Nathan Hunt: For the last 140 years, we have been living and working in a world powered by fossil fuels. And while cheap, abundant energy has been undeniably fun while it lasted, that era is fast drawing to a close. So, what will replace coal oil and natural gas after the energy transition? What obscure elements and compounds are going to power the coming year up? What are the elements of the energy transition? This is The Essential Podcast from S&P Global. My name is Nathan Hunt. Over the next few months, we are going to be doing a series of podcasts about the different elements that will be important for the coming energy era. I'll be joined on this series by Terence Kooyker, the CEO and co-founder of Valent Asset Management, a hedge fund that specializes in these types of elements. Long time listeners will also be aware that Terence is my brother-in-law. To start off the series, Terence and I are going to be talking about dysprosium, lucky number 66 on the periodic table. One of the all-important lanthanides. Let's get to dysprosium. Our first element of the energy transition. Terence, something I've been thinking about a lot lately is plutonium. And the reason I've been thinking about plutonium is because it occurs to me that prior to the nuclear age, plutonium was not a household word. It was something obscure, something for only chemists or chemistry professors to know. And now everyone knows plutonium and uranium and it occurs to me to wonder if in 10 years or 20 years people will be talking about dysprosium and neodymium in the same way.

Terence Kooyker:  I think you'll see that these metals become household names from the utility they provide and how they enable green tech. You know, there's already been plenty of articles about securing rarer supply dependents in China for the supply of these metals and what that could mean for renewable energy expansion. The introduction of plutonium and uranium into the household was a little bit more dramatic than what I think these metals will be. And I don't imagine that they will be associated with weaponization per se. But it's true that it was just dysprosium and neodymium and many of the other rare earths are going to be even more ubiquitous than they are right now. I mean, in appliances, say drills, anything with an electric motor really has a rare earth in there, but in the sense that there are increased stories about the availability of these metals for powering, what is a very important technology now, especially in terms of climate change.

Nathan Hunt: To that point. Why would I want dysprosium? What is it used for?

Terence Kooyker: It's both, important in the generation and also the output of energy. So, as we know, if you induce an electric, current, particularly an alternating electric current, you'll induce a magnetic field around that current. And if you take about just that application in electric vehicles, there's two ways you can translate that movement in an electric vehicle. You can have a pure induction motor, which just runs electrical current through both the stator and the rotor, and the induced magnetic field will rotate the rotor with permanent magnets. You can get a significant increase in efficiency by just having that permanent magnet field on the rotor. And the induced magnetic force from the sater acting on the rotor. It's really that essential property of electromagnetism that allows this to be the case.

Nathan Hunt: Rare earth metals or rare earth elements, I've heard them called both, are they actually all that rare?

Terence Kooyker: In terms of cross-sell abundance? No.  I mean, cerium is twice as abundant as copper. The problem is that there, they should really be called non-economic earths. It's just that they're so dispersed. For something like the platinum group metals, you have a nice seam of Africa where a meteor hit during the heavy bombardment period and left you in nice little seam that you can mind out of. Mind you, that seam is about a foot high, and you have to go a mile or two underground to get to it. But that's still more concentrated than what you get from the rare earth elements. So, it's a combination, both of the disparity in prices. So, like I said to you, you have the balance problem, which is that you get a basket of railroads out and some of them just aren't as expensive as the other ones. And then another thing that really weighed on the rare earth production industry for, for a long time was the lack of environmental regulation in China and how much that depressed the cost of production. You know, this was, this was after the price spike in 2010 where China imposed export caps. And then after that, there was a huge amount of illegal mining that popped up around the country to the point where almost half the production of dysprosium was from illegal mines. And that really weighed on prices for a long time. You know, there's a viable project in Australia, there's one in the United States, but not at those places. But now that China has clamped down on that illegal production, you're starting to see prices get to a point where it does make sense to start producing for this other area.

Nathan Hunt: I want to talk to you about your specific role in this world, in this market, which is the fund that you have founded is investing in dysprosium. And I want to understand the mechanism by which you can do that. I am guessing there isn't a dysprosium ETF that you can just put money into. I am guessing that there isn't a dysprosium mining company, for example, that you can put money into. How do you invest in rare earth metals? Is it like commodities markets in that you need to actually hold the materials themselves?

Terence Kooyker: Yeah. So, in most commodity markets, the ones that most are familiar with are traded as futures contracts, either, particularly in metals, either on the Colmex or on the London metals exchange, you trade forward dates, which means. Frankly, most people never take delivery of these commodities. You simply roll the contract forward to a, to another future date, with disposing of them and the other errors you don't have any listed futures contracts. So, to gain exposure to those metals, you do quite literally have to purchase them and have them shipped to a warehouse, have them assayed. And then you essentially just get a warehouse receipt for that material. You have to hold insurance on that material. But as long as the metals, aren't going to degrade, which is a problem for some of the rare earths, but not for dysprosium, then you could hold on to them for, in theory, as long as you want. But you also have to make sure that you're holding them in regions, where there are also consumers. So, as it stands right now, the majority of permanent magnet centering is in China. So, it doesn't make a ton of sense to export metal from China, ship it to the U.S. or Europe only to have to ship it back to China. So, you do want to hold it close to where it's actually going to be consumed. Certainly, the end demand is coming from all over the world, but the end demand is, is really the export of permanent magnets from China. There are some other ways to get exposure to rare earths and that's in the rare earth equities. So, Linus Rare Earth is one publicly listed one. NP just went public recently that manages the mountain pass mine in California, but mountain pass has trace levels of dysprosium is mostly, light rare earths. The reason that we decided to go directly into the metal is you really isolate it to that metal’s fundamentals. So, in any rare earth mine, you're going to get a combination of different elements. You're going to get a certain ratio of disposing them to cerium, to lanthanum, to neodymium, and that composition varies widely. So, there is no pure play in equities. When you want to pick a story around a specific one of these elements. And in addition to that, you then take on the management risk, operational risk. All these things factor into the price of the equity name. So, by taking delivery of the specific metal and the specific grade that we want, we really feel like we isolate a lot of other exogenous factors that could really disrupt the investment. We know fundamentals of metals, and we just don't want to have to add on these X factors that come with holding the equities.

Nathan Hunt: One of the things I'm wondering is given the importance of dysprosium for a range of different applications. Is this something where we should, in the United States, have a strategic reserve of dysprosium, like we have a strategic reserve for oil?

Terence Kooyker: Yeah. I mean, I think it's even more important than oil. At least with the strategic oil reserve, we're able to fill it from the Permian Basin. Now we have domestic production of oil, plenty of it. With dysprosium, it's a real geopolitical risk. And this has been flagged by the Pentagon and other government agencies and there have been multiple grants to develop it. Domestic production of disposal and other rare earth. And you actually see a lot of other countries already embarking on stockpiling. Even China announced that they're acquiring a significant amount well significant for these markets, significant amount of rare earth and other quote-unquote strategic metals. Japan is doing the same thing and much of the price lifts that we saw at the end of last year, a little bit, this year has been from that stock piling. Now the issue is that great, you have these raw materials in your home country, but now who's going to make them into centered bagnas. As of now you send it back to China to do that. So, there's also this focus on developing domestic processing and that's something that this company U.S. Rare is looking into. They also have rights on the round top, mine in Texas. Their mission is to then build out this domestic capacity for processing and have the full chain. There's also, now this focus on, recycling, because as it stands now only about four to 6% of rare earth are recycled. When you take, for example, the lead markets, almost a hundred percent of lead acid batteries in the United States are recycled. So, there's ample room for an increase in the capacity for recycling rare earths, from any application from small appliances, all the way up to EV motors.

Nathan Hunt: Is it your impression that Tesla has some sort of private strategic reserve of elements like dysprosium. Obviously, this feels like an area of exposure for them. They are currently the most highly valued car manufacturer in the United States. Do they have their own warehouse with dysprosium in it?

Terence Kooyker: I would be surprised if they don't have some inventory of it and, or exclusive offtake agreements from certain producers. You know, they've really flagged the fact that there will need to be more nickel, sulfate production, and more lithium production. They're looking themselves to expand it into lithium production. The thing is that auto companies do this already. You'll have auto companies hedging forwards in palladium and platinum and rhodium in aluminum. I remember back after the financial crisis; it was a real concern that palladium stockpiles were dwindling and that the auto companies would be a little bit screwed when they wouldn't be able to get that metal for their cattle converters. Back then in 2009, 2010, they were buying five, six, seven years forward to ensure that they had a sufficient supply. There's not really that type of a market for disposing them right now and other areas. So, you really have to do it either by holding the inventory themselves or by having exclusive offtake agreements. Now, pulling inventory is a bit capital intensive. For instance, when auto companies buy forward palladium, they only put up a margin on that contract. If they had to hold all the palladium themselves, it would be tying up. Like I said, a great deal of capital. I would think that Tesla is looking for ways to address it's a lot easier in the nickel market and the lithium market, but surely, surely the magnetic railroads are on their minds now more so than before, because the Model 3 relies on a permanent magnet, synchronous motor before that model from Tesla were pure induction motors. Now they're shifting a lot of those models to permanent magnet, synchronous motors, which is kind of a hybrid of induction and permanent magnet motor. And so, it's going to become a lot more important for them.

Nathan Hunt: So, let's say the price of dysprosium goes way up. And I, as an investor, feel that Tesla is exposed to the price of dysprosium. How exposed are they? What's the cost of disposing them? That is going into a Tesla automobile.

Terence Kooyker: Actually, not a lot. From 2010 till present, it was actually a fair bit of substitution or rather thrifting out of permanent magnets of dysprosium permanent magents, I mean, just because after China restricted exports, we had that massive price fight. The thrifting wasn't so much a factor of the price of dysprosium. It was more the scarcity of supply when China decided to put those restrictions in place, as it stands now, in, in your average EV motor, you have about 1.4 kilos of you, neodymium boron magnets material, but in most cases, per weight, it's 5% dysprosium. Right now, you're looking at about 35 to $40 per car in terms of the contribution of dysprosium. So even if we get a 10-fold increase in prices and we go to $350, $400, does that make a really big impact on the end cost of a car? That gets passed on to the consumer and we're seeing the same thing now, I mean, rhodium is a critical component of a catalytic converter. It addresses the NOx emissions. So, when China instituted their China five and China six emissions standard, it required more rhodium included into the catalytic converter. Since 2018, rhodium has gone from around $1,500 to now almost $30,000. And so that has had a significant impact in terms of the catalytic converter cost, but it's not made or break for the auto companies, they're going to pass that on. We're talking about an increase of $400 to a car because of that. And the same thing will be the case for dysprosium. You might see an impact in applications that are, or end products that are cheaper and still rely on dysprosium. Obviously, if you see a power drill, jump up in price from 30 bucks to 40 bucks, that's a bigger concern than adding $300 bucks to a hundred-thousand-dollar Tesla or even a $40,000 Tesla. So, the concern is, is not so much the economics of it, but the actual security of supply, actually having enough because the, the real impact comes when you simply can't continue your production. That's the costly part prime example now that was is the, is the chip shortage and how that's impacting auto manufacturers.

Nathan Hunt: Recently, President Biden announced new goals in terms of achieving carbon net zero over time. Many countries around the world have announced similar goals, China, obviously the European union as well. What we're seeing is much more activity and much more of at least verbal commitments to what is being called the energy transition. Dysprosium among other rare earth elements is obviously crucial to the energy transition. Are you seeing these types of announcements reflected in the price that you are paying or settling these metals for?

Terence Kooyker: Yes, definitely and like I said, part of that is just that governments recognize that these are strategic metals, that these are necessary for attaining the goals that they've set themselves. For instance, since the end of 2018, dispose of them was about $175 per kilo is now $400 a kilo, even more recently, September of last year, it was around $240 a kilo. The same thing has been happening in, in, you know, dymium that was up almost 100% last year. Are we at the point now where demand is really overwhelming supply? And the classic way of looking at this would be to look at number of EV sales, what demand that implies, extrapolate that to how much percentage of actual supply of dysprosium that's taken up. But there's a reason that commodities trade on futures. People are looking at what the future demand will be for these things. And so that's why we're getting these price spikes now. So, part of it is the government stockpiling, part of it is just that I think many see that this is a, a serious effort to build out renewable energy generation. That's also why I think a lot of the forecasted adoption rates are lower than what will eventually be realized. In a traditional forecasting model or adoption model like this. You might take something like how quickly the population assumed some other technology say the iPhone. This is very different. This is mandated by government subsidized by governments, in fact, and there does need to be this concerted effort because as we do build out these new energy technologies, the classical ones are just going to get more and more cheap. And so, you do need to have that push from governments and that social buy-in to really make this possible.

Nathan Hunt: Let's assume I believe the energy transition or what, what we call the energy transition is inevitable. That there is in fact, a climate crisis and that this is the way in which countries and the global economy will have to address this. Would it be a good idea for me to go out as an individual and buy a lot of dysprosium and store it in a warehouse for 20 years under the assumption that this is important now, this is only going to be more important in the future.

Terence Kooyker: It's very difficult to get the right grade and to find the right storage location, et cetera. You also need to have a pretty connected network of dealers and also consumers. At some point, you want to offload this, and you need to know which, magnet manufacturers or potentially which auto companies might want to buy it. The other dynamic I believe will play out is they all have a near term spike in prices. Like what we're observing now. And then there will be somewhat of a supply response. There are viable projects with prices at these levels. I think within the next five years, you could see supply, you know, really catch up to demand and possibly even be larger. And so, you'll have this dynamic where we have a near term price spike, everything calms down for a little bit. You have sufficient supply, and then you got the longer-term rally for the next 10 years, 20 years after that. Simply waiting through that volatility might not be possible for some investors, but as far as the long-term demand, I do think it's disposing of in particular, among other minor metals, we'll continue to see an increase in their evaluation.

Nathan Hunt: If you look at the history of commodities markets, they typically have started a lot like the market you're talking about for rare earth metals, right? Where initially at least it was people having to negotiate the complexities of actually having and holding individual commodities. And we see that that's still an issue in the oil price crash last year related to storage capacity in Cushing, Oklahoma. But do you think that the market for disposing specifically in rare earth metals in general will mature over time? Will we have dysprosium futures contracts with time?

Terence Kooyker: This is always a tough one. A possibility of it, yes. But you need a diversified producer base to actually achieve that, to get it listed properly. First, you need to decide what the deliverable grades will be. And then you need to convince people or producers that they should make those deliverable grades in whatever the deliverable sizes, but with some of these minor markets, there's resistance to having that sort of transparent price discovery. Steel is one of the largest metal’s markets in the world and it hardly trades on futures contracts. There are a number of them listed for iron or two and for steel, for hot rolled coil, but producers were resistant to it because frankly the more opaque, the larger the margin on either side of the trade. So, I think you'll find that there is resistance to it. But eventually I think it's possible because always the impetus for having some contract listed is the need to hedge and auto companies will want to hedge this. So, even if it's not listed someplace, you might have OTC or over the counter markets for it, which would then make it accessible to other investors as well.

Nathan Hunt: Is there a big enough customer or sector, like for example, autos that could force a degree of standardization and transparent price discovery on the market for dysprosium?

Terence Kooyker: Yes. Short answer is yes. And usually that will be done through the suppliers of whatever components that would be. I would think that magnet manufacturers or even EV motor manufacturers would want to start that type of business where a company might or an auto company might have a long-term contract to supply components with some company and as part of that contract, they also can trade in the materials that go into those components. And hedge their price exposure. That's usually how something like this would start.

Nathan Hunt: Terence, thank you for joining me on the podcast and I will look forward to our next podcast on a different element of the energy transition. The Essential Podcast is produced by Molly Mintz with assistance from Kurt Burger and Lundon Lafci at S&P Global. We accelerate progress in the world by providing intelligence that is essential for companies, governments, and individuals to make decisions with conviction. From the majestic heights of 55 water street in Manhattan, I am Nathan Hunt. Thank you for listening.

The Essential Podcast is edited and produced by Molly Mintz.