Dacha’s new Model might emulate a Japanese ‘Shosha’ Trading House
Dacha Strategic Metals Inc. (‘Dacha’, TSXV: DSM) elected a new board of directors last November. The company has been looking for a fresh outlook. Its model, until recently, was to acquire, store and deal in a series of rare earth metals, especially the harder to find ones of the Heavy Rare Earths (HREE) variety such as Dysprosium. Dacha kept the assets in the London Metal Exchange. Management would then exploit inefficiencies in the various niche markets, acting as a kind of managed commodity fund. The company’s success was not only based or reliant on the actual prices of the commodities (rare earths in this case); it was even more dependent on the price development of the metals and the management team’s correct assessment of which metals would increase in demand in the future.
Dacha claimed to have established “the world’s first and only corporate stockpile” of rare earths and other critical metals, appealing to investors who wanted to find a route into the rare earth market without the risks associated with new mining companies. Notably, Dacha bought a Chinese trading company to trade REE within China itself, importing and exporting, allowing it to build inventories, which it could trade strategically, taking advantage of market fluctuations and shortages. Dacha kept its REE stocked in a warehouse in Busan, South Korea, and Shanghai, China.
Get our daily investorintel update
Dacha has stopped publishing quarterly updates about the value of its inventory of REE’s during what is now a transition phase in search of ways to increase value and performance. As the ‘soul-searching’ proceeds, it should be noted that the new Chairman of the Board, Ian Delaney, was the former CEO and current chairman of Canada’s Sherritt International Corporation, has experience in turning companies around and in generating value in unusual conditions. Sherritt invested successfully in Cuba’s nickel and oil deposits in the 1990’s becoming its main independent energy producer. While, Mr. Delaney has been barred from entering in the United States because of his dealings with Cuba (in fairness he started that business before the passing of the Helms-Burton Act of 1996, banning investment in former US assets in Cuba). Delaney showed that Cuba can be good for business.
Dacha’s model was not exclusive; other companies such as Traxys are also involved in third party metals trading, sourcing in-demand metals from miners in expectations of favorable price movements in the medium and long term. One of the main risks of this business, however, is due diligence, especially when it comes to rare earths, some of which are produced in highly politically sensitive areas. Traxys, for instance, drew the attention of the United Nations over allegations that it was sourcing cassiterite (Coltan) from rebel controlled areas in the DR Congo, subject to checks and penalties, under the Dodd-Frank Law, similar to those involved in the distribution of ‘blood diamonds’ from West Africa. Nevertheless, as a broker, Dacha could specialize in the value elements, the harder to find heavy rare earths as well as the rare earth miners’ actual geological assets – abundance and grades – and processing know-how.
Dacha, therefore, does not need to revolutionize its model; however, there is nothing stopping it from evolving. As a broker, Dacha has many contacts in the REE industry, both in mining and processing. Ideally, Dacha would use its contacts and understanding of the industry to develop its ability to participate in the mining projects themselves, acting in the same way a Japanese Sogo Shosha (a large scale Trading House such as Marubeni or Itochu) would, ensuring long term supply contracts between the miner and the end user, shopping around for the best resource to meet end-users’ needs. The advantage of such a partnership is that the investors in the actual mining assets would see Dacha’s involvement as a reassurance that the mined products can be sold. A number of large corporations from automobile to missile guidance manufacturers are seeking reliable rare earths sources; Dacha could help as a broker, helping REE buyers find the best assets for their needs. One such method would be to take up stakes in good projects, building a diversified portfolio, gaining access to stockpiles for long term value (as they were doing before) while also having direct access to spot supplies. Presumably, Dacha’s participation might even include actual management of select REE projects for further growth.
This model is being used by the large Japanese trading houses to revive their own business prospects. The influence of such people as Ian Sherritt is invaluable, should Dacha embrace this kind of change. Sherritt would use his successful track record and relationships to secure cheap financing; that is a key to profitable brokering. One does not even have to look at Japan exclusively. The Canadian Glencore has adopted this approach, becoming the world’s largest commodities trader. In areas such as defense, a company like Dacha might even benefit from government agency support; after all, Chinese REE restrictions and quotas, may be barriers to direct end users, but they are assets to be exploited by well informed and active brokers.