High Yields Stalls Equity Rally, US Tariffs on China’s Critical Minerals, & Canada’s Orphaned Lithium Projects
MARKETS UPDATE
US yields have jumped on the back of stronger-than-expected US economic data. Or is the bond market starting to price in a GOP sweep and an ensuing Trumpflation? Either way, rising yields may eventually cap the US stock market’s USD $9 trillion rally, driven by “Magnificent 7” mega-caps (now 32% of the total S&P500). The flip side of the Biden-era equity market’s unequal run is weakness in small caps, including most names in the critical minerals sector. Lithium stocks outperformed in early October, exhibiting strong China correlation, until they didn't, and the MVIS Rare Earths/Strategic Metals Index has all but managed to erase its October gains this week. But for now, at least, Shanghai/Shenzhen exchanges continue to suck in liquid funds from other Asian corners, even if these flows contradict the bets favoring GOP wagers in the US election. A Republican sweep would cut China’s external prospects to size, wouldn’t it? And if so, what gives? The intensifying “soft-landing” narrative in the US accompanies a rotation of funds into emerging markets, discretionary and industrial stocks, and out of defensive sectors such as staples and utilities. The worst losers from China’s stimulus are government bonds and Japanese equities, which have weakened despite a falling Yen. Reason? All this loose tariff talk is strengthening the dollar. And that's never good for the prices of minerals. (1)
GEOPOLITICAL INSIGHTS
A recent paper by Mark A. DiPlacido, Trevor Jones, and Chris Griswold for American Compass, entitled "Disfavored Nation," re-frames the issue of America’s primary policy goal to move the US away from dependence on China for certain critical materials.
The research delves into the three-decade old legacy of decisions the Clinton Administration supported at that time on a broadly bipartisan basis in US Congress. The authors propose a radical reshuffling of the trade barriers. Critical minerals are at the forefront of Chinese attempts to undermine Western security of supply, but printed circuit boards, active pharmaceutical ingredients (APIs), dry dock containers, and certain pesticide inputs are also exploited by Beijing to corner global electronics, pharma, agriculture, and trade sectors.
On page 18, the authors openly state, "The United States should immediately alter its approach to sourcing critical minerals and other inputs through decisive investment in these sectors domestically, perhaps in large part from revenue raised by the Column 3 tariffs and deregulation, not extend its reliance on Chinese supply chains."
This “Column 3” reference requires a bit of a background here. China was granted by the US Permanent Normal Trade Relationships (PNTR, formerly "most favored nation" or MFN) in 2001. After being suspended in 1951, China's MFN tariff status with the United States was restored 1980 conditionally under Title IV of the Trade Act of 1974. By 1996, all former Soviet states, including Russia, were granted MFN status. In the climate of liberal and democratic “inevitabilitism" that reigned then, China's MFN status was made permanent on December 27, 2001. It has been a one-way play since then. At that time, the US trade deficit in goods with China stood at USD $83 billion. In 2023, it was USD $279 billion.
Nations with which the United States has PNTR enjoy advantageous tariff rates and other market access benefits on the condition that those nations recognize certain market principles. China does not abide by this condition, and treating China as if it did has resulted in severe negative consequences for the United States, chief among them being the threat of supply chain dependence on a hostile power.
There is also a multilateral aspect to all this. Global Agreement on Tariffs and Trade (GATT) was initially signed by 23 nations in 1947, mainly as a liberal nations’ response to the growing economic (and political) colonization of Soviet bloc countries by the USSR. This process was sealed by Stalin’s creation of Comecon in 1949. Following the end of the Cold War, the WTO transformed the GATT agreement from an economic strategy linking like-minded nations into a vision for worldwide cooperation on trade. However, Washington’s prevailing “inevitabilism” at that time included many countries that did not align with market-based economics and had no intention to pursue a fair trade policy. That included the PRC.
The US, a maritime trading nation, has been committed since at least the 1940s to the promotion of free trade, and it has introduced the Harmonized Tariff Schedule (HTS), which distinguishes between "Column 1" and "Column 2" rates. The “Column 1” rates apply to nations that the United States has granted "Most Favored Nation" status, a legal designation meaning that the country will receive the United States' most favorable trade terms and most advantageous tariff rates. “Column 2” of the HTS defines the tariff rates applied to nations where the United States does not extend MFN status. Currently, only Cuba, North Korea, Belarus, and Russia are included in "Column 2".
China isn’t, but the awakening from the 1990s’ “inevitabilism” has been a rude one. The authors of the paper quote a series of reports. A 2022 report by the Department of Defense found China “dominates the global advanced battery supply chain, including lithium hydroxide (94%), cells (76%), electrolyte (76%), lithium carbonate (70%), anodes (65%), and cathodes (53%).” The Department of Defense further found that American reliance on Chinese lithium batteries, casting and forging, and microelectronics threatens US defense procurement. The Department of Energy, in turn, has established that “China also controls 61% of global lithium refining key for battery storage and electric vehicles and 100% of the processing of natural graphite used for battery anodes.” A 2023 report by the US-China Economic and Security Review Commission found that China is the leading source of 24 nonfuel mineral commodities for which the United States is more than 50% net import reliant. The PRC supplied 72% of rare earth imports to the United States from 2019–2022. A study by the Oxford Institute for Energy Studies found that, in 2019, China accounted for 70% of the world’s rare earth element production and 90% of rare earth element processing. Regular readers of Terraden’s Weekly are familiar with this data.
According to the authors, merely applying “Column 2” to the PRC would be insufficient to reverse these dangerous trends. For example, the tariff rate on uranium is zero in both “Column 1” and “Column 2”, as is the rate for several chemical precursors to fertilizer (a nod to Russian and Belarussian dominance in these markets, maybe?). “Column 2” also appears wholly divorced from the value of goods and refers to the volume. Tariffs in both “Columns” are levied as a fixed fee per item or by weight, as opposed to “ad valorem” tariffs that are calculated as a percentage of a good’s value and have not been adjusted for inflation. For example, HTS “Column 2” imposes a tariff on crude oil of 21 cents per barrel, a ridiculous level given the prices prevailing today.
That’s why the authors propose a "Column 3", distinguishing between strategic and non-strategic goods. The paper argues for a two-tier categorization that identifies products as strategic or non-strategic. The authors remind readers that former USTR Robert Lighthizer had suggested a similar system in his 2023 testimony to the House Selected Committee on Strategic Competition with China. Goods in non-strategic categories should be tariffed at a 25% rate, while goods in strategic categories should be tariffed at a 100% rate. Critical minerals fall into the "strategic" category due to their applications for military or "dual use," advanced technology, and components to build US infrastructure (energy, transportation, public health).
These tariffs should be phased in over five years, with no exemption process. Reformed rules of origin and enhanced enforcement should counter China's ability to evade them through cross-border production and transshipment.
The last Mohicans of free trade dogmatism dismiss the paper as yet another re-run of the infamous Smooth-Hawley Act of 1930. But nearly a hundred years later, the idea thrives anew. In late September, senators Tom Cotton, Marco Rubio, and Josh Hawley proposed legislation, found here, that would rescind China's PNTR status and create a separate mechanism for treating imports from the country. While we may wonder about this or that policy depending on the outcome of the US election in 10 days, it is practically inevitable that the new US Congress will legislate to transform the trade relationship with communist China in 2025.
You’d better order your favorite key chain from Temu now. Or better yet, invest in a Western-controlled critical minerals project. It is not too late.
SUPPLY CHAIN OBSERVATIONS
The recent flurry of corporate action in the lithium space raises questions about the future of lithium production from Canada's largely untapped resources.
The country is home to rich spodumene resources in Quebec, Ontario, and, more recently, the Northern Territories. Other companies have also begun to work on brine deposits in Alberta. This province has a long history of successfully developing liquid assets from its rich subsoil and in Saskatchewan. The lower concentration of these deposits means that they are dependent on direct lithium extraction (DLE) technologies, which, to date, have been commercially successful in only one operation in South America.
Canadian-focused firms were among the first to jump on the lithium bandwagon. During the first Chinese-driven lithium boom of 2016-2017, equity investors got acquainted with several names, including Nemaska and Critical Element. Nemaska Lithium owned the Whabouchi project in the James Bay region of Quebec, which was sized at 55.7Mt at 1.41% Li2O and planned commercial production for Q2 of 2018. However, the company didn’t survive as an independent entity. London-based Pallinghurst Group acquired the 50% share, which sold it off to Livent, with the remainder left in the hands of Investissement Quebec, a government-owned entity. When Livent acquired Australia-based Allkem, this 50% became part of Arcadium Lithium. This entity survived for less than a year, posting a 60% loss in the market before being taken out by Rio Tinto. This acquisition didn’t salvage Arcadium's historical performance – currently standing at negative 18.5% over the history of this short-lived company.
Not far away from Whabouchi is Critical Element’s Rose project, with 34.2Mt @ 0.9% Li2O. Critical Element's shareholders didn't fare much better than Nemaska's investors. Between 2018 and 2020, the company’s stock lost 83%, repeating this performance again in 2023-2024.
Sayona Mining, the operator of the NAL mine near Val d'Or in a JV with Piedmont, remains the only independent producer in Quebec. However, its share price has plunged 87% in the last two years.
The story of spodumene developers in Quebec is similar. Patriot Battery Metals and Sydney-listed Winsome Resources– both of which enjoyed a jump in investors' interest in early 2023 have since seen their shares lose all momentum and have been basically flat over the last two years. Q2, the recent flavor of the month, might yet follow a similar pattern, even if continuity between its stunning results is confirmed to form a consistent strike. The nearby Cygnus has crashed 71% in the last two years and is busily rebranding itself as a copper company.
Nor are Ontario stories faring any better. Frontier Lithium lost 70% in the last two years, Green Technology 90%, Critical Resources 89%, First Class Metals 86% and Rock Tech 64%. How many juniors ever recover from such losses? Not many.
Li-FT Power, which controls a more diversified portfolio of exploration assets, has seen some interest recently, but the stock has been down 75% since December 2022. The brine-focused E3 and Arizona Lithium have seen their respective share prices melt by 46% and 80%, respectively. Arizona Lithium has now thrown the towel on the Saskatchewan prospect.
The market struggles of Canada-focused lithium developers make financing onerous and project economics questionable. Canadian investors have turned their backs on the sector, and the rock-bottom valuations do not seem to attract attention from potential acquirers. Even if Rio Tinto's decision to run a fully-fledged lithium division with a global imprint has boosted the consolidation of lithium assets, it is not easy to fathom who could become the midwife for Canada’s lithium production.
With its focus on Serbia, Andean South America, and former Galaxy's assets in James Bay, the London-listed major will unlikely make another move soon. By acquiring Latin Resources, Australia’s Pilbara Resources has decided to make its first overseas move in Brazil. Lithium Americas, bolstered by the refreshed partnership with General Motors, will have its hands full in Nevada, not to mention the remaining USD $63 million funding gap for the project. This leaves Albemarle, but the North Carolina-based company is known to have spent significant time in the data room of Patriot Battery Materials, the developer of what is, arguably, the largest of Canada’s deposits. The US chemical giant eventually walked away from the approach, testifying to its cautious corporate posture, as evidenced previously by the abandoned bid on Australia’s Liontown. This leaves only Sigma Lithium, the single-asset operator of a scalable mine in Brazil, and possibly Chile’s SQM, which is known to be actively looking for assets overseas. However, Sigma would likely focus on the claims patchwork in its immediate neighborhood. SQM’s shareholder register may be too much for the stomach of Ottawa’s increasingly strident, anti-Chinese (and recently anti-Indian) government. In extremis, Australia’s IGO might count as another potential acquirer of lithium assets, but the company appears to be struggling for direction under the new management.
All this means that the structure of the Western (non-Chinese) lithium industry may leave the Canadian assets orphaned for a while. The crass performance of this equity sector and the slipping project timelines will inevitably affect the forward-looking charts that sketch lithium supply in the years to come. In the foreseeable future, the Chinese battery value chain will be filled by the bulging production from Africa. But the West? Jakob Strausholm, the Danish business leader who now shepherds London’s Rio Tinto through the changing commodity landscape, may be off to something here. His company is pledging USD $6.7 billion to consolidate the world's lithium resources. Despite a strong focus on DLE technology in South America, the management at least "acknowledges" the appeal of Quebec's hard rock deposit.
The venerable British firm is clearly giving lithium equities a boost. However, as we learned during the pandemic, several boosters may be necessary before "normality" returns.
MINING & EXPLORATION NEWS
The US Bureau of Land Management has approved the federal permit for the ASX-listed Ioneer to build a lithium-boron mine at Rhyolite Ridge in Nevada. The approval makes Rhyolite Ridge the first US lithium project approved by the Biden administration. The project, six years in the making, had to be redesigned to accommodate the concerns of environmentalists related to a particular species of wild buckwheat plant. The project is practically financed – with a USD $700 million loan from the US Department of Energy and USD $490 million equity investment by South Africa's Sibanye Stillwater – now unlocked by the BLM's decision. The company estimates that the mine will be used to supply batteries for more than 370,000 EVs and will create an estimated 500 jobs during construction and 350 positions during its operation. Ioneer will issue updated reserve figures and estimated project costs by December. Thanks to its boron by-product, the project remains economic despite its depressed lithium prices, and Ioneer plans to commence construction in 2025 and start production in 2028. The decision is a late win by the Biden Administration, which has been working hard to speed up the development of domestic resources of critical minerals. But it comes at a price. The stock trades 65% below the levels from three years ago – a good illustration of capital waste caused by permitting delays.
ASX-listed Dreadnought Resources has announced results from niobium hits at its Stringer discovery within the Gifford Creek carbonatite complex (GCCC) in Western Australia’s Gascoyne region. These include 130 meters of 0.7% Nb2O5 and 122m of 0.6% niobium pentoxide close to the surface. The multi-metallic-focused company, which had started initially as a rare earths hopeful, also provided updates from two unrelated projects, including high-grade gold results from Mangaroon Project in the Gascoyne region and copper-zinc intercepts from the Tarraji-Yampi volcanic massive sulfide targets in the Kimberly region (also in Western Australia). The niobium discovery was followed up with a nine-hole reverse circulation program designed to extend the known mineralization and provide further material for mineralogical and metallurgical work at Stringer, where oxide and fresh bedrock niobium mineralization has been defined over 1.2km. Encouragingly, it remains open, reaching 70m in true thickness and fed by primary dykes at depth.
London-listed Aterian Plc has received an exploration license in Rwanda for its Musasa lithium, tin, and tantalum exploration. Rio Tinto has the option to invest USD $7.5 million in two stages to earn up to 75% in the HCK lithium and tantalum hard rock prospect in the country. Aterian holds three assets in Rwanda through Eastinco Limited, a 100% owned subsidiary: the HCK – of which 70% interest is held by Eastinco, 30% held by 3rd party HCK Mining; Dynasty – 50% interest held by Eastinco and 50% held by Dynasty Construction, and Musasa – 85% interest held by Eastinco and 15% held by Kuaka Cooperative. Aterian has agreed to acquire the remaining 15% from the Kuaka Cooperative in exchange for past consideration, including the provision of water reticulation assets to Kuaka’s small-scale processing facility. Last week, Eastinco Limited temporarily suspended all secondary trading activity at its operations in Kigali. The suspension is due to significant issues with the ongoing rollout of the new ‘Inkomane’ online mineral traceability platform. The Inkomane platform is managed and operated by a third party and is designed to manage mineworkers, taxation, traceability, and inspections in the mining sector. Separately, Aterian holds 90% of Atlantis Metals with licenses in Botswana and owns several licenses directly in Morocco.
Australia’s Encounter Resources has provided an exploration update on its Aileron niobium oxide asset in WA. The most recent results at Emily's target yielded 23m @ 4.2% Nb2O5 from 40m to the end of the drilling hole, ending in mineralization, with additional aircore drilling planned to delineate high-grade zones there. Reverse circulation drilling at Green target confirmed niobium oxide mineralization that extends below aircore results. Further assays are due on November 24. More aircore and RC drilling is also planned at Joyce and Perce targets.
The long-suffering ASX-listed graphite developer Talga Resources has received an exploitation concession for its Nunasvaara South mine, part of its vertically integrated Vittangi Anode Project in northern Sweden. The concession grants the right to mine graphite over 25 years, with an option to extend it further. Talga is working towards a final investment decision on Vittangi, which hinges on key permit approvals and offtake agreements with customers. The key roadblock remains the appeal by opponents to the approval of the exploitation concession following the earlier receipt of the Environmental and Natura 2000 permit. According to Talga, this case has progressed and has recently been assigned to a judge referee to prepare and present the case for decision. Should everything go to plan, project construction is expected to take 18-24 months, counting since the final investment decision.
Graphite One received an indication for USD $325 million financing from the US Export-Import Bank for its US-based advanced graphite material supply chain project. For now, this is a non-binding LOI outlining a 15-year repayment schedule under EXIM's Make More In America initiative. Any final commitment will require the completion of requisite due diligence, meeting EXIM's underwriting criteria, authorization process, finalization, and satisfaction of terms and conditions. The EXIM’s LOI indicated that the transaction may also be eligible for special consideration under Section 402 of EXIM's 2019 reauthorization (PL 116-94), which directs EXIM to take steps to mitigate the competitive impact of export support provided by the People's Republic of China and other covered countries for opportunities such as this one under EXIM's CTEP (China and Transformational Export Program) initiative. Graphite One intends to make a production decision upon completing its feasibility study, expected in Q1 2025. The company stock has traded in sync with periodic signaling of government support. Still, it has failed to maintain gains after each announcement, indicating a scarcity of investor interest in the graphite space.
Largo Resources released a quarterly operating update from its vanadium-titanium Maracas Menchen mine in Bahia, Brazil. 3Q24 production amounted to 3.1kt V2O5, marking a 42% yoy growth (2Q24 sales were 2kt V2O5). Better plant recoveries and processed grades drove higher production. Ilmenite by-product production came in at 16.4kt, up 90% qoq, as the circuit ramps up. Second kiln maintenance will be carried out during 4Q24 as opposed to the originally planned 1Q25, with production expected to come in lower during the quarter. The decision to shift the maintenance schedule aims to mitigate the operational impacts of the rainy season and higher precipitation during the months of December and January. Separately, Largo signed an agreement with an investment fund to monetize its vanadium inventories and access additional liquidity during depressed demand and vanadium prices. Under the agreement, Largo will deliver 2.1kt V2O5 to the fund in exchange for ~$23.5m (equivalent to USD $5.1/lb V2O5 price).
ASX-listed Brazilian Rare Earths has confirmed the presence of new zones of high-grade rare earth mineralization at Monte Alto in Bahia, some 2km to 4km from the initial discovery site. The zones correspond to north-south trending magnetic/radiometric anomalies and run parallel/sub-parallel to the main radiometric anomaly on which Monte Alto was initially discovered with its stunning grades (over an area of 500m on 1km). Channel sampling has again returned remarkable assays (up to 11.7% of total rare earths oxides), including high concentrations of heavy rare earths (dysprosium and terbium). Radiometric/magnetic anomalism has been a pivotal pathfinder to the discovery of ultra-high grade mineralization at Monte Alto and Pele, as well as Sulista targets. Monte Alto East, where assays from channel sampling on an outcrop yielded 14.6%, lies along a trend of magnetic/radiometric anomalies extending 10km south from Monte Alto. The enriched zone includes samples with 0.5% dysprosium and terbium. At Monte Alto Corridors (to the west of Monte Alto), initial prospecting has uncovered outcrops of mineralization including rare earths, niobium, tantalum, scandium, and uranium, with assays showing up to 11.7% of total rare earths oxides. Uranium may be a recurrent feature at Monte Alto, potentially limiting the choice of downstream processing in the future.
ASX-listed OD6, which is developing clay-hosted rare earths at its Splinter Rock and Grass Patch projects located in the Esperance-Goldfields region of Western Australia, has released positive results from heap leach testing. The results achieved encouraging recoveries, surpassing conventional tank leaching methods and potentially simplifying the future flowsheet with lower capital and operating costs. After running over 80 days, column leach tests delivered higher recoveries (up to 79% for magnet rare earths – neodymium and praseodymium) compared to stirred tank leach tests, which achieved 56%. The tests confirmed that column leaching continues to outperform stirred tank leaching, with recovery rates at 65% versus 50%. This also means lower acid consumption, as column tests run over an extended period, ensuring a more efficient process with continuous impurity-free liquor application. The upshot of this development is that scoping studies are being paused to focus on further heap leach testing.
SOURCES: (1) Market Data from Bloomberg as of 7:00 AM ET, October 24, 2024, in the local currency. (2) Additional data courtesy of Albemarle Corporation (ALB US), Arizona Lithium Ltd. (AZL AU), Arcadium Lithium Inc. (ALTM US), Critical Element Corporation (CRE CN), Critical Resources Ltd. (CRR AU), Cygnus Metals Ltd. (CY5 AU), E3 Metals Corp. (ETL CN), First Class Metals Ltd. (FCM LN), Frontier Lithium Inc. (FL CN), General Motors Company (GM US), Green Technology Metals Ltd. (GT1 AU), Latin Resources Ltd. (LRS AU), Li-FT Power Ltd. (LIFT CN), Liontown Resources Ltd. (LTR AU), Lithium Americas Corp. (LAC US), Patriot Battery Metals Inc. (PMET CN), Pallinghurst Group (private), Piedmont Lithium Inc. (PLL US), Pilbara Resources Ltd. (PLS AU), Q2 Metals Corp. (QTWO CN), Rio Tinto plc (RIO LN), Rock Tech Lithium Inc. (RCK CN), Sayona Mining Ltd. (SYA AU), Sigma Lithium Corporation (SGML CN), SQM (Sociedad Química y Minera de Chile) (SQM US), and Winsome Resources Ltd. (WR1 AU).
DISCLAIMER: No statements made in third-party links to this email should be interpreted as legal, accounting, investment, or tax advice. Amvest Capital Group Holdings LLC and together with its direct and indirect subsidiaries and affiliates (“Amvest Capital”) may describe, reference, or provide links, in its sole discretion, to other information or products or sites on the World Wide Web for the convenience of users in locating related information and services. Amvest Capital assumes no liability for the content of any linked sites, including, without limitation, the accuracy, subject matter, quality, or timeliness of the information. Any such information has not necessarily been thoroughly reviewed by Amvest Capital and is provided or maintained by third parties over which Amvest Capital exercises no control. In addition, to the extent that they were reviewed by Amvest Capital, Amvest Capital takes no responsibility for continually monitoring such sites; the material at a site when Amvest Capital viewed it may differ materially from when you do. Accordingly, Amvest Capital expressly disclaims any responsibility for the content, the accuracy of the information, and/or the quality of products or services provided by or advertised on these third-party sites.
This is neither an offer to sell nor a solicitation of an offer to buy interests in any entity managed by Amvest Capital, any related entity, or any other security nor shall there be any sale of securities in any state or jurisdiction in which such offer or solicitation or sale would be unlawful prior to registration or qualification under the laws of such state or jurisdiction. This contains certain statements that may include "forward-looking statements". All statements, other than statements of historical fact, included herein are "forward-looking statements." Included among "forward-looking statements" are, among other things, statements about the company’s future outlook on opportunities based upon current market and survey conditions. Although Amvest Capital believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks, and uncertainties, and these expectations may prove to be incorrect. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. One should not place undue reliance on these forward-looking statements, which speak only as of the date of this discussion. Other than as required by law, the company does not assume a duty to update these forward-looking statements.