANREs. China is short of these very critical materials, so that even if no supply chain at all is constructed or enhanced outside of China for using such raw materials, there will be a demand for them.

The problem with the HANREs market is that it is not understood as a free-standing market by non-Chinese investors. Additionally it has turned out that the highest grades of HANREs as a proportion of total REEs, are in hard-rock ores and tin and uranium residues, the ‘metallurgy’ (cracking) of which has not been successfully (i.e. economically) achieved to date. I believe, however, that the metallurgies of the hard-rock ores have been addressed with sufficient success outside of China, by companies attempting this endeavor, to allow me to recommend to my institutional-investment clients that they fund the development of the best-managed and best-sited ones.

The skills to extract the HANREs into a pregnant leach solution, and to separate the individual HANREs from that solution are in very short supply. No one, as of yet, outside of China has addressed the commercial separation of the HANREs. Innovation Metals, a company co-founded by my TMR colleague Gareth (and to which I am an advisor), is attempting to do something about this, with its goal of creating the world’s first independent rare-earth separation facilities, to toll-treat rare-earth concentrates. Do not be fooled by those who say that all you have to do is ‘buy’ a property and ‘feed’ the ore into an existing LANRE separation system. This is flim-flam.

I predict that at least one, perhaps two American companies, and one European company will be producing HANREs competitively with the Chinese within 3-5 years. from hard-rock mining. I further predict that it is these operations which will catalyze the re-birth of a non-Chinese total supply chain for the production of Dy-modified REPMs. There are a number of promising Canadian, Southern African, and Australian HANRE-themed junior miners, who I believe will become suppliers to the total supply chains located in the USA, Europe, Japan, or even China. Their ability to do so will be based on competitive pricing.

I am not mentioning Great Western Minerals Group’s South African/UK integrated operations, because they are now in a group of one, at least with regard to the commercial production and utilization in the downstream total supply chain of the heavy rare earth Dy. As far as I know their, output of Dy is fully taken up by their customers, and is only a market factor in the reduction of non-Chinese demand for Dy it will cause (less than 3% of the current market).

The first step in the production of a REE is the mining of an ore containing a mineral that has REEs in its molecular or physical composition. In simple English, a rare-earth mineral is one in which the REEs are either chemically bound into, or in a few cases, just physically attached (adsorbed) onto a substrate mineral. The ore at Molycorp’s Mountain Pass mine is an example of the first and the famous adsorption clays in China’s southern provinces are an example of the second.

A common pundit error at this point is to declare that the ores with the highest concentrations of the rare earths are the most valuable. The most valuable rare-earth ores are those from which the rare earths can be extracted efficiently at the lowest cost per unit. In fact, the most pressing problem today in the rare-earth supply space is the fact that all of the HANREs now produced commercially, are from the very low overall grade ‘ionic adsorption clays in China. This is because of:

1. The fact that by ignoring (and not capitalizing) safety or environmental ‘costs’, the Chinese mining industry has been able to continue due to the high demand for their ‘unique’ products, and
2. The lucky situation that the ionic clays are essentially thorium and uranium free, allowing their processing by crude heap leaching in the open.

For hard rock, HANRE-enriched deposits have been found outside of China, the concentration of desired minerals is accomplished by preparing the ore (typically this involves crushing and/or grinding followed by gravity separation). Milling is the first step, with the second typically done by floatation, in which the higher specific gravity minerals are separated from the lighter ‘rock’. by a combination of surface-chemistry techniques and the differences in their densities.

When we have the ore concentrated, we come to a point in the process where mining terminology diverges from both common English and from the strict definitions of terms as they are used in modern materials science. When miners use the term ‘metallurgy’, they usually mean ONLY the extraction from an ore concentrate of the CHEMICAL forms of the elements desired.

In such cases, developing the metallurgy means chemically leaching the ore or ore concentrate. Leaching is a wet chemical process most often involving acids or bases), which places into solution the chemical elements present in the ore, so that they can be further chemically processed to separate them from each other.

Typically even the separated elemental chemicals must be further purified – especially in the frequent case where separation is not analytical (i.e., is not complete). The purified chemicals are then reduced by chemical/physical processes to create pure metals.

An example of straightforward mining metallurgy is the processing of common sulfide ores of copper (Cu). Their metallurgy starts with roasting ( i.e. forced-air, high-temperature oxidation). The Cu oxide so obtained is dissolved in sulfuric acid, obtained in part by capturing the sulphur dioxide from the roasting, catalytically oxidizing it further to sulphur trioxide and dissolving this in water.

The Cu sulphate solution is electrolyzed so that the pure Cu collects on the cathode and the nuisance metals, such as molybdenum, gold, silver, palladium, tellurium, selenium, and arsenic collect in the “mud” formed under the anode. Some of the nuisance metals contained in the Cu ore are also collected in part from the exhaust gases of the roaster, which include volatile oxide species of many of the elements also present in the mud.

The mining metallurgy of Cu ores is complex, and time- and energy- (and thus capital-) intensive, but it pales in comparison with the complexity of the separation of the individual rare earths after they have been extracted from their ores into a pregnant leach solution.

The separation of the mixed rare earths produced by the leaching of their ore concentrates into individual REEs is a labor intensive, time-consuming operation, accomplished commercially today only via the process known as solvent extraction (SX), which is expensive to facilitize, difficult to supply with some Chinese-produced chemical reagents, slow, and in need of a large body of skilled chemical engineers for its operations and quality control. Outside of China, and previously in Japan and possibly Kyrgyzstan, no-one has yet constructed a SX operation with the capability to separate the HANREs.

I have been told that a HANRE-separation-capable facility is, in fact, being constructed in the Western Cape province of South Africa, by Great Western Minerals Group, but I do not know the timetable for that project. I do know that the punditry has now figured out that the HANREs are the most desirable of the REEs, but, once again, the highest grade. largest total ore tonnages are being mindlessly touted as ‘the best investments.’

Of course, the best investments are the well-managed ventures that own ore bodies for which known extraction techniques work, and from which a pregnant-leach solution can be made, which will be capable of being fed into a separation plant, that will produce separated, purified rare-earth chemicals. All of this will have to be done at the lowest costs possible and the lowest breakeven possible.

HANREs so produced, mainly Dy and terbium (Tb), will be saleable into a market in deficit for the rest of this decade and beyond.

A total supply chain to produce Dy-modified Nd-based magnets will be built in Europe. I believe that such a project is also underway in the USA. The successful mining ventures in the HANRE space will most likely sell their products in a magnet ‘bundle’. In order to get Dy, the customer will also need to buy Nd in a ratio of the two that insures the total sale of both.

There are already too many contenders in the LANRE space outside of China. The survivors will be the low cost, lowest breakeven, producers.

Anyone who is going to invest in a junior rare-earth-mining venture must look at its balance sheet, for its break-even point at reasonable prices. One must also ask exactly what market share the company needs, to break even at those prices. Next one must ask for a list of the products to be produced, which are to be sold at that point into the supply chain, and match that list with the companies expertise, or access to expertise, necessary to technically accomplish each step in the supply chain in which it will be directly involved.

Size matters in a high-school locker room. Only skills and break evens matter in the world of mining…

Disclosure: at the time of writing Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).

In October 2011, I took a short trip to Sweden, invited by Tasman Metals Ltd. (TSX.V:TSM, AMEX:TAS, F:T61) to join an analysts’ tour of Norra Kärr, Tasman’s flagship rare-earth-element (REE) project in Scandinavia.

First things first: the Swedes spell the name of this mineral occurrence as ‘Norra Kärr’, not ‘Norra Karr’. This spelling renders the project’s pronunciation as something similar to “Nora Shah”, instead of “Nora Car”. The things you learn on the way to learning other things…

Norra Kärr is located 10 miles northeast of the town of Gränna, which itself sits on the shores of the beautiful Lake Vättern, Sweden’s second largest lake and found in the south central part of the country. The city of Jönköping and its 90,000 inhabitants are 30 miles to the southwest; Stockholm is around 200 miles away to the northeast. Norra Kärr is readily accessible from all parts of the country via the E4 highway that runs close to the deposit. And by close, I really do mean close; while standing in the middle of the deposit, we could hear the cars whizzing by on the highway. Clearly then, accessibility is a key positive for this mineral deposit, regardless of what might be present in the ground. Power and water are also available right at the site.

Having flown into Stockholm the night before, early the next morning the group piled into a couple of vans and cars, for the 3.5 hour drive to the project from the Swedish capital. I spent the journey in the company of Tasman’s Chief Geologist Magnus Leijd, and Yasushi Watanabe, the well-known senior geologist with the Geological Survey of Japan, and who was also along for the visit. This was an excellent opportunity to listen to the two geologists talk about the project, and for me to pose a bunch of layman questions, which fortunately they were both only too happy to answer.

Along with Mr. Leijd, our Tasman hosts included Mark Saxon, President & CEO, Jim Powell, VP for Business Development and Henning Holmström, Project Development Manager.

Norra Kärr is the only rare-earth project in mainland Europe with an NI-43-101-compliant mineral-resource estimate. Per the most recent numbers at the time of writing, Norra Kärr contains an estimated 60.5 Mt of rare-earth mineral resources, at an average grade of 0.54%, resulting in an estimated 327 kt of rare-earth oxides (REOs) present. In addition to the production of rare earths, the project is of interest for zirconium (Zr), hafnium (Hf) and possibly niobium (Nb) as well. Oxides of europium (Eu) through to yttrium (Y) make up 53% of the total REOs (TREOs) present, thus Norra Kärr has one of the most attractive TREO distributions of any rare-earth project with a defined resource. Despite the relatively low overall TREO grade in the deposit, the actual in-situ grades of dysprosium (Dy) and Y, two of the critical REOs (CREOs), are some of the highest of any defined resource.

All of these factors, combined with very low concentrations of thorium (Th) and uranium (U) (7 ppm and 14 ppm respectively), mean that the deposit is of high potential strategic interest.

You can see photographs taken during the visit, in the galleries below (click on each image to enlarge it).

Mr. Leijd indicated that the main minerals of interest at Norra Kärr are eudialyte (85%) and catapleiite (10%), and other minerals that closely resemble them. The latter is a Zr silicate not unlike eudialyte. Norra Kärr probably has the largest occurrence of catapleiite currently known in the world. As an aside, he made the interesting comment that the more intense the characteristic pink color is in a eudialyte sample, the less rare earths it contains, with the mid-brown eudialyte being preferred. The host rock consists of feldspar, nepheline and pyroxene.

There are few exposed outcrops at Norra Kärr; much of the surface is covered by so-called glacial till. Mr. Leijd mentioned that since much of Sweden has been covered in ice in the recent geological past (10,000 years, which is recent to a geologist), there are very few weathered rocks in the country. While this doesn’t sound all that important, its significance was pointed out to me.  The lack of weathering means that the rare-earth minerals are the same at surface as they are at depth in the Norra Kärr intrusion, and they haven’t been altered to new minerals by the effects of air, water and time. While Norra Kärr is not unique in this regard, this lack of mineral variation should simplify subsequent processing of the deposit.

During initial bench-scale metallurgical testing, the main rare-earth-containing minerals were all very soluble in sulphuric acid, with the catapleiite dissolving faster than the eudialyte. Early in the company’s research, preliminary leach tests gave only a 50% rare-earth element (REE) yield. However, after analyzing the residues and mass balance of the metals, the folks at Tasman noticed that most of the remaining mineral was eudialyte, and were able to refine their processing to recover up to 90% REEs in solution. Since my site visit, Tasman has released the next round of metallurgical results, arising from their work at the laboratory of the Geological Survey of Finland.  They appear to have made good progress, with a mineral-concentrate step and room-temperature leaching both giving good recoveries.

I asked Mr. Leijd about the presence of zircon in the deposit, since this mineral tends to be an impediment to processing at other projects, due to its refractory nature. He indicated that there were only very low amounts of zircon present, around 0.6% (compared to around 10% for some of the other well-known deposits). I asked how important it was to distinguish between different mineral types within the Zr silicate family, since there is a wide range of Zr silicate minerals known to date, some with pretty complex chemical formulae (I don’t think I’ve ever seen the same formula for eudialyte, for example, ever used twice!) Mr. Leijd commented that from the metallurgical flow sheet point of view, the differences are only really important if they exhibit different processing characteristics. The mineral zircon, for example, is known to process very differently from the eudialyte present at  Norra Kärr. This makes sense – the empirical results of testing are the driver here.

Mr. Leijd explained that the Norra Kärr mineral deposit has been known for quite some time. It was explored for its Zr content after the Second World War, and indeed at the entrance to the deposit there is a sign in three languages, explaining some of this history. Sweden has of course played an important historical role in the development of rare earths. It was from a black mineral (later named gadolinite) found in a quarry in Ytterby, a village in the vicinity of Stockholm, that the chemist Johan Gadolin extracted the first individual rare-earth elements (REEs) in the last decade of the 18th Century. Four of those elements were named after the village, namely terbium (Tb), erbium (Er), ytterbium (Yb) and yttrium. Elsewhere in Sweden, from a mineral found in the ore fields of Bastnäs, cerium (Ce) and lanthanum (La) were first discovered and isolated – the mineral subsequently being named bastnäsite (or bastnaesite), after its place of first discovery.

Sweden as a whole has a long history of mining, but the specific area in which Norra Kärr is situated does not have a modern mining operation. As mentioned above, the project is close to a large freshwater lake, which means that any subsequent work has to be particularly mindful of the environmental impact. In the summer of 2011, the Swedish authorities designated the Norra Kärr area as one in which mining activities will take precedent over other land uses, such as the construction of buildings. While there are around 50 such designated sites in Sweden, this is the only one so-designated because of the presence of rare earths. This designation does not mean that the project can avoid the usual normal environmental permitting procedures, but has significantly increased the awareness of the project within the local community and government.

Tasman is looking to mine 1.5 Mtpa of material at Norra Kärr, from which 6 kpta of TREOs will be produced. Projections were built around the potential numbers for Dy. Mr. Saxon said that the project could produce around 360 tpa of Dy, which would meet approximately 15% of total world demand. Such numbers will depend on the results of the Preliminary Economic Assessment (PEA) or scoping study for Norra Kärr, which was initiated in August 2011 and is due for completion shortly. Mr. Saxon said that they anticipated very low strip ratios for the project.

Tasman houses its core shack in an industrial unit in Gränna, recently upgraded from its original location in an old barn on the Norra Kärr site, and we were able to see a wide range of drill-core samples. At the time of our visit, 50 drill holes had been completed, though additional phases of drilling since then have been finalized. Costs were around $85-100 / m drilled, all in, including personnel and rig hire. Mr. Saxon indicated that coarser pegmatitic materials at the center of the property contained higher grades of TREOs, with heavy REO (HREO) numbers around 40-50% of TREO. As one moves towards the edges of the deposit, the TREO reduces slowly but the HREO percentage increases, making it a challenge to determine appropriate cut-off grades for resource estimates, and subsequent cost estimates for producing concentrates. Some of the holes in the drilling campaigns have intersected mineralization over 250 m or more. Additional drilling in the spring of 2011 was geared towards increasing the size of the resource estimate, with down-dip drilling, and to increase confidence in the data by completing in-fill drilling. Further drilling campaigns subsequent my visit has also been geared towards these aims. Note that despite its Nordic location, drilling is possible all year round at this location. As of the time of writing, I am informed that approximately 75 holes have now been drilled, totaling in excess of 13,000 m.

Mr. Saxon said that some non-ore minerals in the host rock also dissolved in the sulphuric acid used to process the eudialyte and catapleiite. Finding a way to avoid such dissolution would be highly beneficial for acid consumption and cost. The recent update provided by Tasman on their processing methods highlighted the use of magnetic separation and flotation in beneficiation, with initial work recovering around 90% of the REEs and over 60% of the Zr present, in a much reduced rock mass. Being able to reduce the presence of nepheline in this way, has greatly reduced acid usage in the processing.

When I asked about the infamous ‘silica gel’ problem (where the processing of silicate-based materials can potentially lead to the ‘gumming up’ of processes due to the formation of a gel), Mr. Saxon indicated that to date, they had not encountered such problems in their leach tests. Tasman had previously utilized the services of the late Les Heymann to advise on processing methods, and using Mr. Heymann’s knowledge, of the 13 tests conducted, 11 had no silica gel issues. This was achieved by carefully managing the chemistry of the acid solution in which the minerals were dissolved. Mr. Saxon noted that the aforementioned leach testing occurs at room temperature, using sulphuric acid.

During the first evening of the field trip, Tasman gave the group additional presentations on the company, the project and its history. Mr. Saxon kicked things off with an overview of the history of the project. The “muddy paddock in Sweden” was acquired in 2009 by a precursor company to Tasman. Norra Kärr had been first discovered in 1906, and is well known to local mineral collectors. Swedish mining company Boliden AB held the property for a number of years, having an interest in Zr and possible hafnium (Hf) occurences. The project was relinquished in 2001, with the project data only being made available in 2009, via a database put together by the Swedish Geological Survey for all projects. It was soon after that, that Tasman’s predecessor claimed the land

Due to previous exploration only being for Zr, Norra Kärr was not previously known as an REE occurrence; it did not feature in the US Geological Survey database, for example, which is perhaps surprising given the prior history of rare earths in Sweden. Tasman had first-mover advantage in Sweden and in Scandinavia in general; since acquisition, Mr. Leijd has led the efforts to date, to get the deposit drilled and characterized. Other projects, such as the newly announced (at the time of the field trip) acquisition of the Olserum deposit, are also being explored and characterized.

Mr. Saxon said that the company could live with setting the value of Ce and La present at Norra Kärr to $0-1/kg, focusing primarily on the Y and Dy present only, given their significant in-situ grades (though of course only a competed PEA or Pre-Feasibility Study (PFS) will be able to figure out if that is the case or not). He said that production of Dy, Y and Zr could constitute up to 80% of revenues for the project. Mr. Saxon also re-iterated the point that the deposit had by far the lowest Th content of any defined resource. When I asked if there was a particular reason for the low occurrences, Mr. Leijd commented that there were no obvious geological reasons. There may have been higher levels of Th and U present in a previously eroded part of the deposit; unusually, the intrusion itself frequently contained lower concentrations of Th and U than the surroundings.

In the past couple of years the European Union (EU) has been increasingly focused on issues concerning strategic materials, including the REEs, and in that context, Mr. Saxon said that Norra Kärr is seen within the EU as a strategic asset. Later in the evening the group heard an interesting presentation from Jaakko Kooroshy, of Chatham House, on the EU perspective on minerals, mining and related matters.

Mr. Saxon pointed out that Sweden has a population of only 9 million people, with a very well developed mining industry. What was not so well known is the fact that 90% of mining production is conducted by Swedish companies (in contrast to other countries and jurisdictions). While the general cost of living in Sweden may be higher than in other jurisdictions, corporate tax rates were relatively lower. In addition, the cost of doing drilling work, and the ability to house people in local towns and villages means that overhead is much lower than other projects, with no need for helicopters, mining camps and the like. I asked Mr. Saxon what the royalty rates were on mining; he said that they were 0.25%, with 0.2% going to the land owner, and 0.05% to the government.

Mr. Saxon commented that they had been in discussions with several different groups in Europe in regards to separation of concentrates. Given the proximity, he said that it was sensible to be talking to such entities, and that the company might consider setting up facilities in a country like Germany, to get ready access to chemicals and reagents. With a rail line some 10 miles away, Mr. Saxon said that mined materials could be transported via rail to appropriate locations for subsequent processing. There are no plans for Tasman to do its own solvent extraction (i.e. separation of concentrates into individual oxides). Given the relatively low concentrations, all processing would need to factor in ease of transportation and associated costs.

At the time of my visit, Tasman had not yet received final confirmation of their dual listing on the NYSE:AMEX exchange, but has subsequently done so. Per Mr. Saxon, the desire to make this move was a reflection of the 8,000+ US-based shareholders that Tasman has, and the need to support them.

Dr. Holmström shared some comments on the permitting process for Norra Kärr. He said that Tasman had started the process ahead of the PEA in order to accelerate the timeline. Such matters are regulated by Sweden’s Minerals Act, local and regional environmental codes and other aspects of land use, waste and water management, some of which involve the application of EU legislation. So far, Dr. Holmström said, all of the local municipalities and counties had been positive about the project, in initial discussions.

Interestingly, according to Dr. Holmström there are no guidelines for concentration levels of waste products in air and water, in the Swedish regulations, unlike in other jurisdictions. It was up to the individual operators to show that their processes would have minimal impact on the environment, during permitting. Such work might include, for example, leach tests to simulate the effects of rainfall on a tailings dump.

Dr. Holmström said that they had already commenced the process of obtaining information that can be used in the application for an exploitation concession, simultaneous to applications for environmental permits. He said that the Mineral Act was biased in favor of the mining companies, to encourage the exploitation of natural resources, to the benefit of Sweden. This has led to some conflicts in the north of Sweden, were groups of the indigenous Saami people live and work, engaging in traditional activities such as the management of herds of reindeer. The Saami are increasingly facing the prospect of mineral projects on their traditional lands. Since there are no such groups in the southern part of Sweden, this will not arise for the Norra Kärr project.

Exploitation concessions are valid for definite areas, decided on the basis of the extent of a given deposit. They are granted for 25 years, with 10-year extensions possible, if exploitation is in progress at the time. Dr. Holmström said that there was a special supreme court in Sweden for environmental issues, and five regional courts. When I asked if local politicians can influence the permitting process, Dr. Holmström chuckled, saying that the courts are very independent, and do not take kindly to such attempts at influencing outcomes. That said, legitimate ways to accelerate the overall process included enhanced stakeholder involvement, using high-quality, detailed studies, and discussions with local county and municipality administration boards.

Tasman personnel also gave an overview of the newly acquired Olserum deposit, not far from Norra Kärr. Potential REE potential for this property was identified in 1990; the property itself has previously been subject to small-scale iron-ore mining since the 17th Century. In 2003, the property was claimed by the Swedish junior IGE, who identified HREE-rich minerals in 2004-2005, following 27 diamond drill holes. In March 2006, IGE released figures of 2.5 Mt in resources, @ a grade of 0.8% TREO, and 33% HREOs, although the resource estimate were not NI-43-101- or JORC-compliant. Additional work by a subsequent owner confirmed the presence of REEs at the project, and Tasman acquired the project in October 2011 for 37,746 fully paid shares of Tasman stock. An NI-43-101 compliant resource estimated is slated for H1 2012.

We also heard some information on Tasman’s other projects in Scandinavia, including Otanmäki and Korsnas in Finland. In addition, we heard from Stefan Sädblom, an exploration geologist and project manager with Bergskraft Bergslagen, a “project for the development of mining and associated enviromental work” in the Bergslagen region of Sweden, in which Norra Kärr is partially located.

I was most impressed with the Norra Kärr project, and the pragmatic approach that the Tasman team is taking towards its development. Certainly there will be questions about the viability of the material grade in the resource, but the distribution of HREOs, initial metallurgical results and location (location, location) make this a project most definitely one to watch. I am particularly interested to see how the focus on a handful of critical elements as the basis for project viability will fare, following the completion of the PEA and PFS. If successful, this would be a new approach to the issue of dealing with the problem of balance – namely the fact that in order to get at the ‘good stuff’ such as the CREOs, you also need to deal with a potential surplus of non-CREOs such as oxides of La and Ce.

My thanks go to Mark Saxon and his colleagues at Tasman Metals Ltd, for facilitating my visit to Norra Kärr.

Disclosure: at the time of writing, Gareth Hatch is neither a shareholder of, nor a consultant to, Tasman Metals Ltd. (Tasman). Neither he nor Technology Metals Research, LLC received compensation from Tasman or from anyone else, in return for the writing of this article.