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GWG Executive Chairman Billingsley discusses Mine-to-Market Strategy on RITV

Interview and feature article on Great Western Minerals and Executive Chairman Gary Billingsley
By Doug Hadfield, resourceINTELLIGENCE TV

In the realm of rare earth elements (REEs), the way the market has gone in the last year there are a couple must-have attributes in choosing a prospective investment. There is a danger with these stocks that they could be overbought in an environment where investors are suddenly trampling over one another to hold shares in the next big thing.

Click to play the RITV interview with GWG Executive Chairman Gary Billingsley

Today the next big thing is rare earths and as countless resource analysts will attest to there are bona fide reasons for this. China controls somewhere between 90 and 98 percent of the global supply of rare earth material. There really aren’t any functioning rare earth mines outside of China today. Rare earths are used in some of the fastest growing manufacturing sectors, including wind turbines, cell phones and hybrid electric vehicles, to name just a few.

Every good story has an ample source of tension. The rare earths story abounds with the stuff.

To whit: Gasoline is quickly becoming passe. Within a few decades, most new vehicles will not be run directly from greenhouse gas emitting substances like petroleum-based fuels but rather a combination of fuel and electricity or something else entirely. There are simply too many reasons why this is so: Peak oil, global warming and oil-fueled wars being the three most obvious causes of triple digit oil costs.

Then there is the race for the prize: He who controls the means, will largely control the process. And the means is technology and rare earths. As I stated earlier, China controls almost all the rare earth production in the world.

Add to that that China has also stated that it will cease providing the world with rare earth metals and instead begin manufacturing its own hybrid vehicles. The New York Times wrote an excellent piece on that here. I’ll borrow a couple of paragraphs to illustrate the point:

“China wants to raise its annual production capacity to 500,000 hybrid or all-electric cars and buses by the end of 2011, from 2,100 last year, government officials and Chinese auto executives said. By comparison, CSM Worldwide, a consulting firm that does forecasts for automakers, predicts that Japan and South Korea together will be producing 1.1 million hybrid or all-electric light vehicles by then and North America will be making 267,000.

“The United States Department of Energy has its own $25 billion program to develop electric-powered cars and improve battery technology, and will receive another $2 billion for battery development as part of the economic stimulus program enacted by Congress.”

The problem is not that China wants to dominate the market. China’s problem is a very practical one that concerns growth: It’s difficult to move a billion people around cities and towns without a steady supply of fuel. Since China has little oil and practically the entire global supply chain of rare earths, it makes sense for China to take the battery powered route.

Now consider that Toyota is and wants to remain the global leader of hybrid electric manufacturing and sales. In 2006, Toyota controlled over 91% of the hybrid market in Europe and 70% in the US.

To put it into perspective, in 2007 Toyota announced that it had sold 1 million hybrid vehicles for the first time. Two years later, on August 1st 2009, the company announced its annual sales of hybrid vehicles had doubled again to 2 million.

In every one of those 2 million hybrid vehicle batteries is approximately 25kg of rare earth metals, including dysprosium and neodymium. That means 50 million kg or 110 million pounds of the various rare earths.

Another example: According to aggregateresearch.com, a utility scale wind turbine uses more than a ton of heavy-duty and lightweight magnets, 700 pounds of which is neodymium. According to the American Wind Energy Association, in the US “wind turbine and turbine component manufacturers announced, added or expanded 70 new facilities in the past two years, including over 55 in 2008 alone.” The rate of growth of this sector is astonishing.

Now let’s come back to China. Here’s an excerpt from a Wikipedia article: “Nearly all the rare earth elements in the world come from China, and many analysts believe that an overall increase in Chinese electronics manufacturing will consume this entire supply by 2012.”

This last phrase is in itself remarkable: If China were to consume its entire supply of rare earths by 2012, the world would not be able to produce another rare earth-fueled hybrid or electric vehicle — unless there suddenly appeared another source of rare earths. There are alternatives, yes, but the heavy rare earths in particular allow for long life batteries that make battery-powered travel a viable alternative to petroleum powered travel.

The Wikipedia entry continues: “In addition, export quotas on Chinese Rare Earth exports have resulted in a generally shaky supply of those metals. A few non-Chinese sources such as the advanced Hoidas Lake project in northern Canada as well as Mt Weld in Australia are currently under development; however it is not known if these sources will be developed before the shortage hits.”

Hoidas Lake, 100% owned by Great Western Minerals Corp. (TSXV: GWG), may indeed be ready for the coming rare earths crisis, and with the possible exception of proving economic feasibility, that will be the most important virtue of any deposit in the coming years. Simply put: When the crunch comes, who will have the rare earths required by all those new hybrid cars, turbines, cell phones, TVs, etc.

Hoidas Lake has been popular among analysts due to the fact that it is one of the most advanced rare earth projects on the market

As many resource and commodity investors will know, Great Western Minerals recently increased the known resources at the Hoidas Lake deposit by 123%. The NI 43-101 report prepared by Barr Engineering Co., was released late in November and led to a modest jump in the company’s share price on the TSX Venture exchange. The company now trades at $0.28 per share and has a market cap of $56 million. For one of the most advanced rare earth companies in the western world, GWG is clearly overly discounted at present.

Here’s why: GWG has two near-term deposits and a buyer for the product from both — itself.

GWG has a more profit-ready business model than most resource explorers. It’s called “mine-to-market”. Not only will the company own the deposits it intends to mine, it also owns two REE processing plants, one in the UK and another in the US. These two plants — Great Western Technologies and Less Common Metals — according to Executive Chairman Gary Billingsley, are presently operating at 30% capacity and generating approximately $20 million in revenue annually.

These processing plants can manufacture a number of products. For example, the company recently was awarded a $US $110,000 Defense Advanced Research Projects Agency (DARPA) contract to develop a set of aluminum-based high strength alloys for the department of defense — what Mr Billingsley describes as a starter package.

These alloys are a new class of materials that exploit the complex metal compounds that can be formed between rare earth elements and common metals such as aluminum and nickel. DARPA is the central research and development organization for the US Department of Defense.

At present, GWG and its production facilities source the rare earths required for these contracts from China. The company is fast tracking its way toward production at its two exploration projects — Hoidas Lake in Saskatchewan, Canada and the Steenkampskral past-producing mine in Western Cape province of South Africa.

The recently released resource estimate update at Hoidas Lake improved the tonnage to 2.56 million tonnes of rare earths from the previous estimate of 1.15 million tonnes. The report includes a 1,200 per cent increase in the measured category to 963,808 tonnes from 80,000 tonnes and a 49 per cent increase in the indicated category to 1.6 million tonnes from 1.07 million tonnes.

The new report incorporates the results of 32 drill holes at the site, located 50 kilometres northeast of Uranium City, that were completed in spring 2008, as well as results from four separate drill programs comprising 120 core holes that took place between 2001 and 2008.

GWG President and CEO James Engdahl has said work to advance the rare earth site is continuing to move ahead, with particular emphasis on metallurgical testing, which had caused delays in the past. Both Engdahl and Billingsley emphasize that the company has made strides toward understanding how to unlock the complex structure of the fifteen rare earths in the known ore body.

“We expect to have the metallurgy figured out hopefully in the first quarter of 2010. From that point we will move forward with our preliminary economic assessment review,” Engdahl told Resource Intelligence TV.

If the company does get one or both of its deposits into production in the near term, it is virtually guaranteed a podium spot among any other new producers in the west. At present, the number of REE producers outside of China is zero.

In the meantime, industry experts are forecasting an overall shortage of rare metals, and more specifically REE by 2014, recognizing that several of the heavy REE, such as dysprosium, terbium and europium, are already in short supply.

Disclosure: No Positions.