Real Estate Development & Transaction Pricing Post COVID with Bill Shopoff, CEO Shopoff Realty Investments

Bill Shopoff breaks down the underlying factors influencing the real estate market throughout this pandemic.
Bill Shopoff, CEO of Shopoff Realty Investments, breaks down the underlying factors influencing the real estate market throughout this pandemic. Shopoff, who has been in the industry for decades, was anticipating a recession prior to the shock of COVID-19 which already led him to deploy his capital conservatively and cautiously as he entered 2020. In sectors such as multi-family, although collection rates have exceeded expectations, properties in the hotel and retail sectors are still at risk of being repurposed as residential in the months to come.

Shopoff’s outlook on the economic recovery is contingent on a variety of data points that are not yet known. Neither the possibility of a second wave nor the timeline of a vaccine can be accurately predicted at this time, yet he remains confident in a v-shaped recovery with the occasional hiccup along the way. Industrial real estate will become more prevalent as supply chains attempt to migrate back to the United States, and new home sales have also seen growth since last year. Shopoff also believes that cause for optimism can also be found in the innovation and scientific discoveries that the United States has become historically known for in times of crisis.

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Ryan Morfin:

Welcome to Non-Beta Alpha. I’m Ryan Morfin. On today’s episode we have Bill Shopoff talking to us about real estate development and transaction pricing post-COVID. This is Non-Beta Alpha.

Ryan Morfin:

Bill, welcome to the show. Thanks for joining us today.

Bill Shopoff:

Thank you, Ryan. Appreciate the opportunity to visit with you and catch up.

Ryan Morfin:

Well, you’re known as one of the best real estate guys in our industry, and we really appreciate you taking the time to maybe share some of your insights about maybe what happened leading up to the coronavirus in terms of real estate development, land prices, real estate investing, and then how things have changed in your view, and where you see opportunities going forward.

Bill Shopoff:

And thank you for the compliment. I’m not sure it’s deserved, but I’ll try to live up to the legend. The economy was moving well, obviously, through February. We had been forecasting a recession. Candidly, I thought the economy had enough steam to make it to next year. But we had started to be a little bit more defensive in our posture. We were harvesting some positions already, and we were also very cautious deploying capital.

Bill Shopoff:

We bought three transactions last year, three opportunities, and one of them took us over two years to do the acquisition and it had a distressed nature about it anyway. And then we bought one early this year. And I would say all of those positions, we’re happy with our basis, even post-COVID. So, that’s a good thing. I think if there’s good news, the good news is if you’re expecting a recession and now you’re in one and maybe already coming out of it, now we got some runway to work with.

Ryan Morfin:

Yeah, it seems that some people are expecting a V-shaped recovery, some people depression. So there’s a lot of uncertainty. What are your thoughts? Where are we going?

Bill Shopoff:

Well, I think a lot of it’s going to depend on things that we can’t predict and forecast, namely, what happens with the virus. Do we have a second wave? Do we get a vaccine quickly? It seems like the stock market most days has vaccine priced in, and then it has an occasional day, like it did a couple days ago, where it really got disrupted. But I think that my general feeling is that the economy will have a long drawn out recovery.

Bill Shopoff:

It will initially be V shaped because if you’re coming off the bottom, if you go to virtually no economic activity, which is essentially where we went to for a month to two months, it’s pretty easy that everything looks good from there. I used to have an expression that said we were down so long it looks like up. I think that’s a little bit of where we are right now.

Bill Shopoff:

It’s like everybody got elated because the month of May we had two and a half million jobs when they were forecasting a loss. I think it’s natural that we’re going to have some good job gains. And I would suspect that if we don’t have a big jump in COVID cases, I wouldn’t be surprised if we add June, July, and August where five to 10 million jobs created. These are just jobs people going back to a job that they had.

Bill Shopoff:

Then the question is, do other jobs start falling off? Do the Hertz bankruptcies and those type things, do those start really wading into hitting more white collar jobs than probably what we’ve seen already. It’s really hard to forecast, so I think when we’re taking action today, we’re very basis oriented. Can we ride out some bumps? Because I don’t think it’s going to be a straight line. I think We’re going to have some good times, and then we’re going to get some bad news along the way, and it’ll be a little bit bumpy.

Ryan Morfin:

I think going in basis, a lot of people have always said you make all your money going into a real estate deal. So, the pull back, if you will, on valuations, do you think that there’s a lot of people that are going to get hurt in commercial real estate and they don’t know it yet? Or, are people just going to reset expectations on what their pro forma exit was from something they bought five years ago?

Bill Shopoff:

We’re all down in value today, depending on your asset type and geography, from where we were in February, or even March 15th, let’s say. I think some asset types will recover much more quickly than others. Residential is going to hang in there, multi-family, because I think two things. One is people need a place to live, and at least so far with the CARES Act and the extra money coming in from the feds on unemployment, multi-family collections have I think, across the country, far exceeded people’s expectations.

Bill Shopoff:

So I think that that’s been a good asset class. And cap rates could get further compressed as we stay in this low interest rate environment. There’s ample financing in that arena. The flip side of the coin is retail. There’s virtually no financing for retail today. I mean, I won’t say none, but it’s pretty spotty. It’s pretty select for what’s out there. In fact, we were successful acquiring the note on one of our own centers during the midst of the turmoil. One of our lenders got a margin call, and they offered us our note back, and we bought a performing note for 70 cents on face.

Ryan Morfin:

That’s great.

Bill Shopoff:

So, we might’ve lost some value in the center, but we made it up on the note side. So, we probably stayed even or maybe even got ahead a little bit. Luck and action ran into one another on that day. We knew what to do and we had the good fortune… was really the bad fortune of our lender. They hadn’t made a bad loan. We were a good borrower. But they came to us with an asset that they wanted to move. We were able to take advantage of it.

Ryan Morfin:

What do you think about hotel and offices sectors?

Bill Shopoff:

Hotel, you’ve got to divide into full service and select service. I think the select service is going to make a much quicker comeback, and I’m already talking to people that are back up into the 40% to 50% occupancy range. I think the full service luxury product is going to be a longer pathway to recovery. But I think in both of them you’re probably 18 to 36 months out to get back to where they thought they were. In fact, we’re spending some energy courting some hotel transactions right now.

Ryan Morfin:

Do you think it makes sense to buy hotels and mothball them until demand recovers? Or is the startup cost or the close down cost, is it too disruptive to the property?

Bill Shopoff:

I think it’s probably challenging to just let them sit empty, particularly the select service, because your property costs are relatively low. So I think that you’ll see those people… some stop operating, but I think the people who continue to operate have a huge advantage because they kept their place in the reservation systems and on the online searches. So I think they’ve got a significant advantage.

Bill Shopoff:

The luxury product is going to be case by case. I think if you’re in a beach market, you might do really well there, because that particular location may be getting an advantage by now people wanting to drive for vacation rather than flying internationally or even far domestically. Where I live, our hotels are pretty full. [crosstalk 00:09:45] about office, Ryan, if I might.

Ryan Morfin:

Mm-hmm (affirmative).

Bill Shopoff:

I think office has been a bit of a surprise to me. I probably didn’t catch on as quickly to how much it was going to be impacted. And in fact, in April our collections in office only slightly exceeded our collections in retail. May, our retail dropped a little bit more. Our office picked up, and said margin widened. But I think the number of conversations had by large companies about work from home, work remotely, at least for some part of their job force is going to be impactful.

Bill Shopoff:

It’s a long lead time, because you’ve got people who own spaces or have long leases. And it’s unknown if you bring less people to the office, but you need just as much space to get physical separation, is that going to be a status quo? My sense is there’s a net out migration in the office space. And I think that particularly CBD office seems really challenged right now.

Bill Shopoff:

I can’t imagine going to New York City where you get on an elevator with 20 people. So now you can get on an elevator with four or six people. How long it takes you to get to the the 70th floor. There was just an article in the Journal a couple days ago about Salesforce reopening their office and you have to… if you want to come to the office, you get a code, and they only assign so many codes a day. So it’s going to be very interesting to see how that happens. We’re actually reopening our office on Monday, and we’ll have reopened to about a 1/3 max capacity initially.

Ryan Morfin:

Yeah, it’s going to be interesting to see how that plays out. But a lot of these buildings, you’re blessed if you don’t have a lot of rollover in your lease schedule. But if you do, it’s going to be interesting to see how those empty buildings get re-leased or not in the coming months ahead.

Bill Shopoff:

We own suburban office, and we’re actually doing some leasing right now, and our collections are back up into the 90s. We’ve collected about 92% of our scheduled rents last month, so we feel like it’s starting to come back together, but it’s still… It’s a ghost town when you go to these places right now. So a business owner, I’m sure you guys think of it like we do. I’m writing a rather large rent check for one person to sit there and collect the mail.

Ryan Morfin:

Yeah. It is going to make us rethink that. You mentioned collection rates. You’re really deep in the real estate industry. You have a lot of friends in the space, institutionally as well. Have the lenders been amending and pretending to kick the volatility down the road a bit? Or is there a limitation to when the forbearances are going to stop? You saw what happened with Simon suing Gap for $66 million, not paying its rent. Are there more headlines like that coming? Or do you think a lot of people, just like you said, owners come out of pocket to carry it over, the volatility?

Bill Shopoff:

I think that generally speaking most owners are in better shape than they have in prior positions. Interest rates are low. Leverage was lower than you’ve seen in prior cycles. I think that many people will be fine. The number of borrowers that sought forbearance, for example in the multi-family arena, was a fraction of what the services were setting themselves up for, partly because the forbearance terms from Freddie Mac and Fannie Mae were not overly favorable.

Bill Shopoff:

You had to make too many tenet concessions in most people’s minds to take that forbearance. So I think that most people figured out I got a good property, and I got a property that may be not doing quite as well, and you figure out how to make your payment. We’ve not had to ask for forbearance from a single lender. We’re collecting across our portfolio at 89% of the rent roll.

Bill Shopoff:

We don’t service debt on every single asset because some are, obviously, those are averages. But we’re servicing debt across our portfolios. And having no, at least, no current pain. We have some aggravations, clearly. But I think, look, you take the far end of the spectrum, which is a Simon, a regional mall owner. They’re collecting 10%, 20%, 30% of their rent roll. They’re in a world of hurt.

Bill Shopoff:

They’re just starting to get their malls reopened with social distancing. If you’ve got a good neighborhood center, those centers are coming back to life. They’ll be okay. But we also think that this is… In our mind, we’ve been expecting a demise of a chunk of retail. If you look at our retail numbers, our retail square foot per capita, and you look at all the other developed nations of the world, we’re significantly over-retailed.

Bill Shopoff:

I think that this will be, in my mind, the giant culling of the herd of the retail that needs to go away, and what’s going to happen is it’s going to make some centers that are well-located and well-managed will be winners, and then others will be redeveloped and re-deployed into something else. I think rather than having two 50% occupied centers, I think the poorer of the two 50% goes zero and gets demolished and redeveloped. And the other center is the beneficiary. At least that’s my business premise, and I’m actually making investments based on that premise today.

Ryan Morfin:

I agree with you. I think something like 1/3 of the U.S. malls may go away. And that plays right into your strong suit. You guys do a lot of land development, or entitlement work, and horizontal development. How are land prices changing right now in your view for maybe un-entitled land and entitled land? How has this volatility created an opportunity for attractive entry points?

Bill Shopoff:

I’ve got a couple of good data points because I actually have a number of transactions that are pre-COVID escrows. We just had a buyer go non-refundable yesterday, a public home builder, on a transaction that we just got an approval on. Interestingly enough, we did the approval all remotely, all in a Zoom-like setting, which we’ve gotten municipalities to agree to do.

Bill Shopoff:

So, that transaction was in escrow. The pricing pre-COVID was $19 million. They got a very, very small haircut. $18.75 million. And it really wasn’t COVID related. It was really that there were some cost issues that they determined they needed to be rewarded for, or ameliorate some risk. But we’ve got… I think we’ve got seven escrows that’ll close between now and early October, and we have not been re-traded on one. And I wouldn’t even consider that particular deal a re-trade.

Bill Shopoff:

We gave up $250,000, and we got a profits kicker on the deal, so if they do well we get that money back times three or four. The market seems to be pretty good, particularly single family for sale business. The market was dead in the last half of March and April, but May actually picked back up. And May’s numbers were shockingly good for new home sales. In the West Coast, our year-over-year numbers, this May was better than last May, which is shocking, given that tours were virtual.

Bill Shopoff:

But I think that if you wanted a home, mortgage prices were great, and also in this time new sounds pretty good. You’re not moving in on somebody else’s germs. So I think the new home business has got an advantage right now, and that should be well to us. But I think the better thing for us is that it’s softened some of the un-entitled land positions, so I think our spread could even widen.

Bill Shopoff:

And as I was talking about the retail business, we’re buying centers right now with the idea of demoing them and making them ready for redevelopment of either multi-family residential or condo or town homes. So I think the timing could be great for what we do at Shopoff Realty, so I’m very excited about it. I began this business during a time that was not dissimilar to this. Started the company in ’92 in the wreckage of the savings and loans crisis. I’ve been through a few cycles, and I feel like maybe I’m wiser. I’m certainly older, but I’m hopefully a little wiser.

Ryan Morfin:

No, I think this environment is shaping up square in the middle of your capabilities and strategies. The question I have for you though is one of these sectors, let’s just take retail for instance, the de-leveraging or the de-retailing of America, how fast do you think that will go? Is it going to be something that accelerates because consumers just aren’t healthy and not spending the money? Or do you think online sales are going to spike up because people are still going to be apprehensive of safety? How long is this demise of retail, how fast is it going to accelerate, you think, from here?

Bill Shopoff:

It’s definitely accelerated. People who had never bought on the internet had to buy on the internet. But still, the lion’s share of retail goods and services are done in person. It’s high 80s to almost 90% of the retail transactions. The growth is all in online, but it’s still a relatively small share of the overall market. But I think it’s going to be you have to provide exceptional goods or services.

Bill Shopoff:

If you can’t do it with better service, because you’d have a hard time beating the pricing of an Amazon driven model, and you certainly can’t beat the service of it. I mean, I can get virtually anything I want online, and do many things. There’s certain things I like to go support local stores. I’m a big cyclist. I can buy most of the things I need online, but I tend to support my local bike shop, because I also need them to be there to be the bike mechanic. So I want to make sure I’m supporting them from a retail sense.

Bill Shopoff:

But I think the restaurateurs are going to have a very challenging time if the social distancing lasts for a long time. Restaurants can’t make it at 60% occupancy. Your costs are essentially fixed, other than food. So you don’t have a 40% profit margin. You have a 15% to 25% margin, and a really, really well run shop might have 20%, 25% margin, which means at 60% you’re losing more money than if you were renting, you just stay closed.

Bill Shopoff:

And I think you’ve already seen some operators, particularly some very high end operators saying, look, until we can figure this out we’re just not going to reopen. But we’re seeing people open in our markets. I’ve been to restaurants twice in the last few days. It was reasonably functional. But I don’t think it’s functional for them. They can’t be making the kind of money they need to make to really be in business. I think restaurants are going to be the hardest hit, and I would say quick serve will be fine, but sit down restaurants, probably 25% to 40% of those restaurants fail, would be my forecast.

Bill Shopoff:

I was actually talking to a CFO for a friend of mine that owns a large quick serve restaurant. They’re actually, in their units that have drive-through, their sales were actually up year-over-year during COVID. So they’re taking a dollar that was going to some other restaurant, and their taking that dollar and repositioning it. But I think the consumer is actually in pretty good shape. Look at your credit card bill. I’m guessing you didn’t spend in the last 90 days what you normally do.

Bill Shopoff:

I didn’t take flights. I didn’t go on vacations. I was supposed to take 16 family members to Hawaii this month.

Ryan Morfin:

You dodged a bullet.

Bill Shopoff:

I’m a little richer as a result of that one item. I’m not necessarily richer, but I’m richer because of that. I think the overall consumer is in decent shape as long as they’ve got a job. Hopefully, we have a robust job growth between now and the end of the year, and we can get back… I think we can get back into high single digit unemployment by year end, which would be remarkable.

Ryan Morfin:

That would be amazing. Do you think the government did a good job with the PPP program? Do you think that was a success?

Bill Shopoff:

I do. Although, far from perfect, because none of these programs are perfect. But I think they took all of the playbook from the great financial crisis and other things. I think Secretary Mnuchin did a brilliant job, and I know his boss is a controversial figure, so I’ll stay out of that. But I will say that the secretary worked very well with the Senate and the House to get several packages through. I think for the fed to step in and support the bond market and financial markets really calmed things.

Bill Shopoff:

Because I think for the second time in a dozen years, we were on the precipice, and I think the government moved quickly. Maybe they made some mistakes along the way, but I think it was a program that did function well. We did take PPP. We felt completely comfortable taking it. I feel very pleased that I was able to retain most of my workforce. We did a small reduction in force. We did an across the board salary reduction, because there’s no telling how long this thing lasts.

Bill Shopoff:

I say the last time I acted too slowly. Maybe this time I acted too quickly. But I knew one thing. Quick is better than slow. And I think that we can always rehire and we will rehire some of those folks.

Ryan Morfin:

Yeah. Have you guys looked at the Main Street Lending Program out of the Boston fed? I know a lot of real estate owners are looking at that, and I didn’t know if that is a program that you think is going to have a good impact for the real estate industry.

Bill Shopoff:

You know, I have not spent as much time on that. I think it’ll be useful, but I think that the general lending markets are opening. I got a quote on a ground up luxury condo project this week. Within 25 bips of where I was expecting it to be, and cheaper than where it was 90 days ago because LIBOR is less. So my all in cost… my margin may be wider, but my all-in borrowing cost is less.

Bill Shopoff:

I think that you can start to see things open up. But we have ground up hotel deal that we want to do in Las Vegas. That’s not a deal we’ll even go to the market to ask for money right now. I think if we went to the market today for that capital stack, I think that we would lose credibility in the marketplace. So we’ll sit tight and maybe in the fourth quarter we think that market will be receptive to having a conversation.

Ryan Morfin:

You’re in southern California which isn’t far from Vegas, which you just mentioned. You’ve been to Vegas recently. How is Vegas? Is it alive? Is it well? Or do you think it’s just decimated, and until people start traveling again it’s going to be tough slugs?

Bill Shopoff:

People are very much traveling.

Ryan Morfin:

They are.

Bill Shopoff:

Lot of drive traffic from southern California, particularly out of L.A. People have been locked up in L.A. under a pretty tight lockdown, and they were ready to get out of town. Between the general lockdown, and then the protests, people were ready for a change of scenery. So the casinos have been pretty full under their new social distancing, but I think Vegas is going to have a pretty good recovery. I think it’s going to shock people how quickly it recovers.

Bill Shopoff:

People like to go to Vegas. Whatever they do there that they can’t do at home, they like doing it, so it’s shocking. And rightly or wrongly, Vegas feels pretty normal. I wear a mask when I go out. I went to an office yesterday for a meeting and people were not wearing a mask in that meeting. I tried to keep my distance and do what I could to protect myself because that’s my job. But I think that people are seeking normalcy, so I think that’s going to have a pretty good recovery.

Bill Shopoff:

One data point is the Consumer Electronics Show, CES, announced they will hold their conference, or convention, which is I think it’s the largest convention all year in Las Vegas. That conference will be held in January. I think Vegas is kind of a tentative all systems go. And it’s a little bit the Wild West over there.

Ryan Morfin:

One area that we didn’t talk about is industrial, and I don’t know what your thoughts are. Looks like this trade war that we paused on with China, because they got to this phase one deal, may be falling apart. And a lot of governors I think are shocked about the supply chains from a national security perspective and from a health security perspective all being outsourced outside of the U.S. Do you think there’s going to be a near shoring of manufacturing and hence driving more industrial property usage? Or do you think it’s going to pass and we have short memories?

Bill Shopoff:

I think we’re going to do more manufacturing in the United States for a couple reasons. One, the safety and security aspect. But I’ve been forecasting it for some time because of low energy prices. But depending on the kind of manufacturing you’re doing, energy is a more important product to the cost than the human capital. And so I think that certain things are going to get brought back on shore, because we can beat China or most any other place on energy cost, particularly with low natural gas.

Bill Shopoff:

We have a massive supply of natural gas and virtually unlimited for the foreseeable future. And it’s incredibly low priced. So I think you’re going to see some. You’ll continue to see growth in the warehousing logistics. That market is not going away. It’s a virtually full marketplace, and I think with the growth of Amazon and other suppliers in the logistics chain, I think you’ll continue to see that.

Bill Shopoff:

I’m pleased to report with just got a 1.8 million square foot logistics center in Thailand, so we’ll be monetizing that deal later this year. Very, very exciting deal for our various fund investors.

Ryan Morfin:

Not a lot of people understand or have ever gone through entitling land. How long does it typically take and what are some of the pain points? It can take a long time or it can happen pretty quick. What’s the art about entitlements?

Bill Shopoff:

Well, that deal took a long time. That’s probably the longest… It’s one of the oldest properties in our portfolio today. Kind of went through a turn and then changed and changed course. We’ve held that since before the great financial crisis. That’s the rule of what you don’t want to do. We’ve gotten better at analyzing the municipality and figured out how to risk score a site to understand how we get through an entitlement process. And if we’re really on our game, we can get through one in I’ll say a year to two years in a user friendly market. Probably more in the two to three years in a typical market.

Bill Shopoff:

We’ve got some stuff in coastal zone that we think will be more in that four to six year timeframe. We score those differently. We want to get paid obviously substantially more for the time. And the one thing we know is none of them are easy. But we looked at the site a couple days ago. We went out on property review with several of the team members. And you can do a lot with Google Earth and remotely, but there’s nothing like seeing a site, particularly a site with some warts. And we drove by this one site and all four of us looked at each other, and we kind all at the same time said not cheap enough pricing for this entry point. There’s no price we would take this deal on. I wouldn’t say it’s no price, but no price you’re going to be able to get it for.

Bill Shopoff:

It’s just a site that life’s too short. I’ve got better things to do with my day. And the one thing I know is if you put your capital into something challenging, you’re harming yourself in two ways. You’ve tied up your capital, which is sin number one, and sin number two, which may be worse, you’ve got to expend too much human capital to try to preserve the capital that you put in that deal. Just got to be very careful about those decisions, but I think we’ve got a good evaluation system today.

Bill Shopoff:

And it doesn’t mean we don’t make a mistake every now and then, but I think what we do is build a portfolio where we’ve got enough winners to carry any loser you would have.

Ryan Morfin:

That’s great advice. People don’t think about the return on their time, and that’s really one of the limiting factors we all have on a transaction. Do you see that the properties you’re buying today, you think that they’re going to be shorter duration holds? Or do you think… Looking back at what happened in 2008 and ’09, some people said they got into the market too early and maybe had to wait a little bit longer to exit. Do you think the velocity of this downturn is going to also reciprocate a mirror image of velocity on the upside for exits?

Bill Shopoff:

I think if we buy correctly, I think we can exit relatively quickly on things. I’d say most of the opportunities we’re looking at are consistent with how we’ve been. We’ve always been a relatively short term holder, not that we have to do that but we have found that we’d be pretty efficient in getting in and out of deals in a two to four year timeframe for the most part, and we think that still exists. So we’re focusing our efforts on those things today quite honestly.

Bill Shopoff:

That’s not to say we won’t go into longer deals. We’ve got a couple deals that we actually think are more perpetual deals where there’s good durable cash flow and our entry point is good. I think because of the nature of them, they’re probably things we will just buy and hold.

Ryan Morfin:

Bill, one question for you, what are you optimistic about today in the U.S. economy? What are some silver linings that you see that you hold and you say this is going to be a good outcome?

Bill Shopoff:

Well, I’m probably most optimistic right now about the brilliant science minds in our nation and the world. I think we’re going to have a vaccine, maybe more than one option. And I think almost certainly before the end of the year. Because this is such a global issue, the amount of capital that’s been allocated to that where you have people like AstraZeneca already going into production on spec before their vaccine is approved, where they think they can have two billion doses by the end of the year.

Bill Shopoff:

That’s a lot of money that they could be throwing away, but it’s a bet that you have to take because we need to save the globe. Because it’s the economy that’s really more frightening to me than the virus. For most of us, the virus, we’re going to get sick and we’re going to get well. If you’re elderly or infirm, it’s a worse story for you clearly. So that, I think, leads to my general sense that there could be a pretty good recovery here.

Bill Shopoff:

That’s countered by the uncertainty of the election in November. And I think that anybody who thinks they know the outcome of that… Because from my perspective, Ryan, I think you could see several scenarios. You could see a Democratic sweep and you could see a Republican sweep, and you could see a mixed government in between. I know not many people are forecasting that the Republicans will take the House back, but it’s certainly a possibility. Because there are some districts like where I live that they’re Republican districts. And they went Democrat, but I’m not sure they all stay Democrat. I think several of them will turn back this session.

Bill Shopoff:

But I think who knows what’s going to happen? I certainly don’t have a forecast, and I think that the polls don’t tell us the answer. We know that. So I think we’ll know some time in early November.

Ryan Morfin:

It could be a contested election. There could be another Bush versus Gore type outcome. Who knows if it’s razor thin? But you live in California and you brought up a good question. The political handling of locking people down, whether it’s privacy or personal freedoms.

Ryan Morfin:

It’s going to become a big issue for a lot of small districts, the local political and local congressional races. Do you think there’s a lot of angst built up amongst folks in California?

Bill Shopoff:

I think there is. Interestingly enough, our governor’s ratings are quite good. I’m not sure that I share that vast majority of Californians that approve of how he’s done his job. I’m not sure how you send half a billion dollars to a company to buy some masks that’s never made masks before. To make a half a billion dollar deposit seems a little bit suspect. They’ve unwound that and they’re getting some of the masks.

Bill Shopoff:

Problem is now they’re getting the masks when you can get the masks from anybody at a price that’s a 300% premium over what the current market is for KN95 masks. Those kinds of things I think will come back to haunt them a little bit, and I think there’s some people that are just questioning some of the decision making. I’m not opposed to flattening the curve. I think that the way it was done maybe was some of the things were a little arbitrary. I think we could’ve managed this better. I’m not sure that there weren’t better solutions to how we did this.

Bill Shopoff:

And I think that the voters are going to let people know that they thought there were different solutions. Devastating the economy, borrowing another three-plus-trillion dollars. For me, it doesn’t make any difference. We could borrow our way to the end of my life, but sooner or later it’s going to make a difference to somebody.

Ryan Morfin:

The bill has got to be paid at some point.

Bill Shopoff:

It does, and I think that the governments of the world, because they all had to go to the till, there’s going to be a lot of pressure to keep rates low for a very long time period.

Ryan Morfin:

That’s a great point.

Bill Shopoff:

If you had a 100 basis point rise in rates and you have 20-plus-trillion dollars to service, that starts to have a pretty serious impact on your budget. I think we’re going to stay relatively low rate for a fairly long time.

Ryan Morfin:

That’s a great point, and I think servicing the debt could be catastrophic, but if the U.S. Treasury comes back and refinances a 100-year bond at these rates, may have covered up or swept a lot of sins under the rug. One of the questions I had for you is you look at Texas and Florida and Georgia. We’re sitting here in a situation where we’ve reopened very aggressively, end of April, early May. Sometimes 30 to 60 days ahead of other states.

Ryan Morfin:

Do you think that’s the right call, to let people be responsible for their own safety? You see Oregon is still closed for the most part. Where do you see the right public policy mix here from a business owner standpoint?

Bill Shopoff:

I know there’s a lot of controversy because many of those governors opened early. They defied some of the health practitioners’ logic. But I think that… And you are seeing some case increases in some of those states. The question is are those really increase cases, or are they just increased discovery of cases because testing has also increased at or above the same pace.

Bill Shopoff:

I think that’s something that we don’t know and we won’t ever know. What we know is that the number of cases that existed in the United States and in the world in March far exceeded the number of cases that we have identified. So the line doesn’t look perfect because we didn’t test enough people. Look, I think you’ve got to get back to work. You’ve got to do so sensibly. You have to be cautious about it.

Bill Shopoff:

Myself as a business owner, I’ve got people around the country and different areas have different societal norms. One of my wholesalers is hosting a dinner this week. That’s happening in one part of the country. It’s not happening in many of the other markets. But I think that people need to be responsible for themselves and the people they’re around, and understand that they might not know it but they could be a carrier, and they need to be kind to their friends and neighbors and be appropriate.

Ryan Morfin:

No doubt. Elon Musk has put a lot of controversy out there about reopening against county orders, state orders. Now he’s looking to leave to Texas or Nevada. Do you think there’s going to be a lot more of that? Or is he just looking for attention? Is there what I’ll call a business sense in California to look at how they’ve been treated in the tax changes and 1099 changes? And do you see more flight out of California and do you worry about that, being based there?

Bill Shopoff:

I have some concerns that our system is not user friendly. It’s a great state with a very robust economy. It’s hard to say that we’re going to disappear off the map, because we have I think the fourth or fifth largest economy in the world if we were a standalone nation. We have incredible intellectual horsepower. The people who come out of the UC systems and our private universities are among the top minds in the world. And then they start great businesses here.

Bill Shopoff:

But I think that you have to look and say can you really rationalize staying here. I have two friends who’ve left in the last year and moved to Nevada. In one case, one of my friends owns a number of car dealerships, and a lot of them are here in California but they’re not all here in California. He figures that he’ll save four to six million dollars a year in state income tax by that move. That move pays for the house, the boat, the airplane.

Ryan Morfin:

Yeah, that’s a hard cold math equation there.

Bill Shopoff:

I had another friend. His savings for moving is staggering. I don’t know if this number is accurate post-COVID, but pre-COVID he was saving $80,000 a day.

Ryan Morfin:

Wow. [crosstalk 00:48:43].

Bill Shopoff:

-a huge earner, and he could afford to pay the tax. I said he’s a huge earner, and yes he can afford to pay the tax, but why should he pay the tax? If I believed that, whether it’s the federal government or my state government, is a good steward of money, I don’t mind paying taxes. I want to pay taxes. It’s essential part of our economy. But where I don’t like paying it is where I think they’re poor stewards of our money, and in the case of California where I think that, I’m going to be very controversial here, I think that unions run the state.

Bill Shopoff:

I think unions have a place, but I don’t think unions should be running state politics where our state has a super majority of Democrats where they don’t even have to ask a Republican what to do. You may not like what the Republicans have to say. You might not like what the Democrats have to say, but I don’t think that the country works well when either party doesn’t have to ask the other one’s opinion.

Ryan Morfin:

Agreed.

Bill Shopoff:

So I find that probably to be my most disconcerting thing about the state of California. And I think they’re going to try to figure out how to extract more taxes, and if they continue to do that they will kill golden goose at some point. It’ll take years, decades, but sooner or later they’re going to have to have a reckoning.

Ryan Morfin:

Bill, are there any books or documentaries, or films you’re watching or re-watching to help shape your thinking through this period?

Bill Shopoff:

You know, I just got through reading one of Howard Marks’s books on cycles. Howard Marks is the founder of Oaktree, co-founder of Oaktree. And I would say for anybody, by the way, you can sign up and get his newsletters off the Oaktree website. He’s a great thinker. He normally writes about four a year, but he’s been writing them every week or two, and I think they’re just thought provoking, and I would think your advisors would get great benefit out of reading his information.

Bill Shopoff:

I always read Buffet’s annual letter. I actually have a binder with every one of his annual letters on my bookshelf at the office. And I re-read many of them just to get reflections on how he thinks about the world.

Ryan Morfin:

What did you think about… I don’t know if you watched the annual shareholders meeting this year in Omaha. I did. I do the same, by the way. What did you think of his view, never bet against America? But he’s sitting on a lot of cash right now, so it was kind of a contradictory statement.

Bill Shopoff:

Well, it’s been surprising because I kind of expected that he would make a big move, and I think what happened was that the feds stepped in so quickly that it precluded the big move that he wanted to make. And so now he’s going to have to wait patiently. The problem is I don’t see him being a big buyer of bankrupt enterprises. I think he’s over his discarded cigar butt theory, take the last few puffs off of an old company.

Bill Shopoff:

That’s not really his enterprise anymore. That was one of his expressions for many years. And I don’t see that. Because you just can’t deploy enough capital in that concept. I don’t know. My guess is he’s probably pretty frustrated. He’s sitting on 100-plus-billion dollars of liquidity, and the for sale sign came out for about 60 seconds. They probably made some trades, I’m guessing. The CMBS markets, some of the bond spreads were probably so attractive that they had to take positions, I’m guessing.

Bill Shopoff:

But they probably already exited those because they cured so quickly that if you were on your game, you made a lot of money very quickly. I don’t know what it’ll take to get him to make a big deployment. I know one thing. It’s not going to be in the airline industry. I think he, candidly, made a smart decision to dispose of his airline interests. And shocking that he actually had ever gone into them because he’s had a couple of sayings, and I won’t do justice to this one, but he said the worst day for aviation investors in history was when Orville and Wilbur were successful.

Bill Shopoff:

He said more money has been lost in the aviation industry as an investor than any other industry. I don’t know if it’s accurate or not, but it’s been his opinion and probably pretty close to correct. Very sexy industry, but I’m not sure. I’ve never been an investor in that particular realm.

Ryan Morfin:

Yeah, I’ve only gone in and out quick in American Airlines, and I’m out right now for the foreseeable future. Bill, thank you so much for joining us and sharing us your thought. We’d love to have you back on a future episode and wish you the best of luck. And we’re definitely huge fans in support of your real estate investing activities. So thank you so much.

Bill Shopoff:

Thanks a lot, Ryan. Appreciate it.

Ryan Morfin:

Thanks for watching Non-Beta Alpha. Before we go, please remember to subscribe and leave us a review on Apple Podcasts or 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.

 

The unique history of a Maryland based distillery and craft secrets on how to make great American Bourbon w/ Admiral Scott Sanders Founder of Tobacco Barn Distillery

The unique history of a Maryland based distillery and craft secrets on how to make great American Bourbon w/ Admiral Scott Sanders Founder of Tobacco Barn Distillery

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