Please read on for the transcript of our interview. Note, this is sponsored content.

Peter Bell: Hello, I'm Peter Bell and I'm here with Mr. Don Lay from Medallion Resources. Hello, Don!

Don Lay: Hi Peter. How are you doing?

Peter Bell: Great, thanks. May 17, 2019. Good to be talking to you. You had some news out on May 1st to start the month here.

Don Lay: Yes, we did. We put out some important news on our process development work -- test work at a couple places including the Saskatchewan Research Council and the University of Toronto. Both are sort of the final final legs of our bench-level test work. We will get all that work completed so that we can start to look at economic studies for the proposed monazite processing plant.

Peter Bell: The first time that I've seen a flow diagram included in any of the materials from the company -- that was neat to see.

Don Lay: We thought it was a good idea to, at least, present a top-level flow sheet on the process. There's obviously different levels and lots more detail in some that we've put together, but this shows a top-level of the monazite feedstock coming in, major processing steps, and different products produced -- rare-earth products, phosphate byproducts, and waste streams as well. It's quite exciting to get that out and talk to people at a macro level.

Peter Bell: Talking to people, right? It gives you something specific and tangible here to start to put some flesh on the bones of this plan that you've had for years. It's coming together.

Don Lay: It certainly is. We had initially looked at the sector on a global basis in more heady days of the rare earth element marketplace. Over the last few years, we have really focused on North America as the first place to get processing going. We've been doing a lot of work on process development, like flow sheet work. The bulk of that test work has been done at the Research Council in Saskatoon and managed by Kurt Forrester, our metallurgist. Also, we've been working with the feedstock providers in North America to ensure that we've got adequate supplies available to process on an operational basis. Then, we've also been starting to analyze which jurisdictions could and should it go to -- where is the most appropriate for the plant. Those are important business development activities that we've been working on for a number of years now. In the last nine months or year, we've really been able to accelerate it because we've raised additional capital to move forward more quickly. There's more interest in the rare earth market given the the magnet metals and their use in electric vehicles and electrification, in general. That's going very well.

Peter Bell: I appreciate the guidance on the timelines. There is increased specificity there. It's encouraging to see, especially given all the changes going on out there in the broader world right now. It seems like it's headline news more and more .

Don Lay: It certainly seems to be. China controls the sector -- they produce about 80% of the world's rare earths. Between that, the geopolitical tensions, and people's recognition that rare earths are critical to everything from magnet metals, defense systems, and a lot of other advanced technologies, it's sensitive given the geopolitical landscape we're in right now.

Peter Bell: Increasing attention paid to the whole "critical materials" thing with regards to batteries with the increased use of electric vehicles out theren -- that seems to be hitting Main Street more and more as well.

Don Lay: It is interesting. I was at Benchmark Minerals event in Vancouver this week for their annual show focusing on the battery materials. Lithium is the key one, of course, but cobalt is a very important. Nickel, too. Manganese, to some extent. Graphite, of course. The bulk of battery demand, 80% of the future battery demand, is anticipated to be either mobile or stationary batteries for cobalt and lithium, at least. Everybody's really focused around that. UBS, the Swiss investment banking group, has identified that next to lithium and cobalt it's NdPr, the rare earths, that are critical to electrification and EV -- you need those powerful magnets to drive those cars, buses, wind turbines and all the rest of it. It wasn't mentioned by them, which is fine because they do focus on the battery stuff. Listening for four hours to discussion on the value chain related to EV, I found it interesting that it didn't come up once. Nonetheless, it is on other people's radar.

Don Lay: SP Angel, a boutique out of London recently published a report on NdPr in the last couple weeks highlighting the increased usage given demands from EVs and other electrification technologies that are happening now. They pointed out that this is sort of a blind spot in the commodity world, which it has been for a while. When the prices start to move up, then everybody will recognize it and I think there will be a re-rating of the industry.

Peter Bell: Commodity markets certainly go in and out of favour, don't they?

Don Lay: They certainly do.

Peter Bell: That SP Angel report was amazing. I was surprised to read some of the statistics around the environmental costs associated with the illegal mining, domestically, in China for rare earths.

Don Lay: Yes, that's long been the case. What has also been happening -- starting in 2014 I think it was -- is that the Chinese government has dictated that six of the state-owned enterprises in the mining business buy up and aggregate the rare earth processing industry. A large part of that was not only controlling the resources and the processing capacity, but also ensuring that the processing was done more cleanly. The Chinese are well aware tjat they have a poor record of environmental protection, but they're very keen to change that over time. Of course, it's not going to happen immediately. The population is upset about the pollution of rivers and lakes and also the air. Their whole thrust towards electric vehicles is sort of twofold. One is to clean up the air so the people aren't as sick. And the other one is that China's got the ability to be the leading player in the automobile market, globally, if they can lead in the electric vehicles. Obviously, the Americans, Japanese, and Germans would dominate the internal combustion engine markets but transportation is being re-imagined over the next 10 to 20 years. China wants to have a big role in it. There are a lot of things in flux at the same time.

Peter Bell: Fascinating. An example of how emerging societies can kind of leapfrog over the status quo from prior leaders. I've heard that mentioned before with examples in telecom and banking, but this transportation story is potentially a very large example of that. I appreciate you pointing it out there, Don.

Don Lay: They published a paper I think it was last year called "Made in China 2025". In effect, it's their blueprint for becoming the dominant manufacturing powerhouse on the globe in 2025. They're already a huge manufacturing powerhouse. I don't know if they're the world's biggest -- if they're not the biggest then they're number two or number three and certainly growing faster than any anybody of comparable sizen. Much of that is around encouraging sectors like robotics and things that would automate the processing. Additive-manufacturing or 3D printing -- there's are a number of different things the Chinese are encouraging from a top-down perspective and funding, in some cases, that will enable this to happen. They really themselves as the workshop of the world, much like America has been for a hundred years and Britain for the hundred years before that. China sees this as their era to dominate and we see a huge opportunity in providing alternatives on the rare earth side to Chinese dominance. Certainly, the automakers are starting to pay attention to that. The defense establishment and others that require rare earths in their equipment are paying attention as well. Our story is resonating pretty well.

Peter Bell: I always appreciate seeing you as non-mine solution, as well. It's somewhat unconventional, maybe, for people who follow junior mining and exploration companies. There's a different development pathway here, which is encouraging again.

Don Lay: Yes. As we've discussed before, Peter, we don't have a rare earth property. We had them before and we explored them, but they didn't come up well. A number of years ago, we decided to go down the byproduct processing route. We chose monazite as the target because it's an available mineral that comes out as a byproduct of heavy mineral sands processing. We've been developing the flow sheet for that, as well as the business model for that. Of course, it's got the advantage that we don't have to explore, drill, assay, develop metallurgy, build a mine and all the rest of that. Rather, we buy somebody else's waste product and process it in our plant, which will be a no-tailings facility -- more like a chemical plant than a mining facility that will produce rare earths concentrate products, phosphate byproducts, and waste streams. We're thrilled that we are modeling-out this solution, which could help solve a critical shortage of materials and dominance by one power that isn't aligned with the Western countries. It's an interesting project, but it's not your typical mining company.

Peter Bell: A couple quotes from the SP Angel report that jumped out at me -- I might read them off to you and discuss briefly. First one being, "rare earth concentrates imported by China through 2018 and early 2019 have been largely sourced from Myanmar, however, questions are being raised over potential smuggled material." This was from a report published at the start of May and, already, the field has changed!

Don Lay: Within China, there's both legal and illegal mining and processing of rare earths. The illegal part of it is shrinking as the state-owned enterprises have aggregated the bulk of the mining and processing operations, as well as government oversight and crackdowns on it. What they're referring to here is the processing of the South China clays. There are quotas on the production, mining and processing in China, but that doesn't stop people from doing it illegally. The Myanmar problem is probably bad material being exported to Myanmar, and then being re-imported for processing in China. I think the Chinese government has said that we're not gonna let anything in from Myanmar. That's likely happening now.

Don Lay: There are imports of other material going into China, as well. Some of it coming from United States. Others from Africa. That's raw ore going into China for processing, if you will. There's always lots of dynamics around that. Regarding that particular SP Angel comment, the perception is that stopping that re-importing of material would create a shortage and the stock of three of the Chinese rare earth companies went up by 10% in one day, which is limit-up. That was happening just the other day. Never a dull moment in the rare earth space.

Peter Bell: It would seem so! And that's this week. Lots of eyes looking at other things and other things happening in markets these days, who cares about rare earths? A niche, little area that is critically important.

Don Lay: They don't care until they do, and then that's all they care about! I suspect at some point in time it could be some dust-up in the South China Sea involving Japan, China, Philippines, US -- you name it, there's lots of countries down there. If China threatens shortages of rare earths or somebody else threatens to hold them back, then that could be significant. There could be trade tension between the US and China bringing some retaliatory action. It could be related to defense requirements and threats of war or other military action. There's all sorts of things that could happen. Or it could be just that prices, all of a sudden, decide to move up quickly in response to demand for NdPr for the magnet metals for EVs. The projections I saw at that Benchmark Minerals presentation for EV rollouts were huge in terms of volumes. Each new EV requires about a kilogram of NdPr rare-earth metal material in its traction motor to drive the car. That is going to make the demands for this commodity virtually double within the next five to seven years.

Peter Bell: The SP Angel report from the start of May has some really interesting information on comparing a permanent magnet motor and an induction EV motor -- comparing metal intensity and some of the costs and economics on the different motors. Fascinating technical detail, critically important as a backdrop for it all.

Don Lay: The intensity on the magnet side is noteworthy. An NdPr magnet is ten-times more powerful than a standard magnet. Hence, you can make them so much more compact and, of course, weight is critical in anything involving transportation. The battery is really the problem today, in the sense that they've got to be large and heavy. The motor that drives the Chevy Volt today only weighs 38 kilograms. It's very light, so the energy intensity of it is fantastic.

Peter Bell: One quote again from this SP Angel report at start of May. Imports in China ten times higher in 2018 than 2015 and climbing 167 percent year-over-year. Pretty impressive numbers.

Don Lay: It is. It's long been projected that China will become an importer, even though it mines the bulk of the world's rare earths and processes the bulk of them, around 80 percent. It's long been on the lips of many analysts, like Adamas Intelligence, which is probably the best recognized rare earth analytical group outside of China, that China would need to restart importing rare earths. Particularly since they were controlling their own processing through quotas and such. They don't want to lose their resources, so they're careful about making sure prices are managed and production quotas are managed so that the resource lasts a long time. They feel that's critical to their economy. They don't want to give away the resources cheaply, which they felt they did for many years. Now, however, with the demands for material, particularly NdPr, and the processing capacity China has, they're importing certain ores, including monazite from some places into China and processing it. Some of the ores are coming from United States. Mountain Pass in California, which is the old Molycorp mine, is shipping ore to China for processing. You can imagine there's a lot of folks in the US that aren't happy about that, but that's what's happening. We live in interesting times. Also, there is some material from Africa going into China. Of course, our model is different. We've got an automated process, which won't have many people and will be cost effective, and we're looking to process material here in North America.

Peter Bell: Wonderful to hear it all. Thank you, Don. Mention of Molycorp again in that SP Angel report -- I hadn't realized the operation was acquired there for $20.5 million USD. They have some comments in their report talking about the operation being "stung by tariffs targeting semi-processed output... encouraging owners to process rare earths domestically." That seems to be very much tied in with the headline news that I see on Forbes and in the US media regarding the tariffs wars and this being a small part of that bigger story.

Don Lay: It's one of those sensitive elements that's part of the mix. Interestingly, the US didn't put tariffs on Chinese rare earths coming in. Partly because they don't want to hurt those industries that are using them. The flipside is that they don't really have any alternatives. We're looking to provide alternatives and we've been working on that for quite a while. It's an interesting place to be because the sector's got a lot of noise. I expect it to re-emerge with a lot of public interest here at some point in time. When, exactly, is hard to say. You've been following the story a while and you can hear drum beats in the distance. They seem to be getting a bit louder nowadays.

Peter Bell: I think I came in around the tail end of the last bubble. I have danced close to the exit since then, but at some point you have to jump in and seize the opportunity. The bull will run!

Don Lay: Exactly right.

Peter Bell: A bunch of other things worth noting and discussing in the report, but maybe one I'd point out about the "trend of legitimizing unsanctioned production being supportive for the Chinese industry" and how taxes are "proposed to be levied to finance their rehabilitation efforts associated with past rare-earth mining".

Don Lay: SP Angels have made some bold assertions, I think correctly so. They obviously wouldn't have done it without speaking to a few people close to the situation. They have some statements about including full, life-cycle costs of the processing of rare earths so that they can rehabilitate and clean up some of the problematic sites they've got from rare earth mining and processing. Things that wouldn't have been allowed, of course, in mining operations in North America, for example. I think we're well aware -- we've seen the pictures of bad actors showing bad behavior from processors in China from different times. The government is now cracking down on bad processing and looking to implement and remediate current sites. That will increase the cost of things, over time, when the whole life-cycle cost is included. That's coming and that will likely be supportive of our efforts, as well, because we're doing it in a clean fashion to begin with. If you do it clean from the beginning, then it's relatively easier. If you do it messy from the beginning and clean it up later, then that's expensive. We just prefer to do it better out the gate and time, hassle, and money in the long-run.

Peter Bell: A question that you must face a lot from people who are trying to figure out if there's a good opportunity here with Medallion is the potential scale you're facing on the production side.

Don Lay: Most mining operations have a scale threshold, if you will. They need to get past a certain size to get economies of scale. In the rare earth business for hard rock mines it typically tends to be $300 or $400 million dollars at a minimum to get a mine that's big enough so you could put in a processing system that's big enough to create adequate quantities of material to cover both your variable and fixed costs and make a profit. Three or four hundred million at a minimum, but many of the projects on the books are at eight hundred million or a billion or more -- that's the sort of scale they need. From our perspective, we can start at a much smaller pace than them. Maybe at twenty or thirty percent of the volume that they've got, but our capex would be a fraction. A plant to process all the available material in North American and produce, say, 2,000 tons of rare earth oxides a year would be maybe $20M twenty million dollars. A similar plant would probably be $150-200 million dollars for a similar mining operation, as a comparison. We're just a fraction of the capex number and we can scale it up in a linear fashion quite easily as additional feedstock becomes available from the miners that we look to buy our monazite from. Those are very interesting conversations because our ability to scale-up in the business is very capital-efficient.

Peter Bell: And providing some sense of completion for those heavy mineral sands operations who have that waste product sitting. There may be concerns and uncertainty around the implications of that material if government regulations in the US were to change.

Don Lay: The heavy mineral sands mines, end up with upgrading and producing this monazite as a by-product. Monazite, because it's rare earth material, it ends up having some uranium and thorium in it, which are both radioactive. If it's sitting there in a pile then it's not gonna hurt you, but it needs to be stored properly, transported properly, processed safely, and the waste dealt with properly. Those are all things that we're working on. For heavy mineral sands miners who aren't after the monazite but end up getting it from their processing, it's a bit of a hassle. They're in the business of mining for titanium or zircon. They end up with this material, which is valuable because it's a rare earth ore but also has this radioactive signature that needs to be dealt with. They can put it back to the pit and bury it over -- that's fair game. Nobody's going to get hurt and they are certainly allowed to do that. Or they can figure out how to take advantage of it and earn some money -- that's where we come forward as a commercial partner to buy the material off of them and then process it and deal with everything correctly and safely. Of course, that's an important thing for them because they're good stewards with their mining operations and they want to make sure their business partners are as well.

Peter Bell: Wonderful. I appreciate it all. Mr. Don Lay, Medallion Resources. Thanks very much for talking with me.

Don Lay: Thank you Peter, appreciate it. Talk to you soon.

Find the full video on YouTube here,