Sometimes these hour-long interviews that I like to publish can be exhausting. And not just for you! There's a lot of important information out there but it's hard to set priorities. Following the recent filing of 125 insider transaction reports showing a massive accumulation by Don Lay, CEO of Medallion Resources (TSXV:MDL), I went back to an interview from November 2018 that had largely gathered dust since publishing. Turns out it's full of all kinds of important reference material for the rare earths space and it's my pleasure to share it with you now. Please note that it's not sponsored content.
Peter Bell: Hello, this is Peter Bell and I'm here with Mr. Don Lay of Medallion Resources. Hello, Don.
Don Lay: Hello Peter.
Peter Bell: November 20th, 2018, and there's news out from the company. Medallion completes key rare earth production tests. Congratulations!
Don Lay: Well, thank you very much Peter. Big news that's important for the company.
Peter Bell: Yes. And Rare Earths Salts played a instrumental role doing this work.
Don Lay: The rare earths are a variety of different elements and to be a marketable commodity, they to have to be separated. Our business is to extract the rare earths from monazite, a by-product mineral that we acquire, and then we hand off a concentrate that contains all the rare earths to a another party that separates them. Rare Earths Salts is a company based in Nebraska has got a novel technology to separate rare earths. They have a refinery down there. Earlier this year, we had extracted rare earths from monazite sand in Saskatchewan with the Saskatchewan Research Council, our technical partner, and sent that concentrate down to Rare Earths Salts. They put that through its paces and separated our concentrate into the individual rare earth oxides, which are the marketable commodity. It was a big step to pass and that's what we announced today.
Peter Bell: Quite a few steps involved there. You mentioned the Saskatchewan Research Council -- that's a government entity as I understand it.
Don Lay: Yes. The Research Council is a crown corporation. They operate on a sort of a break-even basis. They've been around for 50 or 60 years and are well-recognized for their metallurgy and experience in uranium, as well as rare earths. They're really doing the bulk of the test work for us.
Peter Bell: And the output of their work is what went to Rare Earth Salts.
That's right. Rare Earth Salts kind of completes the value chain by separating the rare earths into the different oxides, which can then be can be sold on the marketplace or through contracts.
Peter Bell: The potential to have Rare Earth Salts doing some of the heavy lifting with the selling is very significant.
Don Lay: Yes. That's a good point, Peter. A lot of people are under the impression that once you produce a product, people will automatically buy it. Of course, that isn't the case for rare earths. If you produce an ounce of pure gold, then there's a big liquid market for that but things like rare earths are different. Even though there's a marketplace, you have to find customers to pick up your product and that's where Rare Earths Salts has really been working for a number of years -- cultivating customers and sending out sample products for qualification. When large companies want to buy, say, neodymium oxide for magnets they want to make sure you've got an on-spec product and that it's available in quantity for a number of years. They need that even before they commit to buying. Rare Earth Salts really looks after that part of the value chain, which is critical.
Peter Bell: With those relationships, the quality of product is essential. Just imagining a permanent magnet that wasn't quite as permanent it should be -- that could potentially be catastrophic.
Don Lay: The big car manufacturers or other people that use these magnets, it could be General Electric or Siemens in their wind turbines, they wouldn't actually put a magnet that wasn't on-spec into one of their devices. All that testing and all that assurance needs to come months and years ahead of the actual production of the final product.
Peter Bell: And all the competition within the industry there can get pretty fierce, even if it is a somewhat opaque market. The dominance of China and everything are very large issues at play. I'd point out to anyone listening that Rare Earths Salts is based in the US, focusing on the downstream aspect, with what you're doing focusing on the upstream. The supply cannot be taken for granted either. In as much as you say that finding buyers for these things takes some care, we also need some attention in finding sources of supply, as well. There are a variety of different supply routes but what you've done with seeking out the monazite is very impressive. I wonder if there is any sense of any increased competition from other people trying to do similar things?
Don Lay: Monazite is a rare earth phosphate mineral that contains a good distribution of rare earths, including the magnet metals. Fortunately, it is is produced as a byproduct by the heavy mineral sands mining business, which mines beach sands for the titanium and the zircon. As they mine it, upgrade it, and process it, they isolate monazite sand and that sand is something that we buy as our input. It's an interesting and cheaper way to get in the business than building a hard rock mine and everything that goes along with that. We just do that one piece of the business: sourcing the monazite sand and processing it to create a concentrate. There are a number of items to stitch together to make it all happen and one of those is building relationships with the heavy mineral sands miners who are interested in selling this material. They need to do some upgrading on their side, it's not particularly difficult but there is some work required. It's not just something they can do instantly. They've got to upgrade their material to create a high-grade, pure monazite sand concentrate that that we would buy. And then we've got to ship it to our facility, which we are looking to put in North America as our first stage. We then extract the rare earth concentrate from it. Monazite has been processed historically for 80 years at least for it's rare earths. There are a number of pathways and routes to do it, but it's only really being done currently in India by the government. It's also done in China as well by private industry.
Peter Bell: In terms of anyone coming in to scoop you in North America, there are no indications of that yet? The potential sources of supply remain open in the near-term?
Don Lay: Yes. The Indians have lots of monazite in India, so that's what they would process. The Chinese are looking to import monazite and in some cases are importing monazite into China today, but we see no reason we can't be price-competitive with them given the current economics in the marketplace from outside of China.
One of the interesting things about monazite is that it contains thorium and a little bit of uranium, so it is slightly radioactive. It needs to managed, treated, and handled with care. That creates a bit of a bit of an opportunity and challenge because some of the larger companies that we're dealing with would prefer not to send it to China because they are then somewhat unsure what may happen with it there.
Peter Bell: Indeed. Again, coming back to Saskatchewan. Canada. What a place to send it -- really a first-class destination for handling radioactive minerals.
Don Lay: Yes, it is. It's a ways from most of the beaches were monazite is being mined but it has the expertise, knowledge, and infrastructure to deal with radioactive material. That's very significant.
They deal with it every day. They've dealt with it safely for 40 or 50 years and they've got all the technical expertise to continue doing it. They've got the mineral processing expertise, the health and safety -- all of the elements that one is looking for.
Peter Bell: It's funny to hear you speak about you know things for 40-50 years and beyond that with the history of rare earths from monazite, 80 years I believe you said, because everyone's so excited about the future. The potential growth on the demand side and big question marks around supply being able to meet it -- what kind of a price will clear the market? All these questions that people get excited about when they're speculating around what could happen? It's interesting to me with all this change and new stuff coming, that your work has some firm footing. What you're speaking about here is very important.
The indications on the demands for the rare earths market are terrific at the moment. A lot of it's being driven by the demand for the magnet metals -- permanent magnets, which are about ten times stronger than the standard iron magnet you would have played with as a kid -- they're essential for all the new electric vehicles have permanent rare earth magnet motors. With companies like VW responding to things like their problems with pollution from diesel motors, they are now committing to dozens and dozens of electric vehicle models. I'm not quite sure where they are going to get all the magnet material for it, quite frankly. Those models aren't going to ship for a few years, but they've got to be thinking about that right now.
Peter Bell: Well, I hope they are! I wonder how many people might be surprised by what could play out here. It seems standard to take for granted the ability to source whatever you might need. There's so many aspects to that story, but there's one particular piece out in September that was just stunning to me -- apparently the USA put tariffs on China and then removed them. China has put some in response, but hasn't removed them yet! The potential for things to get out of sync there and the "trade wars" aspect of it all is so concerning. It's not really the stuff that you want to base most of your investment decisions on because they are such big trends that tend to take so long to play out, but I want to know somebody's ready to pounce on opportunity there. I think it's often up to the junior companies to exploit the macro opportunities. And you have been working on this for years now. Making progress at this time is fortuitous.
Don Lay: I think the timing is really good. Most people recall that rare earths had a few years 2010-2012 where it was a very hot commodity. The prices skyrocketed in part due to concern about supplies from China. Prices of some rare earths went up ten times in that period of time. Since then, prices have come back down to a more stable base well below their highs above the previous base set before the boom. It's clear to everybody that China is going to continue to use rare earths as a strategic resource. In fact, it's a pillar of their industrial strategy -- an internal strategy -- to attract car makers and other manufacturers to China by making sure they can access key resources they need, one of them being rare earths. It's difficult to find, mine, process, and get rare earths to finished products, so that's where the Chinese have had an advantage for a long time -- partly because of by-product production. They have used it as a strategic advantage and are going to continue to do so. With electric vehicles becoming much more important, some people are missing the fact that China is already the world's biggest EV market. In fact, half of the EV sold today are in China. It's not married to the petroleum economy and automobile economy of internal combustion like Europe and North America are, so the government is providing incentives for production of electrical and new energy vehicles they call them -- hybrids or hydrogen cars or whatever. It's all more advanced forms of transportation, all of it is cleaner, and they want the Chinese companies to dominate those industries in the future. With new technologies it allows them to leapfrog ahead. These are all playing out at once and it's creating some very interesting dynamics, which are quite positive for us being a potential producer outside of China. We quite like the macro backdrop at the moment here. It's quite interesting for us.
Peter Bell: It's seemed to heat up a little bit lately, but it's always hard to tell. There was some strength in rare earth prices apparently in 2017. I've heard some interesting comments about what we've seen this year, not with rising prices associated of a wild bull market yet, but strength again this year. It's always a little subtle as this is not exchange-traded stuff. In the future, I wonder if they will just stay as niche and smaller quantity materials or if there will be some exchanges listing rare earths in China or somewhere else in the world?
Don Lay: I don't think they will be exchange-traded, but not because of the size of the market. Part of being exchanged-traded requires a full standardization of the product. You need a large market plus a standardized commodity to trade on an exchange. In the case of rare earths, there are so many different specifications that it is probably prohibitve. There could be two-nines of purity at 99%, or three-nines at 99.9% and so on. And there are at least six or seven rare earths that are commonly traded. There's a lot of different specifications and it's unlikely it would be exchange-traded ever or at least in what we can forsee. The prices that are quoted from the metal services are very accurate and nobody disputes those. It's pretty easy to get a good fix on the pricing as well as the size of the market, albeit a little more complex than other markets. China continues to loom large in all that.
Don Lay: What is interesting is that probably 70-80% of the rare earths trade on longer-term contracts. I think we will see the length of those contracts increase. If you think about windmills or automobiles, those designs are made 3, 4, or 5 years ahead of a head of shipment. They need to lock-down prices for long periods of time ahead and that's going to tighten the industry, certainly, and probably ensure a long-term stability of consumption and pricing. It'll be interesting to see how it plays out. I think that the game is kind of very early. The marketplace is only about a 140,000 tonnes per year. It's $5 billion per year. Looking forward 10-15 years, it'll probably be a $10-15 billion dollar-a-year market and will still be dominated by the magnet business. We would like to get a little piece of that.
Peter Bell: Amazing to think that such an important piece could be so small. Looking ten years out with maybe +$10 billion dollars total value traded annually -- for such an important piece of what the future looks like, it's always puzzling to me how small it is. An important piece can be a small piece!
Don Lay: The number I quoted there today being $4-5 billion dollars a year is at the oxide level, which is the traded commodity where there's a lot of visibility. If we talk about the magnets, then it has to go from being an oxide to a metal and then an alloy and a magnet before somebody turns it into a magnet. There are an extra four or five companies before it gets to a motor maker who would insert a magnet into a motor for an EV. And that's even before it goes to a car maker -- so there's another step there, depending how integrated things are. There are four or five steps before it gets to the end product.
Don Lay: The Chinese manufacturing economy is a few trillion dollars a year and rare earths go into a lot of that. It's essential for their economy. Even though the value of the oxide isn't that high, the ultimate value of all the things that it goes into is very high. It's necessary for a huge part of the economy, which is why it tends to attract a lot of media attention and political interest.
Peter Bell: Fascinating stuff. Again, to say that it's a relatively small part of the final cost of the items is important because it raises some question. Imagine if they didn't have it -- the product wouldn't be the same! I always like to think about what if something wasn't there, where would we be? It gives a clear sense for how essential this stuff is. And thinking about the cost relative to you know other items -- there's a complicated calculus that goes into all the trade-offs. How far can rare earth prices rise before they start to drive substitution? That's one of the things I've heard discussed more so recently. One of many questions to discuss there.
Don Lay: The substitution is interesting. In the area of permanent magnet, as it is the largest market segment at this point in time, the neodymium or NdPr rare earth magnets used in EV -- there isn't going to be any substitution for NdPr magnets any time soon. I'm not saying somebody couldn't invent some new magnet technology, but the NdPr technology was invented 25 years ago and is just now becoming the standard in a whole variety of segments. Something new may replace it, ultimately, but it's difficult to foresee that. Big companies don't make these decisions quickly or lightly. There's no imminent threats of substitution at all. That's important but there are always new technologies under development. I think one of interesting things about rare earths is that they're discovering new and more interesting uses for them all the time in esoteric areas like doping agents. Universities and research institutes are coming up with all sorts of new uses, so I would expect actually their use to increase over time and not decrease. Even though they're using very small quantities, they're having significant effects. It's an exciting place to be.
Peter Bell: Certainly. I wonder about the potential for increased usage of the rare earths other than the NdPr suite there for other purposes too. What is the potential for that demand to come on? Lots of tough questions around the economics of any one particular project that produces these things with which suite of elements it produces and the production levels versus the revenue drivers. The over-production of some rare earths based on the production mix versus the demand for NdPr.
Don Lay: It's interesting stuff. Cerium, for example, is the most abundant rare earth in the earth's crust. Most large-scale mining operations and NdPr processing typically produce cerium at 35-40% by volume. The market really can't consume all the cerium that's out there today, so it gets stockpiled and sold off cheaply. It's kind of a loss leader for most of the companies, but they produce it whether they want to or not because they want rare earths and the rare earths always come out together. Since the demand is meeting the supply, people are after the magnet materials right now but that wasn't always the case -- quite a few years ago, you could have picked up NdPr for $5 a kilo but now it's $50 a kilo! You could have had as much as you wanted at $5 a kilo, but people didn't foresee how things changed. All the rare earths have quite unique and distinctive attributes and they find new uses for them. It's kind of like looking at 6 or 8 or 10 different markets in terms of supply-and-demand dynamics and how that influences some of them. When people are developing new applications, they're quite sensitive to how there may be a limited supply of that rare earth in particular. Especially if they need it in large quantities -- it just may not be available, which prohibits technologies from coming to market for that very reason.
Peter Bell: You mentioned cerium and for people who've been watching the company for a while, there was some mention in prior news and management discussion analysis of quarterly financials there about some of the plans going forward -- the potential to monetize some aspects of the cerium. A variety of ways for you to make money. How does this news today fit in with all of that?
Don Lay: The two dominant rare earth by volume would be lanthanum and cerium. They're both priced about the same at $2 a kilo. Lanthanum is easy to sell -- you can sell as much as you make to meet demand for the catalyst market. It's used in batteries and as a fuel cracking. Cerium, as I mentioned earlier, is a little more difficult to sell. One thing that we did in our test work was extract the cerium directly from the hydrometallurgical stage and produce a magnet-rich rare earth concentrate. More of all the other rare earths and very little cerium, which increases the value of the rare earth concentrate we produce. Depending on the demands from the marketplace, we could produce a cerium-depleted rare earth concentrate at a lower cost. There are different economic models to play off depending on and how that how that plays out.
Peter Bell: Saskatchewan and Rare Earths Salts again -- there are some aspects of the story that make it clear what the future looks like. Was there a mention of timelines in this news release? Weeks or months, no not quite.
Don Lay: In terms of what aspect?
Peter Bell: Plans going forward -- production timelines and such?
Rare Earth Salts now is processing about 500 tonnes per annum of rare earths oxide output. That should be completed relatively quickly, within a few months here, and then they plan to increase that with customer demand up to 3,500 tonnes per year of production output by 2022. They're looking for us to be a significant supplier of that feedstock. They are working with large multi-national companies as well as government bodies to provide rare earths to build that capacity. They're seeing a lot of demand as they as mentioned in the news release in that quote.
Peter Bell: And this in a global market a 150,000 total rare earths oxide global production, approximately.
Don Lay: Yes, I think I said a 140,000 but it's something like that, Peter. For their 3,500 tonnes they would be maybe 2% of the global marketplace. Enough for people to pay attention, but not enough to affect the marketplace.
Peter Bell: Something that will affect your company and theirs!
There are so few companies that produce rare earths around the world that as soon as you're in productive in any reasonable quantities then everybody knows you and you can deal with customers, suppliers, and everybody on a different level than when you're just supposing to do it.
Peter Bell: And, to that, the future of Medallion -- do we have a sense what might be coming?
Don Lay: What we're doing now is a bit more test work for our process with the National Research Council. Look forward to that -- it's not a significant amount, but we've got to finalize some more things. The key work is out in the public now and complete, which is producing the commercial product that's viable for separation by a partner as we announced today. The creation of a by-product -- a phosphate product -- as well. Then, there's waste-stream valorisation and production to sort through -- a little bit of work needs to be done and there'll be some news on that forthcoming on that. Thereafter, we expect some news from Rare Earths Salts on acquiring customers themselves -- getting to announce specific commercial contracts. They may be named or they may not be named, but either way we'll get a good indication of the kind of volumes and the product areas that they look, materially. And, lastly, the feedstock arrangements from our side -- deals with the heavy mineral sands miners and acquiring the monazite sand for processing. All that news flows is anticipated and once our our metallurgy work is done, we're in a position to get some definitive numbers on capital expenditures for a plant and operational costs. Then, we will be able to provide some more specific economics on the process. I can say we wouldn't be going down this path unless it looked very attractive -- it looks very attractive. We look forward to providing more color on that as we can.
Peter Bell: News today is confirmation that your partner's been able to separate -- maybe not a surprise to any of the people familiar with the space and the story the two companies here, but still something that marks significant progress on that path towards unlocking the value.
There are a a lot of steps needed to be taken with decision-critical milestones to make sure we're on the right path with all of our test work and economic work, as well.
Peter Bell: Great. Always questions about the economics and things, but I wonder about timelines with Rare Earths Salts -- was there any information around how long it took for them to do this?
Don Lay: Fortunately for us from a news-flow perspective, they were moving their labs from one location to another so there was a lot of tear-down and setting up of their labs before they got to a point where they could test our concentrate. I think the actual work was just a couple of weeks in their labs to do the separation. I think the material is probably going to spend about the same amount of time in the plant until it's all fully separated, but that depends on the circuit path the rare earths need to take. It's a complex set of pipes to do all of that. On a commercial basis, we would be shipping hundreds of tonnes at a time for processing. Then it's looking at $20,000 of a tonne for separated rare earth oxides in associated value -- it doesn't take many tonnes to move a lot of valuable material.
Peter Bell: Certainly. And the process here -- despite the resting times, the pipes, and everything it's not solvent extraction?
Don Lay: No. Rare Earths Salts has a different processes. They use a variant of electrowinning, which is a a patented process. They are world leaders in this area. It's cleaner and cheaper than solvent extraction, so we are thrilled to have them as a business partner because they are really leading the pack in the separation race.
Peter Bell: And them as a private company -- there's a bunch of questions that come up with that. People who may not be familiar with who they are and what they're doing. They have some presence online and have been somewhat forthcoming with some news items on their website. Hard to say with private companies what's going on and what they might be involved with, especially with the political importance of critical materials. I wonder about that with Medallion in Saskatchewan -- is there potential to access other sources of funding or expertise? The Saskatchewan Research Council has been an example of that -- imagine if you didn't have access to that group and their ability to provide high-tech services effectively at cost. The economics of what you guys would be facing on your development pathway would be different -- more expensive and potentially slower. Again, good work. The ability to find the way opportunity in the midst of all the the winds of change there is important.
Don Lay: We're we're happy to be focused on North America now where we have the expertise in Saskatchewan with the research council. There are lots of places that we could process the material and necessary expertise to do it. Nowadays with the Trump administration in power, there are a lot of demands and inquiries from the defense establishment because rare earths are used in a number of defense applications. There's a heightened awareness of this opportunity for production in North America on a by-product basis. There's a lot of attention coming and a lot of attention under the surface. I think people can certainly see it in the media and I think we're in a good position to make a splash to show people a great pathway to get to production that people hadn't really considered much. To shine a bright light on it and show people that it makes sense. It was sitting there, but someone just had to do it!
Peter Bell: That's it, right? That's what it is with these exploration junior mining companies. In one way or another, their mandate is to go and find those opportunities that other people have missed or haven't seen yet and exploit them bring them to bring them to market in some way. It's taken years for Medallion since that last bull run, as you mentioned. It's not quite ten years, but it's not that far away, right? And ten years on from today you could be really into production.
Don Lay: Absolutely. Medallion initially got involved in the rare earths marketplace as one of those exploration companies. At that period of time, we happened to have a really smart CEO who knew a lot about rare earths and had very good strategies around it. We did explore some hardrock opportunities, but also started to focus on the monazite by-product approach. We've really stuck with that and it's proven to be that it was the right thing for the company to do. As time goes on, it gets clearer and clearer that it's a terrific opportunity. I think it will make a big difference in the rare earths space over the next few years.
Peter Bell: In comparison to the guys who are generating drill results as news, it would seem like this is slow and boring or something like that -- but if you look closer then you'll see there's potential for some really wild stuff to happen here.
Don Lay: Absolutely. And we've been at it for a long time, so if anybody wants to do it then they're going to be playing catch-up.
Peter Bell: That is really important to me. There's a lot of stuff here and I find it kind of difficult to wrap my head around it all and figure out what is important really -- macro, micro, everything in between. Looking for opportunities to speculate around all this is tricky but knowing that you guys have been doing it for a while helps. People may wonder if it's worthwhile, but that's a choice that you can make. I like to say, "I'm bullish and I vote with my feet". I continue to pay attention to what's going on here. Markets are fascinating and there's so much information out there -- a lot of times the stories are kind of very familiar, but the rare earths seem to attract some of the best analysts that I've encountered. There are some good facts and reports out there, which is essential to attract interest and help bring some of the bigger players in the global materials industries into this small niche space. To that, I wondered about the market cap of Medallion today at approximately $5-10 million dollars?
Don Lay: No. Today, we're probably $4 million.
Peter Bell: $4 million.
Don Lay: Yes. I was talking to an analyst at UBS, the big Swiss group who was based out of Australia and wrote a report on Lynas. He asked about our approach and I walked him through it. He said, that's really interesting and exciting but you're only $4 million -- what can you do about that? I said, What can you do about that! Capital ran away from the rare earth story before our story got that interesting. We've just been building the basics here. I've had a number of people look at us recently and look at how undervalued we are compared to some other companies they look at it -- looking for explanations, wondering if they've done something wrong? No, you don't have it wrong. You're thinking is sound. It's one of those disconnects that you see in the marketplace from time to time -- probably more often in the juniors than big caps but here we are. And that's why I'm excited about the opportunities.
Peter Bell: Wonderful. And cash on hand? Everything like that is very important and those are the questions for a junior -- are you able to keep going and doing the work? I think the recent history gives a pretty clear answer to that, a definitive "Yes".
Don Lay: We continue to raise money in small amounts to move the project forward. We manage a very low-burn company at this point in time as we're doing these business development exercises and test-work. A lot of the expensive things have already been done. As we hit the milestones and capital is available, we expect raise larger financings at higher prices and press forward from there. In the meantime, we just get the word out and press forward.
Peter Bell: Well, thank you for taking the time to speak with me here today, Don.
Don Lay: My pleasure, Peter. As always.
Peter Bell: Till next time, goodbye.
Visit the Medallion website here, https://medallionresources.com/
