I led off with my assessment of the massive imbalance in the critical metal market and forecast for a future balanced market. Any market where 97% of supply and 100% of alloy processing must originate in China is the definition of a market far out of balance. I argue that a balanced market in strategic metals will eventually look like today's energy market. A power plant doesn't care if the feedstock is natural gas or coal because you don't have to change a turbine's physical structure to use either one. A transmission grid doesn't care whether electrons come from hydropower, geothermal, solar, nuclear, or fossil fuels so long as those electrons can get to your home appliances. Eventually the metals markets will balance when diverse supply sources, efficient technologies, and synthetic substitutes can arbitrage away single sources of supply. U.S. GDP has grown for the past several decades even though per capita energy use has declined. We can use the same energy metrics for the metals market.
I noted that Molycorp's acquisition of Neo Materials changed the game for REE producers by creating a true vertical business model. The deal was cash-heavy rather than stock-heavy, which I thought odd given the strength of MCP shares trading at 23 times earnings. I wondered out loud whether Molycorp thought that the balance sheet risk of assuming a half billion dollars in debt outweighed the avoidance of shareholder dilution. Molycorp is the only REE producer than has the financial and operational strength to initiate M&A; all other REE producers are still young and are thus more likely to be bought themselves (like by an oil supermajor seeking lanthanum or cerium for fluid cracking) than to be buyers of alloy processors.
I threw several policy prescriptions at the audience, starting with a big one for federal government policy. Several other panelists had noted that DOD seemed to be the weak link in the interagency effort to secure critical metal supplies. I think I know why. DOD's weapon system procurement program managers are selected from career warfighting officers, which makes sense if you want people who can dream up future capabilities for armored vehicles and fighter aircraft. The weakness of this approach is that warfighters don't think like logisticians. They don't know how to reach down three or four levels worth of subcontractors to find supply chain vulnerabilities. I would like to see DOD's Defense Acquisition University incorporate supply chain security into its curriculum so program managers get the insight they need. I would also like those professional logisticians who do join the acquisition workforce to think more like intelligence officers when they screen contract sources for components and raw materials. The intelligence community has plenty of data on natural resource repositories in many countries; developing indicators and warnings of supply curtailments that procurement managers and logisticians can use should be a priority for the intelligence community.
I also had three other policy recommendations up my sleeve; these were more attuned to things that will help the markets for critical metals become more transparent and liquid. First, I argued that some exchange (preferably the Chicago Mercantile Exchange) should create a futures market for rare earth metals. Producers and end users of both base metals and precious metals can hedge their needs with future contracts in gold, copper, and steel. Agribusiness can do the same with contracts in rice and soybeans. Creating contracts for rare earth metals seems like a decent thing to do for manufacturers who can't mitigate single-source supply risk with contracts for guaranteed delivery from miners. Second, I believe the U.S. Securities and Exchange Commission should adopt some version of Canada's National Instrument 43-101 resource reporting convention that accommodates nuances in ore deposit volumes and grade quality. This will accelerate mining investment in the U.S. by allowing miners to identify more exploration projects that show some early promise. Finally, I suggested that the U.S. government fund an estimate of the production cost curves for REE mining projects worldwide. Investment banks publish costs curves for base metals, precious metals, and oil/gas wells because the thousands of those sources worldwide are well-known. The small number of rare earth mines operating worldwide are so early in production that their costs are only estimates, or they are in semi-transparent economies like China where state subsidies can mask true cash costs. The U.S. intelligence community has enough analytic horsepower and data to publish initial estimates of the world's REE mining costs. Uncle Sam should do this in the spirit of the CIA's World Factbook as an open-source, unclassified academic reference for the entire world, and the best place to publish it is on the U.S. Geological Survey website.
That just about completes the wonderful time I had at TREM12. I made plenty of contacts from the Defense Logistics Agency, the Institute for Defense Analyses, and other government agencies that will have to carry the ball on policy execution for critical metal security. I even got some free entertainment when I saw a junior executive from a mining company try to flirt with a hot babe from an executive branch office. I'll conclude by saying that I'll definitely return in the future, because I can never get enough lunch buffets, fruit smoothies, and house recipe cannolis from the Ritz-Carlton Pentagon City. It's nice that TREM holds its annual conference someplace swanky.