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Freeport-McMoRan Copper & Gold Inc
(Corrects location of financial adviser Hallgarten.)
The helicopter took off, the wooden city of Ketchikan slowly receded, and the mountainous rain forest approached. It was an unseasonably warm day in February 2007. Through circles of moisture on the windows the passengers watched the choppy gray ocean off the southern Alaska coast roll by underneath. In the back seat, Jim McKenzie, a 45-year-old Canadian entrepreneur with a swoop of salt-and-pepper hair, tried to relax as he stared out the window with the eyes of an excited 12-year-old. On the green edge of the horizon was the mountain he’d bought the mineral rights to, sight unseen.
Beside him sat Harmen J. Keyser, the geologist who first told him about the mountain. Keyser, a dour, blond 6-foot-6 Dutchman, was now a vice-president of McKenzie’s company. Beside the pilot sat the man who sold the rights to the mountain, a 78-year-old prospector who’d waited 50 years to make the deal.
First, McKenzie saw the forested edge of Prince of Wales Island, a sparsely populated piece of Tongass National Forest about the size of Delaware. Then he spotted his mountain for the first time—Bokan—just a shadow, then a soaring, knobby granite peak punching up through the dense spruce. On most days, Bokan Mountain hides behind mist. This day was clear. They could see scars on the mountain where prospectors had searched for uranium for half a century.
The helicopter touched down at the base of a path at the head of Kendrick Bay. The three passengers stepped out and hiked up to the open pit where the first miners had scooped out 315,000 pounds of uranium. In 1957, Climax Molybdenum (FCX) opened the pit, named it the Ross-Adams mine after the discovering geologists, spent a year digging, and left. There was still a layer of radioactive dust on the road.
The three walked up the path to a root-filled hole. Crews called it “the 700” after its height above sea level. Miners for Standard Metals had started a tunnel there in 1959. Traces of mining life remained—a collapsed shack and boxes of rock samples. The three went down to the other side of the mountain and picked through rocks on the beach at Moira Sound.
Eight mining companies had held claims on Bokan Mountain before McKenzie came, and all had closed. They were looking for uranium, and most cleared out before they ever sold an ounce of ore. Theirs was poor luck and poor timing. Based on a resource assessment performed for McKenzie’s company Ucore by Aurora Geosciences, Bokan may contain mineral deposits worth $6.5 billion. That figure is not for uranium, though, but a group of elements called rare earths.
Rare earths are crucial to modern and developing technologies but were little discussed until a temporary embargo in 2010 by China, which produces about 97 percent of the world’s supply, sparked a global prospecting frenzy. The cheaper and more abundant of these elements, such as lanthanum and cerium, catalyze reactions and “crack,” or refine, petroleum in the chemical industry. Neodymium, praseodymium, and dysprosium are used in electronics, jet engines, and missiles. “If you’re looking at a technology and you think there’s some kind of magic component to it, it’s rare earths,” says Daniel J. Cordier, a mineral commodity specialist at the U.S. Geological Survey.
There are 17 rare earth metals on the periodic table, divided between “heavy” and “light” based on their atomic weight, the heavies being far more rare and expensive. Together they’re referred to as technology metals. In the 1980s research in rare earths led to the revolution in electronic miniaturization. Scientists figured out how to fuse them with other metals to make permanent magnets 200 times more powerful than magnets made of steel alone. That allows for the tiny neodymium magnets in headphones and hard drives, and the servos that make cell phones vibrate. In display screens, yttrium phosphors create the reds, terbium the greens, and europium both the blues and reds. They’re in military technology and in electric cars, too: About two kilograms of neodymium and dysprosium make the motor run in a Prius. They’re also an important part of the green revolution. The gearbox of a 300-foot-tall, two-megawatt wind turbine contains 372 kilograms of neodymium and 60 kilograms of dysprosium. At today’s prices, those rare earths alone cost $301,680.
McKenzie’s climb up Bokan Mountain, as he tells it, came about through luck and because he was semi-retired at the time and a bit bored. During the Internet boom, when Canadians first installed cable modems in their households, he owned Mediapro, a 150-operator call center in Nova Scotia that guided new subscribers into broadband. He sold to AT&T (T) in 1999 for an amount he won’t disclose. He does say that the deal made him a multimillionaire.
McKenzie had befriended Wade Dawe, a founder of Birchpoint Capital, based in Halifax, which represented investors looking to invest in uranium. Dawe shared stories about mineral hunting, which sounded exciting to McKenzie, real hands-in-the-dirt stuff, unlike the telecom business. McKenzie eventually went to work for his friend.
Just two months into the job, in October 2006, Birchpoint sent McKenzie to the Vancouver office of Harmen Keyser, a geologist and helicopter pilot. Keyser owned mineral interests around the world; he knew his rocks. Surrounded by cardboard tubes filled with geological maps, they completed the last details of a deal for a uranium deposit at Carroll’s Hat in Newfoundland. McKenzie had been counseled by Dawe always to inquire about mineral leads. Just before leaving his meeting with Keyser, McKenzie remembered to ask, “Do you know of any other good properties?” McKenzie recalls this as his “Columbo moment,” as if he were Peter Falk surprising a murderer with his final, telling question.
Keyser paused: “I do have one.” He described a visit to an old prospector in Alaska who owned mineral rights on Bokan Mountain. The prospector was an enigma; he’d refused Keyser’s $1.7 million offer for the rights. Keyser shrugged it off—not his business. But the mystery intrigued McKenzie. Why would a man with few years left turn down the most lucrative sum he’d ever been offered?
“I’m going to go there and get to know this guy,” McKenzie said. “If I sign the deal, I’ll give you a piece of it.” Keyser accepted. He’d already spent a year trying to close a deal and had given up. He was not optimistic.
A month later, McKenzie endured the 12-hour Halifax-to-Vancouver-to-Seattle-to-Southeast-Alaska flight. The prospector met him at the airport in an old green Pontiac and brought him home. For his entire life the man had been called Red for his ginger hair. Now he was just Bob, Bob Dotson. His hair had been replaced by liver spots.
Inside his house a few miles outside the only city in the area, Ketchikan, population 8,000, Dotson sat in a La-Z-Boy while his wife, Irene, fixed coffee. He’d built the house, and the road outside, too, which he named Dotson’s Lane. He talked about the closing of both the cannery and timber mills. The only business in town came from tourists on cruise ships, which was no business at all. He had this vision, he said, that Bokan would one day become a large-scale uranium mine and bring hundreds of jobs to Southeast Alaska. But so many companies had disappointed him by pulling out before production that he’d become suspicious of mining executives and their contracts.
To close the deal, McKenzie felt he had to get to know the Dotsons. “I was willing to go down a turkey trail and not really know where it would end,” he says. “Maybe it was the situation. I did have the time to do it, but I don’t know how many people would have.”
A hierarchy exists within the mining world, and prospectors like Dotson sit at the bottom, lacking the status brought by geologists’ degrees or investors’ money. They piece together the science and the trade by themselves. To his advantage, McKenzie carried none of the industry’s prejudices. So when Dotson explained his theories about the mountain’s geology, rather than dispute him, McKenzie just wanted to know more. Within two days, he checked out of his hotel and moved into Dotson’s basement. He woke up with the Dotsons, drank coffee, and watched Fox News with them. Occasionally he whipped up eggs and sausage for the couple.
He relished Dotson’s stories about living in Alaska when it was still a territory, about being stalked by wolves in the snowy woods, about claim jumpers and gunfights and nuggets of gold. “Bob made me feel like this was treasure hunting,” McKenzie says.
The only digging they did took place in Dotson’s home office, among its 51 years of records about the mountain. They rifled through file cabinets and enormous stacks of reports. McKenzie took notes as Dotson poured over hand-drawn maps and enormous aerial photographs of southeastern Prince of Wales and Bokan. They examined piles of rocks, gravel in jars, and long transects cut from bedrock. At one point, McKenzie found an old radiation detector under some papers. He pulled it from its leather satchel. When he turned it on it began to squeal.
“Bob, this is broken,” McKenzie said.
“It’s not broken,” said Dotson, pointing to the rocks. “You’re surrounded by uranium, brother.”
Dotson explained how he’d joined the first landing party as a surveyor to stake the mineral claims on Bokan in 1955. One of the geologists, Don Ross, of the Ross-Adams mine, had found the deposit by dangling a radiation detector outside the window of a tiny Piper Cub propeller plane while he skimmed the peaks of Prince of Wales Island. When they finished surveying and staking, Dotson believed they had missed some of the uranium, and Ross let him do some exploring on his own. Following lines of radiation along the ground with his detector, he staked his own claims toward the base of the mountain.
Mining crews came and went, but they finally abandoned Ross-Adams and let the claims expire. Dotson’s site, however, remained untouched. For a half-century, between weeks at sea as a ferryboat pilot, he worked on Bokan, trying to gather enough data to attract investors. Dotson dug trenches with Irene, and later his son, Ray, and two daughters, Mary and Susie. The children grew up among the rocks. “They used to catch salamanders. They thought there were baby alligators,” Dotson said. Beneath the forest, black and tan stripes run through granite. The Dotsons used saws and rock hammers to cut inch-deep channels into these stripes for sampling. But Dotson’s radiation detector picked up more thorium, a radioactive element associated with rare earths, than uranium.
Dotson told McKenzie about rare earths, how every rocket ship and missile needed them, but he wasn’t initially that interested. He was there for uranium. China was building nuclear power plants, and the West was pushing for alternatives to fossil fuels. Dotson and McKenzie both pictured uranium from Bokan feeding that global hunger.
“Ultimately,” McKenzie says, “he just wanted someone to really care for the project.” After two weeks, Dotson agreed to lease McKenzie his claims, but to complete the deal, McKenzie had to delve into the Dotson family psyche.
The federal government allows prospectors to own no more than 10 claims without having to pay extensive fees. To avoid those fees, Dotson had split his claims among his grandson Derek and his two daughters, Susie and Mary. The sisters no longer spoke to each other and hadn’t sat down with their father in several years. It had been a long time since investors had shown interest in their claims, so the family agreed to hear McKenzie’s proposal. At 4 p.m. on a December afternoon, they all checked into a roadside motel in Mount Vernon, Wash., midway between the daughters’ homes. McKenzie and Dotson, who’d flown in together from Alaska, sat on one bed. Susie and Mary sat on the bed across from them. They negotiated for seven hours.
“Bob had put his whole life into it,” says McKenzie, “and even the kids were half raised out there.” They weren’t just debating a contract, they were trying to work out a happy ending to a family saga. They’d all spent most of their lives trying to make the mine a reality. “It’s like an American pioneer family and they’re all obstinate. That’s what makes for good prospectors,” McKenzie says. “But they’re so used to fighting that they don’t know when to stop, even when they’ve won.”
Long past nightfall, they signed a simple letter of agreement. Susie and McKenzie stepped out to smoke. Bob went for a walk alone in the dark. McKenzie wrote a check for the down payment the next morning. They agreed that Dotson would receive $320,000, Susie and Mary each $100,000. McKenzie also granted each a 2 percent royalty on the value of any ore extracted from their claims. If the mine goes into production, as expected, the family will become rich.
In the end, Ucore, a company formed by Birchpoint and now traded on the tiny Toronto Stock Venture Exchange, paid $995,000 for the entire site. Birchpoint provided C$1.65 million (about the same in U.S. dollars) of capital, and McKenzie invested C$100,000 of his own for a 6 percent share. After he signed Bokan, he invested another C$400,000 of his own money. Keyser became vice-president, and McKenzie, with no mining experience, became the chief executive officer.
That winter, when the legal contracts were settled, Keyser set out to mark the limits of their claim. To the underside of a helicopter he strapped metal stakes tagged with claim numbers registered with the Bureau of Land Management. Keyser’s crew flew the helicopter to the corners of Bokan and dropped one stake from the air at each corner, which crews then dug in properly, creating a rectangle that eventually grew into 9,421 acres. Having staked their claim, they would register it with the BLM. It is a system that has been around since the 19th century.
The following summer, McKenzie contracted a mine exploration crew to begin plumbing the veins of uranium under the mountain. They lived on a barge on the south side of Kendrick Bay, protected from the weather. Every morning and afternoon, a team took skiffs across the bay to drill holes hundreds of meters into the bedrock with a two-story-high diamond tipped drill. When one team finished its shift, another replaced it, so that the drill spun at all times. From each site they extracted a core sample, a smooth cylinder of rock used to track the passage of mineral veins. These would provide data on the concentrations of ore at different depths. With enough core samples they’d be able to project the vein’s path. By 2010, after three summers on-site, they had almost 9,000 meters of core, some scavenged from previous mine explorers, and 143 drill holes.
Concentrations of rare earths ran alongside the veins of uranium, but the uranium deposit appeared to split from the rare earths at a site on the mountain called the I&L zone, after old claim holders Irma and Lester Hollenbeck. McKenzie faced a literal fork in the road—follow the uranium vein up the mountain or chase the rare earths to the southeast. The answer became obvious in 2009, when China said it would cut rare earth exports over the next six years. “When China made their announcement it was like, ‘O.K., we’re definitely going to the southeast now,’ ” McKenzie says. “I put a press release out and we traded 6 million shares that day.”
Aurora Geosciences, Ucore’s exploration consultants, believes that there are at least 3.7 million tons of rare earths under the mountain, 40 percent of which are the more valuable heavies. They say these bundles of narrow veins, many no thicker than the length of a hand, descend at least 200 meters into the bedrock and run northwest at least 2,000 meters across. Though it appears to be a small deposit, no other verified deposit in the U.S. matches the purity of its grade. “It’s the most significant heavy rare earth deposit in the U.S.,” says Luisa Moreno, an analyst at Jacob Securities, a Toronto-based investment bank.
As with any resource play, Ucore faces a wild market. The value of the publicly traded company stood at C$72 million in mid-October and has swung with the values of the metals. Christopher Ecclestone, a mining strategist at financial adviser Hallgarten, in New York City, notes that any billion-dollar figures for the value of the minerals in the mountain neglect the massive cost of removing and purifying the ore, and can be “pretty bogus.”
“It’s just like walking into a cotton field and saying this cotton field is worth $20 million of Hanes underwear,” he says. Still, he concedes, “Ucore pulled the lever on the machine and came up with the right number of cherries.”
In September 2010, three months after McKenzie had changed the company’s name to Ucore Rare Metals, a Chinese fisherman crossed into waters contested by Japan and rammed his boat into two Japanese Coast Guard vessels before he was arrested. China retaliated by cutting off the supply of rare earths to Japan, and then the U.S. and Europe, for five weeks. China never officially announced its reasons for the halt, or that there even was one. Effectively an embargo, it accentuated what was already coming to pass. In the past five years, China has cut export quotas by nearly half, while imposing a tariff of 25 percent on the four most expensive rare earths and a 15 percent tariff on the rest. Unsurprisingly, rare earth prices have exploded, some more than twentyfold. Dysprosium, which had been $185 a kilogram on June 1, 2010, reached $2,850 on the world market in August. It has since fallen nearly 30 percent, but remains far higher than it was five and 10 years ago.
“I think it’s problematic that China, or one country, is controlling so much of the market,” says Senator Mark Begich (D-Alaska), a member of the Senate Armed Services Committee. “It’s incumbent upon us from a national defense, national security, and an economic security perspective that we recognize that we have to have a broader approach to our minerals.”
At the end of 2010 the U.S. Energy Dept. declared five rare earths to be most critical to the future of the green energy economy. Dysprosium, a metal found in high percentages at Bokan, topped the list. Congress has proposed five bills regarding rare earth metals; some offer loan guarantees for miners, others suggest stockpiling the metals. “A domestic rare earth supply is very important,” says David Sandalow, assistant secretary for policy and international affairs at the Energy Dept. “Security rests above all in diversity of supply, and domestic supplies are the most secure.”
The crisis also led to a deluge of rare earth exploration companies; in 2009 there were only a handful, “and those companies were mainly starving to death,” says Ecclestone. According to Technology Metals Research, 244 different companies have fanned out into 35 countries, searching in 381 sites in places like Greenland, the Mojave Desert, and the Australian outback. In July a team of Japanese scientists proposed vacuuming up rare earth-rich sands off Hawaii. The only problem is that they’re 11,500-20,000 feet underwater, virtually unreachable with today’s equipment.
Molycorp (MCP) owns a rare earth mine in an open pit in the Mojave Desert at Mountain Pass, Calif. The mine was closed in 2002, partly because tailings contaminated a dry lake bed with thousands of gallons of water containing thorium, and partly because China sold rare earths for less. Seven years later, Molycorp announced plans to reopen the mine, aiming to produce 19,050 tons of light rare earths oxides a year, which would make it the world’s largest producer. Though the deposit mainly contains the less-desirable light rare earths, Molycorp announced in October that it has found a deposit of heavies, though further investigation is needed to confirm whether the site has concentrations worth mining.
“The only source of heavy rare earths that the U.S. has that could come online in this decade would be Ucore’s,” says Jack Lifton, founder of Technology Metals Research. “Ucore should be able to produce 180 tons a year of dysprosium. If they get to that, they’ll be the largest producer of dysprosium outside of China—ever.” At current prices, 180 tons of dysprosium would be worth $367.4 million.
McKenzie expects to begin production in 2015, and is hoping to raise $100 million from the state of Alaska and manufacturers who need a stable supply of rare earths. He says Ucore plans to build a mine complex on Bokan, including a mill, a conveyor belt to the shore, a base camp for the miners, and a dock so that processed rock can be loaded straight onto barges.
At the close of this year’s summer season, drill crews pulled 43 more core samples from Bokan. In some ways, the operation has been easier than McKenzie expected. When the U.S. Forest Service threatened to slow drilling over road permits, a whirlwind of political support materialized. Politicians rallied around Bokan because it offers a source of good jobs. “We are at the brink of a new promise, a promise of rare earth minerals,” Alaska Governor Sean Parnell declared at a minerals summit in Fairbanks in September. “Our state is going to play a vital role to enhance our nation’s security, and in improving our nation’s economy.”
When China took over the rare earth industry 10 years ago, it also took over the associated supply chain. For U.S. manufacturers to use rare earths from Bokan, the country must rebuild industries in rare earth separation, metalmaking, alloying, and magnet production. Alaska is now weighing whether to underwrite a rare earth separation plant on nearby Gravina Island, the site of Ketchikan’s airport. Thus McKenzie finds himself selling not just the construction of a mine, but likely a $25 million to $35 million rare earths separation facility.
“What Ucore has in the ground is valuable, says Jacob Securities’ Moreno. “The question is, is it economic to remove?” Mineral exploration is an obstacle course with a finish line that most never cross. Still, McKenzie plunges ahead, perhaps optimistically, maybe naively.
McKenzie is as surprised at the results of his venture as anyone. “I didn’t think I’d get into the minerals business,” he says. “It looks like I orchestrated this brilliant move, right? But it’s just inadvertent luck.” McKenzie acknowledges that this good fortune rides on the shoulders of people who devoted their lives to the mountain.
On McKenzie’s first helicopter journey to Bokan in February 2007, after three hours at the site, the sun was low in the sky. It would be night by 4:30 p.m. at that latitude, so McKenzie, Keyser, and Dotson loaded into the helicopter and flew back to Ketchikan. Keyser would be back in a few days to finish scoping, McKenzie would return in the summer with a drill crew. The helicopter took off, and the mountain grew smaller with distance. Dotson, now in a wheelchair, frequently on oxygen, has yet to return.