skeptical analysis of goldman report

Please pardon my American spelling and long post.

There was a commentary posted yesterday that reflects well on ALK's prospects.

Jack Lifton at Technology Metals Research writes--"In Xanadu Did Goldman Sachs Decree A Rare Earths Surplus For All To See" (http://www.techmetalsresearch.com/2011/05/in-xanadu-did-goldman-sachs-decree-a-rare-earths-surplus-for-all-to-see/#more-3711).

He makes the case that you can't (easily) profitably produce heavy rare earths without having LREE or other ore production to bankroll it. (I'll get to his business analysis at the end of the post.) The problem is that REE chemistry is so devilish.

Warning. Important, brief chemistry lesson:

Most metals can be separated from each other with relative ease because their chemical behavior is so different--they can be preferentially dissolved and precipitated with high efficiency. For example zinc can be separated from gold by throwing in sulfuric acid. Zinc dissolves, gold doesn't. This can be done cheaply on a massive scale.

REE's are a vastly different beast. They are set aside on the periodic table (the lanthanides) for a reason. They are chemically almost identical. As you count up in atomic number (across a row) you change the chemistry of an element because you change the outermost electrons in the orbitals. A few electrons can make an enormous difference when they are on the outside--

Count up five places in row three and you go from aluminum (a reactive metal) to argon (an inert gas). With the lanthanides (REE's) when you count up, you add electrons which are hidden UNDER the outer shell so there is no real change in chemistry. So, if you count up the lanthanide series you go from neodymium (a light REE) to terbium (a beloved heavy REE). The biggest difference is size, not chemistry.

The REE's can only be separated from each other by complicated, expensive methods that Lifton outlines in his article. These processes are specific to the unique mixtures present in any specific deposit and the best methods of extraction and separation can't be predicted a priori. You need lots of money and lots of sweat. What works in China won't work in Dubbo without a lot of effort and optimization.

Back to investing. Lifton writes:

"Note that at any step in the purification process, all of the rare earths have to be separated from each other in order to purify them. This means that economically, the very small amounts of the higher atomic-numbered ?heavy? rare earths in any deposit, cannot be produced economically, unless as many of the other rare earths present with the ?heavies?can also be sold, not just recovered.

This is the dilemma of the deposits of the rare earths that show relatively high values for the heavy rare earths. They cannot possibly be profitably produced just by producing and selling only the heavy rare earths, because their processing will be too expensive to compete for markets for their simultaneously produced light rare earths when up against lower-cost light-rare-earth-producing behemoths such as Molycorp, Lynas, or Bao."

And a statement that bodes well for ALK (**my emphasis**):

"A straightforward solution would be for an end user to **buy the critical heavy rare earths, and all of its needs for the light rare earths, from the heavy-rare-earth producer.** This might necessitate paying more than the market price for the light rare earths, but it would secure the supply of the critical heavy rare earths, for example, for under the hood applications of rare-earth permanent magnets by an automaker.

Alkane has not only LREE's to fund separation and purification efforts, but gold, niobium, zirconium, and rumor has it, kryptonite :)

I still wonder about the HREE recovery issues discussed in the Quarterly Report, but ALK seems far ahead of the other juniors based on the simple fact that it isn't just writing the menu, but is already cooking.

Cheers,

L