Mexico’s economy & COVID response with Miguel Diaz Gallardo founder & CEO of Bacabes

In this episode of Non-Beta Alpha the founder and CEO of Bacabes, Miguel Diaz Gallardo, sits down with Ryan Morfin to discuss how this pandemic has impacted life in Mexico.
In this episode of Non-Beta Alpha the founder and CEO of Bacabes, Miguel Diaz Gallardo, sits down with Ryan Morfin to discuss how this pandemic has impacted life in Mexico. Gallardo talks about the actions, or the lack thereof, that the Mexican government has taken to control COVID-19. For a businessman like Gallardo, it is important to highlight how this virus has affected supply chains, unemployment, healthcare and other economic factors that could have adverse effects throughout the Mexican business sector.

Gallardo talks about the visible divide that exists between the 60% of the population that is working class with jobs that cannot be done remotely and the 40% of business class citizens who have the privilege of working from home. In the less economically stable areas of Mexico, Gallardo has noticed that there are far more people ignoring shelter in place recommendations than their wealthy counterparts.

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Ryan Morfin:                    Welcome to Non-Beta Alpha I’m Ryan Morfin. On today’s episode, we have Miguel Diaz Gallardo the CEO of Bacabes, an eCommerce retailer in Mexico City. Today. He’s going to share a little bit about what’s going on economically in Mexico, as well as how they’re handling the Coronavirus. This is Non-Beta Alpha.

                                           Miguel. Welcome to the show.

Miguel Diaz Guy…:         Thanks for having me, Ryan. It’s a pleasure.

Ryan Morfin:                    Well you’re calling in from Mexico City and part of our Covid insights series. We’ve been talking to friends from around the world who are in the business community; talking about some of the insights that can share about what’s happening with the Coronavirus in their country. So we’d love to hear a little bit about what’s going on on the ground in Mexico City with Coronavirus.

Miguel Diaz Guy…:         Sure. Fantastic. Well, you know, in Mexico, the first thing I think we need to give some context to the issue. I mean, just to understand what’s going on in terms of COVID-19. Mexico is a country where about 60% of the working population actually works in the informal sector. And that means basically that they don’t, they don’t have access to the public health system. They don’t pay taxes, you know. And it’s also important to understand that this 60% of working population, they live on a daily basis. That means basically that they need to go out to the streets and sell. They sell tacos, they clean the houses of people, they work in the construction sector building, building things. So they cannot stop, right? Because they don’t have things like savings or things like that. So it’s this part of the population it’s really hard to- I mean, they simply cannot perform their work at home, so they have to go out.

                                           And I think that the relevant thing about this is that Mexico, the Mexican government decided to implement the so-called Sentinel model, which means that the government is performing very, very few Covid tests. Since this started, the first case in Mexico was I think the last week of February. And since then in Mexico, we have performed only 90,000 tests overall. This is lower than the number of daily tests performing the US. The government claims that this is enough to measure the trend of the pandemic, but the numbers, it’s a very small sample and we know for a fact that there are more cases out there and more people dying from this, from COVID-19.

Ryan Morfin:                    So have people, and I think we’re probably two to three weeks ahead of Mexico from kind of the, the curve, the pandemic curve. Have people been following similar types of social distancing norms where they stay home from work? I know you just mentioned 6% of the population can’t afford to do that, but the people who can, have you’ve seen the business community stay home and try to work remotely?

Miguel Diaz Guy…:         Yeah, the 40% definitely. When you go around the high end neighborhoods in Mexico City, the people is on a lock down. Voluntary lock down, because there isn’t an enforced lock down in Mexico. But if you go out, and I’m a business owner I sell shirts and men’s ware, like this one. My warehouse is in a poor neighborhood in Mexico City. I was there last week and people vary, like I told you, it’s how they’re working in manufacturing plants, in distribution centers of grocery. People that are like having a normal kind of a normal life, right. And you can see Google made public an analysis by country on mobility and Mexico mobility hasn’t you decreased as much as of course Spain and Italy, but not even close to Argentina or Chile or Peru. What we need to hear is not that it hasn’t stopped. I think we can see a problem there in the future, because then there’s the poor people that is going to get sick, actually it’s happening now in Mexico City. The two main alcaldías, or neighborhoods, affected are two of the poorest alcaldías in the city. So we could have a problem there in the near future.

Ryan Morfin:                    That’s very interesting. Have a lot of the factories been closed voluntarily, or are they being forced to close by the government?

Miguel Diaz Guy…:         So the government separated businesses into essential business and non essential businesses and they encourage non essential businesses to close. Essential businesses are basically grocery stores, supermarkets, drug stores, things to be able to buy food and, and survive during the crisis. E-commerce is as well, by the way. You can operate warehouses of eCommerce or eCommerce sites. The government on the other hand is not enforcing the closure of the stores and offices. There are companies still working normally in Mexico City. One of the main examples is one of the biggest groups in Mexico, Grupo Salinas, which owns TV Azteca for instance, the second biggest TV company in Mexico, they’re still working. Some department stores are still working. It’s not a mandatory, but most companies, especially those international businesses, international corporations are on a voluntary lock down. We closed stores, we closed offices, and people are in a lock down. Those that can.

Ryan Morfin:                    And you’re the CEO and founder Bacabes, which is a men’s eCommerce store, which I did go to the website, I will be ordering some, some clothes there for sure. But where do you guys produce them in Mexico? Are they produced in Asia? Where are the clothes produced?

Miguel Diaz Guy…:         So we produce in Mexico, but we import the cotton, the fabrics, from China. We’re seeing a disruption in the supply chain, for sure. The textile manufacturers are closed. They are non essential, so my producer is closed at the moment. Surely we will suffer an effect on the supply chain from that from there.

Ryan Morfin:                    Yeah, that’s where I was going with that, the supply chains and in the US where we’re really focused on one supply chain in particular, which is food. Have the supermarkets been well-stocked? Do you guys feel comfortable with the food access? And then what percentage of Mexicans maybe have a garden in the back or have other ways to have local food produced?

Miguel Diaz Guy…:         Agriculture is essential. A distribution of food is essential, and grocery stores and supermarkets are essential. Basically the supply of food is secure. There are no shortages and anything related to food. Beers are not essential so you can see a shortage of beer in Mexico, and that’s causing some issues, people are upset about that. But in terms of food, it’s just fine and I don’t see any issues there in terms of food.

Ryan Morfin:                    Since you brought up beer, are Mexicans upset that it’s called the Corona virus? There was some conversation on late night TV here in the US, we’re going to have to get a new brand for America’s favorite beer Corona.

Miguel Diaz Guy…:         Yeah. No, and they will, Corona will have some issues about the name, right. They may be thinking about changing their names.

Ryan Morfin:                    Sorry to interrupt you. You were going to say the other thing before I interrupted, I apologize.

Miguel Diaz Guy…:         Oh, no, no, don’t worry. About your second question, not many people have a garden or something to self produce. It’s not common here, especially in the cities. Another important thing by the way, is that Mexico City has like 30% of total COVID cases in Mexico. It’s very concentrated in Mexico City. Here density is huge. People live in small apartments and there’s no space to produce our own food supplies.

Ryan Morfin:                    Do you see that traffic is going down or do you think it’s because mobility is still high that there’s still traffic in the highways?

Miguel Diaz Guy…:         It’s definitely going down. Traffic is going down for sure. But again, when you go to these places, not high end neighborhoods, traffic is super low, but then in other places of Mexico City, you can see not close to a normal traffic because that’s not true, but maybe according to the numbers, 40-50% of regular traffic, which is a lot. I believe compared to other countries.

Ryan Morfin:                    For a lot of the employees of a lot of these companies in that 40% that have jobs and they pay into the government tax program, is there a concept of unemployment, like we have here where you can file for unemployment insurance to get money during unemployment?

Miguel Diaz Guy…:         Yeah, there is, but it doesn’t work as efficient as you guys. Apparently, we haven’t seen numbers related to that. So after COVID, we know because the government has said, that we just lost the number of employments that were generated during the whole of 2019. We will see a crisis in employment, but generally speaking, we didn’t have the resources. The government has also been very clear that they won’t put any money to bail out companies. They’re trying to use this strategy of giving money directly to people, but giving money directly to people that are not in the formal sector. Most of them are not also in the formal banking system, so they don’t have bank accounts so the government has to do that in cash, which is very complicated and you can get a lot of corruption there. So yeah, we have it, but it’s not as structured as in the US. In that area we will see, I guess, a lot of problems in the near future in Mexico.

Ryan Morfin:                    And the health system is a nationalized health system. Is that right? So it’s a health system run by the government.

Miguel Diaz Guy…:         Right. And it’s managed from the federal government. The public health system is not, I would say, developed. Actually the private, the private hospitals sign a deal with the Mexican government to provide services to those people that have access to the public health system. You’re seeing now private hospitals in Mexico City, some of them, not all of them, but some of them, receiving people from the public health system. This is something that we’ve never seen before. This initiative was, was pushed by the private sector now.

Ryan Morfin:                    It was an issue in 2019, and I don’t know if it’s still an issue, and that’s it tap dancer on a touchy issue, but like immigration into the US and kind of the movement of people from Mexico to the US. One of the things that we were seeing last year was a constant stream of people from Central America. And has that stream continued? And, or, do you see that it’s slowing down? Was it slowing down last year and now it stopped? Or does are still people migrating through Mexico right now?

Miguel Diaz Guy…:         Yeah, so I was reading that people keep coming to Mexico and that’s going to be an issue also. But the truth is that in the public agenda, we stopped talking about that. You’re right that in in 2019, that was something that we were listening to in the news basically every day. I haven’t listened about that much, but I just read some article in newspaper that migration from Central America keeps coming and, and that’s going to be more problematic for Mexico.

Ryan Morfin:                    Yeah. Some of the countries like Guatemala and Nicaragua are not doing a great job at containing this at all, so they’re potentially bringing infection rates with them, unfortunately. It seems that President Lopez Obrador and Trump have come to some type of path forward with the trade agreement. What was the dialogue or the mindset in the Mexican business community before COVID started about the trade arrangement that was reached between North America, the trade agreement.

Miguel Diaz Guy…:         Still I haven’t seen an analysis, a full analysis of the new terms of this trade agreement. What I’ve been hearing and people have been hearing here in Mexico is that the new terms actually benefit a lot the United States and not necessarily Mexico. I personally believe that having a trade agreement with the US and Canada is necessary basically, almost in whichever terms that got out of there in the deal. But, we will see it right now. Let’s see what happens, because Mexico depends a lot on certain industries that will be severely hit by COVID-19. Like oil, like tourism, like manufacturing, especially in the automotive sector and textile sector, and also remittances from Mexicans working in the US so I think the economy will be severely damaged.

                                           We’ll see also what happens when apparently the trade agreement starts in July, and American companies are pushing Mexico to put manufacturers, for example in the automotive sector, in the essential part of the business so they can go back to work and activate the supply chain. So yeah, let’s see what happens. I think it’s what I’ve heard in terms of eCommerce that is my area of expertise. That is going to be a, an interesting agreement, but we’ll increase the competition because it will be easier for Mexicans to buy a product from eCommerce sites in the US so that probably will be- I mean, it’s nice to have competition, and for us it will push us to work harder and add more value to our customers here in Mexico.

Ryan Morfin:                    That’s an interesting point that it’s going to increase the trade. You know, I think one thing that we’re starting to hear about in the US is that, to quote several governors, never again, will we let our supply chain be so far from home on critical items, like pharmaceuticals or medical supplies. We’re pretty upset about some of the ways that China’s treated American companies that want to bring supplies back to the US, they’ve kind of blocked them. I think there’s a huge opportunity for Mexico, Canada, and the US to nearshore back a lot of this manufacturing. For whatever reason, I think Mexico is going to be the big winner in that as Americans and American business start to shun China for their behavior during the crisis. But have you guys heard anything about that or is that on the dialogue there in Mexico at all?

Miguel Diaz Guy…:         Yeah. I heard that argument and I totally agree with it. Actually, Mexican manufacturers have lost a lot of competitiveness against China manufacturers simply because China is cheaper, right? This could balance the equation in favor of Mexico. I’ve heard the argument and I totally agree. I agree with it. The thing is that Mexico, in my opinion, the development of the country needs to be more into the commercial side of the business, instead of, I mean, we’ve been manufacturing our whole life, our whole history. We’ve been strong manufacturers, but you know that the real margins of a business is not in the manufacturer side. And this is why I’m doing what I’m doing, why I’m starting up a company with a tech basis in Mexico. I believe that we need to add value in the other part of the supply chain, which is the part that actually adds value to an economy instead of just being manufacturing. But yeah, we are manufacturers and that’s definitely going to help in the short term.

Ryan Morfin:                    What’s your view? Before the coronavirus, it was about 11% of global commerce was eCommerce. Now the number is somewhere over 90% because of the fact that there’s really nothing opened to go shop with. What do you think the return to the old model or the old allocation? How long is that going to take? Do you think it’s going to change, people’s kind of fundamental buying patterns and they’re going to want to spend more money online versus going into a store?

Miguel Diaz Guy…:         That’s a very, very good question. First in Mexico, it’s 2%, not 10, not 11, right? So it’s only 2% of total retail sales are completed via eCommerce. So we’re in the spot that you guys in the US where 10 years ago, something like that. We were 10 years behind is another way of putting it. Certainly COVID-19 will accelerate the eCommerce and will basically accelerate also the debt of traditional brick and mortar retail. Now, at this point in time, we’re seeing some categories going through the roof and some categories really hurt, like all the categories related to travel. Of course, clothing, those categories are suffering now. But in general, eCommerce is growing fast. The most important thing I believe is what you just mentioned, consumer behavior is going to change. I believe so.

                                           The purchase drivers may not be the same ones that were before COVID. In terms of men’s wear, for instance, people were looking for a nice fit, looking for price, looking for design, looking for personal attention, and a brand like ours could provide that to our customers. But probably in the near future, I expect these drivers to change a bit and customers probably will start putting security and safety first. So maybe we will see… What I expect is probably going back to more generalist retailers like Amazon, or here in Latin America Mercado Libre, instead of going to specialized things. That could be a change that I probably foresee, but definitely consumer behavior is going to change. I’m sure about that.

Ryan Morfin:                    Yeah, we think it’s going to change here in the U S as well. I think there’s really no guidelines being given by the US government right now about how restaurants should behave and open back up, how retailers should behave to open back up, you know, what are the guidelines? what if somebody comes into a store and is coughing all over a shirt, what do you do with that shirt? Do you leave it on the rack? Do you go put it in a UV closet? It’s an interesting time.

                                           I would say that from Wall Street’s standpoint Mexico put on a big hedge for the oil prices a few years ago, and it’s going to pay off in a big way, but it’s going to be exciting to see. I think Pemex did a good job of hedging their oil production, whereas Saudi Arabia and Russia destroying each other. I think it’s going to be at least a bright spot for Mexico. What are some of the things that you feel optimistic about with how Mexico is either handling it or just the resilience of the Mexican people?

Miguel Diaz Guy…:         I feel optimistic for many reasons, actually. First there is the demographic bones that we have. We are a very young country. It’s our average age is 27 years old. That and we have 120 million people, so we have many young people ready to work and produce. And that’s good. I see definitely most of the industry’s becoming digital. This transition being accelerated as I mentioned, Mexico was not digitalizing fast enough in many industries. Not only retail, but banking, health, et cetera. This crisis will accelerate the transition into digital. I’m convinced that digitalization of any industry produces basically… Puts a democratization into the consumer behavior. More people have access to those products or services if the industry is digitalized.

                                           We could see, for instance, more Mexicans receiving a formal education because it will be easier with digital with an [inaudible 00:25:23] industry or things like that. Digitalization of industries is definitely good for Mexico will be good for Mexico. That gives me optimism. Now, on the other hand, we should be very careful to handle this crisis because it could be catastrophic. We don’t have the resources of other countries like the US or European countries to put into the economy again. We need to take care of ourselves here, trying not to let many businesses… Helping people that will be unemployed to recover rapidly or this could become, I would say catastrophic for the new term in Mexico.

Ryan Morfin:                    Well, Miguel, we appreciate you coming on the show and we’d love to check back in with you in a few weeks to see how things have evolved. We hope that you and your family stay safe and definitely appreciate your time.

Miguel Diaz Guy…:         Thank you for inviting me. It’s been really nice. I enjoyed talking to you, Ryan.

Ryan Morfin:                    Miguel, hope to see you in Mexico City at some point. Thank you. Bye bye.

                                           Thank you for watching Non-Beta Alpha. And before we go, please remember to subscribe and leave us a review on Apple Podcasts or our YouTube channel. This is Non-Beta Alpha. 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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