Insights on the Russia-Saudi Oil Supply War with Matthew Iak

Matthew Iak, Executive Vice President at U.S. Energy Development Corporation, enlightens the listeners of Non-Beta Alpha about a major controversy between Russia and Saudi Arabia over oil supply.
Matthew Iak, Executive Vice President at U.S. Energy Development Corporation, enlightens the listeners of Non-Beta Alpha about a major controversy between Russia and Saudi Arabia over oil supply. This ongoing dispute has been overshadowed in the media due to the COVID-19 pandemic. Mr. Iak believes that the clash is unnecessary because consumers of oil and gas have no brand loyalty, only price preferences. Saudi Arabia is undercutting Russia in the European markets.

Meanwhile, Russia is making efforts to persuade United States compliance with OPEC Plus, which will ultimately cut the US global energy supply share. Mr. Iak believes that it is the United States’ obligation to maintain supply control in order to prevent the formation of an oligopoly that can price gouge and push weaker industry players out of business. Depending on the progression of the current COVID-19 crisis, prices may remain under control or become incredibly unstable causing the market to potentially hit zero and, consequently, could push all high debt-bearing firms out of business.

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Ryan Morfin:                    Welcome to Non-Beta Alpha. I’m Ryan Morfin, and in today’s episode, we’re going to discuss the war on supply, Putin versus Saudi Arabia with industry veteran Matthew Iak from US Energy Development Corporation. Matt’s here to talk to us today about what’s going on in the oil and gas space. This is Non-Beta Alpha. Matt, welcome to the show.

Matthew Iak:                   Thank you, Ryan. Glad to be here.

Ryan Morfin:                    So Matt, I know in a previous career you’ve managed a billion of client assets as a broker. And prior to joining US Energy, you were an advisor going through a lot of the same things people are going through today. And now as an executive at US Energy, can you maybe go into a little bit of what’s going on in the environment today and what brokers need to be thinking about when they’re talking to clients about the oil and gas space?

Matthew Iak:                   Yeah. Thanks Ryan. They’re both correct. Yes. I’ve been with you energy for almost 15 years now, probably just over and former life as an advisor. So I fully respect the angst and agna that many clients are having today, not just relevant to their investments in the energy sector, but probably across the whole spectrum. So I’d love to focus on the energy sector as much as I can provide some value and some guidance to hopefully give people an understanding of where things stands now, Saudi Arabia, Russia, the US overall pricing and how it affects the overall investment portfolio.

Ryan Morfin:                    So today we’d love to get your opinion just on some recent headlines on the oil and gas space, everyone’s really focused in covering the COVID and the virus pandemic, but a significant impact has been made across several industries. Oil and gas is no exception, but there’s something brewing that’s larger, that would probably be top news, if it wasn’t for all those other bad news that’s surrounding us today. Which is the war that’s going on between Saudi Arabia and Russia, and why it’s going on and how it’s impacting US Energy producers. I’d love if you could just go into that a little bit and share your insights.

Matthew Iak:                   Yeah. So the backdrop of all this is you’re right. If COVID wasn’t … Or Corona, wasn’t the top of everyone’s lips. I think that the number one news headline might in fact be the supply side war that has occurred once again in the oil industry and a backdrop Corona did obviously come to a head in February when the spread started and you started to see Russia and Arabia disagree, or as they call it OPEC plus start to disagree on future supply cuts in terms of stabilizing prices, what was then to be seen as significantly smaller impact than what we’re seeing now. And by both parties standing their ground, on essence doubling down by opting to flood the market with additional supply, that itself would be a major headline repeating the 2015 era of the Saudi playbook appears that the Russians are doing a very similar stand and Saudi Arabia is digging their heels in as well. So it’s a really unique headline, one that is actually almost being thrown out because the supply side …

                                           If we talk about a normal equation, you’d have a denominator and a numerator, and we would be talking about one side of the equation, but now that the other side of the equation, the denominator in terms of actual demand is the biggest question mark, it almost makes some of the posturing less important than trying to figure out where demand will fall from over 102 million barrels a day of demand, down somewhere is at 90 years or is at 80. And then ultimately what levers are there to try to control that price decline with or without the stance of Saudi Arabia and Russia, that is occurring in that backdrop.

Ryan Morfin:                    And so the pricing of oil that we’re seeing today, could it possibly go lower? And how would that play into production levels that US producers are facing whether they want to produce or not?

Matthew Iak:                   Yeah. I’d love to tell everyone that this is the bottom of oil prices, but it definitely could go substantially lower. In fact, there’s conversations about below zero and in many aspects, oil is and will be below zero for many producers. And in fact, you’re probably less than 60 days away from being unable to store additional supply. And thus there’ll be parts of the supply chain that will be having negative arbitrage, is not 6 or 10 or $14 a barrel, but to the point where it’s a negative pricing, even if the actual market price didn’t drop further from here. But aside from regionality and storage issues, I think with ELGOS running the market now, and Hedge Funds really dominating money flows, you could absolutely see triggers that bring oil as down as low as $5 a barrel.

                                           I don’t know if the conditions are there yet, but it’s an absolute possibility, that you don’t hit bottom yet because of the technical side. So you have the fundamental side, on one side of the equation, which I recently discussed, and then you have the technical side. And both are still at risk, which means that you could only dice for lower prices. And again, this is more of a short term than a long term conversation, but that risk is real.

Ryan Morfin:                    And some people talk about people being forced to pay others to drag oil away from the drilling sites. Is that a real possibility in today’s market or in the future market?

Matthew Iak:                   It is. I mean, I just … People don’t really recognize that in parts of the world, is the supply side fight. Russia and Saudi Arabia having a fight for the control of the supply chain, which I will hold the whole separate argument of why I think that’s a useless and silly fight because buyers aren’t really stuck with any one seller. They’re not really loyal to anyone, but the lowest price. So to have a supply side fight is somewhat of a silly fight, but Saudi Arabia is already selling oil at 12 to $13 a barrel below market price to Europe. To try to supplant Russian supply, which means at $20 a barrel you are down to 8 or $7 a barrel that they’re selling oil to their lifting costs, and it is … Might be 5 or $6 a barrel, but at the end of the day … So, and the answer is yes, there is absolutely as prices drop, and even in current markets, as storage fills and custody is, or people might have to pay to take oil or even natural gas away.

                                           And ultimately when you have … The US has significant legal ramifications for not producing oils that are already in production. So to not lose leases to land owners, to not have certain conditions applying in terms of contracts with midstream companies that you’re guaranteed takeaway capacity, you have significant issues where people could be in in fact, losing money per barrel.

Ryan Morfin:                    One question I had is I know in the last call at five or six years, a lot of these marginal producers have been ramping up leverage. And now they’re in a position where oil prices and their revenues are served really curtailed. What’s your view on the outlook of those companies that are over leveraged today and how is that going to play out in the market?

Matthew Iak:                   Yeah, so markets usually have a natural level of capitulation and companies are going through bankruptcy and restarting. And I think the last downturn really was almost unnatural in that there’s very little capitulation. There’s a lot of zombie companies that are overlevered, have been able to kick the can in one way or another. Most of the bankruptcies were chapter 11 and were really were nothing more than financial re-engineering in 15, 16 and 17. So what you had is debt holders taking the equity holders out, taking possession of the companies and the assets, but never actually going to market. And we’ve really never had the free market takeover in that force capitulation. And I think you’re finally going to see a mass exodus and wipe out of companies really even here at 20, but especially if there is any even technical move down because of algorithms in the market or fundamental move down because Saudi Arabia and Russia refuse to or keep their heels hammered in.

                                           There’s a lot of other global fallout for the other OPEC members, Algeria, Nigeria, Iraq, there’s significant fallout everywhere, but in the US specifically, I think those zombie companies, and there are a lot of them will ultimately now be out of business. And I’ll come to my conclusion, which I’ll reiterate multiple times probably on this call. Anyone who is long cash and short on debt is probably in the largest generational opportunity in the energy space. They’re just going to have to be very patient and wait for those opportunities to come to them. But there is going to be hundreds of billions or trillions of dollars of loss, unless there’s someone who steps in and interferes with the capitalistic process here in the US which could happen. State regulators are already starting to get involved as is comments from the white house. So there could be a backstop to all of this, but ultimately in the free market system, which is the healthiest system, there’s going to be more pain before those gain.

Ryan Morfin:                    So going back, so where did all this start? I mean, did Putin really want to take aim at the US fracking and marginal production market or and the Saudis were basically stepping up to protect our market for a period of time. And now they’re saying they’re finished, or is this something that’s a personal riff between these two countries because of Syria? What’s your thoughts on what’s really playing out this pricing war between these two superpowers in the oil space?

Matthew Iak:                   Yeah, so Russia has always wanted … And has really been frustrated by the US coming out of the last applied side war and for team with a lion’s share of the market. So there has been … The United States has increased production by 600 barrels a day. It’s an utterly frustrating process for them. Saudi Arabia attempted this move once and failed miserably, and actually lost a significant amount of supply side control in the last price war. And that tends to happen with capitalism, right? You drop prices, people get more efficient, they can operate at a lower cost. The reality is the US is still a higher cost producer than both Saudi Arabia and Russia, and will remain scale as a more expensive production level. But the reality is the world doesn’t want two oligarchs and despots in control of pricing. It really wants the US, it’s almost an American obligation for the US to become independent and stay independent and keep our supply side control.

                                           Because ultimately, I think what it does is it keeps us in a world where we’re not going through Corona and also paying $80 oil. And I think ultimately the US is a godsend in so many ways. For the revolution we’ve had and not allowing these countries to have the ability to produce oil at 90 to a $100 a barrel and force everyone in the market. I also think the supply side war is silly in the sense that even if you close every US oil and gas business, including the majors as oil prices rise, a new company will come in and other companies will come in and fractured at efficient low costs. You can get production to market so quickly, thirties, forties and fifties and sixties, the US will once again supply the world with … and will wash the world with oil to keep prices from staying higher or lower than Saudi Arabia and Russia war.

                                           So I think all of this is very interesting. So yes, you have the Russia side that would like this, but people don’t recognize that Russia’s conditions of producing oil aren’t exactly easy to ratchet up and ratchet down production. A lot of them are extreme conditions. And ultimately they really don’t have the same levers. They want to produce and they’re going to continue to produce. They have smaller levers than Saudi Arabia does. So they weren’t really in the position to continue to cut without it having a major cost to them. Now, they also can’t afford this $20 oil really, $30 oil and below puts them in a complete recessionary scenario. So although they have the balance sheet to afford this for a couple of years, Putin has an awful lot of political [inaudible 00:13:22] who wants to stay [inaudible 00:13:25], going through a massive sums of tariffs of you name it that’ll probably come hurt them.

                                           So they want lower, probably not this low. Saudi Arabia on the other hand, did always want to keep prices modest, but has now stuck its heels in, in this battle, trying to fight with Russia, not really against the US, but it’s also not working with the US, it would like US to take a significant part of this pain. Unfortunately, it doesn’t work as quickly in the US as shutting things down or slowing these down, but they do want us to take a significant amount of this pain and go away from 13 million barrels a day, maybe down to 10 or a longterm.

Ryan Morfin:                    So who do you think blinks first? You think it’s going to be Saudi Arabia or Putin?

Matthew Iak:                   I don’t think it would be Russia. I think Russia believes they have the strongest hand. I believe if Russia can get what it’s wants, which is really difficult, because what it wants is the US to come into compliance and to jump into this negotiation with OPEC plus and cut supplies. The problem is that violates US antitrust laws. The Texas railroad commission is already in negotiations, but it can’t really act as a country to, in essence stop capitalism. So I think the more likely scenario is you’re going to have a lot of short term pain, you’re going to have a slight insignificant long term production decline in the US, which is going to be lower prices than people want them. A lot of bankruptcies, a lot of retooling of the industry in the US. But also Saudi Arabia and Russia not getting what they want longterm, which has any type of control where it can’t just be turned back on in the next high price.

                                           So I think all of the above. Short term pain and longterm gain. That could all be put to bed very quickly if Russia and Saudi Arabia do decide to get together, and there are some levers pulled by the US in terms of it opening up its strategic reserves and buying some of the reserves along with a bunch of other measures, like the Texas railroad commission. Doing what it did in the seventies, and ultimately limiting production from the state. There could be some, all of the above that doesn’t seem likely, because you have capitalism in the mix against a bunch of oligarchs who are very stubborn in their way.` And it basically means everyone has to lose. And I’m not sure everyone has that, and the reality is, Ryan, as you and I were talking offline before, it depends on how long cov had six round, because if you have a demand side destruction of 20% of the market, there’s not enough leverage to pull. You’re going to have a substantial reduction in price for that period of time.

                                           Now, as soon as that goes away and the global production goes back to a norm, obviously you’ll have a massive pendulum swing. But until that point in time, there’s really no control in where the prices go from a fundamental or a technical standpoint, which means wall street algorithms are going to run a while and have massive volatility in price.

Ryan Morfin:                    Well, Putin has recently also leveled the playing field during this coronavirus. He’s made himself president for life by changing the Russian constitution. So he’s now on par with the King of Saudi Arabia to not have a local domestic politics interfere with his time horizon. Well, I got one more important question for you. Who do you think wins in a bar fight Putin or MBS?

Matthew Iak:                   It’s a phenomenal question. I think the US wins in a bar fight.

Ryan Morfin:                    The US wins in a bar fight. All right.

Matthew Iak:                   We win in a bar fight, but hey, listen. At the end of the day, there’s a ton of optimums in the space Ryan, there’s going to be a lot of pain. There’s going to be a lot of EMP companies that aren’t there five months from now, but there’s going to be an awful lot of gain as well. The US will come out just as resilient. The energy market will be just as technically sound. My only concern truthfully is something I don’t have the bandwidth to measure. And that’s if the oil and gas market as a whole takes a substantial hit for three months, five months, six months, and there is a retooling of the whole industry. It unfortunately is what led the US thought of the last recession. And I’m unsure as to without that industry, the US is V-shape recovery versus U-shape, right?

                                           Because I don’t want to speak for others, but I truly believe that you now with the passing of this bill have a more likely scenario of a V-shape, if this Corona can be contained. But the oil industry could be the one question mark. It was the leader of the last time. And without it, I do wonder where that major inflection point comes to move the market higher, faster.

Ryan Morfin:                    All right. Well, that’s all the time we have for today, Matt. I wanted to thank you for coming to the show today. We appreciate your time and your insights, and we hope to revisit this conversation. I assure it will continue to be a timely conversation going forward. So thank you so much for your time. I know you guys are very busy right now.

Matthew Iak:                   Thank you, Ryan.

Ryan Morfin:                    Thanks for listening to Non-Beta Alpha. And before we go, don’t forget to subscribe and leave us a review on Apple podcast or our YouTube channel. Our next episode, we’ll speak with a Shanghai native that will tell his story on the first few weeks in China, during the COVID crisis, give us some perspective of what they’ve been going through since they’ve been in a few weeks out of the US. Until then this is Ryan Morfin signing off from Non-Beta Alpha. Thanks for joining us. And now you know.

 

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Ryan Morfin: Welcome to Non-Beta Alpha. I'm Ryan Morfin. On today's episode, we have Pini Althaus, CEO of USA Rare Earth, talking to us about the supply chain glut in rare earth minerals. This is Non-Beta Alpha.

Ryan MorfinPini, Welcome to the show. Thank you for coming on today.

Pini AlthausThank you for having me, Ryan. Good to be here.

Ryan Morfin: So you're an investor and a miner in rare earth minerals. Can you share with our listener base, what are rare earth minerals? Why are they important and why is there a geopolitical race going on globally?

Pini AlthausYeah, I mean, rare earths are an extremely ubiquitous part of all advanced manufacturing or technology manufacturing today's day and age. Several years ago, I had not heard too much about rare earths myself. I was not that familiar with it and being involved in this sector, in this company, for the past few years has given me an education of course. And I mean, I was sad to hear that 50% of all imports into the United States contain are earth elements and it runs the gamut from consumer electronic devices that we use every day. Our cell phones, our laptops, most communication devices, medical equipment. So there's a tie with COVID, which we can touch on at your discretion. Electric vehicles, defense equipment. So pretty much anything or everything high tech today has a rare earth element or critical minerals contained within them.

Ryan MorfinAnd what are some of the names of some of the more important rare earth? I know there's lithium for batteries, but what else is considered in this category, critical?

Pini Althaus: Yeah, so lithium is a separate category to battery material. The rare earths are 17 rare earths. The four, let's call it, key rare earths that we're focused on at our company, the four rare earths that go into the permanent magnets. And these are the magnets that are found, there are a number of them in your back of your cell phone or an iPad. But if you look at an F35 striker jet, you've got about a ton of rare earth magnets in those. And we've got two heavy rare earths and two light rare earths is part of the permanent magnets. You've got dysprosium, ytterbium are the heavies, and then you've got neodymium, praseodymium as the two light rare earths. So those would be key rare earths that are the focus.

Ryan MorfinAnd you use these in, I guess, in military applications as well, but historically, where has the United States sourced the rare earth for supply chain?

Pini AlthausYeah. And that's the shocking part. We've been securing those materials from China. So China controls the rare earth sector and has done so for the past 30 years or so. And it was a significant misstep on the part of the United States, allowing China to have this control. And actually this wasn't a question of China coming in and doing anything nefarious as far as stealing IP or anything. The US government made a conscious decision about 30 years ago to allow China to come to the United States and acquire the processing capabilities for rare earths. So just as part of some background, you've got the rare earth materials containing various mining projects, but once you extract them, you have to then process them and they go through certain phases before they get to the magnet phase. And China, the thought process was let China do the mining, let China do the processing.

Pini AlthausWe don't need to do that here. And we'll buy the materials from China cheaply and the premier of China at the time, Deng Xiaoping made the comment, he said, "The Middle East has oil. China has rare earths." And unfortunately we weren't smart enough to understand what he was saying. And the Chinese understood that the future of manufacturing is going to revolve around control of the rare earth and critical mineral supply chain. So if you think about it today, Ryan, we cannot build... Forget about consumer electronics and medical equipment. We cannot build the equipment that the US Pentagon or the US armed forces require, whether it's F35 fighter jet, Tomahawk cruise missile, communications equipment, without going to China and obtaining those materials. And it's obvious to all that this should be extremely alarming. We've seen China use this as a weapon, if you will, as far as how it interacts with other countries back in 2010, when there was a dispute between China and Japan on the East China Sea.

Pini AlthausSo China cut off rare earth exports from Japan for 40 days. Japan obviously being a significant user of rare earth elements for their high-tech manufacturing sector, that was stopped after 40 days. But in fact, it was President Obama that first made the United States aware of this, formed a division within the Department of Defense to handle this issue, but not much has happened. And we continue to be relying on China for these materials. And what has been made about trade war with China and whether the trade war is really the impetus for China withholding rare earth exports. And that is a huge misnomer. Whilst China had been talking or implying that they would cut off rare earth exports, the truth of the matter is that China, under it's made in China, 2025 mandate, its belt and road initiatives and others. And you seem to control the critical minerals and rare earth supply chain so that it can continue its dominance as a manufacturer or a global supplier of these materials and finished products.

Pini Althaus: It's the backbone of its economy. And in fact, China has become a net importer of rare earths from different countries like Miramar and others. So with that, they are decreasing the exports to countries like the United States, Japan and others.

Ryan Morfin: And was it ever a risk that the Chinese were going to turn off the exports of rare earth to the US during the trade war? How close were we to that? And was that ever some saber rattling that went down during trade negotiations?

Pini AlthausYeah, I think it was saber rattling. I think it would be paramount to an act of war. I can't say with any authority that that would not happen, but it would be probably, aside from war itself, it would be one of the most significant acts of war cutting the United States off from the ability to procure rare earths. But that being said, I mean, if you look at, as an analogy, the oil and gas sector and the reliance of the United States had for many, many years on OPEC countries to supply us with the oil. And we had embargoes and we had price manipulation by OPEC. This is far more significant given the ubiquity of where these rare earths go. And yes, we're always under the threat that China can cut off exports under the guise of a trade war or for any other nefarious reasons.

Pini AlthausBut I think even more importantly, to just as the natural run of the course of things with regards to their business and their desire to maintain themselves as the global leader in manufacturing and exporting of goods, China is in a position now where it actually requires these materials for their own domestic consumption and can legitimately cut off rare earth exports by stating that they need it for manufacturing and that would actually be somewhat correct. So we're in an extremely dangerous position here with this reliance on China. And it wouldn't just be China. If it was another country, it would be similar issues, not to the same extent, but reliance on one country for these materials is dangerous.

Ryan Morfin: And it's been mentioned in the past that in 2010, China flooded the market to really kill all the competitors in the rare earth mining industry. Where was the World Trade Organization during this period? And how did that play out and how does that set the chess board for China to run the tables?

Pini Althaus:

Yeah. So the WTO stepped in when China cut off rare earth exports from Japan, I think it lasted for about 40 days because the US and Japan protested the WTO, and they stepped in and China resumed exports. While I'm not an expert on these trade matters, one thing that I am aware of is that one of the reasons why China had to resume the export of rare earths was it did not legitimately need all the rare earths for domestic consumption. So therefore it was a nefarious act, if you will, to cut off rare earth exports. Now that has changed, which means China have to cut off rare earth exports today, they have a legitimate case to say that they require these materials. There's a shortage of these materials and they require them for their own domestic purposes. It is the backbone of their economy and there's very little we could do about this today, which is why it's becoming an even more urgent issue.

Ryan Morfin:

And the US government started stockpiling some of these after that incident. Can you talk a little bit about what DOD and DOE has done to start making sure that there's not a critical supply shortage going forward, and is it enough?

Pini Althaus:

Yeah, again, there is a national defense stock pile, and there are materials still that the United States needs to procure in order to shore up its stockpile. There are magnets, the finished magnet products as well, the United States government needs to stockpile. Again, there's a limited amount that the United States government has. It requires approval from Congress, whether it's in the NDAA or other approvals from Congress, to allocate monies for the national defense stock pile of these materials. That being said, there's no endless supply of these materials. And unfortunately, the apparatus, the way it's set up right now with the US government, it's going to continue to require having a secure supply chain of those materials for many, many years to come. So it's not a question of stockpiling for 10 or 20 years, and then this complacency and saying, we'll kick the can down the road. But keep in mind as well, Ryan, that US government accounts for low single digits of overall rare earth imports into the United States.

Pini Althaus:

We're talking about defense contractors, we're talking about the manufacturing sector. The direct impact this has on the economy, jobs, the automotive sector, and others is significant. So it's not just limited to the United States government. If you look at over the past couple of weeks, the sanctions that China have put on Raytheon, Boeing, Lockheed, et cetera. I mean, the question is where are they going to get those materials? And if we go beyond that, you need rare earths for the 5G network. Now that Huawei has been banned from installing the network, not only in the US but other countries, we have to have the ability to get a secure supply of these materials as well. Which currently, again, trying to control the hundred percent. So it runs across the board, both for government, defense and manufacturing in this country.

Ryan Morfin:

Well, and so help me paint a picture for our audience. Does China have all the mines for rare earth, or they're the only ones who started mining it? Or are their mines globally dispersed and nobody's been doing the actual infrastructure to do the mining?

Pini Althaus:

Yeah. So finding rare earth projects or rare earth elements is not the difficult part. It's finding them in significant quantities that makes a project economically viable. And part of that consideration are the environmental rigors that companies in the West have to adhere to. And China, even by their own admission, have had a complete disregard for mining these materials and even for processing these materials. And in fact, just the last week or so, the BBC did an expose on this, 60 Minutes has done an expose on this. But the Chinese have not denied this and have talked about cleaning up their act, but it has an effect on the bottom line for what the costs of mining and processing are if you have no environmental standards to adhere to. So China have exploited those rare earth projects they have, primarily in inner Mongolia, and have brought a number of projects online and quite quickly, and in a significant way, with a complete disregard for the environment.

Pini Althaus:

So it was seen as an environmental no-no in the West for many years. Now, what's happened over the past few years is you're starting to see rare earth projects in different parts of the world sprout up. You've got the Mountain World project in Australia owned by Linus, which is a producer of Nd and Pr, neodymium and praseodymium. So two of the light rare earths. They may have some heavy rare earths coming online at some point in time. And you've got Arafura, which is another company in Australia that we're working with to assist them with their processing so they don't have to send the materials to China for processing. But really these are a drop in the bucket for what the requirements are for the United States. And certainly what the requirements are for allied countries, the EU, et cetera. So there is a race, if you will, worldwide to start bringing projects online. The Chinese are very active in trying to secure assets outside of China.

Pini Althaus:

So in Africa. They have ownership of a project in Greenland. So there is somewhat of a race. The Australian government has stepped in and has started limiting the ability for China to own, or have ownership in, or off takes for the Australian rare earth projects. And that's part of the strategic Alliance between Australia and the US. Canada, similar thing as well. There are a number of projects that are looking to come alive, but these projects are, for the most part, will take many, many years to come online. We have to expedite the process. We have to assist with a [inaudible 00:14:41] supply chain and the domestic rare earth sector, because previously investors have been scared off by things like China flooding the market, which is not a possibility at this point in time, given that China can't actually afford to flood the market. They are already very heavily subsidizing their mine to magnet supply chain there.

Pini Althaus:

This is more now a case of being able to get production from non-Chinese sources so that the United States and allies have a viable, secure supply chain of these materials. And it's a concern worldwide. We speak to governments all over the world, and we're all facing the same issue. Some more than others, especially countries like Japan, that don't have their own rare earth projects there and are reliant on Australia where they've made some investments there. And in the United States, they've made an investment recently in Africa. So there is this race, if you will. And I think we've got a five-year window here to at least stand up a few projects worldwide. Otherwise we've lost this race and we will be dependent on China for many, many years to come. And Ryan, it's a bit of a hypocrisy. If you look at it where you've got materials going through clean, green energy applications, like electric vehicles, wind turbines, et cetera.

Pini Althaus:

That we're sourcing these materials from China, where they've, again by their own admission, has been complete environmental devastation to water bodies around these mines and processing facilities, to the communities. People have been getting sick around these projects yet we're putting these materials into our electric vehicles or wind turbines. It makes no sense at all. And people are starting to wake up to this. And that's why the sector is starting to see a lot of support come out of Congress and bi-partisan support. And in fact, it's one of the only bi-partisan issues right now in Washington. And it's good to see that some things decided to move in the right direction.

Ryan Morfin:

And is there a special process? You talk about the expense, is it really difficult to mine these? You have to go through a special chemical process to extract and clean and purify. Is it a lot harder than, say, gold or silver or some of the other, we'll call, more traditional elements?

Pini Althaus:

Yeah. It's all about the processing to some extent. So if you look at MP Materials in California, which used to be Molycorp before they went through their bankruptcy. They are a miner of Cerium and Lanthanum, which are two of the light rare earths, the lower valued light rare earths. Given that they do not currently have processing technology, they are sending those materials to China for processing where China is tariffing those heavily. Linus is also, they're doing their processing work in Malaysia and elsewhere. So it's really about the processing at this stage. One of the things that we've done, after we put out our PDA last year with our upgraded resource, which now includes a significant amount of lithium. We make a decision that, based on the test work that we had done around our processing methodology, that we were not going to send our materials to China. That it's paramount for us to do this work in the United States and in a collaborative effort as well.

Pini Althaus:

We've been asked by some of our investors, "Well, why would you be looking to help other projects with their processing?" And the answer is simple. There's no one project or one company that's going to put China out of business or make a dent, or somehow be able to take care of the overall demand worldwide for rare earths and critical minerals. And it's very important for us to have processing capability in the West. So that was the impetus for us opening up our own rare earth and critical minerals processing facility earlier this year, which we did in Wheatridge, Colorado. And in fact, we've made some significant progress on the method that we're using for this. And we're starting to collaborate with Australian companies, Canadian companies. We're currently talking to a group over in Europe as well, because this has to be a collaborative effort.

Ryan Morfin:

How does Europe solve for these problems? Do they have this better under control than the US?

Pini Althaus:

No, they're in a far worse position than we are. The EU commission recently put out a report, I think, a couple of months ago that the requirement for rare earths is going to increase tenfold within a short period of time. Lithium 18 times. They don't really have rare earth projects. Again, there are the Greenland projects, which people have heard in the news recently. Those need to further development work so they don't have rare earth projects ready to come online there. There are a couple of lithium projects that are spread around Europe, but for the most part, Europe is in an even more precarious position. If you look at Germany with the auto manufacturers, you look at the big companies like ThyssenKrupp and others, all these countries and companies are looking for alternatives to China, because we've already seen in the news about China withholding or reducing exports of some of these rare earths that are required for these industries.

Ryan Morfin:

And you mentioned earlier the regulatory posture of the US makes it difficult to mine. Is it becoming a more bi-partisan issue that we need to maybe relax some regulation around the mining exercise, to incentivize private sector to come in and start producing this? Or is the Republican party versus the Democratic party on two separate pages of music?

Pini Althaus:

Yeah. Good question, Ryan. I mean traditionally the Republican party is obviously being more pro-mining and in favor of less regulation when it comes to these things. With regards to our project, we're on Texas state land. So we don't trigger federal environmental permitting at this point in time. And obviously Texas being Texas, a mining state and oil and gas state, things are a lot easier in Texas than they are on projects on federal land where the Bureau of Land Management controls the environmental process around that. But the thing is here, and I don't want to step into what other companies are doing, et cetera, but we do need to be reasonable about allowing projects to come online if they're adhering to environmental standards that are acceptable worldwide. And what we do know, is that China is destroying the environment and cities and water bodies around their mines and processing facilities.

Pini Althaus:

We have standards here in the United States, and I think what we need to do is make it easier for companies to mine, while at the same time protecting the environment. And there are ways to do that. And we're definitely seeing buy-in from Congress, from both sides, with regards to looking how we can stand up a secure supply chain. And, obviously under the Obama administration, they had very strict regulations when it comes to mining. And that's changed under the Trump administration. Hopefully what we start to see is some normal middle ground that'll allow other projects to come online.

Ryan Morfin:

And typically in these rare earth mines, is it amalgamation of different minerals that are all consolidated together and you have to separate them out? Or do you ever find pure play, Europium, I can't even pronounce some of these. Gadolinium, Cerium. I mean, are they all mixed together and you've got to filter and sift them through, or are they pure play mines?

Pini Althaus:

No, they're generally they have a mix. So they're polymetallic projects. They have a number of different materials. Some projects, you more to what we call the light rare earths like MP in California or Linus in Australia. Our project is actually on the opposite end of the spectrum. We have a very high concentration of heavy rare earths. That being said, we do have to go through a process of separating these materials. But the case of our project where we've got 30 materials. We're not going to produce 30 materials. We're not going to market 30 materials. So what we're doing is we're focusing on the key materials that are marketable, that we need for permanent magnets, lithium as well, and working on the separation and the optimization of those materials in particular. But we're all faced with the same processing challenges and that is something that can't be set.

Pini Althaus:

There's no easy way to do this. There are different technologies that have been used in different parts of the world. So predominantly there's a process called solvent extraction, but it's big, it's bulky, it's not benign. It's a bespoke solution for one particular project. So it doesn't work for feedstock from other projects. What we've done is we're using a processing technology that's actually been around since the 1940s. It was part of the Manhattan Project. It's called continuous ion exchange. In fact, the Chinese use it to increase the purities from 99.99 to four nines, five nines, and even six nines. So for some applications you require higher purity levels. It's a far easier processing method to scale up and to take feedstock from other projects. In fact, we've demonstrated for the Department of Energy that we can take coal waste from Pennsylvania and do high purity separation of rare earths using our processing methods. So it's not a step that can be skipped unless one needs to send it to China for processing, which is not going to help us with our objectives here.

Ryan Morfin:

How many other, we'll call it, going concerns on any other businesses that are doing this, that are trying to, I guess, start the development of these mines. Are you guys one of a few or are you one of many? And is it an international or just a US game? Who's leading the charge at going after this?

Pini Althaus:

Yeah, well, I'd say the Australians are leading it outside of China right now. You've got some really good projects in Australia. Again, more skewed toward the light rare earths. There's one more heavy rare earth project in Australia, which is not yet producing. The United States, you've got MP Materials, you've got Ucore in Alaska, you've got the Bear Lodge project in Wyoming, which is also another light rare earth project. So as far as a heavy rare earth project that looks like it will come online in the near term, that would be our project. In Canada there are a couple of projects there as well, and again, more skewed toward the light rare earths. But we really need to get as many of these projects online as possible. Because again, I don't see it as competition. We all have a problem doing supply agreements or offtake agreements for our materials.

Pini Althaus:

In fact, one of the things that we're going to have to consider is looking at potentially scaling up our production, based on the demand that we're already starting to see. And I think other companies would find that as well. So it's all about the economics of the project. You have projects that were economically viable back in 2012 or rare earth prices with 35% or so higher than they are today, and are not necessarily viable today. So that's the challenge as well, economically viable projects. And we've got to get as many of them online as possible. It takes many, many years. I mean, our project has had over $70 million put into it to get to where we are today, and we're close to getting to the production scenario. It all revolves around processing at this point in time.

Pini Althaus:

We'd be very happy to see another couple of projects come online, because this is extremely important for national security and for the economy as well. I mean, if you think about it, Ryan, if you've got a billion dollars of rare earth materials, that translates into a trillion dollars or I should say trillions of dollars of finished product. So you've got a magnet in your phone there that's worth a couple of dollars and the cell phone's a thousand dollars. And electric vehicles and defense applications even more.

Ryan Morfin:

Yeah, everyone has one of these iPhones now, and there's tremendous amounts of rare earth on the circuit boards here. And I think people take it for granted that that supply chain is not secure right now. So one question for you, there's talk of this maybe medium term to longterm, but there's talk about mining in space. Do you think that's a feasible option in the longterm, medium term? What are your thoughts on that?

Pini Althaus:

No, that's just ridiculous. I mean, we're trying to find ways to make mining on earth economically viable. I think the cost of going up to space would be more than what our capex will be bringing our entire project into production. I mean, we've got about a 350 to $400 million capex to bring 130 year mine life into production. I'm not an aerospace expert, but I think sending a rocket, building a rocket ship and sending it up, I think maybe on the fuel alone, you could bring a couple of projects into production. So unless we have a fortunate situation or an asteroid lands on earth, and fortunate if it lands somewhere where we don't care, I don't see how that happens. And if it's big enough, it's a problem as well. It's nonsense. And even, options aside of the deep sea mining for rare earths, I mean, you've got all sorts of environmental issues around that as well. I think we need to look at projects that we can bring online, that can be done so in an economic way, that can be done so in an environmentally responsible way.

Pini Althaus:

I mean, one of the things that we've done at our project is we've got in excess of 60% of the materials that have come out around top, will have a clean green energy applicability to them. So we're using the benign processing method. We're going to be using renewable energy on site. In fact, we will likely be putting a solar farm on site as well. We've talked to a couple of companies that have approached us about that, and we'll be a net producer of power for the surrounding area. So there are ways to do it which don't affect the environment. Obviously if there's a project that's situated on a sensitive area, that's a unique situation for that specific project. We've seen it with the Pebble project, which is not a rare earth project. The Pebble project in Alaska where their environmental concerns is we've been recognized by both Republicans and Democrats, but we have to be reasonable about the projects that don't have environmental concerns.

Ryan Morfin:

So Pini, in season two, we ask all of our guests a series of six questions. They're usually, yes, no questions, but trying to take a survey of our conversations. And if you want to add a little context to the yes or no, feel free, but here goes the first question. If there was a COVID vaccine available today, would you take it?

Pini Althaus:

Yes.

Ryan Morfin:

Who do you think is going to win the election?

Pini Althaus:

Which election?

Ryan Morfin:

The US election.

Pini Althaus:

Well, I think it looks like Joe Biden's going to win it, but I think what happens, if we go past January six from my understanding is that the house will vote on it and it's one vote per state. But I don't know if I see it getting there at this point in time. I really don't have a crystal ball.

Ryan Morfin:

Third question. What type of economic recovery are we in? What type of shape is it taking? A V-shape, W, U, L?

Pini Althaus:

Yeah, I think 2021 is going to be challenging. I think we've been, and rightly so. I mean, we've had no choice as of almost every other country. We've been printing money for the past year because of COVID. And I think we've got to brace ourselves that, at some point in time, the chickens come home to roost. It was a necessary step. People needed it on an individual level. Businesses needed it as well, but I think we've got to do whatever we can to stimulate the economy, give people confidence to go out and work again, employ people. So I think we've got to watch ourselves, especially in 2021. And I have some concerns, but long-term, I think the approach in the United States is a healthy one.

Ryan Morfin:

During lockdown this summer and quarantine, was there anything in particular that you accomplished that you're particularly proud of?

Pini Althaus:

Yeah. A great amount of family time, which, if you would've asked me a few years ago if I could sit at home and be at home for six months, I would have told you absolutely not. I wouldn't be able to do it for six days, but it has... I'm sure it's done this with a lot of families as well. It's brought families together. We had a baby actually last year on Thanksgiving. So I was doing a lot of travel at the time and thought I wouldn't get to see my daughter in her first year or couple of years too often. And being home with her every day is actually been just the most amazing experience. So thankful at least for some silver lining in COVID.

Ryan Morfin:

Are there any silver linings that you see in the economy going into 2021?

Pini Althaus:

Yeah, I think we've gone through an absolute beating and it looks like we've got the ability to come out of it. And I think that's a testament to how strong the economy was built up in the years preceding COVID. So overall I remain an optimist. I mean, we are a country built on opportunity and going out and making it happen. And we're not a socialist country sitting and waiting for people to send us paychecks or wealth distribution or anything like that. I think the American dream still lives on. I think if you go out and you're willing to work and put your head to it and heart in it, I think we do have the ability to climb out of it. So if we look at what the economy is doing over the past few weeks, it looks like it's starting to rebound. And to me, that's assuring because it could go completely one way as well.

Ryan Morfin:

And the last question is, is there anything that you're watching, or listening to, or reading today that has been impactful on your thinking that you'd like to share with our audience?

Pini Althaus:

Yeah, that's a good question. I think it's been more personal stories. The news, I sort of take that in context or with more than a grain of salt. In some cases stay off the news channels for a number of days at a time, it became quite repetitive. But I think on the personal side, talking to friends, my family's all back home in Australia, they've just come out of 110 day lockdown, which we can't relate to that. It's been very trying on them and seeing the fortitude that they've had to come out of that and stay intact. I think the mental health issues that will come out of COVID are going to have a far longer effect than the economic issues. I think we're going to have to focus on mental health issues in this country for a long time to come.

Pini Althaus:

The impact on kids has been significant with regards to lockdown or remote schooling, et cetera. But to see people come through it. I think it's a testament to people in general and to the country and other countries as well, to see got that fortitude and survival instinct to try to get through whatever adversity we can. So hearing the personal stories, the challenges that people have gone through, I think it's made me a lot more aware of things that I have to be thankful for and where we can help out other people as well. I think we have to be united going forward because there are things...

Pini Althaus:

I think one of the things that COVID has shown us is we can get into this complacency and life goes on and we go one day to the next. And all of a sudden we get hit by something that affects everybody equally. I mean, COVID, whilst there were groups of people, whether it was the elderly or people with underlying health conditions, that got hit the worst. I mean, we all got hit in some form or another. So really, this should be something that unites us, not divides us.

Ryan Morfin:

Well, Pini, I appreciate you coming on today to talk to us a little bit about the supply chain crimp on rare earth and we'll definitely keep an eye on it and would love to have you back in the future.

Pini Althaus:

Thank you, Ryan. Thanks for having me.

Ryan Morfin:

Absolutely. Thank you. Bye-bye. Thanks for watching Non-Beta Alpha. And before we go, please remember to like, and subscribe on Apple podcasts and our YouTube channel. This is Non-Beta Alpha, and now you know.

 

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