Sharp Rebound in Critical Minerals, Canada-China Spat, & a Federal Price Backstop
MARKETS UPDATE
Following three weeks of steady losses, critical minerals finally saw a V-shaped turnaround, and this time, it was driven by easily identifiable, sector-specific news. First, in a sign of margin stress, China’s CATL, the global battery leader, announced a decision to close its lepidolite operations in Jiangxi, equivalent to 8% of China’s lithium supply. Several hours later, China’s stalwart ally Vladimir Putin declared that his country “should consider” limiting exports of uranium, titanium, and nickel in retaliation for Western sanctions, adding that such restrictions could also be extended to other commodities. In reaction to the news, shares of strategic minerals and uranium companies were propelled northward by aggressive short-covering, even though the gains made barely a dent in the prevailing trend that has depressed the prices in the last couple of weeks and months. Despite this week's reprieve, the MVIS Rare Earths/Strategic Metals Index has narrowly recovered the September losses. This week's events clearly illustrate that bottom-level prices are unsustainable, and geostrategic risks drive up premiums on projects controlled by Western or Western-aligned operators. This has been the investment thesis of the decade, though extended timelines continue to test investors' patience. (1)
GEOPOLITICAL INSIGHTS
Following a public consultation on how to respond to “unfair Chinese trade practices,” Canada aligned its policy with its G7 allies—the United States and European Union—and announced a 100% tariff on imports of Chinese electric vehicles, up from the 6% imposed to date. Ottawa will also slap a 25% tariff on steel and aluminum imported from the PRC.
Chrystia Freeland, Canada's deputy prime minister and finance minister, acknowledged that the country must now assess its trade relationships through a national security lens. Her nation relies heavily on two-way trade with the US and has been closely watching the Biden administration's moves to impose higher tariffs against Chinese EVs, solar cells, batteries, steel, and other products.
“Geopolitics and geoeconomics is back. That means that Western countries— and very much the US — is putting a premium on secure supply chains and is taking a different attitude towards Chinese overcapacity,” Freeland said. Alluding to Canada’s critical minerals endowment and vibrant mining industry, she added: “And that means that Canada plays an even more important role for the United States.” Justin Trudeau’s government had promised billions in subsidies to lure global automakers such as Volkswagen AG and Stellantis NV to set up electric-vehicle battery production in Ontario to supply North American assembly plants.
Freeland brought up an earlier statement by the North Atlantic Treaty Organization, which labeled China a “decisive enabler” of Russia’s invasion of Ukraine. The Deputy Prime Minister pulled no punches, even stating that China's entry into the World Trade Organization more than two decades ago “was a mistake.” “I see that Leninist precept in Chinese economic policy — of dominating the commanding heights of the global economy and of acting quite intentionally to undermine and cut out Western competitors,” she said. “I think it’s high time for us to be clear-eyed about that.”
Beijing didn’t wait long to lash back. In retaliation, China plans to start an anti-dumping investigation into canola imports from Canada, lifting prices of domestic rapeseed oil futures to a one-month peak. Just this week, Beijing announced that it would take Canada to the WTO to challenge Ottawa's decision to impose new tariffs on Chinese EVs and metals.
To complete its round of anti-G7 moves, Beijing has also attacked Tokyo’s alignment with Washington’s foreign direct product rule ("FDPR"), a US regulation that allows American authorities to control the sale of products made with US technology, even if those products are manufactured outside the United States. China has threatened severe economic retaliation against Japan if Tokyo imposes further restrictions on sales and servicing of chipmaking equipment to Chinese firms, thus complicating US-led efforts to cut the world’s second-largest economy off from advanced semiconductor technology. Toyota Motor privately told officials in Tokyo that Beijing could react to new semiconductor controls by cutting Japan's access to critical minerals essential for automotive and semiconductor production. FDPR has been used to restrict China's access to advanced computing chips by targeting foreign-made products that rely on American technology or tools, effectively kneecapping CCP-controlled companies such as Huawei and slowing down China's ability to advance its supercomputer industry.
The US side has stated that it is working with Japan to ensure a stable supply of critical minerals. While diplomatic solutions are preferred, the US has not ruled out using FDPR to enforce compliance. However, the planned resignation of Japanese Prime Minister Fumio Kishida this month and the US presidential election in November complicate the timing of reaching such a solution.
China's counteroffensive also scored important victories this week, including the Spanish Prime Minister's flaky statement opposing the EU's tariffs on China's EVs. He was promptly joined by the ever-incoherent Chancellor Olaf Scholz. European carmakers, already suffering from low capacity utilization, expressed dismay at the ease with which Beijing is able to divide and conquer the members of the continental trade bloc.
SUPPLY CHAIN OBSERVATIONS
With critical minerals prices in the doldrums for the third straight year, the Biden administration is considering using public coffers to prop up US critical minerals projects undermined by a relentless drop in investibility. A combination of persistently low prices, Beijing's predatory trade policies, uncompetitive cost of capital, and private investors' general lack of interest in the space, the US government is investigating how to support the troubled projects whose timelines are becoming uncomfortably extended.
In a move somewhat reminiscent of the arrangements that marked the fledgling platinum market in the 1970s, the US Department of Energy would set a price floor and agree to pay the difference when market prices fall below that threshold for critical minerals produced by certain US-based projects. OEM’s slow disenchantment with the EV space is adding to the urgency. Following General Motors’ decision to delay its USD $330 billion commitment to Lithium America's Thacker Pass project in Nevada, the department said on September 3 that "it is working closely with Lithium Americas to finalize a USD $2.26 billion loan by the end of the year." But the federal government’s grants, low-cost credit, or promises thereof, have thus far failed to ignite investors’ excitement about the US mining sector.
A federal price backstop for strategic materials would help meet the Biden Administration's fundamental goal of boosting the domestic production of minerals for clean energy technologies such as electric vehicles, a global supply chain China now dominates. It reflects the growing bipartisan consensus that the capital markets have failed in identifying the key sectors vital for America’s reindustrialization. Democrats and Republicans alike are keen to bury Adam Smith and David Ricardo and resurrect Alexander Hamilton and Friedrich List. And they are using critical minerals to speed up the shovels and escape the steely embrace of China’s overcapacity.
It’s unclear how much the policy would cost. The Department of Energy appears adamant that the policy would be structured to “nudge” the sector of its current lethargy and would not amount to the provision of permanent subsidies. It is unclear what that means for NPV spreadsheets of mining projects, but it appears designed to facilitate early offtake agreements with future customers. Such deals are a condition sine qua non to attract heavyweight finance for project construction. Still, in a fast-changing value chain (e.g., OEMs), the flow of commitments has been choppy and too heavily concentrated around a handful of Korean players. In some cases, mining developers were forced to throw in the towel and peek behind the Great Wall.
The Office of Manufacturing and Energy Supply Chains, the core body helping to accelerate energy transition, focuses primarily on construction. So far, nobody has figured out how public policy could help reduce mining developers' cost of equity. This myopia may result from the fact that the bulk of exploration and development companies rely on small and illiquid, yet public equity markets in Canada and Australia—a phenomenon virtually unknown to the US-based start-up universe.
It is not entirely clear whether DOE can set up—and fund—a price backstop effort without explicit authorization from Congress, especially after the Supreme Court limited federal agencies’ discretion earlier this year by overturning a decades-old legal doctrine. Should the nation's highest court go down this path, it would be reminiscent of Germany's troubles. Europe’s largest economy is suffering from perennial underinvestment, partly owing to its Constitutional Court’s curbs on deficit financing. This is not the way to compete with the PRC.
The DOE is exploring what it can do within its existing authority to avoid such hurdles. One option is to repurpose some grant funding intended for minerals projects.
Companies surveyed last spring expressed “strong support” for the DOE to implement “demand-side tools,” such as a price floor or contract for differences. On the anode side, US taxpayers' support would offset the spread between (pricey) North American graphite and the imported material from deflation-mired China.
The question arises whether the DOE's interventionism is a familiar story of too little too late. In late 2022, DOE selected 21 projects, focusing not on mining but on processing and recycling, leaving the Department of Defense as the only federal agency directly supporting upstream projects. The 21 projects collectively received USD $2.8 billion from the bipartisan infrastructure law, with little or no consideration for the pricing environment. Then, in 2023, as the projects negotiated the grants' terms, the price of lithium fell by 75%, and the price of cobalt, nickel, and graphite each dropped by between 35 and 50%, with most prices dropping further this year. Partly due to the slump, a third of the slated projects, which were set to receive a collective USD $1 billion, failed to make it through the negotiations to receive the awards. Such unused funds could now be utilized to prop up the market.
Several companies in the grant pipeline have instead sought loans from DOE's Loan Programs Office, which has over USD $200 billion in estimated loan authority and can provide a more significant share of a project's financing. Since May, mining and extraction projects in the critical minerals sector are also eligible for such DOE loans. It is theoretically possible for companies to obtain both grants and loans. But will that be enough to overcome permitting morass, organized hostility to projects, and the sector’s near invisibility on US investors' radar screen?
MINING & EXPLORATION NEWS
ASX-listed Galan Lithium entered into an offtake prepayment memorandum of understanding with Chengdu Chemphys Chemical Industry. The Sichuan-based company will purchase a total of 23,000 tonnes of lithium carbonate equivalent in the form of lithium chloride. The terms cover the first five years of Phase 1 production from the Galan’s Hombre Muerto West project in Argentina’s Catamarca province. Chemphys will also provide Galan with a USD $40 million offtake prepayment facility to facilitate the continued development of Phase 1 of the project. Galan's CEO expressed his delight after the deal. Galan has since received firm commitments to raise AUD $12 million via a placement at AUD $0.105 per share. Chemphys will subscribe for USD $3 million. In addition, the company launched an AUD $13.3 million one-for-four non-renounceable entitlement offer at the same price as the placement. The funds will be used to develop Hombre Muerto West further, as well as corporate overheads and working capital needs.
Fujian-based copper-gold and lithium miner Zijin has lowered its lithium production forecast for 2025. The output will fall below its target of 25,000 tonnes. The company will control the pace at which its projects are commissioned and constructed as the industry grapples with oversupply. Zijin views Chinese lithium prices as "unsustainably low,” pointing at recent studies that show that new production is not viable at today’s prices. Zijin will postpone the launch of two lithium projects, one in Argentina and another in Chinese-controlled Tibet. The first phase of Argentina's Tres Quebradas lithium carbonate project had a planned capacity of 20ktpa. In contrast, the first phase of the battery-grade lithium hydroxide project at Tibet's Lhaguo Tso salt lake had a capacity of 20ktpa.
Australia and US-listed Piedmont Lithium has withdrawn its application for a debt package from the US DOE loan program, which was expected to help fund its North Carolina project, which includes a mine and a lithium refinery. The project is expected to cost north of USD $1 billion. The adverse market conditions are forcing the company to scale back its expansion plans. Piedmont had previously canceled its Tennessee project, which had already received all necessary permits. The North Carolina project was expected to have a total capacity of 60ktpa lithium carbonate equivalent.
ASX-listed rare earths developer Viridis Mining has released assay results from extensional drilling at Cupim South (now on granted Mining Licenses) and maiden auger drilling the Centro Sul target in Brazil’s Minas Gerais state. The best results from Cupim South include 21m at 15,339ppm TREO from surface, including 10m at 28,425ppm TREO. Better results from Centro Sul include 5m at 6,666ppm TREO from 10m. Most intersections are above the hitherto reported grade of 4,500ppm TREO.
The Western world’s largest rare earths miner, Lynas, declared that Stage 1 construction at Mt Weld in Western Australia is complete, and commissioning has commenced. The company expects Stage 2 construction to be completed by mid-2025, but the ramp-up at the Kalgoorlie plant will be slowed down in response to the prevailing market conditions. The plant currently runs on a batch basis, with periodic shutdowns for maintenance and optimization during the ramp-up phase. During the second quarter, the company generated income of AUD $86.1 million, a beat against CGe and consensus (A$78m and A$68m, respectively), driven by higher interest income but partially offset by lower tax expense. Management expects the 12-month capex commitment to range between AUD $400 million and $500 million, exceeding earlier projections.
Australia’s IGO Limited (formerly Independence Group) surprised the markets with a significant (AUD $0.26) dividend, reiterating the management’s faith in the EV future and the vital role that lithium will continue to play in electrification. The company intends to focus its efforts on further optimizing its Greenbushes mine in Western Australia, arguably the world’s best hard rock lithium deposit. IGO also plans to maximize cash flow from Nova, its aging tier I underground nickel asset. The company’s future exposure to nickel will depend on the metal’s price trajectory. Net earnings were negatively affected by an exploration write-off of AUD $286 million and AUD $171.8 million impairment of assets (Cosmos and Forrestania). The balance sheet is fragile, marked by a net debt of AUD $328 million – an uncomfortable position given the growing imperative to replace reserves.
ASX-listed major Mineral Resources joined the chorus of companies announcing increased capex guidance. For the next 12 months, the Western Australian firm expects AUD $1,945 million in capital expenditure. Mineral Resources is developing the Mount Marion lithium underground mine and is finalizing (a downsized) Onslow iron ore project despite low lithium prices and a wobbly iron ore market. The company is highly leveraged, with a net debt of USD $4,428 million, and, unlike IGO, declined to pay out a dividend. Still, earnings for the previous 12 months were 22% ahead of market expectations. Following some bizarre accidents of its road trains, the company’s stock has recently fallen to a four-year low.
US-based MP Materials is continuing its share buy-back program. The company announced a USD $300 million increase to its share repurchase program, raising the total authorized amount to USD $600 million while extending the program's duration until August 30, 2026. The program certainly is helping the share price, which has bucked the negative trend affecting most critical minerals companies at the moment. Since the previous earnings report, the company has repurchased roughly 1.4% of the company at an average share price of USD $10.84, 25% below the most recent print. Throughout 2024, MP Materials has repurchased about 8.6% of its shares, spending USD $225 million.
Idaho-focused antimony and gold developer Perpetua Resources has received a key approval for its mine. The US Forest Service plans to make public a draft record of the decision authorizing the restoration of a historical mine within the Stibnite Gold project in the Payette and Boise National Forests. The open-pit mine has an estimated 4.8 million ounces of gold reserves and a reserve of 148 million pounds of antimony. Shares of Perpetua, already propelled by China’s announced curbs on antimony shipments, reacted positively to the announcement.
US-Australian miner Arcadium Lithium suspended Stage 4A waste stripping and any expansionary investment beyond Stage 3 at its high-cost Mt Cattlin spodumene operation in the southern region of Western Australia. The company has laid out plans to place the Mt Cattlin mine into Care & Maintenance after it completes Stage 3 mining and ore processing by the end of the first half of 2025. Arcadium will endeavor to avoid a complete shutdown of the facilities. The management is exploring the viability of underground mining at Mt Cattlin, which could potentially extend the remaining mine life. Arcadium will determine other project deferrals over the next 18 months. This will apparently not affect the historically troubled Nemaska project in the James Bay region of Quebec.
SOURCES: (1.) Market Data from Bloomberg as of 10:00 AM ET, 12 September 2024, in the local currency. (2) Additional data courtesy of Arcadium Lithium Corp. (ALTM US), Contemporary Amperex Technology Co. Ltd. (300750 CH), Chengdu Chemphys Chemical Industry Co. Ltd. (private), Galan Lithium Ltd. (GLN AU), IGO Ltd. (IGO AU), Lithium Americas Corp. (LAC US), Lynas Rare Earths Ltd. (LYC AU), Mineral Resources Ltd. (MIN AU), MP Materials Corp. (MP US), Perpetua Resources Corp. (PPTA US), Piedmont Lithium Inc. (PLL US), Viridis Mining and Minerals Ltd. (VMM AU), and Zijin Mining Group Co. Ltd. (2899 HK).
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