August 21, 2019 Gregory Silberman - Chief Investment Officer, Atlanta Capital Group
…And so the saga continues, China holds the threat of withdrawing REMs from the US, threatening to undermine global supply chains. These threats translated into action when China last week increased the import duties on ores and concentrates to 25%.
This is a bit of a blow to the supply of REMs as most mine operators around the world export their ores for processing to China. The processing of the ores is environmentally very polluting and radioactive involving acid baths and radiation. The numbers of such facilities outside of China are few and far between. Not to mention the few that existed like the Mountain Pass mine and processing facility in California had to shut down because they couldn’t compete with Chinese costs.
Chinese companies are already some of the dominant producers of REMs, now the extra import duty on foreign ores for processing could almost be considered a death knell for Western ore suppliers.
That’s Tough for REM Miners and Processors, right? – No, It’s Great!
The last couple of months have been better for the operators of mines/plants dealing in rare earth metals (REMs) than this last decade.
Mine operators with assets in the E.U, Russia, and Australia are all perking up at the thought of higher prices and beckoning opportunity. Keep in mind that four of seventeen rare earths are named after the village of Ytterby , Sweden for a reason.
For Australia’s Lynas, things couldn’t be better, being that it is one of the biggest producers of REMs outside of China, and is perfectly positioned having recently expanded its Mountain Weld Mine and Concentration plant in Western Australia to produce and process more oxides.
Thanks to the threat of disruptions in the Global supply chain other operators like Paladin Energy have made the decision to restart their Uranium mine at the Langer Heinrich mine in Namibia. In order to set this up they divested themselves of their holdings at the Kayelekera uranium mine in Malawi by selling its 85% interest to the Hylea and Chichewa joint-venture – Lotus Resources – to manage and mine.
According to Paladin CEO Scott Sullivan, this transaction will now allow Paladin to focus on its flagship asset the Langer Heinrich mine in Namibia. The Langer Heinrich mine ceased operations and was placed into care and maintenance a couple of years ago due to the drastic fall in world uranium prices. Now the great trade war and the threat to the supply of uranium heralds its revival, a revival that Paladin is anxious to support and promote with an infusion of funds.
Companies and operators across the board are clearing the decks, so to speak, to be prepared to reap the rewards this trade war and its aftermath could generate.
But if a Trade Deal happens?
Doesn’t matter, this is the second time China has done this. The first time there was an unofficial ban on exports of rare earths to Japan and the E.U., it came in the form of long delays in export clearances, scheduling slowdowns at the ports etc. While none of this had any formal official sanction, it was an obvious retaliation to the Senkaku incident, all done to show the world that China could cause significant industrial distress if it wanted. And it did cause distress.
Keep in mind this current kerfuffle is not the official Chinese position, not a single Chinese official has officially spoken about the possibility of banning the export of rare earths, but neither have they denied it. This very silence has caused uproar with papers and blogs across the world commenting about this non-comment.
This is now the second time the ‘rumour’ of a possible ban, none of which come from ‘official sources’ have roiled the markets. Some ‘unofficial op-eds’ by concerned Chinese citizens in the People’s Daily, a photo op or two of Premier XI at REM processing facilities, and et voila industries across the world have to face the possibility of having to re-budget their entire year’s spending and costing.
This simply cannot be allowed to go on.
Even if China does not follow through with the import duty on ores, and does not ban the export of rare earths this time…what about next year, or ten years from now. Geopolitics being what they are, and the rapid changes in consumer behaviour, all coupled with a slowing global economy does not bode well for long-term economic stability for as long as the status quo exists.
A decade ago the ‘unofficial’ slowdown on export of these essential minerals caused a furore and dinged industries. Now ten years on any such move would have massive consequences affecting the production of everything from solar cells to satellites. Any and all projections and predictions envisage industry using even more of rare earth minerals as time goes on, not less.
This same doubt about the REM supply chain in 2030 could have catastrophic consequences that no one in their right mind wants to face.
This proverbial Damocles sword cannot be allowed to hang around threatening the future of world industry. This danger is something nations across the world have finally, belatedly woken up to.
This is why a meeting of industry in Brussels last week was determined to reduce the planets dependence on China. The trade association called Rare Earths Industry Association (REIA) was formed to bring together all the partners in the REM supply chain with the aim of “Supporting Transparency” across the supply chain.
Read Diversification of Supply Sources!
That’s Nice, but Christmas?
The companies I mentioned up top, Lynas, Paladin Energy, Hylea? Who do you think is going to benefit?
Worldwide, companies that source REMs, and countries where their manufacturing is based out of, are going to be heavily invested in ensuring that companies that operate anywhere but China get competitive, and if that means subsidies, so be it.
It’s the dawn of a new age in Rare Earth Metals people. An age where countries are going to do whatever it takes to make native sourcing of REMs competitive and where independence is the new mantra.
Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group Investment Management.
Greg Silberman is the Chief Investment Officer of ACG Investment Management LLC (“ACGIM”). ACGIM specializes in creating custom private market solutions for RIA/Family Office clients.
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