U.S. Beef Industry Insights with Orlando Salazar

Ryan Morfin sits down with a member of the 44 Farms family, Orlando Salazar, to discuss Angus beef and how American farms have been impacted by the COVID-19 crisis.
Ryan Morfin sits down with a member of the 44 Farms family, Orlando Salazar, to discuss Angus beef and how American farms have been impacted by the COVID-19 crisis. Angus beef has the longest, most accurate carcass data of all livestock, meaning that the breeding and feeding methods used on angus cattle ensure optimal quality and taste. 44 Farms prides themselves in not only keeping detailed records of this data, but also by their refusal to use hormones and antibiotics. Hormones, which enhance growth, and antibiotics, which enhance health will cause the meat to, respectively, become less flavorful and tender.

This trade-off forces many farms to make a difficult choice: whether to produce a quality product or whether to maximize profit? Salazar claims that 44 Farms has chosen the path of “Quality.” During this lockdown period, American farms have taken a hit because the HORECA sector (Hotels-Restaurants-Catering) is no longer ordering products in the mass volumes that they previously were. In response to this, 44 Farms has pivoted toward a heavier reliance on their online sales as well as a recent deal with Walmart to boost cash flow and stimulate operations.

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Ryan Morfin:                    Welcome to Non-Beta Alpha. I’m Ryan Morfin. On today’s episode, we have Orlando Salazar, part of the 44 Farms Family based in Cameron, Texas. They do all natural cattle and today, he’s going to talk to us about food supply, food access, as well as food security. As many of us in the wealth management industry eat a lot of steak during the given year, it’s probably important for us to all dig in and figure out what’s going on behind the scenes, behind the menu at the steakhouse. This is Non-Beta Alpha.

                                           Orlando, welcome to the show. Thank you for joining us today.

Orlando Salazar:             My pleasure. Thanks, Ryan.

Ryan Morfin:                    Well, all natural, could you tell us a little bit what that means and why that’s so important for people who are buying steak or ordering steak?

Orlando Salazar:             You bet. We raise all black Angus cattle. The Angus breed has had the longest history of maintaining carcass data than any other breed in the country. We’ll start with that. That’s important because if you’ll notice in restaurants, you rarely see any other breed promoted on menus or by restaurants, even by hamburger places. McDonald’s and Arby’s, they’ll mention all Angus burgers and the reason why there are lots of do that and want to do that is because the Angus industry, specifically black Angus, has kept the most accurate and longest history of carcass data in the country. So since they’ve done that, they’ve been able to literally prove the quality of the beef by maintaining this carcass data.

                                           So the USDA allows them to pretty much tout the quality of the beef because of the data that is behind it. So when we talk about all natural, we’re talking about two things, specifically, no hormones and no antibiotics. This is really important because in a very large operation, antibiotics play a key role for a lot of big producers. The more cattle that you have that you’re able to keep in the pipeline, the better price point you’re able to maintain. As you lose a head of cattle in the pipeline, you lose numbers and antibiotics keep those numbers up because you don’t lose that head. You don’t lose sick animals. Hormones promote quick growth and weight gain, but antibiotics take away from the flavor of the animal and hormones take away from the tenderness. So by not using antibiotics or hormones, you’re upping the quality of the beef, but you’re also hurting yourself because you’re not able to maintain the number of head of healthy cattle by using antibiotics.

                                           So when you don’t use antibiotics, once an animal has a respiratory issue, you have to remove that animal from the pipeline and so your numbers go down and it gets tougher to maintain the number needed to meet demand. So there’s a very tight balancing act that you have to make an order to produce all natural beef, so it’s not easy. There’s not a lot of people doing it and the reason why is because it’s hard. It’s hard to maintain those numbers when you take away the use of antibiotics and hormones.

Ryan Morfin:                    Well, that’s a great question. A lot of people don’t really look into the numbers, but hypothetically, for a thousand head of cattle, if you do all natural, how many of those cattle can you actually take through to production for meat versus the larger farms that are doing it, injecting them full of hormones and antibiotics, what percentage of that thousand herd would go? What’s the loss factor from one business model to the other?

Orlando Salazar:             I don’t know. Since we operate a boutique operation, we only slaughter about 200 head a week, between 200 and 220. I’m not sure what national numbers are, but it’s significant. I mean, for us, two to 3% is a big number. So animals get sick, you can’t use them anymore, you’re committed to the program. We’re called Never/Ever program because we never ever use either antibiotics or hormones, but it is an impactful percentage for sure.

Ryan Morfin:                    The trend right now in high end restaurants is for people to really make sure they’re using the best products and it seems that this process definitely captures the flavor and the health of the meat and also the consumer, I think, appreciates that. Has this always been the case or is this becoming a new trend you’re seeing not only the beef market, but also other markets is that niche providers of sustenance are looking at treating animals better and healthier as the overall conscientiousness of consumers start to awaken?

Orlando Salazar:             Well, it’s a great question. Our tagline is know your rancher and what that means is we want you to come out, come to 44 Farms and see how we treat our animals. Come out and see how we feed them, how they’re maintained, the cleanliness of our property, the cleanliness of the water, the quality of the food they’re provided. So those things are things that people look at now. Over the past 30 or 40 years, the whole restaurant eating experience has changed. Forty, 50 years ago, the star, so to speak, of the restaurant business was the owner. And as time went on, 15, 20 years ago, the chefs became the star. And I would say now we’ve trended to the point where the chef is still important, obviously, but the food is now the star of the restaurant, the food, where it came from, how it’s prepared, how the animals were cared for, how the vegetables and all the other products are brought to the table.

                                           So now it is the product itself that is the star of the whole eating experience. And restaurants are always looking for places to secure food and product from places that they know that they can refer their customers to and say, “Here’s where we get our stuff from. Here’s where we get our product from.” And you can go to that place and feel very secure about the quality of not only the product, but of the staff that’s caring for the animals or raising the crops.

Ryan Morfin:                    No doubt, the farm to table concept has taken off with people like Jean-Georges, Daniel Boulud, and the folks over in Copenhagen, Noma, really focusing on that. And it is, you’re right, putting the spotlight on the people who are raising the animals and curating the ingredients. And so as it relates to a layman’s perspective, a lot of folks don’t really know their food and they probably should spend some time getting to know it better. One head of cattle, I mean, how many, on an average, how many pounds of meat does that provide and how many types of different cuts of meat would typically be provided from one head of cattle?

Orlando Salazar:             Well, a steer is slaughtered when it’s about a year old and it’ll be slaughtered at anywhere between 1200 and 1400 pounds and that will yield a carcass weight of about 800 to 900 pounds. And as far as the number of cuts, it just depends how the primals, or the larger sections of the carcass, are cut up. So it really varies as to how many cuts it provides, but it will produce about 900 pounds of beef. The primary portion of that is ground beef, because one of the things that you find, as we moved into the carcass business, because originally we were in the genetics business so all we did was raise SEED stock. All the animals that we raised were meant for reproduction. So you wouldn’t want to slaughter the animals that we were selling 15 years ago. When we moved into the beef side, we had to actually learn a whole new side of the business, which was the carcass side, the slaughtered animal side.

                                           So we went to Texas A & M and took a three day course on Beef 101. And basically, we took a live animal and actually put our hands on it and our instructors, after five hours of book learning, they asked us to try to rate that animal that was still alive, whether it was prime choice or select, just by looking at the what’s called the phenotype of the animal, the curvature of the animal, the musculature of the animal, how round it was, it’s features on the outside, that was in the morning. In the afternoon, those dudes were hanging, those carcasses were already hanging and there were teams of 10 of us, and we all had an opportunity to actually butcher up a carcass. And what you find is that the cuts of meat that everybody wants, the ribeyes, the filets, the filet mignons, those are actually very small percentage in a big old carcass.

                                           So everybody wants those cuts of meat, but then you have 80% of the carcass remaining that you have to find a home for, so it’s a challenge. It’s a challenge because all the restaurants all want the same cuts. They all want the tenderloins, the ribeyes, the skirt steaks, the New York strips. Everybody wants those cuts, but we still have a lot of carcass that we have to move. And just to give you an example, in every carcass, there are two 12 to 14 pounds filet strips. So you have about 22 to 24 pounds, 26 pounds, of filet, in a 900 pound carcass. So that tells you, number one, why they’re so expensive and number two, they’re not easy to get to. There’s no automation that can be set up in order to, in an automated way, get to that sirloin, that filet, that tenderloin, so it’s a lot of work. And that’s one of the things that we found is that we have a much higher appreciation for butchers and the work that they do in order to provide that ultimate product to the consumer.

Ryan Morfin:                    So when you’re at a restaurant, which cut of meat are you typically ordering?

Orlando Salazar:             Well, it depends. Everybody loves a filet. I love New York strips, so ribeyes. I mean, those are the top three, and I’ll take either one of those.

Ryan Morfin:                    So you said earlier that one of the parts of the business that you guys were initially, and it was the genetics component, and maybe you can talk a little bit about how that’s evolved. I mean, science has really evolved around health and wellness, but also of the genetics of kind of curating the head of cattle and maybe you can talk a little bit about that process.

Orlando Salazar:             Yes. When I talk about genetics in beef, people think it’s kind of curious. They hear about genetics with race horses, and they kind of get it, right? You buy the progeny of a secretariat++++ and you know why you’re doing that because you’re going to get an animal that runs really fast and that’s the point. You want the genetics behind the parents of those animals, because you figure, “Well, mom and dad were quality animals, then their progeny are going to run fast too.” Well in beef, the point of genetics is to create several things. One of them is obviously a better tasting beef, better quality beef, but for the producer, for the cattlemen, they’re also looking for other characteristics.

                                           And as they maintain these animals, some of the characteristics that they’re looking for makes it a lot easier for them to maintain these animals and breed more animals safely and more easily and those characteristics include their birth weight. Birth weight is a key component to animal guys that are raising in an operation, a cow calf operation. They want these mommas to be able to have these calves out in the pasture and not struggle and they don’t want to have to send guys out to have to help these mommas give birth. So low birth weight is a key characteristic that’s controlled by genetics. Some of the other things that are controlled by genetics-

Ryan Morfin:                    So lower birth rate, sorry, lower birth rate is better for the calf?

Orlando Salazar:             Birth weight. It’s birth weight-

Ryan Morfin:                    Birth weight.

Orlando Salazar:             not rate. Birth weight. Yeah because if they’re born at a smaller size, it makes that momma have an easier time giving birth. So low birth weight is a plus, but then you want them to grow quickly. So some of the other characteristics that are controlled by genetics are then the weaning weight and yearling weight, how quickly they start gaining weight after they’re born. So these numbers are all kept, all these statistics are kept by the Angus association. So every animal that’s ever born, that information is fed into a central collecting area that are called EPDs. And those EPDs literally change every month because every month thousands and thousands of bits of data are being fed to the Angus folks in order to track the genetic outcomes of the animals that we’re selling.

                                           So we go from birth weight to weaning weight, when they’re taken off of momma’s milk, to yearling weight, how much they weigh at a year and some of the other characteristics that’s controlled by genetics is milk production, the quality of the ribeye, the carcass quality overall, so there’s lots of the marbling. All those characteristics are controlled by genetics. So when we’re talking about a genetics operation, when men come to, cattle guys, come to buy our animals, they open up one of our sale books and they look at these numbers, the EPDs, and they decide what is important to them. Do they need lower birth weight, animals? Do they need something that’s going to grow quickly? And a lot of that depends on the animals that they already have on their place.

                                           For instance, if they have some momma cows that are three, four or five years old, low birth weight is not going to be a huge issue for them because those mommas have been giving birth already, so maybe you want a bull that produces a bigger size animals. But if you know you have a bunch of heifers, which a heifer is a female cow that’s never given birth, if you just bought a bunch of new heifers, then you want some low birth weight animals so that those new heifers don’t struggle when they’re giving birth for the first time. So they look at all these numbers and they decide the characteristics of the bull that they want to buy, that they need for their particular operation.

Ryan Morfin:                    So approximately how many data points are in typical books, you have 10, 30? And how often are you measuring these cows to capture the data?

Orlando Salazar:             Let me pull one out and I’ll tell you. This is our sale book from our spring sale, I’m sorry, our fall sale, and we sold 500 bulls in one day. So as I open this book and I look at our EPDs, I’m counting one, two, three, four, five, six, seven, eight, nine, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, about 32 data points that are collected on every animal.

Ryan Morfin:                    And frequency of monitoring, you’re measuring this cow once a day, once a month?

Orlando Salazar:             They’re weighed very often. To be honest with you, I don’t know how often they’re weighed, but they’re definitely tagged and they’re monitored. We like to average about three to four pounds a day in growth. We are a vertically integrated operation, so we grow our own feed. We grow our own sorghum. Our sorghum is mulched and is crushed and it’s mixed into… Lost my place. But we produce our own food for them and so we monitor how much they eat, how much they drink. We’ve even reached a point to where we have found that keeping the food that we provide to them in shade causes them to eat more because they don’t like eating when it’s hot, when it’s been heated up by the sun so-

Ryan Morfin:                    Interesting. What does a healthy cow eat versus an unhealthy diet? I’m sure there’s some producers who put some things in the trough that are probably not as healthy. I mean, what do your cows versus that?

Orlando Salazar:             Well, that’s a great question and everything really just depends on the amount of moisture that’s available in any part of the country. When there’s lots of rain, cattle can graze on grass. And there’s plenty of hay. Hay is available at low prices and so a lot of this can be supplemented. So it just depends on the situation. I mean, I know guys that literally go out and literally buy anything to feed their cattle when we’re in a drought situation. But all those things, these questions that you’re asking, more and more cattlemen are being way more careful about what they do, especially if their cattle are going into a well known food chain, because they know these questions are going to be asked. So they’re doing a lot better job about maintaining the food quality that they’re providing to their animals.

Ryan Morfin:                    Well, you mentioned food chain and food supply during this period that we’re in of uncertainty about a health crisis, what are your thoughts about the U.S. food supply and food chain and food access and do you think it’s robust and strong, or is there something that could be put under pressure in the future?

Orlando Salazar:             Well, I think that the farmer is probably one of the most important links in the chain of our culture. The farmer produces everything that we have. Obviously we import a lot of product, but when I look at the American farmer and I look at the American cattleman, we operate on very, very tiny margins. And we are so dependent on climate, we’re so dependent on rain and we’re so dependent on things that are out of our control. In a way, we’re sort of blessed because we’re a boutique operation. We aren’t part of the sort of big operation that’s impacted by the rest of the country.

                                           We have our own niche, little marketplace, but the American farmer and cattleman needs support right now. For instance, we are not able to move cattle right now. Nobody’s buying cattle, nobody’s processing cattle because restaurants aren’t ordering, everything’s backed up. So that, that puts us in a situation where we’re having to sort of dump product and we’re not making any money off of it. We have three areas of business. We have our genetics operation where we sell live animals for reproductive purposes, we have our online sales where we receive product from our processor and we fulfill orders online for people all over the country for consumer use and then of course we have our restaurant customers, which is fulfilled by our processor, which works with our distributors and I guess it would be a fourth part, and that is our prime pursuits business.

                                           We just recently, as of about six months ago, started procuring all of Walmart’s cattle and the-

Ryan Morfin:                    Wow, that’s amazing.

Orlando Salazar:             Yeah. And so what that means is that we are building up a pipeline of product with our own customers to provide cattle to Walmart. In the meantime, our pipeline is not big enough, honestly. I mean, it’s a huge, huge demand, so we’re securing cattle as good a quality cattle as we can find that’s Angus beef from all over the country for Walmart’s use. So that piece of the business has gone well for us. Obviously Walmart’s still open, they’re still selling, so that part of our business has gone well. Now, the difference between what we do for our high end restaurants eventually, and what is currently going on with Walmart, is because we need the numbers, because we need the volume to supply Walmart’s demand, we are using antibiotics in the Walmart product, but we’re not using hormones. So whereas our product is no hormones and no antibiotics, the product for Walmart is only no hormones.

Ryan Morfin:                    So some of the stock shows, and a lot of our viewers may not be familiar, but you could get a head of cattle to sell for a few hundred thousand dollars. What’s the highest you’ve ever seen cattle go for per head and what’s kind of an average price you would say?

Orlando Salazar:             Well, those are good questions. So for us, the highest that I’ve personally ever seen at our sale barn at our farm was $500,000 for a female and that was a few years ago. I see bulls sell for 60, 70, $80,000 all the time. The average price for a good bull that we can sell to our customers can go anywhere between five and $10,000.

Ryan Morfin:                    And so one of these male bulls that is not going to be used for breeding is a steer and that head of cattle is going for that five to $10,000. Is that what you’re saying?

Orlando Salazar:             Oh, no, no, no. The animals that I’m referring to are all only for reproductive purposes, only for genetics.

Ryan Morfin:                    Got it.

Orlando Salazar:             When you take those animals and our customers would take those genetics, that bull, and use that to multiply his herd on his ranch.

Ryan Morfin:                    Got it.

Orlando Salazar:             And then the progeny of that bull would produce, then he would sell commercially to the feedlots.

Ryan Morfin:                    I see. And so the average a bull or steer now, that goes into the feedlot, what’s the average price for a high quality carcass?

Orlando Salazar:             That is a good question. I don’t know the answer to that. I do know that Angus is paid a premium. In other words, they’re sold per pound, whereas on the genetic side, they’re paid per animal, five, 10, $15,000, $20,000 for a bull. When they’re sold to the feedlots, they’re sold per pound. And if they are Angus, they get three, four or 5 cents a pound higher because it is Angus. I’m just not sure what the going rate is right now.

Ryan Morfin:                    Right now, yeah. And it seems the animal and meat sales have been going up maybe online, but I believe the restaurant side of the business is getting dramatically impaired. But are you seeing an uptick in online sales and an uptick in, I guess, retail consumption or has it been slow across the board?

Orlando Salazar:             Yeah. Online sales have skyrocketed for us, but it is a very small percentage of our business. Restaurant sales have completely dried up. Retail sales, we’re not in that many retail locations right now so that’s not a huge impact. Right now, we’re selling for the Prime Pursuits program with Walmart, we’re procuring the animals and then we’re selling them to Walmart at a certain age, I think maybe about six months old. So at that point they’re released from us. So I’m not sure eventually how much they’re selling in the stores. We did open up with 500 stores in the Southeast part of the country. So that’s where the Prime Pursuits program first started.

Ryan Morfin:                    Wow. So you mentioned farmers dependent on climate and that’s an interesting comment. There’s a lot of the, we’ll call them environmentalist or I’ll call them hyper-environmentalists talk about CO2 emitted from cattle, heads of cattle, as an argument to become a vegetarian. Do you pay any credence to that? Or what are your thoughts on that?

Orlando Salazar:             My thoughts are that I’m the sixth day, God created man and cattle. They were created on the same day. If you look in the Old Testament and you looked at some of the areas in Chronicles and you see that King Solomon, in one day, slaughtered so many head of cattle they couldn’t count when they were celebrating, I think, the opening of the temple. They had to have a huge operation. One verse says that they slaughtered 25,000 on one day. So in order to produce that many bulls, you had to have a heck of an operation.

                                           So what I’m saying is this, we’ve had CO2 emissions since practically the beginning of time, and I don’t think they had any problems back then. There’s probably fewer head of cattle now than there’s ever been, so I would say it’s silly.

Ryan Morfin:                    Yeah. Well the all natural food movement is definitely accelerating and 44 Farms is known as some of the best high end meat in the country and so I wanted to thank you for joining us. I know it’s a huge monumental feat to get Walmart to let you into their supply chain, so congratulations on that. And I’ve seen 44 Farms in some of the highest end restaurants here in the South and I’m probably coming across the country at this point. So keep up the great work. And do you want to give us the website that people can go to if they want to order online?

Orlando Salazar:             Pretty simple, www.44farms.com. We’ve got not only steaks and high-end cuts of beef, but our hotdogs and ground beef are phenomenal. You will love them.

Ryan Morfin:                    Orlando, thank you for joining us today and I’m going to be sure to get on that website today and buy some food for the freezer. And I appreciate you explaining to us and our viewers a little bit about what goes on behind the menu as we all go to many steak restaurants for business dinners across the calendar. Thank you so much and be well.

Orlando Salazar:             You bet. Thanks so much, Ryan. Appreciate it.

Ryan Morfin:                    Understanding the quality of the food supply that you and your family consume is important. We thank Orlando for helping us understand that. Thanks for watching None-Beta Alpha. And before we go, please remember to subscribe and leave us a review on Apple Podcast or our YouTube channel. This is Non-Beta Alpha. Now, you know.

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Pini Althaus:

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

Pini Althaus:

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

Pini Althaus:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Pini Althaus:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

Yes.

Ryan Morfin:

Who do you think is going to win the election?

Pini Althaus:

Which election?

Ryan Morfin:

The US election.

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

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

Pini Althaus:

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

Pini Althaus:

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

Ryan Morfin:

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

Pini Althaus:

Thank you, Ryan. Thanks for having me.

Ryan Morfin:

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

 

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