Categories: Energy
Topics: General Energy

Leading Edge Materials (TSX-V: LEM) Interim CEO Mark Saxon on Working to Create a Non-Chinese Critical Metals Supply Chain in Europe

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the Interim President and CEO of Leading Edge Materials (TSX-V: LEM)(OTC: LEMIF), Mr. Mark Saxon. Mark, how are you today?

Mark Saxon: Very well, Gerardo. Got a touch of the flu that you might hear in my voice, but apart from that doing very well. Good afternoon, it's always good to chat.

Gerardo Del Real: I appreciate you taking the time, despite the flu. It's been a pretty important week on the macro level. You are one of the more insightful voices not just in the rare earth space but in the critical metals space. So with the headlines that we've seen in the rare earth space, prices are going up, we're hearing the saber rattling going on between China and the U.S. We understand how China plays the long game. I don't believe that the visit to the local rare earth plant by Chinese officials was coincidental.

Before we talk about Leading Edge and the engineering study for battery graphite, which is critical to the EU, I want to talk and get your take on the rare earth space. You, of course, still have the world-class Norra Karr project. I'd love to touch on that a little bit, but give me your macro take, Mark, on rare earths, what's going on right now, and why Leading Edge has responded, frankly, with a 40-something percent pop in the share price, albeit from a very depressed point, right?

Mark Saxon: Sure Gerardo. Really it's been a very interesting week. I've had this conversation with plenty of commentators and plenty of investors and really, it took us a little bit by surprise in terms of the timing of this bounce. But really anyone that's followed the sector hasn't been surprised as this was always a threat. The rare earth industry was due for a turn.

That's really based on the fundamentals, they haven't changed at all since 2010/2011 when we saw the last major skyrocketing in rare earth pricing. So today China is still very much the dominant producer of rare earth metals, with very strong control over the downstream processing, and the value add of those metals. So the visit by the Chinese president Xi to a rare earth factory is really sending a message to say, this is important, this is relevant, this is something that the US has zero control over, and it's very much in Chinese hands. The timing was unpredictable, but this was always going to happen. It's taken the industry by a little bit of surprise, I guess.

Gerardo Del Real: I've called it China loading the trade war gun. I believe the end game and the fatal blow will come a couple of decades from now, from the bond market and China's dominance there. I think that's the long game. But in the interim, this is them loading up and sending a message.

Let's talk a bit on Norra Karr. For those not familiar, the flagship is the Woxna graphite project there in Sweden. But you also have a project that at one time demanded a market cap in the triple digits, and we're talking millions. Right now, not so much the case. I think the project's been forgotten by the market. I don't believe that many are aware of the asset. Can you just touch on it briefly, Mark, and describe it for people not familiar?

Mark Saxon: Sure. I'll cover the rare earth situation a little bit more broadly, and tell you a little bit about Norra Karr. This situation that we're seeing in China, I guess it's particularly directed toward the US, but Europe is in exactly the same position as the US is in this case where processing technology and access to deposits and exploration has not kept up for a very long time. So Europe and the US are customers of rare earth metals, and don't really have an alternative at this point.

As a brief reminder, rare earth metals are 15 different elements. They have very similar chemical properties, they occur together in nature and each one has different pricing, and in fact pricing from top to bottom can vary by 100 times. So it's really quite hard to talk about rare earths in general form. The real driver is rare earth magnets, so a number of the rare earths give the property of very, very strong magnetism. If you've ever held one of these magnets or seen one, then consider one the size of your thumb nail or let's say a one cubic centimeter square. If you stuck that to your fridge, then it's going to stay on your refrigerator forever until you sell the fridge. You're not getting it back off again, they're so strong.

These magnets deliver smaller and lighter and more efficient, and so particularly in electric vehicles those magnets are becoming highly relevant because they greatly increase vehicle efficiency. So in an electric vehicle you've got the battery and the battery drives the car. But the performance of the battery relates to the weight of the car, and so obviously there's a big move to try to lightweight the vehicle because that greatly increases the performance of the battery.

Gerardo Del Real: It's interesting to me that Tesla – and not to cut you off, Mark, but a quick point – it's interesting to me that Tesla, for about a year and a half or two was looking for ways to diversify away from those rare earth magnets and just recently announced that they're coming back to it because the bottom line is that was the best-in-class material for them. So again, it speaks to your point, right?

Mark Saxon: Exactly. And really, it's only one or two kilograms of magnets per Tesla. In terms of the cost input it's not huge and you would think that one or two kilos in a car doesn't make that much difference, but when you only have one supplier, which is China, then obviously you've got to be very cautious of your supply networks. And Tesla, like every other auto company has to be choosing the best solutions, and if you sit around and you choose second best solutions versus one of your competitors, then you're obviously not going to be competitive for very long. And rare earths really are that best performer in the market.

It's something like 80% to 90% of electric vehicles built use rare earth magnets in their motors, and really there's no incentive to change that unless the price goes up again by 10 times, that'll scare the market. But at current pricing, it's the best solution and they'll be integrated for a very long time.

Gerardo Del Real: Let's talk about Norra Karr. Norra Karr is a project that's a world-class asset. I want you to speak to that a bit because I know it's a project that for a while was a bit stalled, largely in part to some local opposition. You have huge government support for that project, and there appears to be a path forward now, a clear path forward when it comes to that. So can you touch on that just a bit, Mark?

Mark Saxon: I'll touch on a bit of the history and the future at Norra Karr. Norra Karr sits in southern Sweden and was a discovery we made in 2009. We spent a lot of money, we created a resource, we created a prefeasibility study over about 5 years, and during that time we applied for a mining lease over the project because we were confident it was moving ahead.

I guess we fell into a bit of a hole there because the Mining Act in Sweden hadn't really been tested in a few areas, and we were working in a new part of Sweden where mining wasn't quite as traditional as it is in the north of the country. So we impacted on some areas where people didn't really understand the questions and answers about mining.  There was an appeal made against our mining lease, and it was found that the mining lease required more information. This didn't just apply to our mining lease, it was a test of the Mining Act itself, and so there were half a dozen mining leases across Sweden that all went back to government for testing, and then got passed back to the Mining Inspector for further adjudication and for further information.

So we're still going through that process now. We've had regular communication with the local people, we've had regular communication with the Mining Inspector and with the government. So it's still in process. It's a very important project on a European scale, and we've been spending European public money in terms of research and development. So I can't make promises but I'm optimistic. A slow process, but one that's still moving ahead.

Gerardo Del Real: Now Leading Edge Materials currently has a market cap of approximately $15 million Canadian, give or take $1 or $2 million. Do you remember the after tax NPV of just Norra Karr? And we'll talk Woxna here in just a bit. I just want to provide a bit of context as to the disconnect in the markets right now.

Mark Saxon: Yeah, sure. I won't talk numbers, but it's many times of what our market cap is anyway. It's well into the many hundreds of millions, and that was based about rare earth pricing that was similar to where we are today, so obviously we believe that the project will be very economic at current pricing. We've done a lot of work to optimize the project, and that's in terms of using of byproduct materials, reducing the land use, reducing the water use. So really being responsive, I suppose, to the concerns of the local region.

I think the project will look quite different when we come back with new technologies. And really, that's the rare earth market overall. The industry has moved on quite quickly because a lot of research has been done. So there's been great research in rare earth separation technology, and in markets, and also in the processing as well. I guess that's part of the reason we're quite confident that the project has life.

Gerardo Del Real: You talked about the different types of rare earths. There's the lights, there's the heavies, the heavies of course are the ones that are typically and traditionally looked at as the higher demand, harder to find, more expensive, more critical ones. And Norra Karr, I believe, is very well endowed when it comes to having heavy rare earth elements. Is that accurate?

Mark Saxon: Exactly. And really, we're getting quite specific now, but Norra Karr is very rich in a metal called dysprosium. Dysprosium is a metal that's added to rare earth magnets, which allows them to operate at higher temperatures. The rare earth magnets have an unusual effect that when the temperature gets too high, they lose their magnetism. But add a small amount of dysprosium, which is quite a valuable material, add a small amount into the magnet and its magnetism will retain at high temperatures.

So particularly when you think about use in vehicles, where the temperature in an engine can get quite high, then the amount of dysprosium increases. Tons of magnets are used in wind turbines. They don't get quite as hot so the amount of dysprosium is a little bit lower in those applications. But very important in electric vehicles.

Gerardo Del Real: We've talked about the importance of establishing a Chinese-free supply chain for the critical metals. Graphite is a large, part of that effort you just achieved. The company just achieved a big milestone, you received your engineering study for the battery graphite demonstration plant at Woxna.

Can we talk about that? Congratulations on that front. I know that's a long time coming, a lot of hard work behind the scenes that's gone on there. Can you speak to that a bit and why that's important?

Mark Saxon: Yeah, sure. Absolutely, Gerardo. You mentioned there the supply chain issues, and really we're seeing that very much in the European context, that having secure supply chains are becoming far more important because a battery in the automotive industry is now far more dependent on these critical materials. On one side it's magnets, on the other side it's batteries.

The graphite that comes from a project like Woxna, we're hoping to prepare that to be appropriate for lithium ion batteries. At the moment, the lithium ion battery market in Europe, in terms of production, is quite small. But that is growing almost exponentially, and there's some very major investments in the pipeline that will be producing a lot of lithium ion batteries. The lithium ion battery, it's about 15% graphite. 

For us, Woxna is a fully built graphite mine in central Sweden that we purchased in 2010, and I guess traditionally it was producing graphite for the steel industry. Looking forward, we're hoping to produce graphite for the lithium ion battery market, and so we've just completed the engineering study which will allow us to build a demonstration plant for 100 kilograms per day of lithium ion battery anode. So that can really flow out into the markets, and so the customers can test it and build batteries with our material and see how it performs. That's really a very big part of the industry.

You can imagine that safety, obviously, is very important in battery technologies. So the customer needs to receive large volumes of graphite, they need to test it over 6-12 months, and really do stress testing to make sure it performs well. And that goes for all battery materials, not just graphite. The qualification process is quite long.

Gerardo Del Real: To long-term subscribers – not to cut you off, Mark – but to long-term subscribers of mine and listeners, I'm going to sound like a broken record but I'm going to ask the question again for new listeners and potentially new subscribers. How many other juniors have a fully-permitted, fully-built graphite mine in Sweden, or in the EU?

Mark Saxon: We're in a very unique position there. There's a number of very small graphite mines in Europe. One in Norway, one in Austria I believe, one in the Ukraine, but they're not producing materials that are suitable for the battery market. Today, 100% of battery anode material comes from China. So every single piece of natural graphite that's used in a battery, in a EV, in a telephone, comes from a Chinese source. That imbalance really can't last, and the transition will not be fast but absolutely that transition has to come. Woxna and Leading Edge Materials is in a great position.

Gerardo Del Real: Excellent. Mark, thank you for the thorough update. Is there anything else that you'd like to touch on?

Mark Saxon: No, I think we've touched on most things, Gerardo, and really it's been a very interesting week, and a little bit unexpected on the rare earth front, but it was always going to happen. So I guess we've been watching the industry from the sidelines, and after this week we'll be a little more focused on rare earths. So happy to share the story.

Gerardo Del Real: I know you're working hard behind the scenes on multiple fronts, so I get feeling that we're going to be chatting again here soon. Thanks again today, Mark. Get well.

Mark Saxon: Thanks, Gerardo. See you, bye.