Lifton on the Chinese investment strategy for natural resources
I was in China last week participating in the Global Forum on Energy Security. I had the opportunity to meet with long time Chinese acquaintances as well as to meet some new (younger) ones.
For the foreseeable future and, I think, already for most of the 21st century, growth in the Global Baseload (Demand Floor) of natural resources has and will come from China. China’s newest economic direction, under the leadership of Xi Jinping recognizes this by urging and, more importantly, underwriting, financially, the expansion of the Chinese supply of natural resources by the financial acquisition and control of foreign (non Chinese) producers of such resources whenever and wherever possible!
Since the turn of the century I have been watching the “learning curve” of Chinese mining finance. Ten years ago Chinese finance refused even to consider investments in junior natural resource companies. There was no “official” bias, but privately I was repeatedly told that it was impossible for Chinese bankers to assess the probability that a greenfield site with supposedly firm geological and economic value (mineral deposits, for example, vetted by Canada’s National Instrument 43-101) would ever come into production. Chinese mining finance simply was not up to such risk assessment. The Chinese government acknowledged this “fact” by impairing the ability of Chinese companies to invest financial reserves or make loans into such acquisitions.
Chinese mining finance has now shifted essentially 180 degrees. The Chinese government has adopted a policy of go find natural resources, assess their probability of actually going into production; and buy the best ones.
By Chinese standards this has happened overnight, as such things can only happen, under State Capitalism. But Western “China watchers” with their sights set on the impact of Chinese economics on the immediate global economy and upon the politics of state actions, as well as through a general ignorance of the operational details of the natural resources’ supply aspect of the “global” natural resources markets, have chosen to ignore this tectonic shift.
Several years ago I proposed to an international brokerage for which I have been speaking on global critical materials’ issues that I would help their Chinese clients to vette non-Chinese natural resource producing or using ventures. I pointed out that the “promotional” aspect of junior natural resource ventures in particular made it difficult to understand their actual as well as their potential value. I was and continue to be politely refused. In the beginning this was due to a lack of support for such investments by the Chinese government, but lately it has become obvious to me that the current basis of declining my offer for participation in such due diligence is that Chinese companies, not the State directly, are now driving such investments and that they do not trust me or almost any other non Chinese to give good advice defined as selecting investments that are first and foremost “good for China,: and are only secondarily to be or become profitable. The Chinese government’s financial regulators accept the fact that an FDI (Foreign Direct Investment) by a Chinese company must be into a profitable venture or at least one with a timetable for profitability. Otherwise it would be just a drain on capital through subsidies, and such a drain would fall most often on the PBOC (The Peoples Bank of China, that nation’s Federal Reserve).
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The Chinese mining finance sector would rather make its own mistakes than rely on the advice of a foreign capitalist believed to be driven only by the profit motive (me). I accept that reluctantly. I say reluctantly because I really think I could help in my small way to integrate China into a mutually beneficial global economy if this were their goal. It is not. China’s goal is to make China into the world’s largest economy to prove the precepts and cement the rule of the Chinese Communist Party.
I note that a basic Western moral guidebook states that whoever has the goal of gaining worldly goods only does so at the risk of his/her soul. This guidebook is soon to be out of print in the west, but it’s advice is very much taken to heart in China even though it manifests itself in a China First economy.
Look East young people. And ignore junior mining venture announcements of MOUs with Chinese FDIs. The long term continuous engagement with Chinese financiers necessary to gain their trust and respect is not in the playbook of promoters and charlatans seeking only immediate short term gain through share price manipulation. Chinese investors are only interested in the long term production of the natural resources necessary for China’s economic growth and stability.
Just as an example I note that the 10 year “due diligence” cycle of so-called efficient markets in the West evaluating the global supply of the rare earths has simply reinforced Chinese dominance of such markets. The great conspiracy theory in the Bay Street syllabus, which says that China has manipulated prices and supply to control demand is correct in its conclusions but obscenely wrong in its analysis. It is the state directed mandate to ensure the security of supply of these resources for China’s benefit as a domestic consumer that has driven its activities and those of its companies. Present and projected future demand within China for the rare earths is, for example, the sole driver of China’s FDI in the global rare earths space.
So now, I repeat for the nth time. Invest on those ventures that can mine and process Neodymium, Praseodymium, Terbium and Dysprosium profitably, and you will be investing along with the Chinese.
China has “high graded” its heavy rare earths’ supply in its easily extracted domestic ionic adsorption clays. They were typically “mined” at 0.080 % (800 ppm) 10 years ago; the best are now at 0.050 % (500 ppm). As a result China is actively seeking heavy rare earth deposits, clays and hard rock both outside of China. Watch carefully and use common “business” sense when such forays are reported. There are non-Chinese ionic adsorption clays of higher grade than those remaining in China, most of these known today are in the Indonesian archipelago and Eastern Africa (along and in the Indian Ocean); also there are good xenotime themed deposits rich in HREEs and in NdPr, but these exist only outside of China in places such as Africa, South America, and Australia. All of these non-Chinese deposits (none have as of yet been developed into mines) suffer from infrastructure or management problems or both. Chinese SOEs in the mining sector are evaluating many if not all of them. But Chinese businessmen are not fools. They advance and retreat in due diligence just like we do. MOUs are rapidly signed (they are not monetary instruments but merely memoranda of possible interest) but paid off-takes are rare and outright purchase so far even rarer. The stated preferential procedure in all of this for the Chinese is to mine, beneficiate, and even extract the desired values into process leach solutions to be shipped (one way) to China for separation and further downstream processing. Thus it is of no value to Western, Japanese, and Korean end users of rare earths as raw materials to participate in such ventures other than as supply for their Chinese domestic manufacturing ventures.
One opportunity that arises out of all of this is for new or newly applied separation technologies for the rare earths. A wise (rare) non-Chinese manufacturer with a long term outlook can today invest in right sized separation technology along with non-Chinese raw material supply. The Chinese rare earth industry is awash in excess capacity at every step of the rare earths’ supply chain. There is no incentive among such Chinese companies to invest in separation technology. But if non Chinese ore could be processed into separated individual and blended oxides and metals competitively with China but outside of China then an entrepreneur could sell such products even into China! Such a venture is now underway in the USA. This is free market capitalism at its best.
It is the same story for lithium. In this case however most of the world’s lithium supply (76%) came from outside of China as recently as 2014. But China has now emerged as the world’s largest market for lithium chemicals for energy storage, and, as an example of the strategy discussed in this article, a Chinese group has bought control of Australia’s Talison, the world’s largest producer of lithium from hard-rock. Chinese financiers are now swarming into South America’s lithium rich brine fields.
Unlike rare earths where innovation in Chinese processing is stifled by overcapacity, lithium processing, time and energy consuming, is begging for innovation everywhere. And once again the technology exists and has been developed in the USA to recover lithium from both brines and extracted spodumene cheaper than any processes used today.
Graphite, the third member of the Energy Generation/Storage “Triad” is plentiful in China and most of today’s supply is both mined and processed there. But there are much better graphite deposits outside of China than in China and once again technology, developed in the West, is able now to produce such presently Chinese staples as spheroidal graphite for lithium-ion battery anodes more cheaply and efficiently than in China.
To sum up for today: The overwhelming present and future demand for the rare earths, lithium, and graphite today is in China for domestic consumption. But the technologies for processing all of these materials into end user forms is in rapid development outside of China, mainly in the USA.
As globalization pauses (or fails, once again) we must look to our own security of supply. It will be new and newly developed extraction and separation technologies, not new deposits, that allow us to achieve and maintain domestic self-sufficiency.
China is well underway in achieving the internationalization not the globalization of its natural resources supply base. Like the USA in 1947 it can pick and choose its targets from a demoralized and economically (impaired?) defeated West.
I think that your investments in the natural resource space need to accommodate this reality and to look carefully at process technology.
Jack Lifton is the CEO for Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. Technology metals ... <Read more about Jack Lifton>