Global Gains & Metal Pain, Beijing Targets Exports (Again), and Brazil's Resource Pivot
MARKETS UPDATE
In a week marked by high drama in Seoul, Paris, and Bogotá, markets largely maintained the year's trend. Crypto, semiconductors, gold, the S&P 500, the Russell 2000, Taiwan's Taiex, and Japan's Nikkei extended their gains. Meanwhile, metals continued to search for direction in the lackluster post-U.S. election environment. The persistently strong US dollar offers little relief, and support from other quarters remains unlikely. China’s top leaders are preparing for their annual Central Economic Work Conference to map out economic targets and stimulus plans for 2025, but Chinese stocks usually ease after this event. Weak oil prices are also forcing OPEC towards an agreement to delay the earlier plan to boost output by three months. So far this quarter, the S&P GSCI Electric Vehicle Metals index has lost 5%, underperforming both the Chinese and North American indices of critical minerals stocks. In the meantime, the Australian market has suffered a spectacular collapse, with an average 27% drop among the most prominent critical mineral names since the end of September. (1)
GEOPOLITICAL INSIGHTS
Casual observers of the critical minerals space must be excused for experiencing a bit of a déjà vu when last Tuesday, China’s Ministry of Commerce announced an export ban on “items related to gallium, germanium, antimony and superhard materials” with potential military applications. This marks at least the fifth instance of Beijing invoking its 2020 Export Control Law to target strategic metals. Gallium and germanium were the first to fall under these measures in July 2023, followed by graphite products in October 2023. A ban on rare earths processing and separation exports was announced in December 2023, and this past August, limits on antimony exports were slapped for the first time. So what is different this time?
Most previous announcements referred to special permits that Chinese exporters were required to obtain to ship their products overseas. The system created bottlenecks and increased the level of control of the flows. This time, however, the announcement appears to be an outright ban on shipments, specifically targeting exports to the United States. How Beijing will manage to police the flows and prevent transshipment of these products through other markets to the US is unclear. “Shadow fleets” of gallium, à la russe, may be a bit tough to spot from outer space.
Beijing’s move can be seen as a direct retaliation for the decision by the US Department of Commerce last Monday to impose additional curbs on the sale of high-bandwidth memory and chipmaking gear, including hardware produced by US firms at their facilities overseas. Note that the ban targeted memory chips this time, not logic chips. Washington also blacklisted an additional 140 Chinese entities active in the sector.
Critical minerals are one sector in which Beijing can be expected to retaliate against America's endeavor to reverse trade patterns and constrain technology outflows (the two policies are not necessarily perfectly coordinated). Gallium, in particular, appears as a par excellence retaliation tool. Some 50% of Chinese gallium exports are destined for the global semiconductor industry, where it is used in integrated circuits and optoelectronics. But the fact that China rolled out such big guns fifty-two days before the new administration's inauguration means that it either has other arrows in its retaliation quiver or sees the incoming team in Washington as less damaging to its interests.
Little change can be expected in terms of the actual flows into the US market. Although China controls over 50% of the global antimony production, no material inflows were registered in the United States long before the initial announcement last August. China's sediment-hosted hydrothermal replacement deposits are pretty unique in terms of scale (especially in Hunan). Reserve replacement must have been suboptimal for a while now as China has been exporting less and importing more of this material to cover its own needs, not least for its military-industrial complex. China's overall antimony exports plunged by 97% between September and October, excluding the US market, showing that the August curbs meaningfully constrained global shipments. China's dominance in the two "G" minerals is even more extreme. Chinese production accounts for 94% of the gallium supply and 83% of the germanium, but Chinese customs data show that there have been no shipments of wrought and unwrought germanium or gallium to the US in the first ten months of this year.
The problem is thus neither new nor US-specific. The EU, for example, sources 71% of its gallium, 45% of its germanium, and 40% of its natural graphite from China. By telegraphing its intention to run its 2010 rare earths playbook all over again, Beijing has successfully ensured global customers are protected from potential disruptions. Buyers, including Taiwan’s Globalwafers Co, California-based Lumentum Holdings Inc, and Pennsylvania’s Coherent Corp, all claim that they do not expect market dislocations because the industry had time to prepare, has accumulated ample inventories, and has worked hard to identify alternative sources of supply.
For example, Canada's base metal producer, Teck Resources, has emerged as one of the world's largest integrated germanium producers. It is positioned to boost its metal output in the wake of China's export ban. Not that Teck operates any primary germanium mines – the only such large-scale operation exists in Yunnan, in southern China. Rather, Teck’s zinc production can be optimized for germanium extraction. Mesothermal zinc-lead-silver polymetallic veins, found in Western Canada, contain germanium, whose beneficiation is economical. Particular high-sulfidation epithermal veins formed closer to the surface can also become sources of germanium. Such zinc ores undergo electrolysis, during which gallium metal can be obtained in residues.
Japan is currently the volumetrically most significant exporter of gallium to the United States, with Toho Zinc’s smelters being the chief source of the material. It is not clear how sustainable these flows will be. Japan is undergoing a significant overhaul of its semiconductor industry, with several officially-backed start-ups (e.g., Rapidus, Preferred Networks, Screen Holdings, and JAMS) racing to catch up with the Taiwanese leaders. Similarly to Japan, Korea’s zinc industry is a source of gallium, some of which is also shipped to the US (mainly from Korea Zinc).
Montreal-based 5N Plus Inc., closely held Indium Corporation in upstate New York, and Belgium's Umicore are among other Western sources of both metals.
Gallium is also extracted as a byproduct of alumina production. This technology, based on the Bayer process, was the preferred route during the Soviet era and still dominates the industry in Russia and Ukraine.
On the antimony side, recycling satisfies some 18% of US demand. Recently, Belgian and French producers have also become more reliant on recycling as flows of antimony out of China have dwindled to a trickle. This market has been tight this year, with prices for 99.65% ingot more than doubling to reach USD $26,000 tonne at the beginning of Q4.
In the long term, to satisfy its antimony needs, the West will have to rely mostly on quartz-gold deposits in shear zones, many of which offer potential for significant byproducts. One such project is the Hillgrove gold-antimony project in New South Wales, recently acquired by Larvotto Resources, which aims to produce 5,400tpa of antimony starting in 2026 and just happened to be going through a capital raise on the day of the Chinese announcement. Two other companies in the race are the gold/antimony developer Southern Cross in Victoria, Australia, and Perpetua’s Stibnite project in Idaho. This last project is not expected to start production until 2028 and will require over USD $1.8 billion in pre-production capex. Many other potential sources of antimony have focused more on gold extraction to benefit from strong bullion prices, as is, for example, the case of the Talco Gold project in Tajikistan, which came online in late April 2022 and is expected to process 1.5Mtpa of ore to produce 16ktpa of antimony metal at full capacity. Either way, this will do little to solve the dilemma of Western munitions manufacturers, given that the project is a JV co-owned by Tajikistan Aluminum Company and China’s Tibet Huayu Mining.
Downstream from mining, a key player is the United States Antimony Corporation, which operates America's only antimony smelter in Montana and transforms antimony ores into oxide, metal, and trisulfide (which goes into ammo). Management has recently declared that it is looking to ramp up capacity to increase the metal supply.
If you have been reading to this point, you may have noticed the names of several key countries in the critical minerals value chain – Canada, Australia, Belgium, Japan, South Korea, Taiwan, and France. This is not a coincidence. As a provider of consumer demand “of last resort” to global markets, the United States stands to score an impressive victory in the intensifying trade war with Beijing. However, China’s Ministry of Commerce has done a decent job alerting America First-ers to the fact that such a victory could be rather pyrrhic without concessions to geologically and metallurgically more endowed or more advanced allies. Barely a week after the US President-elect tweeted his intention to slap a 25% tariff on goods originating from north of the border, the Mining Association of Canada reminded its customers that some 50% of the country's mineral exports were destined for the US market. In 2022, they were valued at more than CAD $80 billion.
Clearly, the equity market was puzzled by the whole thing. US investors bid up MP Materials, whose product is patently unrelated to Beijing’s announcement. On the other side of the Pacific, graphite producer Syrah Resources was the primary beneficiary from nervous positioning. It was all over on day two, with MP's share returning to where it started. Evidently, big money is still quite dumb when it comes to the mining space. They should spend more time reading our weekly commentary.
SUPPLY CHAIN OBSERVATIONS
The competing images of the G20 gathering in Rio de Janeiro aptly testify to the discomfiture that has plagued global leaders for a while. The organizing staff may have mismanaged the traditional photo-op, but the host country’s president was probably too busy to bother. His ulterior agenda was to please his Chinese guest above all else.
China, whose current account deficit vis-à-vis Brazil owes (nearly) everything to soybeans, iron ore, and oil products, sees the South American country as a potential geostrategic pawn, and critical minerals are part of the playbook.
In recent years, Brazil has emerged as a potential source of future rare earths production from a variety of geologically dissimilar sources – ionic clays (e.g., near Poucos Caldas in Minas Gerais), monazite sands in Bahia, or even anatase-based, titanium-rich deposits not far away from Belo Horizonte. It just happens that coinciding with Xi Jinping's high-profile visit to the country, state-owned China Nonferrous Metal Mining Group (CNMC) acquired Mineração Taboca S.A. for USD $340 million, whose Pitinga mine, located 100km from Manaus in Amazonas State churns out 17.9Mt of ore annually and had been on the block for a while.
Taboca has existed since 1969. The company operates its own hydro plant and produces a range of metals, including rare earths, tin, tantalum, and niobium. It is not clear what drove CNMC to acquire this asset—is it the tin market, destabilized by the civil war in Myanmar, or the appetite for rare earths? Regardless, Brazil resounded with bossa nova whispers that Xi Jinping’s thirst for the country’s upstream resources has not yet been quenched.
More may be on the way. In late November, it became known that Chinese mining group Baiyin Nonferrous was acquiring Mineração Vale Verde, a copper concentrate producer in Alagoas state-owned by British private equity manager Appian Capital Advisor. This trend is relatively recent, as only one sizeable Chinese transaction has taken place in Brazil in the past. Back in 2016, Anglo American mistimed its sale of the Catalão niobium mine in Goias to China Moly (CMOC) for USD $1.5 billion.
Alas, the uneven economic relations between Brazil and China have broader ramifications, potentially impacting the longer-term viability of mining and, especially, ore processing.
Brazil entered the 20th century as an economy on the road to industrialization. Its three southern states excelled in industrial production, including advanced automotive, aerospace, and chemical sectors. To this day, Brazil’s exports to the United States comprise mostly industrial goods. However, left-wing governments, which came to power in the early 2000s, saw an opportunity to ride the wave of the commodity supercycle. Before the GFC shock, the Brazilian economy began to show the first signs of Dutch disease.
The single-minded focus on commodity exports gradually contributed to a slow but steady deindustrialization of the country's south, with cheaper industrial goods displacing domestic production. The chemical sector is a case in point. It is the 6th largest in the world, generates two million direct and indirect jobs, and represents 11% of the industrial GDP. It is the 3rd largest industrial sector by GDP, with net sales of USD $187 billion. At around USD $5.8 billion, it also happens to be the most significant sector in federal tax collection (13.1% of the industry’s total).
But it is in crisis. Between 2020 and 2021, the value of China's chemical exports to Brazil nearly doubled, and by 2022, Brazil recorded the largest deficit in the sector's history, reaching USD $64.8 billion. The share of imported products on the local market reached almost 50% in 2022, while local production, stagnant for 10 years, has capacity utilization below 70, further compounding concerns of further deindustrialization.
What has deepened this unwelcome trend since then? I have a surprise for you. It’s tanks in Donbas.
Since 2022, Russia's invasion of Ukraine has triggered a natural gas crisis. Due to its dependence on gas inputs, the Brazilian chemical industry was deeply affected. As Russian exports were increasingly redirected from the European market to Asia, Chinese importers managed to clinch deep discounts, which had a knock-on effect on their competitiveness.
This matters for producers of critical minerals. While sulfuric acid is plentiful thanks to the presence of many roasters (not least at some of the older gold mines), reagents such as sodium carbonate, aluminum sulfide, and ammonium bicarbonate have to be imported from halfway around the world. Only byproducts of the fertilizer business, such as nitric acid, can still be easily obtained locally, thanks to robust value chains serving the agricultural sector. But even there, almost 80% of nitrogen fertilizers consumed in Brazil are now imported. In addition, onerous import taxes contribute to what has become known as "Brazil cost."
Maybe Lula should have paid a bit more attention to other guests in Rio, too.
MINING & EXPLORATION NEWS
Chilean lithium giant SQM published its Q3 earnings, showing a depressing 24% quarter-on-quarter drop in sales prices (and a 67% drop since the year before). The realized prices were USD $9,700/t of lithium carbonate equivalent. Even worse, the management expects Q4 realized prices to be even lower. For the first nine months of this year, earnings came in at negative USD $525 million, leading to a loss of USD $1.84 per share, compared to gains of USD $1.81 billion and USD $6.33 per share in 2023. Volumes actually improved – by 18% year-on-year. Initial revenues were recorded from the Mt Holland mine in Western Australia, where the refinery is under commission, and first production is expected by mid-2025. The commissioning of the 50ktpa Kwinana refinery is currently 41% complete. SQM hopes to increase its 2025 sales in line with higher production, which would respond to the anticipated demand growth of 18% p.a. over the next five years.
TSX-listed Frontier Lithium announced maiden drill hole results at the Ember LCT pegmatite (previously known as the Spark-EXT), with an 18.8-meter intersection yielding 1.43% of lithium oxide, of which 7.8 meters gave a very impressive grade of 2.54%. This hole is located 1km from the Spark deposit. Frontier has also provided an update on fieldwork activities supporting Phase 1 of its DFS on the PAK project, which is expected in the first half of 2025 (incorporating Spark, Bolt, and Ember pegmatites). The company is in the process of delineating the future stockpile sites and is conducting baseline environmental assessments and community engagement initiatives.
Exxon Mobil signed a nonbinding memorandum of understanding with Korea's LG Chem for the supply of lithium carbonate from its Arkansas Project. Over several years, the offtake would cover up to 100kt supplying LG Chem's cathode plant in Tennessee, which has been in construction since December 2023. This is the second agreement to supply lithium from its proposed Arkansas project. Last July, Exxon signed an MOU with Korea's closely-held company SK On. Exxon has plans to recover lithium from the Smackover Formation in Arkansas using DLE (direct lithium extraction) technology. Exxon, Occidental Petroleum, and Equinor (formerly Statoil) are three oil majors interested in lithium projects.
Malawi-focused developer Sovereign Metals published test results at ProGraphite GmbH in Germany, indicating that its graphite product from Kasiya rutile deposit should be suitable for refractory materials. Such materials typically require large flake graphite with high oxidation resistance. In the case of Kasiya's course flake, the material above 180-μm shows no oxidation below 400°C and can potentially qualify for premium product sales. This type of material currently accounts for around 24% or 306kt of global graphite demand. Over 50% of Kasiya graphite is considered a large flake (nearly 30% is in the jumbo flake or super-jumbo category), which should open the material to multiple applications. Meanwhile, optimization efforts on the fine material (below 180μm) show positive initial results and should confirm its suitability for lithium-ion anode material. In mid-2023, Rio Tinto acquired an initial strategic interest of 15% for AUD $40 million and has recently invested a further AUD $19.2 million, increasing its stake in the company to 19.9%.
London-listed 80 Mile Plc has completed the acquisition of 95% of White Flame Energy, a company with hydrogen and helium gas licenses in Greenland. White Flame has three exploration and exploitation licenses adjacent to Pulsar Helium's Tunu project covering 8,429 km² in Greenland. The total acquisition cost for 100% of White Flame Energy is GBP £2.75 million. White Flame Energy has also been granted a four-year extension to its first licensing period. The basin has anomalous helium and white hydrogen occurrences, as well as liquid-rich hydrocarbon reservoirs with potential resources estimated to contain up to 8.1bn barrels of liquid hydrocarbon equivalents in place (these are management’s estimates, not according to any recognized standard). Separately, 80 Mile plc has also identified the presence of natural hydrogen and helium in historic drill holes at Hammaslahti in Finland, where helium concentrations in one of the drill holes stood at 7.10%.
This quarter was supposed to mark the deadline for the decision by ASX-listed Iluka to go ahead (or otherwise) with its Eneabba rare earths refinery project. And it has. The Australian Government will contribute an additional AUD $400 million out of the total capital cost of AUD $1.7-1.8 billion terms, consistent with the original AUD $1.25 billion non-recourse loan, previously secured from the Australian Government. Iluka will contribute an additional AUD $214 million in cash equity to close the capex gap, which amounted to slightly over AUD $600 million. To start production, Iluka may use the existing stockpile of 1Mt monazite-rich material (potentially yielding 2.7ktpa of neodymium and praseodymium over 9 years), but other sources of feedstock, such as the Wimmera project in Victoria, are less-than-certain, potentially offering alternatives for other (future) rare earths miners in Australia and elsewhere. The Government’s decision is symptomatic because the projected operating costs make Eneabba unprofitable at NdPr prices below USD $80/kg. Politics over economics—it’s the 2020s, my friend.
New South Wales-based Brazilian Critical Minerals has announced the first mixed rare earths carbonate produced from its Ema ionic clay project in Amazonas State. The deposit shows similarities to ionic deposits developed in southwest China over felsic material. The grades, oscillating around 1,000ppm to 1,800ppm, do not rank among the highest in the business (Meteoric’s clays in Minas Gerais show sections of up to 8,000ppm). Still, the impurity levels are comparable to those of more advanced projects in the country. Completion of the drill program was expected to be included in an updated resource that will underpin the scoping study anticipated for Q1 2025.
Vancouver-based Standard Lithium is expected to publish the DFS with revised operating parameters for its South West Arkansas project, which is being developed in partnership with Norway’s energy company Equinor. The partners are now considering splitting production into two 22,500tpa phases and producing lithium carbonate instead of lithium hydroxide, starting in 2029. Capital cost is still unknown (previously, it was USD $1.3 billion for a 30ktpa hydroxide operation). Phase 2 (also 22,500tpa) would begin in 2034, leading to a total capacity of 45ktpa. A formal investment decision is expected by year-end, thus unlocking an incremental USD $40 million in funding from the Norwegian partners. Last March, Standard Lithium successfully installed and commissioned a commercial-scale direct lithium extraction (DLE) unit using Koch’s Li-Pro TM Lithium Selective Sorption (LSS) system, obtaining an average lithium recovery of 95.4%. Standard has also secured a brine lease position in East Texas, where it has drilled and confirmed lithium concentrations of up to 806 mg/L. A maiden resource is expected in 2025.
Following unsuccessful efforts to secure funding from existing investors and third parties, South Africa’s struggling vanadium producer Bushveld Minerals suspended trading its shares on AIM and appointed a turnaround specialist. Continuing weakness in vanadium prices, leading to operations running at a loss for an extended period, drove the decision. Liquidity constraints made it impossible to conduct necessary maintenance works. Business rescue initiatives protect the company's subsidiaries from legal action while potential plans to revive the business are developed and implemented. The team is currently consulting with its advisors, including Guernsey-based insolvency practitioners, to evaluate further courses of action.
ASX-listed Hazer Group has extended a non-binding MOU with Mitsui & Co. to November 2025. Hazer has developed a proprietary hydrogen and graphite production technology based on methane pyrolysis, suitable for steelmaking, thermal energy storage, water purification, and chemical sectors. The MOU will now involve production evaluation, testing of larger samples to be provided from Hazer's commercial demonstration plant, and market engagement with prospective off-takers. Hazer also has an MoU with South Korea’s POSCO. The Korean company hopes this will help it achieve net zero targets by 2050.
SOURCES: (1) Market Data from Bloomberg as of 9:00 AM ET, December 5, 2024, in the local currency. (2) 80 Mile Plc (80M LM), 5N Plus Inc. (VNP CN), Anglo American plc (AAL LN), Appian Capital Advisor (private company), Baiyin Nonferrous Group Co., Ltd. (601212 CH), Brazilian Critical Minerals Ltd. (BCM AU), Bushveld Minerals Limited (BMN LN), China Nonferrous Metal Mining (Group) Co., Ltd. (private company), CMOC Group Limited (3993 HK), Coherent Corp. (COHR US), Equinor ASA (EQNR NO), Exxon Mobil Corporation (XOM US), Frontier Lithium Inc. (FL CN), Globalwafers Co., Ltd. (6488 TT), Hazer Group Limited (HZRO AU), Iluka Resources Limited (ILU AU), Indium Corporation (private company), JAMS Group (private company), Korea Zinc Co., Ltd. (010130 KS), Larvotto Resources Limited (LRV AU), LG Chem, Ltd. (051910 KS), Lumentum Holdings Inc. (LITE US), Meteoric Resources NL (MEI AU), Mineração Taboca S.A. (private company), Mineração Vale Verde Ltd. (private company), Mitsui & Co., Ltd. (8031 JT), MP Materials Corp. (MP US), Occidental Petroleum Corporation (OXY US), Perpetua Resources Corp. (PPTA US), POSCO Holdings Inc. (005490 KS), Preferred Networks, Inc. (private company), ProGraphite GmbH (private company), Pulsar Helium Inc. (PLSR LN), Rapidus Corporation (private company), Rio Tinto Group (RIO LN), Screen Holdings Co., Ltd. (7735 JT), SK On Co., Ltd. (private company), Southern Cross Gold Ltd. (SXG AU), Sovereign Metals Limited (SVM AU), SQM (Sociedad Química y Minera de Chile S.A.) (SQM US), Standard Lithium Ltd. (SLI US), Syrah Resources Limited (SYR AU), Tajik Aluminium Company (private company), Teck Resources Limited (TECK US), Tibet Huayu Mining Co., Ltd. (601020 CH), Toho Zinc Co., Ltd. (5707 JT), Umicore SA (UMI BB), United States Antimony Corporation (UAMY US), and White Flame Energy, Inc. (private company).
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