strategic metals bulletin bulletin #38

Terence van der Hout Strategy Metals Bulletin; Jun 12 - 18, 2011

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Strategy Metals Bulletin (38) Terence van der Hout June 12 - 18, 2011

Gold&Discovery Fund

Aims to update investors on developments in the world of strategy metals –

crucial inputs to industry, defense and technology innovation

I attended the Critical Materials Investment Symposium in Vancouver, last week,

and this is the reason I was unable to send out a bulletin. The flip side of this is

that a number of interesting topics were discussed during the symposium, some

of which I would like to share with you. This week’s selection looks at innovation

starting to bypass strategic metals, looks at electrification as key to moving

forward, sees metals morph, and provides a list of metals mentioned by various

speakers and which should therefore be regarded as critical.

Innovation bypasses strategic metals: magnets & drive trains

There was some consensus on the effects of the rising prices of REE. Although

the investor in us may enjoy the recent run up in stock prices, the price

explosions are not a good thing. They make inputs for manufacturers expensive,

and stimulate innovations away from their use. Ron Stravlo, a manager for

Japanese magnet maker TDK emphasized this, stating that for some magnets,

reengineering out of REE-containing products has already commenced. Mr

Stravlo believes this process will take 6-8 years, and this is effectively the time

window that the REE industry is given to provide security of supply for the

magnet elements (dysprosium and neodymium). According to Jack Lifton’s

forecasts, using fairly conservative growth figures and under the assumption that

the non-Chinese projects will mostly come online as planned (which is highly

unlikely), the neodymium supply will be solved by 2016, and the dysprosium

supply issue will never be solved. This is a fairly problematic statement. In the

automotive industry, 5 different drive train technologies are being developed,

only one of which contains rare earths. It appears the world can do very well

without REE, despite the added performance they bring.

Innovation bypasses strategic metals: catalytic converters

Neil Branda of 4D Labs, an innovation laboratory based in Vancouver, gave us an

insight into the way research is done at the frontier of technological

development. Amongst many other innovations, a catalytic converter has been

developed at the lab which works well and is completely devoid of the strategic

metals REE, palladium, rhodium and platinum. The device is apparently

patented, and may be applied in the automotive sector in 6 – 12 months.

Although this doesn’t mean the technology will be adopted immediately, the

converters might be cheaper to produce, given the absence of expensive metals,



and will not be subject to the supply constraints apparent in the world of critical

metals.

For us as consumers of automobiles, this is probably a good thing, although not

many of us are aware of the issues in strategic metal markets or know that they

are inputs to many of the most important components of a car. For investors in

REE, a sizeable part of the lanthanum market may fall away as a consequence of

innovation. Lanthanum is not part of the set of elements for which there are

shortages, as oversupply is prevalent and is expected to last. The oversupply is

compounded with the new technology. The impact is greatest in the other

metals that a converter uses. According to experts, 40% of the palladium supply

goes to catalytic converters, 50% of the platinum, and a whopping 90% of the

rhodium. These markets will be impacted in a major way should the technology

take off, and the investment proposal for these markets will be greatly

diminished.

Electricity is key to innovation

Tom Drolet, an expert on nuclear energy, believes electricity to be the core of

the future, as it translates value into use. Everything will be electrified, and in

order for this to happen, more energy is needed to generate electricity. For all

the potential of solar and wind power, they currently add less than 5% to the

total energy need, and scaling up to signifanct levels is years and billions of

dollars away. Mr Drolet sees varying potential for nuclear energy for the future,

the inherent dangers need no explanation given the recent set of disasters in

Japan. He believes natural gas will be the number one fuel of choice for moving

electrification forward.

As an extension to this, John Kaiser believes that battery technology is at the

science frontier, and two challenges need to be met. Firstly, how do we cope

with intermittent energy, and how do we electrify vehicles. Both challenges

imply a crucial role for the further development of batteries that are able to

store large volumes of electricity, and batteries that are quickly rechargeable and

provide sufficient power for enabling efficient transportation.

Morphing metals

Mike Berry reinforced the message I have been trying to convey for the last 10

months: the days of abundant resources are over and the age of resource

nationalism has started. Resources have fallen in price persistently over the last

100 years, up until 2002. Since then, prices have gone up dramatically, more

than compensating for all previous declines. Mr Berry speaks of the coming

convergence of the quality of life when he explains the ambitions of the

emergent economies of China, India, Brazil, etc. to equal or surpass the quality of

life that the western countries have become accustomed to. In order to facilitate

this, demand for resources has risen dramatically, which subsequently ‘morph’



into scarce, critical and highly qualitative resources. The resources undergoing

this morphing will provide for investment opportunities, but in the end, demand

for them will become more and more intense, and will lead to resource

nationalism.

Critical metals

A large number of metals were discussed by various speakers, but it appears the

two following metals are pretty much central to the criticality issue (besides the

obvious REE) and have the necessary scale to be interesting:

- Graphite – not a metal, but central to the car industry, including as input to

batteries. Used in steel, brake linings and fuel cells, the emerging

technologies for graphite are based around its application in batteries and in

pebble bed nuclear reactors. The market is dominated by China.

- Vanadium – input to the steel industry, and in the large scale storage of

electricity. China’s per metric ton use of vanadium in steel is low relative to

other countries, and is expected to rise, giving the metal a robust demand

growth. Demand additions as a consequence of vanadium’s application in the

battery storage industry may be substantial. Vanadium is not rare, but has

potential supply constraints in the fact that 90% is supplied by Russia, China

and South Africa.

Further metals that are in the critical category are tantalum, manganese, lithium,

niobium and indium, although not all of these have the same supply constraints

or high-tech application potential. There are a number of companies that are

exploring for these metals, and the general message is that a number of these

companies have the potential to match the performance of the REE explorers

going forward.

Disclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund has

commercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in this

bulletin is the author’s independent opinion of developments in markets and at companies, and hence may contain

factual errors, and may not reflect the opinions of the Gold&Discovery Fund. The content of this bulletin is not intended

as an investment recommendation.

Copyright: The information in this bulletin can be forwarded, cited or used otherwise, but only within the context as

intended by the author, and with complete reference to the source.

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