Strategy Metals Bulletin (59)

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

Terence van der Hout                    

Mar 10 – 17, 2012 Gold&Discovery Fund

Europe gets organized around the critical metals supply chain
Scarcity of minerals is getting serious attention in Europe. After centuries of devastating exploitation of its natural resources, and a further number of centuries of exploiting those of its colonies, Europe has begun to realize it cannot sustain its level of development without secure access to a broad scope of critical minerals.

Germany, traditionally a country with a high level of industrialization, is most dependent on a steady supply of raw materials. It is also the first country to feel the effects of an absence of inputs that have supply constraints, and has recently started initiatives that seek to diversify their sources of supply. The initiatives are from both govement and business.

Under the guidance of the German Mineral Resources Agency (DERA), German industry is advised on such matters as diversification strategies, identifying supply constraints, and the raw material potential. If that sounds rather vague and bureaucratic, then the Alliance for Resources, a business initiative, is a lot more pragmatic.

Large companies in the chemical industry (such as BASF and Chemetall) and in the automotive sector (BMW, Daimler, Bosch), have joined forces to lobby govement for policy-making, they intend to move upstream in the supply chain to brokerage and help develop mining projects, and thirdly they seek to jointly negotiate potential off-take agreements with miners. A final phase of jointly managed funds to finance the whole undertaking is foreseen.

Of course, the South Koreans and particularly the Japanese have been at this game for years, and have managed to capture a number of sources of valuable minerals (Dong Po in Vietnam, and Orissa in India for rare earths). Long overdue, for Europe this initiative is an encouraging start. The initiative may provide a solid support for various advanced and promising rare earth, graphite, tantalum, antimony and vanadium projects, (as well as other metals) in Europe, America and Africa.

It is the first instance in which business is diverging from the official stand point that free markets always provide for access to raw material inputs. German business has realized that a purely market approach to scarce raw materials no longer works. This is explicitly recognized. Some materials critical to various value-added industries may not be available at any price. With the further monopolization of these metals, industrial development is jeopardized, and access therefore presents a fundamental problem. Govements, on the other hand, abhor this standpoint. In fact, the idea of free markets is so well embedded in politics, that any step away from it will require a complete overhaul of the European trade agreement system, and render the WTO obsolete. Not likely to happen. But industry has more pressing business than to worry about politics, and is moving ahead by itself.

Certifying tantalum in the DR Congo
Tantalum has recently charged to the top of the critical list. The Dodd-Frank Act, expected to be enforced by the US Congress sometime this year, seeks to force suppliers and users of raw materials to prove that their origin is from a non-conflict region. A large portion of the official tantalum supply and an even larger unofficial portion (in the form of coltan), is sourced from illegal mines in the Democratic Republic of Congo. Their proceeds are believed to provide funds for various factions which are ravaging the region with armed conflict and genocide.

The Dodd-Frank Act has not yet been ratified, and part of the reason for this is that an objective certification process has not been developed. The German Scientific Agency (BGR) has advanced a long way towards developing such a system at the source, namely where the metals are mined. The BGR plans to take samples of all mineral occurrences (of tantalum) in the DR Congo, establishing a database of the chemical composition of minerals based on single grain analysis. Thus, a company acquiring the mined and processed metal can use the Analytical Fingerprint (AFP) to determine the origin of the ore, and match this with a database containing sites that are situated in known conflict regions, or which are known to be illegal.

The system will have a voluntary character, and this may be due to the tremendously complex and yet arbitrary nature of the certification process. Every site within an area roughly the size of India will need to be sampled. Then who determines which site is conflict-free or illegal? I can see a lot of opportunities for corruptive practices from the side of the certifiers, and wonder whether this may become just another additional chink in the exploitative chain that seeks to drain the DR Congo of its resources whilst squandering the proceeds on violence.  

Molycorp makes a bid for Neo Materials
In a not too surprising move, Molycorp announced a take-over bid for Neo Materials, a Canadian company with rare earth element concentration and separation facilities in China that produce magnetic powders, phosphor powders and zirconium oxides and alloys.

After the previous takeover of Silmet, the strategic investment by Molymet, and the joint venture with Mitsubishi and Daido Steel, Molycorp is buying itself into becoming a powerhouse in the unique art of separating rare metals. I have attempted to picture the Molycorp consortium in the picture below in relation to the steps in the production process of rare metals. The original Molycorp expertise is in mining and separating the light rare earths (LREE), and is depicted in the pinkish colour. The Daido/ Mitsubishi JV is added in at the bottom. The SIlmet functions are in green, the Molymet expertise in orange, and Neo Materials’ added value in blue.

 

Should the take-over bid be successful, Molycorp will be the non-Chinese rare metal processor supreme, and could become the processor all North American REE juniors tu to get their concentrates separated into individual oxides.

A few chinks in the chain are still absent, and they are of prime importance for Molycorp’s mines-to-magnets strategy. For one, the production of magnets, the most value-added step, is in the initiation stage and production is by no means imminent. Secondly, Molycorp is partially dependent on sourcing LREE, and all of the heavy REE (HREE) from China. Given China’s plans to become an importer of HREE, this supply is anything but guaranteed, and Molycorp should be expected to make a move into securing a robust source of non-Chinese HREE in the future.

On a finishing note, The Gold Report has been kind enough to publish an interview with me: http://www.theaureport.com/pub/na/12740

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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.

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