Mohammed bin Salman the future of Saudi Arabia and the oil markets W/ Bradley Hope and Justin Scheck authors of “Blood and Oil”

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Ryan:

Welcome to Non-Beta Alpha. On today’s episode, we have Bradley Hope and Justin Scheck, the authors of Blood and Oil, talking to us today about MBS, the future of Saudi Arabia, and the oil markets. This is Non-Beta Alpha.

Ryan:

(singing)

Ryan:

Bradley and Justin, thanks for doing the show.

Bradley Hope:

Pleasure.

Justin Scheck:

Thanks for having us.

Ryan:

Well, we’re very excited to talk about your book, Blood and Oil, talking about MBS. And he’s actually a very interesting figure that has popped up into the scene over the last few years. But I guess some people who are Saudi files may have seen this coming, but he is a different type of leader, 20, 30 vision of Saudi Arabia kind of bouncing around the tech circles in Silicon Valley, more transactional leader than maybe those we’ve had in the past. We’d love to just hear a little bit about why you guys got interested in MBS and what makes him so important for our viewers?

Bradley Hope:

Well, obviously, MBS has really demonstrated why he’s such an interesting character. I mean, every few months, he seems he kind of first under the headlines or something pretty world impacting. Probably the biggest, most recent one would have been the oil price war that he led just as we were coming into the COVID-19 crisis. So, I have kind of a middle East background and Justin and I met in London and we were covering the Aramco IPO in the earliest days and trying to understand more about that company. It was a very opaque, but very profitable and big company. And the thing about MBS is he’s so mixed up in the world of business and finance that as soon as you start digging into something like Aramco and the IPO, you end up hearing more and more about him as a leader and as a kind of budding businessman at that time.

Bradley Hope:

And so, I think that’s how we got started. We just kind of went from story to story. We did Aramco IPO, we did this big story about a fire that they tried to cover up at Aramco, efforts to kind of prop up the Saudi Stock Market using the Sovereign Wealth Fund. Anyways, we kept doing more and more stories. We realized that in the course of our reporting that MBS is one of those characters that’s very easily turned into a caricature because it’s very politicized, very polarized, and there’s not a lot of nuance going on and it’s also a place that’s very hard to learn about what’s going on in Saudi Arabia, what’s going on behind the scenes.

Bradley Hope:

So, we saw it as a kind of journalistic opportunity to start from scratch and really try to explain this character and all the more important, because he’s set to become the King of Saudi Arabia after his father dies. And he’s just 35 years old last month. So, he could be the King for 50 years if he was in good health. So, he’s going to be an impactful person. And that’s kind of how we got on that journey.

Ryan:

And it’s interesting because he took a slightly different path than maybe some of the other princelings that were maybe in the orbit going into the running for King. What about his path is different?

Justin Scheck:

So, Saudi Arabia, since the founding of the modern kingdom about a century ago, the founding King appointed a son, his favorite son, one of his oldest sons to succeed him as King. And since then, the crown has passed from brother to brother to brother. And there’s a council of the princes who were there to decide who gets it next. So basically, the oldest brother who’s competent to be King gets the crown. So, there’s never been really serious questions about who’s going to get the crown for half a century. And now, the youngest sons of the founder are in their 70s, are getting older. One of them is King Salman, Mohammed bin Salman’s father. So, before wears the crown kind of went in this sleepy order of brother to brother to brother. Now, we’re approaching the first time where it could go down to the next generation.

Justin Scheck:

And so, in preparation that happening, all the brothers knew that was happening. There was this jostle for power going back to through the 2010s when the last King Abdullah was King. There were two crown princes, two brothers between him and Salman. It seemed very unlikely that Salman become King and then Mohammed bin Salman would have any power. And so, through a combination of I guess, good luck in the sense that two of his older uncles died making his father in line for the throne and then very effective palace intrigue, palace maneuvering by Mohammed bin Salman. He had to earn his place. He had to earn his place next in line in a way that hasn’t had to happen in the Kingdom for a century. And he did that by outmaneuvering rivals to his father, by sidelining people who wanted to see him cut out of the line of succession, and by consolidating power in a way that showed people that being loyal to Muhammad Bin Salman and being part of his camp could lead to great rewards and being disloyal could land you in prison or worse.

Ryan:

And it was really fascinating to watch. I mean, I was glued to the TV. I’m not sure most Americans were paying attention, but with the palace intrigue that you mentioned about arresting all the business magnets in Saudi Arabia and taking them to the Ritz. From an outsider, looking in, who’s done a lot more research than myself, were there some merits to the grafts investigations or was this total power play just to get people to fall in line?

Bradley Hope:

Well, and I’ve done a lot of white collar crime and financial crime stories in the past. And the corruption in Saudi Arabia is on another level. I mean, it’s just another add a couple zeros to everything that you’ve ever seen before, but again, that’s also oversimplifying it because in the past, the way things had worked, obviously all laws and all power comes from one place, only the King. There’s not like a constitution from which rights emerge or arise, it comes from the King. And whatever he says is de facto the law. And so, what happened in the past was people don’t realize, but in an absolute monarchy, there’s still a kind of politics. The King has to keep people happy, keep powerful people happy, and spread the love, so to speak, as he can’t keep all the money for himself.

Bradley Hope:

And so, one of the ways that things happened in the past was different Kings allowed a kind of corruption, a kind of graft to occur. So, people became rich, but it’s kind of hard to say it was completely green-lit, but it was kind of understood. Nobody was cracking down on it and it was kind of known at the time. So, the thing that’s interesting is yes, corruption was out of control, but yes, it also was sort of permitted and what Mohammed bin Salman basically did was say, “Listen, everything that was permissible in the past is no longer permissible in the past. So, you’re going to be going to prison and you’re going to be held there. There’s no rule of law. You’re not really going before a judge, and you’re being held for something that if you had known at the time would have been considered a complete crime that would get you arrested, you wouldn’t have done.”

Bradley Hope:

So, it’s a little bit complicated in that sense, but the most important thing to realize is that that so-called shakedown what they called the shakedown, it really had multiple purposes. It was one, send a signal to the whole Saudi Business Community, the Royal Family, that that era of permissible corruption was over, or at least mostly over for most people. So, that’s one. Two, they were collecting money. So, they supposedly raised about a hundred billion dollars from these people that has turned the assets over, but three, and probably most importantly, this was an effort to take out his rivals. He had a bunch of guys in his own family, cousins, who were plotting against him, and each one of them had a so-called corruption case that they could be held for and they were held for it.

Bradley Hope:

And the exact same time as they were held for corruption case, they also had their positions taken away. He had one cousin who was the Head of the National Guard, which is really one of the most important defense forces for the Royal Family, that guy was removed. Everybody was removed from their positions with corruption as the cover story, but really it was a power consolidation more than anything else.

Ryan:

No, it was a fascinating move. And the fact that it ended, I think there’s maybe one or two people who mysteriously passed away, but it wasn’t met with revolts from the other parts of the factions of the other clients.

Justin Scheck:

I think one-

Bradley Hope:

It was pretty effective.

Justin Scheck:

Yeah, it was effective. But I think one message that it sent was that it doesn’t pay to revolt through this consolidation of power that Bradley referred to. In the past, the Ministry of Interior, which is a military arm and the Ministry of Defense, which is the Army and the National Guard, which Bradley was referring to, each had a different brother, a different prince in charge of it. And that created sort of a balance of power.

Justin Scheck:

Mohammed bin Salman is taking control of all of those. So, by taking control of all of those through efforts, including the Ritz crackedown where he removed people who were in power, he showed people that it doesn’t really pay to resist him. And that the consequences for pushing back were just really not worth incurring. So, it was effective in that sense. It was also effective in the sense that he showed people that, he probably said, he determines the rules, the rules are what he says, that’s how it used to be. There’s no document, no precedent. You can refer to what he says goes. And so, it was very effective in that sense.

Ryan:

And going back to his past, I mean, he was one of the princelings that stayed in Riyadh for education, didn’t go to Europe or the United States got, I think, very involved with kind of his father as the governor. Early on was tinkering with stock markets. So, he’s had a lot of interesting experiences, like maybe is divergent more real world street smarts would you say than the other Royals?

Bradley Hope:

Yeah. Most of the Saudi Royal Family, they go abroad for their university education or at least their masters, and they spend a lot of time abroad and they almost become quite a bit westernized. You can meet some Saudi princes who are the plummiest, most posh, British accent, and they love horse racing and going to the Savoy and having high tea. So, obviously MBS, he kind of stayed behind, not because it was so much a choice of his, but kind of his situation. So his father had a set of sons and a daughter before he got a third wife, which was his MBS’s mother. And two of those older brother, older half-brothers of MBS, they died in a kind of tragic way. And then the uncles died. Two of them died.

Bradley Hope:

And so, MBS was kind of almost like a grandson to King Salman. That’s like a 50-year age gap and he was there to kind of comfort his dad, be with him. He was also not the type. He wasn’t so ambitious the way that some of his other family members were. He was kind of a little bit slower to get started. He liked playing video games and he was having a good time, kind of a typical teenager lifestyle. When he did wake up and start paying attention, he was in Saudi Arabia, learning from his father who was a really interesting character. He’s the family disciplinarian.

Bradley Hope:

So, any wayward Prince would get hauled before King Salman, who was then Prince Salman. And they might even end up in one of Prince Salman’s personal jail cells that’s just for the Royal Family. So, he’s learned from this guy and he also was the governor of Riyadh, which is the center of power for the Al Saud family. And so, that’s kind of his upbringing. And I think it explains a lot about why he’s so able to outmaneuver his rivals in his own family, because a lot of those guys almost kind of they became westernized. They thought that there’s a kind of polite way that things are done in the world and MBS, I think, he likes to think he’s more in the tradition of his grandfather, who is famous for leading raids into camps and taking over by forest and being quite aggressive. And so, MBS is like that too. He’s very aggressive. He always looking for the element of surprise like that shakedown, for example, hit everybody out of nowhere. And I think that’s the key to why he was able to rise so quickly.

Justin Scheck:

And I would add to that. I think a lot of the conventional wisdom inside and outside Saudi Arabia and even in the Royal Kingdom, was that the key to becoming the King of the next generation was to be in an internationalist and to be cosmopolitan. And in fact, the key was to be the best person at maneuvering within the Royal Family. And there’s a line in our book, King Salman told an American visitor, “I didn’t go to the Sorbonne to learn how to be a Prince.” Meaning, the way you learn how to govern in Saudi Arabia is by being in Saudi Arabia and being within the palace walls and learning who’s strong and who’s weak and how to manipulate them. And that was the key to his power.

Ryan:

Yeah. That was actually a very impactful line in the book. And I also remember when you guys you wrote down that there’s an American diplomat there and the court official is telling the Americans, it’s a very important relationship between the US and Saudi, and he interrupted him and said, “As long as you keep selling us your weapons.” So, it’s a more transactional relationship today maybe than it’s ever been. But do you think MBS has the… Well, before I ask that question, I guess the question I would ask is, is it correct to characterize MBS as somebody who utilizes digital technology trends, kind of a modern day politician versus what I’d call maybe a 1920s, Chicago politician, big party politician? That was his rivals. I mean, it looks like he picked them apart because he used tech and he used a lot of digital marketing strategies that hadn’t been used before. Is that an accurate statement?

Justin Scheck:

Yeah. Yeah. I mean, I think you could frame it that way. The way I would frame it is a little different, which is that up until he came along, the people in power in Saudi Arabia were old men. And historically, the Royal Family got its power base and its foundation of its legitimacy in the eyes of the Saudi people was from an Alliance with the religious establishment, which between the family and the clerics went back over 200 years. And for most of the history of Saudi Arabia, the Royal Family felt that it had legitimacy because these very conservative clerics told the people, “This is the Royal Family that presides over the Holy cities of Mecca and Medina, and they should be respected.” And that worked to a point, but what Mohammed bin Salman realized, as he’s entering his 30s, about 60% of the Saudi population is under 30 years old.

Justin Scheck:

They have some of the highest smartphone and social media saturation in the world, and they’re on Instagram and they’re on Twitter. And they spend all day seeing what their counterparts in other wealthy countries are doing, which are things like going to the movies, and going on dates, and seeing live music, and getting the opportunities to have all sorts of different jobs and to start their own companies and things you really couldn’t do in Saudi Arabia.

Justin Scheck:

And he realized that if he was going to have legitimacy in his family as a ruling family, who’s going to continue to have legitimacy in the eyes of the people, they would need to get buy-in from these people who were under 30 years old, and that wouldn’t come from the religious establishment. That would come from giving them what they wanted. And so, to that end, Twitter is probably the most powerful and important example. He’s realized the power of digital media to give him the legitimacy that he wants, both for his family to rule, but also for him to be the member of the family, who is elevated to King.

Justin Scheck:

And so, Twitter digital marketing strategies are a kind way of putting it. He’s been extremely proactive getting out of Twitter and having his deputies, burnish his image at Twitter, and probably even more proactive at cutting out dissent on Twitter. And that’s involved the various sort of blunt instruments of bringing in people who criticize him on Twitter and having his deputies beat them to something we’ve written about in the Wall Street Journal.

Justin Scheck:

In a more sophisticated way, we write a lot about how he, going back six years, had some people working for him, infiltrated Twitter as employees, and started getting into Twitter to figure out who anonymous critics were and going after them. And then there’s been also some of the spying on people through very sophisticated digital means. So yes, he has used new technology in a way that others didn’t see necessary.

Ryan:

I mean, you probably just have to ask Jeff Bezos about that. That’s insane. So, he sent his agents into Twitter to go kind of create, I don’t say espionage, but to go find out who is anonymous critics are. That’s amazing. Well, so given that the old guard was always built around a power base, so keeping the hobbyists happy and contented and now he’s moving to vision 2030, which is a vision that in some ways maybe it’s more secular, I don’t know if that’s a correct way to stereotype it. But it’s definitely less draconian than what has been going on in the last 15 years or so. Will he be able to keep the hobbyists in place as a supporting element for society, or is there going to be a confrontation internally in Saudi Arabia?

Bradley Hope:

Well, I think a lot of the ultra conservative ranks and the very influential kind of religious leaders with a lot of followers, he imprisoned a lot of those guys. I mean, they make a very sizable number of the people in prison in Saudi Arabia. The vision 2030 plan, I wouldn’t call it secular. It’s really just an economic development plan, but I think what’s more important and it relates to what you’re asking is, what does he spend his time on? It’s on economic development. He hasn’t really espoused his personal Islamic kind of perspective. He’s made a few comments that people have kind of applauded. He talked about 1979 when there was the famous terrorist group took over the Holy Mosque in Mecca. And he referred to that as a kind of pivotal moment when the country was sort of hijacked and sort of held captive or held captive by this extremist branch of interpreting Islam.

Bradley Hope:

So, I mean, all the signs show him to have a much more liberal perspective, something more common that you would find in somewhere like the United Arab Emirates. He has in no way supported any extremist groups, actually quite the opposite. He’s taken on Hezbollah in a way that was quite aggressive. He kidnapped the Prime Minister of Lebanon after he was unwilling to confront them in the way that MBS was ordering him to.

Bradley Hope:

Our book covers the first five years and that’s been economic development, consolidating power. I think the nature of religion and how he sees his role, if he becomes the King, when you’re the King of Saudi Arabia, you get this extra title, that you’re the custodian of the two Holy cities of Islam. And so, it’s actually a very important sort of figurehead religious position to have as well. And I think before he takes that mantle, he’s going to have to start explaining how he’s planning to see that, or do that, or handle that. And I think all the signs point to it being very different than anybody else in the history of Saudi Arabia.

Ryan:

There was one comment in the book where I guess MBS was sitting with a cleric and they’re talking about politics and history. And he said his favorite book was Machiavelli. That was kind of a different answer than I would have ever expected, but it also, I think, sets the stage for someone who is going to be a hyper realist approach towards foreign affairs. And given that we have somebody currently in the White House who I think is a hyper realist, very transactional, it’s no wonder those two, I think got on well. But the question I guess, is as we’re seeing more dominoes fall between peace, between UAE and Bahrain, do we see the GCC all fall in line in coalesce around a stabilizing peace process with Israel to confront maybe an emerging Uranian, China influence in the Middle East?

Bradley Hope:

Yeah. And that’s a good question now. The short answer is, I think yes, but the more nuanced answer is that it’s very easy for UAE to do something like recognize Israel because they have huge amounts of money, which gives them huge amounts of power and very few citizens, which gives them very few people to upset. The rulers of the UAE can kind of do what they want politically. They can change courts very easily. I was talking to a Saudi, a person I know well, the other day who made the very kind of facile, but fair analogy that whereas UAE is like a jetski, Saudi Arabia is much more like an oil tanker because it’s got a population of 30 million people and this deeply ingrained top down schooling that Israel is bad.

Bradley Hope:

Still, there are schools in the Kingdom where educational materials say, “Jews are pigs.” These long standing things that the leaders of the country have been trying to pound into their considerable population, it’s a big country for the region. And so, to all of a sudden go back and say, “Oh no, they’re our friends now,” is not necessarily easy. On the other hand, with this very young population, the young population is much more open to shifts like that. And Mohammed Bin Salman has done a lot of not public dealing with Israel and has shown much more willingness to buy Israeli technology, to transact with Israel, to treat Israel like an ally against Iran. But his father is still very much of the old guard.

Bradley Hope:

Our colleagues in the Wall Street Journal had a story today talking about how King Salman, when he was governor of Riyadh, used to call himself the Palestinians Ambassador to Riyadh. So, there’s this feeling that I think the King would be very reluctant to abandon Palestine, which brings you to like… I guess, the real answer here is for Saudi Arabia to do this, it has to ask the question, is it going to require something from the Israelis? Is it going to require Israel to give something, and Israel showing a complete unwillingness to give anything meaningful?

Bradley Hope:

And so, if Saudi Arabia is going to insist on getting something meaningful from Israel, it’s hard to see in the short term formalized relations, but I think if they’re willing to be flexible the way UAE was, I think, the reality is it’s going in that direction.

Ryan:

Well, and as we’re talking about regional role, Yemen comes to mind and can you guys put some context for our viewers? There’s a war going on in Yemen as a civil war. It’s being fueled by, I guess, the Iranians, and the Emiratis, and the Saudis to try to find a balance of power there, but what business or why is it so important for the Saudis to be involved in Yemen?

Bradley Hope:

Well, you can-

Ryan:

Wierdest thing.

Bradley Hope:

You can imagine in the Gulf, it’s a very sensitive geography because this is a country that shares a long border of Saudi Arabia, from their perspective and perceptions are really important with Saudi Arabia. It really helps you explain a lot of why they do things, even the Khashoggi murder is a good example, too, if we can talk about that later. So, for the Saudis, and the Emiratis, it’s untenable to have a sort of unstable country on its border that has foreign powers meddling in it and that sort of thing. But what nobody expected was that Saudi Arabia was suddenly, so suddenly changed its entire kind of perspective on how they handle this sort of thing.

Bradley Hope:

In the past, Saudi Arabia has been a country that didn’t really like to lead from the front. They would sort of wait to hear what Washington wanted to do. They would commit in some way. They would commit in a way that would allow them to some umbrage as well, so that they could always say, “Well, we did support it, but we also didn’t completely support it. It was a very wishy washy perspective to have an MBS.” And this was characteristic of all of his decisions. He assessed the situation and said, “Well, this is one that we’re going to lead from the front.” And he just essentially, very quickly, told his generals that, “We’re going to war.” They were shocked, never in their life had they gone to war as the first ones in and it has been a very messy process on so many levels. It’s a humanitarian crisis in Yemen.

Bradley Hope:

So, this is probably the bloodiest thing that’s on MBS’s conscience in a sense. The Saudis really didn’t know how to use their equipment the way that… they didn’t read all the instruction manuals necessarily, and they’ve been buying all this equipment for a long time. So, it’s just been really a messy process. And also, even their alliance with the UAE has sort of fractured over Yemen with different kinds of perspectives on how to end that and not make it into their own kind of Vietnam forever war. And I think it’s one of the ones that they’ve been trying to figure out this year, but then the COVID crisis has just delayed everything, but they had a lot of signs of, I guess, a kind of truce, a kind of a path forward earlier in the year, but now it seems like it’s not moving that direction as much.

Ryan:

And that foreign power meddling is no Donnelly Iran and it’s been news to me or interesting to watch from someone who doesn’t watch the region as closely as you two that China has started to really get more aligned with Iran. And so, do you guys fear, or do you think there may be more proxy, sparked up proxy entanglements in the region? I mean, Syria is not a done deal yet. Kurdistan, Turkey or do you think there’s going to be more conflict going forward in the next few years in the Middle East?

Justin Scheck:

I’m more in the line of no looking backwards and looking forwards. I mean, there’ll probably be lots, but I think the one thing that gives me pause is that Saudi Arabia’s relationship with the US really suffered a lot under the Obama Administration. The Saudi leadership and especially MBS who was rising empowered within the administration really didn’t like that the Obama Administration was willing to strike a deal with Iran. They felt that they were being lectured by Hillary Clinton on human rights issues. And I think the fact that it was a woman who was telling them how they should do things was especially galling to some of the older Saudi leaders. And there was a feeling that, “We’ve been friends for a long time. Why are you giving us a hard time? We’re your friends. You should let us do whatever we want.”

Justin Scheck:

And so, looking forwards, if there’s a Biden victory here, and you have a situation where Saudi Arabia feels like it’s going to be taken to task for human rights abuses, and that the US Administration is more likely to try to come up with a deal with Iran, Saudi Arabia may need to turn toward China in a more meaningful way. So, I wouldn’t assume that any alliance that we see for me now is something that’s going to be sustained, and that I wouldn’t assume that old relationships are necessarily set in stone.

Justin Scheck:

I think that it would be sensible of Mohammed bin Salman to consider China as an ally to become closer to if only to gain some strategic firepower in dealing with the US in the future.

Bradley Hope:

Also, if you look at the kind of game theory of it as well, I mean, just at the same time that the Saudi Arabia decided to lead from the front and its own region, the US as well has decided to lead less from the front around the world. And so, all of the countries in the Middle East and Asia unit doesn’t matter where it is. Everyone is seeing what’s happening and they’re hedging their bets. Also, China is appealing to these countries for some reasons, because it’s a completely nonjudgmental, non values sharing relationship.

Bradley Hope:

China’s extremely transactional, more so than the US government under Trump or MBS. I mean, what they’re looking for is they’ll help you build a new port that could be quickly retrofitted and turned into a Naval Base. They’re always thinking about the long, long term. And so, for them, if they can be an economic development partner in the Middle East, that solves a lot of their short term problems, but their longterm goal is to have influence and to have these non judgemental relationships. Let’s just look at China and North Korea, it’s the same. They have the same model around the world. They don’t tell anybody how they should do things, but they try to become a kind of somebody you can’t say no to. And I think that’s the way things are going, but I don’t know if that necessarily will lead to more conflict, but it will definitely lead to a weakening of American influence in the Middle East.

Justin Scheck:

Yeah. And one important thing to add to that very basic level is the foundation of the US Saudi relationship is oil, but the US no longer need Saudi oil. The US is a net exporter of oil, whereas China very much needs oil from the region. And so, there could be a reinvention of those relationships based on economic and energy needs, rather than based on some kind of longterm friendship that no longer benefits, both sides as much.

Ryan:

So, we might see China, the peacemaker between Iran and Saudi, so they can get their oil. That’s interesting. Question for you guys, I mean, you brought up the oil independence, we like politicians like to say energy independence, even though I don’t think that’s quite accurate. But the question for you guys is, how much is the US fracking industry and oil production that marginal production? How much is that on the mind of MBS? I mean, if we’re no longer tied economically to the Saudi’s output as a trading partner, our reliance on them should go down and it’s probably somewhere on his radar that at some point, we may not be as interested in defending the peninsula. Do you guys think that’s an accurate statement and how has that played out in these chain of events?

Bradley Hope:

Oh, I’ll make a small comment first, but Justin’s more of an oil expert than me, but I think that when he sees what’s going on with fracking and the kind of the way the oil market’s reshaping, I think what he sees more than anything is alarms ringing or hears alarms ringing about his country’s economic future, because they’re so dependent on oil. And for the world to be having all these shifts, there’s the growing electric cars and the US having plenty of oil. And I think it just makes him nervous about the price of oil and how fast he needs to move to make these kind of dramatic changes within the country. I think that’s how I look at it.

Justin Scheck:

Yeah. To give a little bit of an obtuse answer for a long time, Saudi Arabia had this abstract, the leaders of Saudi Arabia had abstract concern that one day the oil will run out and what will we do then? And Mohammed Bin Salaman sort of came in with that concern as he was kind of moving up with the government, and then all of a sudden around 2014, which is just before his father becomes King, as he’s becoming powerful, the concern shifts from when’s the oil going to run out to when’s the demand for the oil going to run out? And it becomes a much shorter window that Saudi Arabia’s ability to have essentially unlimited money based on oil could go away much sooner than they expected.

Justin Scheck:

And so, I think the reason, obviously he takes aim at Russia when he wants to start an oil price war, is that the US doesn’t control its oil prices. It’s a free market. The oil producers in the US are independent companies. And so, when he looks at the fracking industry, it’s not as much a geopolitical thing, as much as, “What can I do to put these guys out of business?” And the answer is to drive down the price of oil. And so, we’ve seen them take action to do that. I think it’s an existential issue for the fracking industry if it continues. Obviously, it’s not a terribly insightful thing to say, but the real question for all of them is, does oil demand recover to somewhere where it was five or six years ago? If it does, then there’s more life for fracking, and there’s more wiggle room for Saudi Arabia.

Justin Scheck:

If demand remains weak, the Saudis have an increasing incentive in the short to medium term to put the frackers out of business. And I think we can expect to see them continue to do that.

Ryan:

Yeah. From the numbers I hear, I mean, there’s almost a trillion dollars of bad oil and gas stuff, just sitting out there, kind of the old GFC game of amend and extend and kick the can down the road. And at some point, I think those banks are going to have to, I’ll say, mark to market, but take a look at what they’re really holding onto. It’s going to be an interesting, a few more years now, oil patch for sure.

Justin Scheck:

Bring up when we’re talking about oil is we’ve seen repeatedly in the history of the fossil fuel industry that the technology comes along fairly quickly and methods of extraction that were prohibitively expensive two years ago are doable today and fracking, no costs have come down. And so, you never want to write off the ability of these companies to come up with technological innovation that can make them competitive again. But that doesn’t do anything about the debt. I mean, a lot of these companies are just going to be dead and it’s going to be new companies that do this.

Ryan:

Right. Yep. Somebody else come and buy the dead, write off the losses, and clear the market, if you will. Well, going back to what was, I think, a very stellar PR trip for MBS on the West Coast, walking around with all the tech giants in Silicon Valley and then fast forwarding to what we brought up a moment ago, the Khashoggi incident in Turkey. How has that made him recalibrate or has that emboldened him? Because it seems that some of the people that went on this trip to go execute that plan in Turkey have been killed, have been executed in court. Has this been a warning sign about the international backlash of just being too cavalier? Or, do you think he’s more emboldened now than ever?

Bradley Hope:

Well, I think that whole from the US trip to the Khashoggi murder, I think never in the history of the modern world have we seen so much good publicity turned bad. He couldn’t get enough good publicity. He was lotted by columnists. People were going over there all the time. Businessmen were obsessed with him. These conferences that he was holding every year called the Future Investment Initiative. It really was a huge who, of global finance and business. I mean, everybody was going, wanting to take part in the transformation of Saudi Arabia.

Bradley Hope:

The Khashoggi murder has not quite changed that. Everyone’s still interested and maybe they still traveled there until before the COVID-19 sort of crisis. But I think he’s highly chastened by it. I think it doesn’t mean that he thinks that his country was doing anything wrong. I think there’s probably some perspective that they’re being treated unfairly or they’re being treated differently than other countries and how they handle their affairs. All of the people he targets are Saudis, and there’s a view in Saudi Arabia that this is how… They have a different view of what’s treason in Saudi Arabia than we do in America.

Bradley Hope:

We think of freedom of speech. Well, there really isn’t freedom of speech. There is no freedom to assemble. There’s no political rights in Saudi Arabia. And so, people in Saudi Arabia understand that, and if they go against it, then they’re really risking their lives. I think the real question, and it’s really hard to say at this point in time, is, did he learn a kind of life lesson and will this be a transformative experience for him? Some people we’ve talked to who’ve met with him and had candid discussions have said he admits he did things wrong and he’s going to change his ways in the future. But I have to say, I’m a little bit skeptical that that will be fully the case because he has this short circuit technique to getting things done. And that’s being bolder, faster, reckless sometimes. And he, doesn’t like for somebody to try to confront him or play chicken with him. He’ll always be the last one to pull away.

Bradley Hope:

So, I think we’ll still see a very disruptive leadership from Saudi Arabia in the future though I think they’ll probably try to dial down the extraordinary renditions and any kind of political assassinations, hopefully.

Ryan:

So, do you guys see the flaming up again of Russia, Saudi Arabia price war? Do you think as the economy starts getting going again, that they may come back and revisit phase two of this squabble?

Justin Scheck:

It’s so hard. It’s hard to predict. I think that it was very surprising when Mohammed Bin Salman kind of tanked the price of oil because I certainly had to come in, another lot of people did, and it’s this interesting tactical thing where he saw an opportunity with softening of the oil price in the early stage of the coronavirus knockdown. It’s good now we can get Russia and he kind of went and got Russia and Russia was like… You know what I mean?

Justin Scheck:

So, I think it was unexpected that MBS did that. It was unexpected the way Russia reacted. And when you have these gigantic pieces of a market that are controlled by individuals who are acting on non-economic criteria, I don’t know, who knows? I stay very far. I stay away from any predictions on that because that’s one of the kind of recurring themes here is that Saudi Arabia was a place that acted predictably for a very long time. And their whole brand was not doing anything you don’t expect. And they contribute to stability in the region and stability in OPEC.

Justin Scheck:

And as Bradley was saying, you’ve got a guy in charge now who is so deeply frustrated with what he saw as his ossify leadership that he’s going to do whatever he thinks is the right thing. And really he has a lot less to lose than a lot of his counterparts because he’s not going to lose an election. The oil price goes down. He’s still got so much money, even though their financial situation is a little rough. They have huge amounts of money coming in. So, he doesn’t have the same short term downside as pretty much anyone else he’s dealing with. And in the longterm, sometimes shows of unpredictable force can strengthen your position as someone who people are afraid to go up again. So, I have no idea.

Bradley Hope:

I’ll be a bit more bold and say I doubt that he would go down that route again, because obviously at that moment in time as well, he didn’t really understand, or the world didn’t really fully understand how big of a financial crisis would be coming from COVID-19. So, Saudi Arabia’s economy is battered twice over by the price of oil, by the COVID-19. And then there’s also the political costs. A lot of US politicians were pretty upset and they were pushing the US government to take a harder tack on Saudi Arabia over that, more than anything else, probably. And I think as a result, probably it’s just not a likely intelligent strategy for the short term. And that’s something else that I think one of our things we learned about MBS and writing this book is that he’s not an erratic emotional kind of man-child as he’s made out to be. He’s actually highly strategic person. And looking for longterm gains, although sometimes making very kind of reckless short term decisions, but they’re always in service of a longterm strategy.

Ryan:

He seems like quite the individual to watch going forward. And I think it’s exactly what you guys said. He’s there for the long term, he’s flush with cash. And he has a vision where a lot of people, even in the US can’t determine what color the sky is today. So, I think that gives him a leg up in terms of charting a course longterm. I wanted to shift gears a little bit for a few more minutes with you guys into something that I think is very important.

Ryan:

First, I’d like to say, thank you guys for being great journalists because I’m sure you guys aren’t getting a lot of love from others these days. I do read a lot of your work. Your book’s fantastic. Investigative journalism in some pockets is alive and well, but wait, how do you guys feel when you hear about fake news or there’s a crisis in journalism? Do you guys agree with that or do you think it is immature defense of people getting picked apart on the issues for not having a strong arguments intellectually as we’re used to hearing from our leadership?

Bradley Hope:

Well, I think Justin and I are both highly non-ideological journalists. We’re always excited to be surprised by what we find and actually we kind of crave that. We crave that experience. And I think that’s really important for a journalist. Journalists who are highly political, they tend to be less credible in my opinion. And the other thing about Justin and I, and also where we come from the Wall Street Journal, is we have this kind of worldview that money, and business, and finance really drives how the world works today, more so than even ideologies in some ways.

Bradley Hope:

And as a result of that, the shortcut to understanding the truth of something, or to really investigate something is to follow the money. It’s the old adage. It really is the only thing that feels satisfying even with the current administration, all of these kind of scandals and investigations. The only one that ever felt substantive to me was the one where there was paying the money off to the playmate because you could just follow the money, you could see where it went from A to B to C and it just made a lot of sense. It made it also not look like it was some sort of political hit job. This was a thing that was covered up and then it was uncovered. And I think that’s kind of the approach we take.

Bradley Hope:

You’re totally right though, that when you are willing to be surprised and you don’t kind of change your direction when the wind is blowing left or right, people are not happy about that. On Twitter, we get attacked all the time whenever we read a story that doesn’t align with somebody’s views, and it’s kind of its own pandemic that people are wanting the news to align with their views because that’s the number one way that we don’t kind of get to the heart of something.

Ryan:

Someone mentioned the word to me infodemic is we’re stuck in the social media echo chamber. And if something comes into that echo chamber that is not aligned, it causes a chasm, if you will, in the worldview. It’s unfortunate. Do you guys feel that way? Do you guys agree with that, that social media potentially dangerous that we’re just kind of becoming hyperpolarized in our worldviews?

Justin Scheck:

I don’t love this movement we’ve seen where people are increasingly… I choose to only get my information from liberal news outlets. And I just get mad from each conservative that lets you have all these people who are being fed these like fire hoses of information. Everyone’s getting more than they can absorb, but oftentimes, it’s two totally separate things. And it creates a situation where people have in mind that there’s good guys and bad guys and like my team we’re the good guys and the bad guys are bad because they want to do bad things to the world.

Justin Scheck:

And one of the things you learn doing the kind of work rather than I are doing, I always talk to my kids about this. Nobody thinks they’re the bad guy. Nobody wants to do something they think they’re bad. Everyone comes up the way to justify what he or she is doing is good. And everyone thinks you’re the good guy. And unless you have the ability to sort of empathize with the other side, with people you disagree with, you’re never really going to understand what’s going on.

Justin Scheck:

And I think that it’s harder and harder to do that as a consumer of news, not a producer, but as a consumer of news, I think it’s harder and harder to do that. For whichever side you’re on, there’s the people you trust because you know they’re the good guys and there’s people can’t trust the New York Times because they’re bad guys. You can’t trust Fox’s they’re bad. Whereas in reality, the reason people do things isn’t because they want good or bad it’s because of unique things to them that you need to try to understand better. And I think that’s one thing that’s really lost.

Ryan:

That’s a great comment, I’m going to use that, nobody thinks are the bad guys. That’s fantastic. So, how do you guys shape your editorial filter? Because I think that’s probably the most important thing to ask you guys. If we’re all getting these fire hoses of information, do you have a rules based approach or is it always… I think you guys mentioned you guys cooperated. If you didn’t just take someone’s word for it, you had to make sure there’s multiple sources. How do you build that for your own personal filter?

Bradley Hope:

I don’t think there’s a strict kind of methodology, but I would just give you an anecdote from this project. At the time, so watching the MBS story in real time versus working on a book about MBS with more time to go through it, we really kind of noticed all of the ridiculous kind of distortions that were going on in the media. So, for example, there was this one Prince that was disaffected from his family and he was kind of trying to hold his family hostage. We have a chapter called Captain Saud in the book where he’s kidnapped by MBS, but what he was doing was he was using his position to make it seem like there was a kind of… he gave a lot of oxygen to these things going around that the King Salman had dementia, the MBS was corrupt. At the time, people were running the story saying, “Anonymous letter from a Prince,” but nobody knew who the Prince was except for the original journalist who wrote the story.

Bradley Hope:

And if you dug into that Prince, you could see he was a complete dissolute kind of like lay about character, not somebody with character. But at the time, those things ricocheted and they got amplified and that happens all the time, I think. When you get time to go back and look at the facts, in retrospect, you see how people got really spun in the wrong direction. And so, I think the number one thing that we try to do is just be driven by our own curiosity and be willing to be surprised and always try to understand someone’s motivations, follow the money, those kinds of things.

Bradley Hope:

As a consumer of news, I try to just read as widely as I can, even though some newspapers are more ideological, they sometimes have really good journalism, even despite that. And I think all Americans have a kind of innate sense of what is real. You see it all the time. People hold you to account as journalists. They say, “Why do you have so many anonymous sources? Who are your sources?” That’s a really good instinct to have because journalists are always, in my opinion, always trying to do their best. Nobody thinks of the bad guy.

Bradley Hope:

But at the same time, they are fallible just like anyone is, and they can also make mistakes. And so, anyways, I think it’s good for consumers of news to be really paying attention to the articles and not taking them at face value, but also definitely not assuming that there’s a conspiracy going on or that there is an agenda because it’s always somewhere in between. Somebody may have an agenda, but they don’t realize it. Or, somebody may make an error and they didn’t realize it. I think you have to have faith in American journalism, but also trust, but verify.

Ryan:

Great. Great, quote. What if anything, are you guys reading right now that you think is like, “Oh wow.” Or any new books, you guys, besides Blood and Oil, which we definitely are going to hyperlink to this episode? Any new books that kind of helped shape your word worldview over the summer?

Justin Scheck:

Well, I’ve been reading a book, it’s not super new. I think it’s a year or two old by Ronen Bergman, who’s an Israeli journalist called Rise and Kill First. It’s about Israel’s history of political assassinations and it’s amazing. I mean, it’s incredibly well written, so it kind of keeps you going and the characters are very fleshed out. But a lot of it is former Israeli government figures talking about how they made decisions and carried out operations to kill political enemies abroad. And it’s absolutely fascinating as a regional history and also just as a great read.

Bradley Hope:

And also for the Middle East, another book came out this year called Black Wave by Kim Ghattas, Lebanese journalist. And it’s a really, really powerful intellectual history and the kind of starting point is, how did the Middle East get to be this way? And it’s really asking about this conservatism, this heavy conservatism. So, it has that perspective of the Middle East used to be much more cosmopolitan and have more social liberties, and how did things get out of control? And I think it’s a really powerful book. It takes place kind of in Iran, and Lebanon, and Saudi Arabia. So, I think I recommend that one.

Ryan:

Fantastic. Guys, I’ll pick both of those books up. Again, the authors of Blood and Oil. I appreciate you guys doing the show. I learned a lot today and I’m sure our viewers will appreciate it as well. So, thank you guys.

Justin Scheck:

Thank you.

Bradley Hope:

Thank you very much.

Ryan:

Thank you for watching Non-Beta Alpha. And before we go, please remember to like and subscribe on Apple Podcast and our YouTube channel. This is Non-Beta Alpha 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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