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Ryan Morphin:

Welcome to Non-Beta Alpha, I’m Ryan Morphin. On today’s episode, we have Brian Nelson, CEO and founder of NB Private Capital talking to us about the back to school applications for student housing. This is Non-Beta Alpha. Brian, welcome to the show. Thanks for coming back. We’re super excited to have you back. It’s a very timely conversation today. It’s back to school and you guys are on the ground at many universities across the country. What’s going on in higher education today in America?

Brian Nelson:

Well, you’re seeing everything. A whole popery of reactions to the virus, you’re seeing some schools have an outbreak, other schools have decided to delay in-person classes until late September or early October, and they’re taking a wait and see approach and they’re seeing what some of these universities that have had these outbreaks have done. But really what you’re really seeing is universities try to get their arms around what’s causing the outbreak, what activities are driving it? They don’t believe it’s happening in the classrooms or on campus which is great because the staff, the professors, they don’t feel vulnerable. It’s the outside activities, it’s the frat parties, it’s the things that the universities can’t quite control. So they’re trying to do the contact tracing and whatever they can to really break down and get a sense for what’s causing this and then what actions can they take to avoid getting students together.

Ryan Morphin:

And early on, I think in August two universities Notre Dame and University of North Carolina, they were open and they shut down and I’m sure you guys were watching that. What are your thoughts about that and do you think there’s going to be more schools that have to shut down just because of, like you said, the social interaction of being young, right? You’re going to be out at frat parties, pool parties. What are your thoughts on that?

Brian Nelson:

Yeah, I think New York Times reported that there’s about 26,000 cases at over 750 schools across the country as of yesterday and you’re going to have some schools have larger outbreaks. I think it’s going to happen. And the way the media works, you’re going to only hear about those schools. A lot of schools have kept it pretty well mitigated and they’re jumping all over it. Most of them have set aside dorms or have completely moved students out of dorms. So they’re in a position where they can quarantine students. They could contact tracing and quarantine other students who may have been in contact. Universities can control their own a lot better than a mayor or governor can and so I think you’ll see that the university of model’s a little bit more effective. What you’ve seen though is university administrators grapple with this concept of do we send all the students back to mitigate our liability or do we keep them here and avoid them going back to the community and taking a virus back to mom or dad or grandma and grandpa who might be more vulnerable.

Ryan Morphin:

And what is the liability for school, can students sue the university if they get sick while they’re in school?

Brian Nelson:

I don’t think so. I think it’s going to be very difficult but in our society you just don’t know. And there’s always going to be the university administrators are going to look for every possible area they can to cover, so there’s no negligence on their side. They’re educating students. They’re doing everything they can and it’s a really difficult balance for them because the easy answer was to go do all online classes but the reality is most students aren’t going to pay full tuition if they’re going to do that. You’re going to have a lot of students transfer to schools that are in person and then there’s just think of a lot of trades that you have to learn on site. And so there’s enough of a push where the university administrators and the presidents have to do something to offset practical balance between the two. And I think they feel pretty comfortable they can mitigate liability but there’s always that risk.

Ryan Morphin:

Well, you brought up a great point about paying full tuition. What are you seeing right now in your portfolio of schools that you guys are at, what percentage are coming back and what percentage are staying online?

Brian Nelson:

Yeah, I think a lot of it has to do with the loyalty to the school. Harvard University or USC kids are gonna come back, they’re going to stay loyal, they’re not going to like it going online. Actually, almost 800 or 900 undergraduates at Harvard tried to sue the school for not going online. But at the end of the day, most students are still pretty loyal. They’re doing what they can if they are online we’re in the student housing business, surprisingly, we’re seeing about 70% of the students living on or near campus to be around their friends, to be close to school, to have group study, even though the school is completely online. A lot of them, most of them aren’t staying home and that surprises a lot of people. We’ve seen some schools try to push away from that because they don’t want kids to gather and we’ve seen a lot of national experts promote that because they’d rather have students together where there’s a little bit more control and they’re not interacting with more vulnerable people to the virus.

Ryan Morphin:

If you had to ballpark because I know it’s probably hard to tell, like what percentage of schools, universities and are they going online versus saying, “Hey, come back and we’re going to give it a try.”

Brian Nelson:

Yeah, right now I think we’re about 80% do in-person schools or some hybrid where they have a balance of in-person. What you’re really seeing is instead of having the 300 student auditorium class five days a week, they’re having two classes or class twice a week, three courses online and they’re having 40 students that are socially distanced and masked when they come in. So the schools have gone out of their way to make sure everybody’s safe, but we still think about there’s about 80% that have in-person, about 10% have been online all the whole time dating back to June and another 10% have moved to purely online over the last two months. We right now it’s really hard to read the tea leaves, but most schools anticipate going to a hybrid model where even the schools that are online expect to have some in-person classes in January.

Ryan Morphin:

I was just a guest lecture on Monday morning at George Mason University and there’s a hundred kids in the class and I got to tell you, it was an interesting experience. I mean, you could tell kids were just logging on but they were probably doing other things. Maybe it was the quality of the speaker or it’s just commonplace I guess that they’ve got to be forced to be online to get participation scores. But do you think this online experience for kids is going to yield good educational outcomes for future workforce labor supply?

Brian Nelson:

Not at all. No. I think where it helps is that students appreciate the in-person experience so when they get back to it they’ll pay more attention and they’ll take it less for granted. The students absolutely loathe it. I have three teenagers at home. I have one son in college and he specifically transferred from one school to another. He’s going to Utah state now because they have in-person. I think you’ll see a flat out rejection of it. And here’s funny thing about teenagers, even though you’re lecturing and they’re on their phones they’re still listening to you. You just don’t see it because they’re they can play games mindlessly and still take it in. It’s a different generation but the in-person classroom is definitely something they prefer. And I think it’s going to prep them better for the real world. I think if there’s anything we’re worried about this online experience is that students take so much of business, so much of real-world is relationships, it’s communication, it’s nonverbal communication, they need those skills and it’s going to be imperative going forward. So I think they’re going to have to get back to in-person quickly.

Ryan Morphin:

Well, you brought up tuition earlier. I mean, for that are going online and going to Harvard, it’s all online, I mean, that’s an insane amount to take an online course. How do you think the revenue model for universities is going to shake out after this?

Brian Nelson:

Well, we saw a study this week from New York Times where they had asked staff members, there’s a lot of people are concerned about going in person because they’re worried the professors are worried and they might be older or more vulnerable. And ironically, the number one thing that they were worried about was their peers. The other staff members. They were less than fewer than 30% of them were worried about their own safety. They weren’t worried about the student’s safety, fewer than 20%. So you know that they recognize this demographic is not that vulnerable. What they were worried about, number two, on the list was the institution, the financial health of the institution itself.

Brian Nelson:

So it’s talked about, it’s discussed, it’s a big deal. The Pac-12, right before they canceled school or canceled football, it’s a big hit for schools like that. They took out a pretty substantial loan. It’s going to really weigh in on the schools for a lot of reasons and that’s why I expect most of them to get back to the in-person model quickly because a lot of the students who were doing online at Harvard or USC, they’re doing it because this is what you have to do this semester and then you go back in-person and you still get that degree. If you continue to do online, I think it didn’t really have an impact on what they can manage of the tuition and they’re going to struggle with it.

Ryan Morphin:

Yeah. Revenue from sports programs is a huge budget surplus for a lot of these schools. Do you think some of like the Big Ten, the Pac-12 over are going to come back to maybe do the sports after the second wave in the spring?

Brian Nelson:

I have a hard time picturing personally envisioning spring football. I think that’s something you say to keep fans and everybody and players training and happy and particularly the recruits. I have a hard time seeing it. I think that’s why you’re seeing the Big Ten in discussions to try to move that data closer to Thanksgiving. In college football a lot of it is how does my conference, how does my school compare on the national level and if you’re one of only two conferences playing in the spring, I don’t think you’re going to get the audiences, I don’t think you’re going to get the TV viewership. You have football coming right around the fall again.

Brian Nelson:

So you’re going to have some players reluctant to go all in. I don’t think it’s a good model. I think they’re going to watch closely how the ACC and the Big 12 and the ACC play out. We already saw a big outbreak at Clemson and we’ve seen another one in Oklahoma. And I think a lot of the Pac-12 school still feel like case counts and outbreaks is the enemy. Where you see in the South with these other conferences their sense is we can handle it. The case fatality rate is pretty low and we’d rather have these students under our watch being tested frequently if not every day and under our care than at home doing stuff that we can’t control. And it’s a very good argument but I think you’re going to see the Big Ten and the Pac-12 watching very closely how the next couple of weeks unfold.

Ryan Morphin:

Well and talking about tuition as well, I mean, international students, I mean, there was a lawsuit brought against the administration about I guess they were not going to allow visas for kids to come back internationally if the school wasn’t having in-person classes. It seems to me that they’ve quietly reinstated that. Are you seeing any data to suggest that they are or not?

Brian Nelson:

Yeah, I think there’s been pushback on international students, no question. I mean, some of our properties that have a big international constituency we have fewer occupants and there’s a lot of reasons for that. I think the president was trying to, in my opinion, was really tried to push schools to open in-person and not to use the international students falling behind as an excuse. But at the end of the day, I think what you’re seeing is pent up demand for US education. So you’re seeing more and more students wanting to come here. I think they’re having a more difficult time doing that. So they’re doing online where they can but I think January this winter semester and I think in particular next fall, I think you’ll have one of the largest enrollment in applications that we’ve seen on from the international community.

Ryan Morphin:

There’s a professor at NYU who’s suggesting that about a third of the we’ll call the tier three schools will have such a hole in their budget this year that they may go out of business. What are your thoughts on a comment like that, do you think there’s any feasibility to some of these schools folding because they’re having to carry all the administrative costs?

Brian Nelson:

I do. I don’t think the numbers that high. I think some of these schools will always have some powerful alum in the state legislature or other ways that they can amortize some of the debt that they’re taking on. They’re going to have to furlough, they’re going to have to cut expenses. I do think there’s going to be some regional schools that are going to struggle. There’s going to be Liberal Arts Schools that really frankly are too expensive and don’t really have the ROI to begin with. So I think whenever you have a pandemic like this, it really focuses back to who has the fundamentally sound business model from a university standpoint, who’s getting a return on investment for their education and those universities are going to continue to thrive. They’re going to get harder and harder to get into. And you’re going to see some schools, particularly in areas where there’s a declining population, where they just don’t have the growth. They can’t command their tuition premium and it’s just doesn’t make sense.

Ryan Morphin:

No, it’s an interesting time for administrators at universities to figure out, like you mentioned what their ROI is for the students and I think it’s brass tax time now. I mean, people are looking at ROI and education to figure out if they want to stay at the current university. And it’s interesting to me because as some of these big name schools pivot to online courses, I’m wondering if it might convince them that, “Hey, you know what, we don’t need to have everybody in Southern California or in Boston, we can have an online program because we did it for a year and it worked out pretty well.” And start to democratize or internationalize the Ivy Leagues, if you will. Do you think there’s any risk to the in-person model cannibalizing or like Ohio State’s starting to say, “Hey, you know what, we’re going to look at giving Ohio State degrees in Abu Dhabi through our online course?”

Brian Nelson:

If it expands their business in areas where does it cannibalize students coming here, I think there’s an opportunity for that. It’s still very difficult for them because it’s hard to get a four-year degree online. It just, regardless of what your discipline is and imagine employers are they going to be impressed by that? So it would have to depend on what the market is for local at that international or that country. How local, really local employers react or respond to that degree. In terms of Ohio State, you’re never going to replace the experience in Columbus, Ohio. Kids want to go to school. They do not want to be at home, I’m telling you. Mom and dad, if anything the quarantine we’ve all learned, it said, mom and dad living at home if you’re 20, 21 years old, no way. Both sides agree to that.

Brian Nelson:

Mom and dad see that you’re not coming home at 12 o’clock or one o’clock on Saturday night, they’re starting to ask questions. They don’t want to police a 20, 21-year-old. They’re worried. They’re worried about the virus and what’s going on. Kids at home or when kids are at school they’re on their own, they’re learning, it’s a rite of passage. They’re going to the whatever Greek system for frats and sororities. They’re making lifelong friends. They’re going to the football games, but there’s just an experience. And I think employers are going to value that experience too that people have said, “Hey, I’ve moved away from home. I figured out what it took to get into this particular program at the school and I got my degree.” I just think there’s so much value in that that I don’t think you can replace it all online.

Ryan Morphin:

I think that’s the marketing campaign right there. We’re going to teach your kids life skills to get out of bed and brush their teeth. Hopefully, the first 18 years did that for them but if not the learn it on their own and I think your point is spot on. My roof, my rule. That’ll get kids to get out of the house right away at 19. So let’s switch gears a little bit and thank you for the insights on the educational trends if you will. What’s going on in student housing, how has occupancy, how has rents, how are the kids dealing with it? Have you guys had outbreaks, how are you dealing with that and what’s the state of play in student housing today?

Brian Nelson:

Yeah, we’re across the board. So a lot of it starts with what’s happening at the university. So a handful of universities are all online. In theory, a lot of people thought that would be death to the student housing properties. It has definitely crushed the market. Those markets are about 50% to 60% occupied. Our particular properties in those markets are closer to 80 to 90. We’ve done, okay top of market. But part of that is we’ve been very proactive in marketing the parents, everything I just told you. That they’re better off away from home. They’re safer. Mom and dad, you are safer. We had to convince them in a lot of the different things we’re doing, we have a molecular disinfected that we spray that has a 30-day shelf life. But we talked about really three core things. It’s safer here. It’s more fun and honestly, kids are getting better grades when they’re closer to campus and they’re surrounded by other students.

Brian Nelson:

So that’s a really effective campaign that’s resonated. Also most students feel the classes are going to be in-person in January. So we’re still seeing steady occupancy. We have more and more students touring now and we expect that we’ll be signing leases all through October, November, December as they get tired of living at home and moving on. For universities that are doing the hybrid model or that are all in in-person, we’re actually doing way better, far better than previous years and the driver for that is what we call the de-densification of a lot of the universities nervous about viral spread, also about liability have gone away from the concept of shared dorm rooms and so they’re de-densifying they’re asking you essentially setting a policy where one student, one bedroom.

Brian Nelson:

And what that has done is it’s put about half of the freshmen now looking for private off campus housing and so you add 1,500 to 33,000 freshmen to the market that is already pretty stabilized and you could see why a lot of properties are having some of their best years ever. So we’re seeing a little bit of mixed bag but for the schools that are on have any type of in-person, it’s been a terrific year.

Ryan Morphin:

And I’ve heard that some upperclassmen are being forced to not allowed to have university housing there on their own, where they can stay home to make room for this one student one room. Is that a trend that you’re seeing being implemented so that the universities can grab the freshmen and I’ll say indoctrinate them, but grab them and pull them into the university community?

Brian Nelson:

Well, that’s part of why they always like having freshmen on campus is because even though it’s expensive for the universities to do it and they don’t really like to be in the housing business, but the graduation rates, there’s such a correlation between such a strong correlation between kids who live on campus their freshman year, meet their friends, get acclimated to go into the games and being part of the school, there’s a substantially higher graduation rate. So I think you’ll see a lot of universities still try to keep that dorm presence. But at the end of the day, I have a hard time seeing them going back to a policy of shared bedrooms especially when students now are acclimated, nobody wants to share a bedroom if they don’t have to. So I do think there’s some permanence in what they’re doing, they’re also setting aside about 10 to 15 dorm rooms that are just empty and vacant and the idea is that’s quarantine space in case we need students to have a place where we know we can look after them.

Ryan Morphin:

Fascinating. Have there been any defaults that you’ve experienced with people saying, “You know what, I’m not showing up.” Are there kids that are leaving once they find out that they’re going to go online, I mean, what is the, I guess the transferability or mobility for these students today?

Brian Nelson:

Yeah, I think that’s a great question. It’s really difficult because all of our leases have parental guarantees. And typically if they’ve been impacted by the virus economy they’re not signing new leases right now or over the summer when we did a lot of our pre-leasing. So inherently, most of the students come from parents who are pretty stable. Who are in a financial position to support their son or daughter and so I don’t know that mom and dad, typically mom or dad really want to risk right, ruining their credit to push back on rent especially on something they just signed freshly. We have seen of some movements where universities have gone a hybrid model and then went all online like you referenced North Carolina and that’s where you see parents pushing back. They’ve leaned on the school to help them get out of some of the leases.

Brian Nelson:

In some cases we’ve seen the school get involved. Now, of course, schools can’t do that, that’s a private contract. For the most part though, the students want to stay. I think maybe we’ve had the online schools maybe, we’ve had five to 10% pushback at the most and in many cases we’ve been able to talk to the parents and they’ve ended up backing away. So it’s pretty small. I mean, it exists, but it’s fewer than 3% even in the online schools.

Ryan Morphin:

That that’s interesting that the some of the universities are going to try to put their nose on that. That seems like a big contractual no-no for them. But as it relates to the student housing industry going forward, what are some things that you’re going to be watching as indicators for the health of the higher education system in the United States?

Brian Nelson:

Yeah. Great question. And a lot of it depends when the universities come back. Whether they go full swing in some of the higher revenue producing models like football. You’ll watch the Pac-12 closely. Are they going to come back in January with a lot of layoffs or are they going to cut back on a lot of the lavish expenses they have for the athletes and things like that or are going double down and say, “Hey, look we need revenue from every source, this is a big driver?” Or are they going to start focusing on disciplines in programs that make more money? For example, a lot of schools have a higher premium for their MBA program for example, because there’s a better ROI. Are they going to expand that and maybe contract on some of the other less profitable disciplines or are they going to be committed to just higher education and the breadth that it provides?

Brian Nelson:

We’re going to look for a lot of that but for the most part, I think you’ll see that these institutions have been around for close to 200 years for a lot of them. They have money, they have deep pockets, they can get access to money if they’re in trouble, they have alum that will help. They have state legislatures that are typically support that are typically an alum. Picture Mississippi or Kansas, half of the people went to University of Mississippi or Mississippi State that are in the State Legislature. So they’ll find ways to get support. Now, of course you have a presidential election and there’s been a lot of push for free college. So there’s a lot of balls in the air but I think you’ll start seeing them go back to business but I think you’ll start seeing universities pay off some of the debt that they’re incurring by being a little bit more shrewd and a little bit smarter from a business model perspective.

Ryan Morphin:

Well, this is in season two we’re calling the human factor. So I was going to ask you six questions just quick, yes, no type of answers. If there’s a vaccine available in November, you’re gonna take it.

Brian Nelson:

Yes.

Ryan Morphin:

Who’s going to win the election, Trump or Biden?

Brian Nelson:

Trump.

Ryan Morphin:

What type of shape, letter, shape recovery are you going to have the, V, U, W?

Brian Nelson:

Tough data to answer that question, but we were going to have a, it’s an awkward V. It’ll be like an L, a turned L yeah.

Ryan Morphin:

We’ll call it a drunk V. I like that one. Anything that you achieve this summer that you’re super proud of, non-work-related?

Brian Nelson:

Yeah. I spent more time with my kids than I ever could have dreamed of. This was great. There were a lot of negatives and depression with the quarantine and sensitive to that but there’s time with family that you just, you can’t replace that.

Ryan Morphin:

Absolutely. Any silver linings in the economy that you see for 2021?

Brian Nelson:

Yeah, quite a bit. I think there’s a lot of money on the sidelines that’s just waiting to come in especially international money wanting to invest. I think a lot of people in the downtime have great business ideas, great innovations. I think one of the number one drivers of the economy are new industries and I think you’re going to see some new innovations that just create more opportunity. I think the next three or four years are going to be fantastic and of course that’s going to be very inexpensive. That’s going to help to.

Ryan Morphin:

Anything that you’re watching, listening to, or reading that you’d like to share with the viewers?

Brian Nelson:

I’m reading a classic Seven Habits of Highly Effective People. It’s a little older, so everybody’s been there done that. But there’s some pretty solid principles in there that I think have been forgotten in the 21st Century business practice.

Ryan Morphin:

Absolutely. Well, Brian, thanks so much for coming back on our back to school week. We appreciate you guys keeping us informed of what’s going on in student housing and wish you guys nothing but the best and we’ll be keeping an eye out for hopefully some type of college entertainment whether it’s football, ACC, Big Tens anything we’ll take care of at this point.

Brian Nelson:

We’ll take it, agreed.

Ryan Morphin:

Be a great be well, and I’ll talk to you guys soon.

Brian Nelson:

Great. Thank you.

Ryan Morphin:

Thanks for watching Non-Beta Alpha. Before we go, please remember to like, and subscribe on Apple Podcasts, Spotify and our YouTube channel. This is Non-Beta Alpha, and now you know.

Speaker 3:

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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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