Mining Markets


The tech metals supply squeeze

With the world’s growing middle class gaga for gadgets such as smart phones and tablets, and the push to improve carbon-friendly technology for electric vehicles and wind turbines, many of the materials needed to make these items are...

With the world’s growing middle class gaga for gadgets such as smart phones and tablets, and the push to improve carbon-friendly technology for electric vehicles and wind turbines, many of the materials needed to make these items are becoming both scarce and expensive.

Aside from being used in high-tech applications, what these metals share in common is that supply is dominated by one country (often China), which spells out supply risk for industry end-users.

Mining Markets spoke to three industry experts about the technology metals and minerals that are causing manufacturers the most grief and the stocks/companies that could take off as a result.

Luisa Moreno, metals and mining analyst at Jacob Securities has a thing for rare earths and tantalum; Matt Gowing, strategic metals and clean tech analyst at Mackie Research Capital, likes lithium and graphite; and Chris Ecclestone, mining strategist at Hallgarten & Company, is bullish on antimony, tungsten and fluorspar.

The China factor: 90%
Price forecast: 2012: US$12,000-US$14,000 per tonne
Analyst pick: Mandalay Resources (MDN-T)

The ancient Egyptians used antimony for black eye makeup but nowadays it’s used in lead alloys, batteries and semiconductors. And because it’s a poor conductor of heat and electricity, it’s mostly known for making flame-proof materials.

“Now that cars have more plastic, they need to use much more antimony,” Ecclestone says. “Cars are death traps without it.”

The price for antimony has doubled over the last year to about US$12,000 per tonne because China, which is responsible for nearly 90% of world supply, has been trying to clamp down on pollution and illegal mining.

Ecclestone says antimony is an interesting investment over the long term.

“It’s not hot, except for those who are desperate to get it,” he says. “There isn’t space for twenty antimony companies out there, but there is a good scenario for long-term growth, allowing a few small companies to make money.”

There was a small company in Canada that started to capitalize on this; Beaver Brook Antimony Mine Inc. restarted its mine Newfoundland in 2008 after closing a decade earlier due to low prices. The following year, the mine was bought by the largest antimony company in the world, China’s Hunan Nonferrous Metals Corp. Soon after, China Minmetals Corp., China’s biggest metal trader, bought a 51% stake of Hunan.

Although China is the world’s dominant producer, it’s been importing antimony to meet its own demand after shutting down some domestic production. About 60% of global antimony supply comes from Lengshuijiang, in Hunan province, but the government has ordered the cleanup of more than 100 illegal and unlicensed mines and processing facilities. It won’t be granting new mine permits until June.

For investors looking for a play on antimony, Ecclestone recommends Mandalay Resources (MDN-T), which operates the Costerfield Australia gold-antimony mine in Victoria, in addition to a silver-gold mine and a copper exploration project in Chile.

Ecclestone warns that Mandalay is long-term story that could see its stock decline in the near term.

“The company has multiple mines in different jurisdictions, serious management and a sizeable market cap. . . but I think the stock is fully priced,” he says.

He sees the antimony price being stable around $12,000 to $14,000 per tonne over the next year.

The China factor: 58%
Price forecast: N/A
Analyst pick: Canada Fluorspar (CFI-T)

Another mineral that has gotten little attention is fluorspar. It’s used in anesthetics, non-stick coatings like Teflon and fire-retardant clothing. China produces 58% of world fluorspar supply and is starting to restrict exports.

“Now it’s a big scramble among international chemical companies (to secure fluorspar supply),” Ecclestone says.

Ecclestone recommends Canada Fluorspar (CFI-T), which is reviving an old fluorspar operation in Newfoundland. The company has secured a powerful partner and offtake agreement, and the project is funded to production.

In fact, France’s leading chemical company, Arkema, bought a 50% stake in Canada Fluorspar. The company aims to have the operation up and running by 2014, producing 120,000-180,000 tonnes of fluorspar acidspar concentrate per year. Arkema will have the right to buy a small portion of the output at a low rate for 10 years.

“The French are putting tens of millions of dollars into it to make it happen,” Ecclestone says of the fluorspar mine. “That’s how desperate they are to get their hands on production.”

The amount of fluorspar traded on the international market is relatively small — about 700,000–800,000 tonnes in 2010 compared to the world consumption of 5.6 million tonnes. For that reason, Ecclestone doesn’t have a price target for fluorspar.

The China factor: 80%
Price forecast (80+ mesh): 2012: US$2,775 per tonne  2015: US$2,631 per tonne
Analyst pick: Northern Graphite (NGC-V)

Graphite is in demand — and not just for pencils. Its tolerance of high temperatures make it perfect to line steel mill furnaces. It’s also used in batteries, in automotive parts, such as brake linings and clutch materials, lubricants and fire retardants.

China supplies up to 80% of the world’s graphite but has been limiting exports in order to meet domestic demand.

However, China imports most of its “large flake” graphite and that’s one area that Gowing sees as an attractive investment.

“Large flake graphite is used in lithium batteries,” Gowing explains. “Manufacturers need 25-30 times more graphite than lithium. . . it should be called the ‘graphite battery.’”

Prices for large flake graphite have ballooned from more than tripled since 2005, when it cost US$717 per tonne.

For investors, Gowing recommends Northern Graphite (NGC-V), which plans to start construction of the Bisset Creek graphite mine near North Bay, Ont., by mid-year. Commercial production is expected to follow in mid-2013. The company recently signed a co-operation agreement with a Turkey-based Grafen Chemical Industries to develop intellectual property rights for graphene research and will supply the high-purity, large flake graphite from Bisset Creek.

“Large flake deposits can withstand price fluctuations better,” Gowing says.

Cash costs for Bisset Creek are expected to be $1,000 per tonne while the long-term average graphite price is forecast to be $2,500 per tonne.

New applications for graphite are also being developed in relation to electric vehicles, mobile electronics, fuel cells, nuclear reactors and solar PV cells, which Gowing says could drive up demand.

The Chile factor: 39%
Price forecast (lithium carbonate): 2012 forecast: US$5,477 per tonne   2017: US$5,982 per tonne
Analyst Pick: Canada Lithium (CLQ-T); Lithium O ne (LI-T)

It’s the electrification of the car and new technologies for large-scale power grid storage that makes Gowing believe that lithium will be one of the most important strategic metal investments in the coming years.

Most of the world’s lithium currently comes from Chile, Australia, China and Argentina and more than half of that production is from brine projects, which are much cheaper to operate than hard rock mines.

“But lithium supply from some sources is vulnerable to weather,” Gowing says. “Brines in Chile and Argentina are affected by heavy rains and in China, the projects often freeze over, all resulting in lower production.”

This has caused inventories to fall while demand continues to increase and is projected to keep doing so in coming years as more electric vehicles come on the market. In 2005, lithium carbonate cost only US$2,125 per tonne, less than half the current price.

Gowing expects lithium demand for electric vehicles alone to grow to 130,000 tonnes by 2020, which is just a little more than the total amount of lithium sold in 2011.

Lithium price contracts reflect this, Gowing says. The three largest producers, Sociedad Quimica y Minera (SQM), FMC (FMC-N) and Chemetall, a subsidiary of Rockwood Holdings (ROC-N), have increased their price contracts by 20% this year, choosing higher margins at the risk of losing market share. These top producers have multiple revenue streams with lithium representing a small part of their overall businesses.

Although hard rock mines have higher costs, Gowing’s top pick in the sector is Canada Lithium (CLQ-T), because its Quebec lithium mine is much more advanced than any of the new brine plays. Canada Lithium expects to commission its open-pit mine and processing plant near Val d’Or, Que., late this year, with full production of 20,000 tonnes lithium carbonate per year achieved by 2013.

Gowing says investors with a longer-term outlook could look at Lithium One (LI-V), which plans to release a feasibility study in the third quarter of this year for its Sal de Vida lithium and potash project in Argentina. Gowing says the high grade and low impurity levels demonstrated so far could help Lithium One become one of the lowest-cost producers in the space, and would allow the project to go ahead no matter how volatile the lithium market becomes.

The China factor: 95%
Price forecasts:
Neodymium: Current: US$200 per kg (China FOB)      2015: US$71 per kg
Dysprosium: Current: US$1,410 per kg            2015: US$984 per kg
Terbium: Current: US$2,810 per kg      2015: US$1,683 per kg
Analyst picks: Matamec Explorations (MAT-V); Frontier Rare Earths (FRO-T)

China produces more than 90% of world supply but since 2008 it has cut export quotas by 40%. More recently, it’s been slashing domestic production both to preserve its depleting resources and because of the environmental destruction caused by some of its mines. Meanwhile, demand has risen for these 15 minerals and so have prices. In the last two years alone, some prices are up 1,700%.

The situation has put the rest of the world on high alert to find and develop rare earth deposits outside of China. Hundreds of exploration companies have popped up with a mandate to find the next big rare earth deposit. Ecclestone warns investors that most of these companies won’t ever develop a mine.

“I’m scathing of the whole rare earth space,” Ecclestone says. “The key is the P-word: production. If you aren’t near, you might as well pack up your bat and ball and go home.”

Ecclestone admits he’s not completely bearish for all of the rare earth metals. He sees limited upside for the heavy rare earths, which are pricier and facing more of a supply crunch.

That’s why Luisa Moreno, metals and mining analyst at Jacob Securities, believes that rare earths are still worth investing in. “We still like thin cell phones and iPads, which depend on these elements,” she points out. “And we have not solved the problem with China being the dominant producer.”

Molycorp (MCP-N) will be restarting its Mountain Pass REE mine in California this year and Lynas Corp. (LYS-A) is aiming to have its Mt. Weld REE mine, in Australia, running by 2013. However, these deposits are light REE deposits, containing more of the less desirable minerals like cerium and lanthanum. “So the story will continue,” Moreno says.

Investors should look for projects that have a higher proportion of heavy REEs and are close to production, Moreno advises. She’s keeping a close watch on Matamec Explorations (MAT-V), which is advancing the Kipawa project in Quebec. “It’s got heavy rare earths, Toyota is involved and production is in sight,” she says.

In late 2011, Matamec signed a non-binding deal with Toyota Tsusho Corp., the trading company of the Toyota Motor Group. The deal could result in a 49%-51% partnership that would help Matamec accelerate development and secure financing, while giving Toyota Tsusho a secure supply of rare earths. It wouldn’t completely solve Toyota’s supply issues, however. “The Kipawa deposit is not enough to satisfy demand so Toyota will have to continue to look for more,” Moreno says.

Moreno’s other rare earth pick is Frontier Rare Earths (FRO-T), which will soon be coming out with a preliminary economic assessment for its flagship Zandkopsdrift project in South Africa. It’s not only one of the largest REE deposits outside of China, it’s also got a high proportion of heavy rare earths.

“One caveat is the recovery rates …there have been issues with the metallurgy,” Moreno says. She’s looking for an improvement on that front in the PEA.

Like Matamec, Frontier has signed a deal with an industry partner that could help accelerate the project and ensure customers down the road. Korea Resources Corp. (KORES), the Korean government-owned mining and natural resources investment company, has the option to acquire up to a 20% interest in Zandkopsdrift and has as an offtake agreement for up to 31% of production. Frontier is aiming for production of 20,000 tonnes of total rare earth oxides by late 2015.

The DRC factor: <10%
Price forecast: Current: US$110 per lb. 2013: US$90 per lb.
Analyst picks: Advanced Metallurgical Group (AMG-Euronext)

Tantalum is used to make capacitors for almost all cell phones, laptops and other electronics and much of it comes from Africa. The tantalum price was low for years due to a flood of supply from so-called “blood tantalum” mining operations in the Democratic Republic of Congo but efforts to clamp down on illegal supply helped contract prices more than double over the last three years.

 “But that will depend on how well laws are enforced in the Democratic Republic of Congo,” Moreno says, referring to a crackdown on conflict minerals.

It’s not clear how much tantalum from the DRC is making its way into our everyday gadgets.

Global Advanced Metals recently announced it’s shutt
ing down the world’s largest tantalum mine, Wodgina, in Australia, due to high costs less than a year after it was reopened. Because of this, Moreno sees potential for tantalum to be in short supply.

“Niobium can be used as a substitute for electronics but it’s bulkier. . . tantalum powder is best,” Moreno says.

Although there are a few TSX Venture Exchange-listed companies with tantalum projects, Moreno likes the Netherlands-based specialty metals company Advanced Metallurgical Group (AMG-EURONEXT). Listed on the Euronext in Amsterdam, AMG operates the MIBRA mine, in Brazil. MIBRA is the largest source of conflict-free tantalum outside of Africa. AMG currently produces about 300,000 lbs tantalum per year (plus niobium) and is working on debottlenecking to increase production to 400,000 lbs.

The China factor: 82%
Price forecast: Current: US$445 per tonne 2013: US$485 per tonne
Analyst pick: Woulfe Mining (WOF-V)

Tungsten is another metal that China dominates when it comes to production. In the 1980s and ‘90s, China flooded the market with its-low cost production, driving down the price and driving producers in the rest of the world out of operation. Over the last few years, as it has with other technology metals, China has been restricting exports to conserve resources for future domestic needs and has forced illegal mining operations to shut down.

That’s why Ecclestone is bullish on tungsten. It’s an extremely hard metal used for cutting tools as well as in the aerospace industry, military applications and electronics, and users outside of China are looking for a secure source of supply.

Since 2010, the price has jumped to about US$445 per tonne from US$250 per tonne. Ecclestone expects the price will likely peak at US$485 per tonne in 2013 but will remain in the US$400-range.

“Prices may peak in 2013 and then start a light decline, mainly because Western world production will pick up,” he writes in a December 2011 report.

But production won’t be enough to seriously move the price lower because China’s strategy is unknown.

Ecclestone recommends would-be tungsten investors to check out Woulfe Mining (WOF-V). It’s trying to revive what was once the world’s largest tungsten mine, in South Korea.

The Sandong tungsten-molybdenum mine shut down due to low metals prices in 1992 after 40 years of production, and Woulfe has been busy proving up National Instrument 43-101 resources. The company is aiming to put out a feasibility study by the end of the first quarter.

Woulfe’s predecessor company, Oriental Minerals, tried unsuccessfully to restart the mine between 2007 and 2010, but Ecclestone believes the new management is much more capable. One of the company’s major shareholders is Korea Zinc, the world’s biggest producer of refined zinc.

— The author is a chase producer at BNN and a former staff writer with The Northern Miner.

— This is a corrected version of the original story, which had tungsten priced incorrectly per lb. instead of per tonne.

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