Terence van der Hout                    

Oct 26 – Nov 5, 2011 Gold&Discovery Fund

Aims to update investors on developments in the world of strategy metals – crucial inputs to industry, defense and technology innovation

This week’s bulletin retus to its roots of providing short bursts of information on developments in the critical metals. Firstly, we see Alkane making progress with securing partners for its niobium production, we observe further tightening of the REE markets by China through an invoice system, we continue our rant on crashing prices as an argument for discontinuing REE production in China, and we regard the ratio between FOB and China domestic REE prices.

Alkane finds downstream partner for its niobium
Alkane, an Australian company developing a strategic metal deposit, has announced it has signed a non-binding Memorandum of Understanding (MOU) with a European company to set up a joint venture (JV) which will use all of Alkane’s niobium production to manufacture ferro-niobium (FeNb) for application in the steel industry. Alkane plans to mine zirconium, niobium and REE in Australia, in 2014.

Niobium’s resistivity to high temperatures and to highly corrosive conditions makes it a perfect additive to steel in bridges and pipelines, and saves up to 10% of the weight of an average vehicle. I elaborated on the niobium market in SMB46, so I will not repeat all of that here.

What is important to realize is that Alkane has two possible production scenarios. The first is a 400,000 ton of ore per year (tpa) option, and the second envisages 1 mil tpa. Obviously, scenario two is preferred, as it enhances revenues and therefore profitability, but for that to materialize, it will need to find clients for all of its production of zirconium, niobium and REE. Having secured clientele for 50% of its zirconium in a non-binding MOU in July, this recent announcement ‘virtually guarantees’ the extended production scenario, as it locks up 100% of the niobium production. If Alkane can now secure clients for its REE, this would mean that the total production of REE Alkane will be putting onto the market on a yearly basis will amount to almost 6,500 tons. The main REE produced is yttrium, a heavy REE applied as colour phosphor in TV sets and LEDs. Alkane’s share will capture over 5% of the current REO market, and virtually all of the non-Chinese yttrium production, making for a very interesting source for Japanese and South Korean high-tech manufacturers. Alkane is continuing to prove it deserves a rightful place in the world of critical metals production.

China plans to introduce a new REE invoice system
In a further measure aimed at tightening Chinese REE production and materials available for export, Chinese industry actors have said the Chinese govement is planning to implement a new invoice system for the REE industry. The invoices will be launched in November by the govement aiming to further curb the illegal production of rare earths, as insiders believe the invoices will be linked to official production and export quotas. The invoices are used as an official stamp of approval for tax purposes, and the measure should officially eliminate the countless small scale illegal operations that currently do not fall under the REE quota systems.

The rant, part two
Last week’s rant, if you recall, was about the false argument of justifying Chinese production halts because of crashing REE prices within China. Well, the rant continues into this week.

In a 27th Oct article on Mineweb, a reputed website, an industry analyst was cited as saying “This month, the price of neodymium oxide declined 34% to $157 per kilogram, while europium oxide slid 35% to $2,904 per kilogram. All of this has shaken the industry in China”, and was the reason China is halting production at its largest REE mine, in October.

Well, according to the metal-pages data, there was no such 34 – 35% decline of the two elements over the month October. Neither was there such a decline a month earlier. As you can see below, europium dipped to a low in the beginning of September and is more or less flat since, whereas neodymium fell sharply in August and has shown moderate decline through to October. So where does that leave our analyst? Either metal-pages supplies incorrect data, or the analyst is hopelessly out of synch with the market. My conclusion remains – China is not halting REE production because of crashing domestic prices.

 

Ratios between FOB and China domestic prices
Just to add some completely unnecessary information to your already overloaded heads, I have tracked the ratio between Chinese domestic prices for light and heavy rare earths, and the FOB equivalents, over the past 9 months. This ratio is clearly finding a new equilibrium with prices much closer together now than two years ago.
 
 

As you can see, the average FOB price of LREE in January was 8 times more expensive  than the domestic price. This moved up to a ratio of 12:1 in March, and has come down to just over 3:1 this month. This has been due to the China domestic prices catching up with FOB at more elevated levels. For the HREE, the difference was less pronounced, and in fact, the FOB price of neodymium and dysprosium, the two elements that are most crucial for high performance magnets, is only 1.5 times higher than the China domestic price.

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Disclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund has commercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in this bulletin is the author’s independent opinion of developments in markets and at companies, and hence may contain factual errors, and may not reflect the opinions of the Gold&Discovery Fund. The content of this bulletin is not intended as an investment recommendation.

Copyright: The information in this bulletin can be forwarded, cited or used otherwise, but only within the context as intended by the author, and with complete reference to the source.