Categories: Base Metals / Energy
Topics: General Base Metals / General Energy

Defense Metals (TSX-V: DEFN)(OTC: DFMTF) President Dr. Luisa Moreno on Establishing an Independent Rare Earths Supply Chain & Hitting High Grade at Wicheeda

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the President of Defense Metals and one of the more accomplished guests that I've had on the show, Dr. Luisa Moreno. Luisa, it is an absolute pleasure to have you on. How are you today?

Luisa Moreno: I'm very well. Thank you for having me, Gerardo.

Gerardo Del Real: I mentioned that you're one of the more accomplished guests that I've had on, and we've had quite a few. But listen, you're a doctor, you're a physics engineer, you're a CEO, you're an author for kicks, a government consultant, and as I mentioned, President of Defense Metals. So, I want to talk about the flagship project here of Defense Metals and the team that you've been able to bring together, because I think that speaks volumes about the direction I think the project is headed in. But before we get into that, I'd love to learn a little bit more, because I'm familiar with your work, share a little bit more of your background, if that's all right.

Luisa Moreno: Sure, sure. Essentially, as you said, I did cover rare earths as a research analyst in investment banking in Toronto for a number of years. So I've been looking at rare earths since 2010, at least, until now as an analyst. And then I formed my own consulting company and I continue following the space and working with the federal government in Canada, as well as provincial. And I did some international, other government research consulting type services as well. So, at the same time I am part of the board and management of various companies. The main sector for me is critical metals, so rare earths being one that I covered for a long time, but I also follow lithium, graphite and other critical metals. So I like the areas. I like diving in, in terms of metallurgy as well, which is very critical for strategic materials, and it's been really great fun doing it.

Gerardo Del Real: Let's dive in. You mentioned that you love diving in. Let's absolutely dive in just a little bit on the macro side. I joked and mentioned off air that I've followed your work since at least 2010. I did very well being an early investor in several rare earth companies that you covered in passing. And that was a mini-bubble, bull cycle that lasted a few years. And then unfortunately it was a round trip. And in my amateur opinion as an investor and a speculator in the space back then, the difference back then compared to now is back then there was projected demand, right? We knew that the electrification of everything was going to be a very real thing, but there wasn't quite the capital allocated to the space the way that we have now, right?

And so when you see the amount of capital that's being invested and allocated into the space, and you couple that with the geopolitical considerations, that are now becoming more and more permanent on an everyday basis, I would love to get your take on where you see the next several years of critical metals development away from China and in more stable jurisdictions. What has to happen to make this a more sustainable bull cycle, or are we there?

Luisa Moreno: I think it's progressing somewhat. So, if you look at production of rare earths, back in 2012, say 10 years ago, it was about 110,000 tonnes. And China produced 95,000 tonnes of the total production, which is about 85, 86%. Today, that production and demand has more than doubled. So we are at north of 250,000 tonnes today, and China only accounts with 60% of the production. Only – relatively speaking of course, it still is the largest production, but it is less, and that is very good. Unfortunately though, the supply chain is still in China. So when you look at processing of these materials, chemically processing them and recovering and separating the rare earths, about 85% of that still happens in China. It's lower than 10 years ago, which was north of 95%, but it's still quite significantly in China, and that has to change.

And it will change, I think, by having more production, continue to have more mine production outside China, and through the development of processing facilities outside China. I think there are some companies that have alluded to that somewhat, like Neo Performance Materials. You also have, I think Energy Fuels that talked about that, and there are individual companies that do not have a resource necessarily, a rare earth resource or deposit, but they are also thinking to raise money and to develop processing facility outside of China. So that is a real possibility, and I am certainly hopeful that we will see more of that. And as far as Wicheeda is concerned and Defense Metals, obviously we do have a deposit, one of the highest grades and with very good infrastructure. And we are in a very good position to really also produce these materials, separate them potentially down the road, and who knows, either collaborate with others, or do it ourselves, to produce metals and go downstream.

Gerardo Del Real: When people focus on establishing independent, critical metal supply chains, they tend to focus on the threat of, in one scenario potentially China say, and what will cut off the essential, especially the heavy rare earths, that have national security implications. Very few people, I think, outside of people in the know, focus on the vulnerabilities with China processing the critical metals and accessing the technology while they're doing so. Correct? And I think you mentioned, the flagship with Defense. Is that just as important for developing independent deposits and then subsequent supply chains through the processing and the breakdown of the materials and everything that goes along with that? Do you see that in a similar sense that the technological vulnerabilities tend to be almost as important as the vulnerabilities of the metals themselves? Or do they just go hand in hand?

Luisa Moreno: They are two separate subjects, I think, to the extent that let's call it, end users of these materials are able to secure the oxides and the rare earth metals directly from China and be able to use them outside China. I think they're probably fairly safe, but if they have to manufacture them, like, for instance, I believe there are companies in Europe and even in Canada that are in the space of permanent magnet motors, where they design the motors and so forth. And for that, they need the rare earth magnets. And so when they decide to manufacture these motors, for instance, in China, yes, you are a hundred percent right, in a sense, that those technologies, whatever intellectual property that they might have there, could potentially be in a vulnerable position if they're manufactured in China.

But sometimes companies choose to do that because they will be able to have cheaper labor. And they also are able to obtain these metals, these materials at the cheaper price, because as soon as you export them out of China, they always have a VAT attached to them. So they end up being at least 10, 13, 15 or more percent, depending on the finished product that is a VAT applied to them. And so sometimes companies are, I guess, tempted for the security supply of the materials and potentially some benefits, as I said, in terms of labor, to manufacture in China.

Gerardo Del Real: You mentioned the flagship. You mentioned Defense Metals. I know that you don't lend your credentials easily to just any company or any project. What attracted you to the Wicheeda project and what comes next, as far as developments? The last couple of releases, you've absolutely knocked it out of the park with high grade, rare earth oxide, right? You had 162 meters of 3.23% total rare earth oxide. The release before that was 6.01% total rare earth oxide over 23.4 meters. That's just one part of it, right? What attracted you to this specific deposit and how do you see it developing?

Luisa Moreno: I must say that the most important factor for me, when I learned that they are able to produce a mineral concentrate, I was instantly very interested and very happy for the company when I learned about that, and excited that it was also in Canada, in North America. And so when they invited me, it was not difficult to say yes. At that point, I didn't for sure, know of the higher grade intersections that we have seen and the size of the deposit, because they didn't complete at that time, when I joined, the PEA. So it has been good news after good news after good news. But it is so important for a rare earth deposit, hard rock, call it, rare earth deposit, as opposed to ion-adsorption clay deposits. It's important for hard rock, rare earth deposits to have a high grade flotation, mineral concentrate.

And so, because they're able to do that, they basically become more comparable to other producers of rare earths around the world, including Mountain Pass, with MP Materials that produce a concentrate, I believe about 60, 65%. And then you have Lynas that produces a mineral concentrate of about 40%. And then you have all the Chinese companies that produce concentrates anywhere from 30 to 65 and higher in China. So, it might change, but it has been an absolute requirement for an economic rare earth deposit. And the fact that we are able to produce that out of Wicheeda deposit, it goes a long way to support potential production at Wicheeda.

Gerardo Del Real: You mentioned Lynas and MP Materials and Mountain Pass, and each one of those companies and that specific deposit and mine has market caps, many, many, many, many multiples of Defense Metals. I'm excited to see the project develop. I think the timing for it couldn't be better. I do believe this rare earth bull market is going to be a more sustained one than past ones. And I think your timing has been absolutely perfect. Luisa, is there anything else that you'd like to add?

Luisa Moreno: No, I think you said it. Back in the days in 2010, there was a dispute between China and Japan, as you may recall, over the Senkaku Islands, and that there were rumors that China was going to block exports to Japan. And at that time there was an instant bubble in prices, and we did not really understand or fully appreciate the demand that came afterwards. Because as I said, 2012, we had 110,000 tonnes production. And today we have north of 250. There has been significant demand. And so when you look at forecast demand for rare earths, just for the EV application, it calls for another 250,000 tonnes of total rare earths. So the demand is going to be significant, and that would lead to significant potential for other companies to add production. And it should support higher prices for rare earths as well, just because of real, as opposed of other bubble type, fear type demand.

So, on the basis of that real demand just for one application, as I explained, 250,000 tonnes at least in the next 10 years, I think that's going to be very good for the space and it's going to open lots of opportunities for various companies in the next five to 10 years.

Gerardo Del Real: Luisa, it's been an absolute pleasure, fascinating discussion. Have to do it again whenever you have a few extra minutes, let me know. Thank you again for your time.

Luisa Moreno: Thank you. Thank you, Gerardo. It was nice talking to you.