For an issue that was the storyline for the second season of "House of Cards," one of

the most popular shows among Hill staffers.

The refinery can't proceed while we're in a trade war.

We want you to kill it for good, and we want you to kill it today.

You'd think this would be something that we'd be more aware of.

The biggest uses of rare earths are for the electronics and auto industries.

We want our companies building those products right here in America. But to do that, American

manufacturers need to have access to rare earth materials, which China supplies.

In your phone, rare earth elements. Whole world runs on this.

Neodymium and Samarium help the Abrams tank navigate. They make up night-vision goggles

and radar systems. One US government report found element shortages have already delayed

some weapons production.

Really, guys? You're going to build an entire military based on a mineral element that's

wholly controlled by China? I need a drink.

Lost in cable news reports and popular entertainment is the most important fact of the ongoing

rare earth crisis. The United States was once a world leader in harnessing rare earth technologies.

This leadership was not beaten by Chinese rare earth subsidies, nor lax environmental

regulations in China.

How did China come to not just surpass the United States, but to dominate rare earths

so completely? This was a question addressed in a 2014 briefing to congressional staffers.

The full briefing was 80 minutes long. This 20-minute summary contains all the highlights.

If House of Cards moved this fast, it would have wrapped in a single season.

There are no issues here, then.

We're prepared to offer the 40-year lease on the Mei Mei Rare Earth Elements Refinery.

For appearances.

Yes, appearances.

Your iPhone that you have in your pocket right now

has nine different rare earths in it. Toyota Prius, magnets and the batteries and

all the material additives, the lighting, the communication systems, the defense systems

and so forth, all of that uses rare earths.

As you might imagine, the world demand for rare earths is just only growing. Even though

the United States has a considerable supply of rare earths, we are largely dependent on

China for these critical metals. The United States holds about 13 percent of the world's

rare earths reserves.

China, on the other hand, holds about 50 percent of the world's reserves, and China actually

accounts for about 95 percent of all rare earths production. About 91 percent of American

imports actually come from China.

The rest of the rare earths are still coming out of China, but they come to us through

France. They come to us through Japan. In the end, it's all coming out of China.

Now, at NCPA, we agree with free trade among nations, and so we really have no problem

with depending on foreign nations for different goods and services. But in this instance,

there is a problem, because China threatens to use their dominance over rare earths as

a weapon in trade disputes. They've actually demonstrated this in a dispute that they had

several years ago with Japan. Imagine if that were to happen here in the United States.

China very soon will use 100 percent of the rare earths they produce. They will legitimately

be able to say, "We can't afford to export rare earths anymore. We use them all ourselves."

They'd be absolutely right.

China's becoming more and more an internal consumer. If the 130,000 tons that are produced

a year, 100 million of those tons go back into China, they never get into the market.

At some point, China is going to keep all of their rare earths, and it's going to be

acceptable that they're going to do this. They'll be using all of it. When is that?

2018.

2018?

Yeah.

Why is Apple building the phones in China? Because they can procure the rare earths.

China has really, in a very clever way, inherited all the manufacturing.

One thing our congress is really good at is defending IP, right? You guys are proactive

there. You're going to find out that all of those rules and all those laws that we've

created, and all the mechanisms for enforcing it, are only going to play into China's hand.

China's used this monopoly to strip the world of their IP.

They don't design anything in China. They make companies come to China via rare earth

minerals and other industries, then they say, "If you're going to come here and you're going

to be part of our market, you must turn over your IP." When China signs a 10-year deal,

after that 10 years, they boot that company out and it goes to a Chinese company.

The CRS, the GAO and the Pentagon keep putting out reports going, "Oh, we're doing great.

We're making progress." They reference two mining companies that are mining rare earths.

They're taking the really good stuff that matters and they're shipping all that powder

to China, and China turns it into the magic. Now, do they own the company in China that

does that? Yes, so they tell everybody, "Hey, we're doing everything." But that's not really

going to work on that F-35.

We've had to get exemptions, a number of exemptions, so that we can import the rare earth materials

to configure this airplane. That's very unusual to get these exemptions, and we've got a lot

of them.

Our defense industry is 100 percent reliant on China. If they control the metal, the alloys,

the magnets and the [inaudible 05:15] garnets and components that go onto our military systems,

they in fact control procurement.

Today, we are announcing an indictment against five officers of the Chinese People's Liberation

Army for serious cyber-security breaches against six American victim companies.

When pieces of our equipment are manufactured in China, they have access to those specs.

If we spend a trillion dollars on the F-35, China spends a million dollars in China to

look at the blueprints. They caught up to us really quick.

The state-of-the-art defense technology is dependent upon someone we're competing with.

We can live without the cell phones, as inconvenient as that would be, but you can't live without

that. How did we get here?

The US used to lead the world. We owned all the IP, all the technologies, extraction processes,

all the metallurgy. The Chinese government was coveting this company called Magnequench,

what had the best IP portfolio for rare earths in the world. Deng Xiaoping's direct family

members on the down-low said to GM, "You want to build an auto manufacturing facility in

China? Give us Magnequench."

A government-sponsored process to capture all of the technology. If we aren't willing

to fight to get it back, we're left as an extractive economy with basically commodity

sales, which, I'll tell you, is a pretty skinny business.

You take your ore and you crush that and you dissolve it, and then you use a very, very

complicated process. It's probably even more complicated than enriching uranium. That's

how hard this is. That's how you get those little powders. But those little powders are

pretty useless.

You give that powder to Martin Marietta or to Boeing, it's not like they can throw it

on an airplane. They can't do anything with it. They take $4 billion in pixie dust, and

they turn it into $7 trillion in high-value, high-growth, high-margin value-added goods.

That's 10 percent of the economy.

Even if US Rare Earths jumps into business tomorrow and starts producing rare earths,

all they're going to end up with is those powders. What are they going to do with them?

Their only customer is China.

GAO did a report a little while ago that says rebuilding a domestic rare earths supply chain

would take up to 15 years if we really wanted to ramp up.

A company comes along and tells you, "We're going to be a rare earth mine and we're going

to build our own value chain." It can't be done by an individual company. There's no

way you can take on a country who has got more human beings dedicated to the production

and value-adding of rare earths than we had in the Manhattan Project during World War

II. They literally have two cities that they call "Rare Earths Cities."

People involved in this, we love the free market. We think that is the best way to go.

But the first thing you have to recognize is that you are not dealing in a free market

when you're dealing with China. Realize that the companies that do do rare earths can take

losses all day long, as long as they're supporting a $7 trillion manufacturing base to the government.

The United States needs to respond. We need to respond to some things. We can't just be

totally passive and say, "Free markets will fix this one." The free markets aren't in

the room.

You need multiple players to have a free market and we must, in the Western world, step up

and participate in this.

You're pulling out rare earths and your deposit has, let's say, 8 percent rare earths. It

may have 14 percent thorium. Thorium was classified as a nuclear fuel in the early part of the

atomic age, as if it would be uranium, plutonium.

The liabilities associated with being the proud owner of source material, it is so horrific

that no public company I'm aware of will ever take on that risk.

In the '80s, the IAEA lowered the threshold for the definition of source material. All

of these domestic producers of rare earths who are producing these wonderful rare earths

that we had the full spectrum, all the heavy stuff, their customers no longer wanted to

accept the material.

Because when the customer would take the material and extract out the rare earths they wanted,

they had a little pile of thorium, and they didn't want to own that little pile of thorium

because nobody knew what to do with it. It's not the kind of stuff you throw out the back

door, because people that did that back in the '20s [laughs] are still paying for it.

Thorium is a very mild alpha emitter, very easily handled, not dangerous whatsoever and

not water soluble, can't get into the ground water.

This source material rule crushed the domestic supply of rare earths.

Thorium is just always with that material.

The value chain guys that used to take the powders and make the metals and the alloys

and the magnets, they slowly faded away, went bankrupt or relocated to China.

Mining companies today literally try to find deposits that don't have thorium. The problem

is, when you don't have thorium, you don't have those heavies. The result of that is

they end up with an abundance of material that typically sells at or below cost, causing

losses.

They have a tendency of putting more lipstick on a pig. We need to thoroughly understand

the consumer side -- grades, percentages of concentrations.

This is the only US mining company mining rare earths today, and anybody else going

into the business trying to avoid the thorium liability is going to end up with the same

general deposit. What's the problem with this picture? 83 percent of your product you're

selling at a loss.

Here's the stuff that matters for the United States. The problem is, they ship all of that

stuff to China to be processed into metals, magnets and alloys. What happens to all that

material that used to go into the value chain? Today, it's thrown away. They bury it. Companies

will really bury it to avoid the liability. How much? Plenty. We've got to deal with the

thorium problem.

But what if, instead of treating thorium as a waste, what if we treated it as a potential

energy resource?

There's no such thing as highly-enriched thorium. When you get thorium out of the mining and

refining process, it's ready to use as is.

How do you not take a perfectly good fuel source and put it back into the ground? If

we've gotten the thorium out of the ground and it's in a good form for a fuel source,

why not make it a material that we can use?

In fact, there's some exciting research underway to develop electricity reactors using thorium

instead of uranium.

This is not going to be a waste byproduct anymore. This is not going to be a burden.

Now, we will take something that has kept us for 30 years from participating in the

rare earth industry and turn that into energy.

Basically, in the '50s, the light water reactor became the reactor of choice for the Navy.

The suppliers of that -- General Electric, Westinghouse -- said, "Hey, we've built up

this whole supply chain and expertise. Let's make a civilian reactor out of this military

reactor."

Thorium can be used in solid fuel reactors, the CANDU reactor. But, by far, the best possible

use for it would be in a molten salt reactor. The thorium fuel is dissolved in a salt that

doesn't become liquid until about four or five hundred degrees.

The standard operating temperature for one of these reactors is 600 degrees Celsius,

three times that of a light water reactor. Light water reactors really don't make very

good heat. 330 degrees isn't very hot at all. They use water as a coolant. They're under

tremendous pressure -- 3,000 PSI.

Molten salt reactors can't blow up. They aren't under any pressure. You could actually look

into it. It'd be water-clear. You'd see it swirling around like a hot tub. They can't

melt down, because they are melted down. The whole point of it is, any time you stop working

with a molten salt reactor, it solidifies.

We've been well-served by pressurized water reactors, but we could do even better. The

cost is one-fifth. You don't have these huge containment vessels, these huge seven- and

eight-stage turbines to make your electricity. Everything is more compact, everything is

safer.

When you burn thorium in a molten salt reactor, you get 99.999 percent burn-up. When you burn