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

Terence van der Hout – Gold&Discovery Fund

Dec 18 – 24, 2011

This week’s bulletin takes a look at China’s decision to exclude Baotou from the country’s approved list of exporting companies, we see political issues continuing at Lynas’ Malaysian separation plant, and Greenland profiling itself as a future mining country to Chinese investors.

Baotou excluded from export list
In October, China announced it would suspend production at the world’s largest rare earth mine, Baiyun Obo, at Baotou. As explained in SMB50, the mine produces 60% of the world’s rare earths (of the lighter sort), and I considered the falling away of a few months’ production a nuisance, indirectly aimed at raising the export (FOB) prices. On Monday, the story received a serious follow-up with the announcement that Baotou will be excluded from the Chinese Ministry of Commerce's list of 11 approved exporters for next year, citing environmental conces.

Currently, Baotou has the highest quota for export, and if I use Gareth Hatch’s figures and select all the companies that are linked to Baotou, we are talking about a loss of 25.8% of the amount of rare earths currently available for export to the west, or 7,800 tons. So is this a bad thing? Well, an Aussie newspaper has cited industry insiders as saying the “lost exports from Baotou could lead to acute supply constraints and potentially prompt a surge in rare earth prices, mirroring a similar spike when China banned exports to Japan last year over a diplomatic row”.

For sure, if China is seeking to maintain current export quota levels, the remaining Chinese production capacity would need to fill the gap. We know a number of Chinese operations have been closed, and we also know that China is aiming for an annual production of roughly 90,000 tons moving forward. If for 2012 we take away all of Baotou’s production from the quotas, there would be roughly 18,000 tons left from other operations to ensure current export quotas are filled. These operations would collectively almost need to double production from current levels to achieve this goal. And REO will remain available to weste manufacturers at current levels only if China is willing to cede all of this added production for export.

Although these calculations are fairly crude for lack of a more accurate insight, even with a higher margin of error it becomes very clear that export quotas for next year will be substantially lower, should China follow up on these statements. We may not immediately notice the effects, given the economic state of Europe, the USA and Japan, but should policies become focused on providing more liquidity to the markets, we should find production in various sectors using rare earths pick up again, and cause renewed serious shortages in REE supply chains. Things may heat up again, with good chance of a repeat of rising prices, recycling and re-engineering efforts on the part of the manufacturers, hoarding, moon-mining stories and other forms of misinformation that will keep the media happy and the general public confused.

Lynas update
Lynas is insisting they will start processing rare earths at their Malaysian separation plant during the course of 2012, in spite of increasing resistance at grass roots level protesting against the hazards of radioactivity at the site and its surroundings.

As we discussed in a previous bulletin, Malaysia has a REE-radioactivity trauma thanks to Mitsubishi’s gross neglect during exploitation of their REE refinery in the nineties. Local birth defects and leukemia were allegedly linked to their operations. This has caused an understandably deeply rooted suspicion of similar current initiatives in the country, however much standards have improved since then.

However, in the run-up to the elections expected next year, the Lynas-issue has become politicized to the highest levels. Under pressure from regional politicians, Malaysia’s inteational trade and industry minister came out in public opposition to Lynas, reprimanding the company for  releasing completion dates for their separation plant that pre-empted the Govement’s approval process. The minister was further cited as saying  “The absence of any meaningful consultation prior to the construction of the rare earth plant is unacceptable.”

As we leaed from the IAEA representative in Hong Kong, the problem that Lynas have is not technical. It is assumed their plant complies to the highest environmental levels. The problem is social engagement, and the failure to address this sufficiently has politicized the issue to unnecessary levels. Given the history of REE production in Malaysia, social anxiety should certainly have been one of the major criteria for selecting the site for Lynas’ separation plant. And if it was taken into consideration, social engagement should have been a prime focus of activities from the outset. Even after eruption of the protests, Lynas would have been better suited to maintain a very low profile, instead of raising expectations about their production schedule.

Greenland presents itself
After wresting political autonomy from Denmark a few years ago, Greenland govement officials have recently gone on a road show to attract investors for their vast untapped natural resources, and the main focus is China. Mr. Berthelsen, Greenland's minister of Industry and Mineral Resources, led a delegation of Greenlanders to the China Inteational Mining Conference in November in search of Chinese mining companies willing to invest. The minister said his goal is to change Greenland into a land of mining resources. The govement hopes to see five or six mature projects for extracting iron, zinc and rare earths under way within five years.

Greenland is particularly looking for proceeds from mining in terms of infrastructure. Although the additional employment opportunities would also be welcomed, the inhabitants are largely fisherman and hunters, not destined for lives hauling rocks. Thus, importing Chinese labour would not present a large problem, further lowering the hurdle for Chinese companies.

Another positive development accommodative of REE mining in Greenland has been the govement’s recent inclusion of radioactive materials in rights to apply for exploitation licenses. Mining of substantial volumes of uranium is currently still forbidden, and the regulation change allows companies holding deposits containing uranium as a by-product (notably Australian company Greenland Minerals) to apply for an exploitation license.

Besides Greenland Minerals, which holds the largest rare earth resource outside of China, another company active in Greenland is fellow Australian company Ram Resources, exploring a deposit with large historic niobium and tantalum potential. Ram Resources is in early exploration phase. A third company exploring in Greenland is Hudson Resources. Hudson have changed from a diamond discoverer to a REE explorer when the REE market set fire last year. They have a light rare earth deposit of respectable size.

The opening up of Greenland presents a once-in-a-lifetime opportunity for resource-starved China to gain access to the Arctic, and it would surprise me greatly if Chinese investors failed to answer the minister’s call.

Twitter: @GoldDiscFund

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.