Magnetic field descends on rare earths stocks as shortages hit critical lows

The global auto industry has been ringing the alarm bells that trade wars are all well and good, but not when production lines are brought to a halt because supplies of vital components have been shut-off in the crossfire.

That is what is going down at the moment in response to China’s April 4 imposition of export controls on a range of rare earth materials, including high-performance magnets.

It was Beijing’s response to President Trump’s imposition of punitive tariffs on most goods exported by China.

The global auto industry’s just-in-time approach to holding inventory needed to complete cars makes it particularly susceptible to delays in key components and they are now wailing that they are down to a couple of week’s supply of magnets.

China has not banned exports. It is just that where in the past orders could be placed with Chinese suppliers weeks in advance of the desired receipt date, the delivering timeline has now been stretched out to 3-4 months at best.

The problem is that while China controls about 60% of the trade in rare earth materials, its control of magnets is up around 90%. There is nowhere else to turn for the big magnet consumers, including theUS defence industry and the nascent robotics industry.

It is a full on pressure play by China in its tariff wars with the US. Washington now faces the prospect of the global auto industry spluttering to a halt in coming weeks if the tit-for-tat trade war is not resolved in a hurry.

Suzuki’s production line for its Swift car could well be the first to fall victim to China’s rare earths curbs, according to a Reuters report.

Reuters has also reported that in a letter from the key auto trade associations in the US, the Trump Administration was told that without reliable access to rare earths elements and magnets, automotive suppliers will be unable to produce critical automotive components, including automatic transmissions, throttle bodies, alternators, various motors, sensors, seat belts, speakers, lights, motors, power steering and cameras.

They added that it would only be a matter of time before vehicle factories are disrupted.

Japan has been here before. In 2010 its rare earths and magnet supplies were cut-off by China for two months over a territorial dispute. It’s why rare earths have been on the critical minerals lists of North America, Europe and SE Asia ever since.

But previous little has been done to loosen China’s grip of the supply of rare earths products and magnets. The feeling now is that finally the non-China world will have to take a war-footing approach to building out a non-China supply chain.

That means higher prices and billions of dollars of government support may have to become the order of the day. Developing new mines will be part of the solution and is within the capability of the west.

The big challenge will developing a magnet supply chain.

Aussies:

All of the above came home to roost on the ASX in Thursday’s market. The rare earths space was electric.

Sector leader Lynas (LYC) popped 12.5% higher, not because rare earth prices have taken off, but because panic over supplies from China is setting in and there will be long term consequences for downstream consumers (auto, renewable energy, defence, electronics, robotics…the list goes on).

Lycans touched on some of the consequences last month when it said it was encouraging its nervous customers to take a more risk-based approach to their procurement strategy which means paying a risk premium for secure supply.

Meteoric (MEI) was 8.75% higher in Thursday’s market with its world-scale ionic rare earths project in Brazil set to benefit from the push for non-China supplies, and the country’s focus on building a downstream industry.

The same could be said for Viridis which rose 20.6% in Thursday’s market on the strength of its project in Brazil. Back home, Australian Earth Earths (AR3) popped 7.14% higher and the Gina Rinehart and Australian government-backed Arafura (ARU) rose 9.3%.

Somewhat weirdly, Hastings (HAS) - the rare earths play of another iron ore billionaire Andrew Forrest – traded flat.

Mont Royal (MRZ):

Given all of the above, it is an ideal time to be bringing one of the world’s biggest undeveloped rare earths projects to the ASX.

It is being achieved through a share consideration merger between ASX-listed Mont Royal (MRZ) and the TSXV-listed-listed Commerce Resources Corp (CCE), with Mont Royal the go-forward company.

Ownership before an associated $10m capital raising by Mont Royal will be split 14.7% to existing Mont Royal shareholders and 85.3% to existing Commerce shareholders, which reflects that it is Commerce that delivers the world-scale Ashram project in northern Quebec to the marriage.

Ashram is big all right and the mineralisation comes with a potential revenue kicker in the form of fluorspar (iron-making, aluminium refining and LFP batteries). That the share exchange values Commerce at $A21.7m says there are challenges.

The scale of the deposit means it likely requires some $1.5 billion to develop, including $500 million for a 130km access road to the remote site. But it could well be just the sort of project the world needs in the supply chain now that China has shown a willingness to weaponise its control of the industry.

Quebec is hugely supportive of critical minerals projects and despite the current hostilities between Canada and the US, there is no doubt that the auto industries in both countries would rather see a made-in-Quebec stamp on their rare earths supplies.

The merger between the two juniors is an Ashram-underpinned strategic positioning to that thematic and it has to be said there is a depth of experience in project developments and equity markets by senior management and the biggest shareholders across both companies.

Among their number is Michael O’Keeffe, the ex-Glencore Australia boss who went on to sell a coking coal project in Mozambique to Rio Tinto for $4 billion and later, another coal project in Alberta, Canada, to Gina Rinehart for $500m.

O’Keefe is now best known as executive chairman of the $2.3 billion ASX-listed Quebec iron ore producer Champion Iron (CIA). So his value-creation record with development projects/mining operations is up there with the best.

He is also listed as 7.5% Mont Royal shareholder after bringing it to market in 2019, initially as a WA gold explorer and then as a lithium/gold explorer in Canada’s James Bay region. Like his iron ore contemporaries in Gina Reinhart and Andrew Forrest, it seems he too has taken a shine to the rare earths thematic.

And it goes without saying O’Keeffe knows his way around Quebec.

Cygnus (CY5):

Talking about the majority French-speaking province, a diary note suggests that Cygnus (CY5) must be close to releasing another batch of results from its high-grade Golden Eye gold-copper prospect.

Back on May 8 the company reported high-grade hits (including 7.4m at 5.7g/t gold equivalent) and said additional assay results would be released late in the month. It’s now June 6, so the wait is about over.

The market has twigged to the pending release (visible gold was observed in one of the holes for which assays are pending) and has pushed the stock to 10.5c from 7.3c a week ago. At 10.5c, it is an $89 million company.

Golden Eye has never been mined but previous owners did put in a double ramp access to within 150m of the mineralisation.

More to the point is that Golden Eye sits less than 3km from the treatment plant Cygnus acquired earlier this year as part of its acquisition of the broader Chibougamau copper-gold project.

The previous owned had been working away at becoming a 24,000tpa copper equivalent producer at the project via a proposed hub-and-spoke operation where a collection of nearby former mines/deposits would be processed at the existing 900,000tpa processing.

Golden Eye looks to shaping up as the first spoke in the wheel to a bigger story emerging at Chibougamau.