Though the rare earth field is awash with news and constant media exposure, we recently came across a well-written report examining the European market. The report, published by Ernst & Young, entitled “Material Risk Access to Technology Minerals, discusses many points typically not covered in the now very public rare earth metal discourse. We caught up with Michel Nestour, Director in the Mining and Metals Practice based out of the UK (and author of the study) as well as Andy Miller who leads the Americas Mining and Metals practice for some additional insight into some of the key findings in the report.
MM: Can you give us some background information on the E&Y metals practice?
E&Y: As a practice, we serve 25 of the top 30 mining and metals companies. We perform external audits, tax, advisory and transactional work that includes due diligence, operational M&A and strategy. There are 1000 professionals in the metals and mining practice including mining engineers, mineral process specialists and geologists (Michel came from Corus). We have a global center in Australia, and major operations in the key mining hubs such as the US, Brazil, China, South Africa and Russia. We focus on both mining and metals (upstream and downstream). We also work for some players in the rare earth sector.
MM: You mention in the study that Korean companies are able to take equity positions in rare earth metal companies in China. Though there have been some news reports on specific investments, this factor is not widely known. Are other countries able to do the same and if so which ones and if not, why not?
E&Y: As was reported in the China Daily in June of this year, Posco has taken a 60% ownership stake in a Chinese mining company. This was a way to get access to the export quotas set by the Chinese. Essentially, you want to be near the actual extraction as well as to the refining, fabrication, etc. near raw materials. In addition, Glencore announced it was looking at a rare earths mine in the USA which is currently owned by a private business, Wings Enterprises Inc. In Baotou, a high-tech zone in inner Mongolia, we understand that there are French companies and some outsiders are trying to locate themselves there. In addition, we understand a sideline meeting of the 10-nation association of South East Asian nations (ASEAN) summit in the Vietnamese Capital Hanoi between the Chinese w/ the Japanese and South Korean counterparts on the subject of rare earth metals had been canceled last week.
MM: You cite from an EC report, three minerals that should experience the largest demand growth – gallium, indium and germanium. And we know these metals are by-products of bauxite, zinc, lead and copper. Little is made of this particular issue. How do you see the “rare earth crisis” affecting these three metals? It seems as though the supply chain story here is quite a bit different from the heavy REEs. What are your thoughts?
E&Y: Gallium, indium and germanium are not Rare Earths as they are not part of the 17 elements comprising the Rare Earths.Ã‚Â But they could potentially be considered “Rare Metals.Ã‚Â If you look at these three minerals they are by-products and subject to the supply/demand scenarios for the underlying metals. This drives the larger miners and drives those metals. According to Metals Insider, in China, there is an export quota for example for Indium of 233 tons in 2010 (expectations are that this will be the same in 2011, according to the Chinese commerce ministry). You are asking us whether a large diversified miner will make the investment to refine more of that by-product if demand for the gallium, indium and germanium increase. We do not think so as these products are just credited to cost of sales and the diversified miners generally would rather produce the copper, tin, lead, or zinc.
The large miners look at this sector but the interest is pretty limited it’s just too small for them. If there is nominal investment, they’ll add it. Generally if it doesn’t make economical sense, it becomes a tailings pond.
The second post to this series will appear later today.