EDITOR: | May 5th, 2015 | 12 Comments

China’s new tax to put a fire under the non-China rare earth sector

| May 05, 2015 | 12 Comments

China’s old export controls are gone, the new resource tax is in place – between 7.5% and 11.5% for light rare earths and 27% for medium and heavy rare earths (and 6.5% for tungsten and 11% for molybdenum). George Bauk of Northern Minerals Ltd. (ASX:NTU) sees it as the light at the end of the tunnel. “The resource tax could be the beginning of the rare earth sector coming back,” he said during an interview in Sydney today.

Like most people in the industry outside China, Bauk is trying to get to grips with the policies now regulating Chinese rare earth exports. His hunch is that the high resource tax on the heavy elements suggests China is increasingly concerned about running out of those rare earths and is trying to encourage a global level playing field. Beijing wants to see HREE production coming on stream in the rest of the world because it sees the future need to be able to use imports as its own domestic mines run out of HREE. Naturally Bauk sees this as a huge opportunity for Northern Minerals; the company’s West Australian project is heavy in HREE, especially dysprosium.

But, at this point, we run into the old problem with the REE sector: the lack of transparency. Bauk sees this as the sector’s greatest weakness. “No one can tell what it costs to produce what is coming out of China”, he adds. (In other words, we don’t even know what the level playing field should be.)

The other issue is dysprosium itself. There is talk that some magnets can be developed without using this particular rare earth, but that should be seen in the context that some magnets may not need Dy. Bauk uses the analogy of match boxes: once they had striking strips on both sides of the box, but now they usually have only one after companies realized that only one was needed. Same with magnets, but overall dysprosium will continue to be in high demand for many magnets. Yet, importantly, he believes that consumption of Dy. per magnet is not as low as some manufacturers would have us believe, and that these companies are keeping levels of use a closely guarded secret – they don’t want China and other new suppliers to hike the price if it is disclosed that the demand is greater than suppliers now think.

He also has a query on the lights needed for magnets, specifically neodymium and praseodymium. Presumably these are in the same critical basket as dysprosium, but the tax on them is much lower.

Here’s another point he makes about the tax: the money goes to the provinces, not the central government in Beijing. Perhaps this is an incentive for those provinces to try harder to clamp down on illegal production.

Should this encourage more non-China production of HREE, Bauk feels it may have the effect of promoting the belief that supply of HREE are secure. That is, if end users can be assured they will be able to obtain the elements they need, in a competitive price environment, then they will develop more products using these elements – a sort of scandium situation, writ large. Give them HREE, and they will come.

The problem is with the repercussions of the post-2011 REE slump: too many companies have, most through no fault of their own (low prices, inadequate sources of new capital), been to some extent treading water. Add to this fact that greenfield exploration has pretty well evaporated. For the LREE that is not so much a problem given the quantity of known deposits, but it will be an issue for the heavies a few years out as China’s HREE resource shrinks.

This writer can’t help thinking of the 1990s. I was writing about junior resource sector and, as anyone who was around then will remember, it got to the stage where many small explorers ran out of money, and effectively exploration slowed to a dribble. The result when, first, gold and then other metals began their stellar run post-2003? The mining industry was caught flat-footed and it took several years to get projects back on track.

The same problem may confront HREE. However, if George Bauk’s feeling that China’s latest move will put a fire (or at least a warm glow) under the non-China rare earth sector, then that sector might be able to meet the supply challenges of the future. Certainly, Northern Minerals’ advanced stage now (it has raised nearly A$90 million over the past five years) will put it a good position.


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  • Roger

    Fantastic article Robin. Well written and communicated. Well done!

    May 5, 2015 - 1:29 AM

  • bearcat

    Will the fire only be under Northern Minerals–why isn’t “Northern Minerals” in the article title? How about other ree juniors who will most benefit from more “heat”?

    May 5, 2015 - 12:50 PM

  • Alex

    Seems demand for HREE not big, Nobody don’t want to pay extra for security of supply chain. There is no additional processing works for HREE except China. Some disproporsions will occur because of processing quota in China – at the end of the year may be Chinese will not interesting to process Y, Sm because of cheaper then other – if processing quota will end.
    May be it is place for one HREE producer but there are too much projects at the not free market. I wonder their optimism.

    May 6, 2015 - 12:40 AM

  • andrew

    Good article in general except for the comment about lack of transparency. What competitor will provide a detailed cost of production, rather naïve to assume this would ever be tabled.

    May 6, 2015 - 2:25 AM

  • Kris Van den Cruyce

    Is this tax also applicable for Vanadium. It is not mentioned in the article but I read it somewhere else.

    May 6, 2015 - 4:30 AM

  • bearcat

    Why in the world is anyone even talking about Great Western in any context other than a wake? It is finished as far as shareholders are concerned. Can’t they understand what a share price of .004 cents means? If you want to see something pathetic, check out the GWG Stockhouse board for classic examples of false hope and not coming to grips with reality. Perhaps here discussion needs to be on companies with a future and not the departed.

    May 6, 2015 - 8:55 AM

  • Mr. kean

    What if are you under on the stockhouse bullboard now reeguy? How is the stock treating you? Lol

    May 6, 2015 - 10:37 AM

  • Robin Bromby

    This point was made by George Bauk, so I can’t answer on his behalf. But “What competitor should provide a detailed cost of production?” you ask. Oh, let me think. Mmmm. Oh, I know. Perhaps every listed gold miner who discloses cost-per-ounce of production, or iron ore miners who gave an FOB cost, or zinc miners cost per pound, etc. etc..
    In these cases, if a Chinese producer doesn’t disclose it’s not big thing because there’s plenty of other data. In the case of REE, that’s not the case. Moreover, my sense was that George was NOT complaining or expecting Chinese practice to change, but explaining that it was a fact of life the industry had to live with.

    May 6, 2015 - 5:26 PM

  • merlion

    “But, at this point, we run into the old problem with the REE sector: the lack of transparency.”

    Loose lips sink ships!

    Two battleships went down for good … Arizona and Oklahoma. December 1941, Pearl Harbor. Many, many more were sunk and, after repairs, re-floated.

    19th Lord Semphill gave British military secrets to Japan prior to WW2. The secrets were very useful components in the building of Japan’s early WW2 aviation supremacy. Although British Intelligence had Semphill fingered, Churchill allowed Semphill to run scot-free because prosecution for spying would have revealed that the British had successfully decoded Japanese communications.

    The RE sector is opaque for 2 reasons: One is strategic and the other is profit. It’s not a huge sector so one leaked megabyte of info can have bottom-line ramifications.

    The strategic factor is obvious. China is boning up its military. Japan likewise.

    The profit factor is significant. The middle supply chain makes prodigious profits – unlike the miners – their upstream suppliers. Well-researched innovative gadgets command good prices that need to be protected. Downstream, the knock-on growth prospects for consumer products are essential for China’s plans to create jobs and build wealth. Same in Japan.

    I’ll bet Japanese middle supply chain entrepreneurs keep their research secrets well-guarded. They won’t be ‘hack-able’. They won’t be seen on chat forums or in Press Releases. (Duh!) The research papers will be locked up in Chubb safes.

    Try asking them what they use to make a permanent magnet. What constituents? What quantities? You’ll get a smile and another Chinese wall.

    Mum’s the word.

    May 6, 2015 - 8:55 PM

  • Robin Bromby

    As I have noted to an earlier post, the comment was not a complaint or even expectation that things would change, but as a fact of life that ROW REE players have to live with.
    As the report noted, Japanese magnet makers probably use my Dy than they’re letting on.

    So, this was not demand that people open their books — that’s never going to happen — but merely a statement of fact.

    May 6, 2015 - 11:40 PM

  • marpal

    I agree with Merlion …..”The RE sector is opaque for 2 reasons: One is strategic and the other is profit. It’s not a huge sector so one leaked megabyte of info can have bottom-line ramifications.
    The strategic factor is obvious. China is boning up its military. Japan likewise. ”
    (Thinking out loud)…North America needs to secure our future medicine and military needs. A signature and a handshake from foreign leaders won’t protect us. China lifted export taxes. To abide by laws? hmmm
    Maybe it’s as simple as 1) Eliminate black market exports (no feeds to other countries) 2) Lift export taxes 3) Own resources from other countries. 4) Export less and import more.
    Result: Reserve their own supply, and deplete others.
    Merlion’s post sparked the thought and my guess could be way off base for how simple it is so maybe our North American governments are awake and cutting through some red tape to fund N.A ree industry today, to protect us tomorrow.

    May 8, 2015 - 6:58 PM

  • Alex

    Every suverein country have to think about their REE security of supply.
    From Russian point of view the Chinese saply chain have more security then the ROW. As for commercial point of view every country have to have stock for 2-3 year and laboratory production tecknology.
    If you have stock on 2-3 year of sanctions you can make production for 2-3 year . But to make production and supply all other countries with REE cheaper price means donate them. In peace period it is not reasonable.

    May 8, 2015 - 11:41 PM

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