EDITOR: | May 9th, 2013

Shandong dumps TUC deal over Australian HREE

| May 09, 2013 | No Comments
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CHINAS~1China has done it yet again: a state-owned company starts to cosy up to a foreign mineral company and then, a few months later, pulls the plug on the proposed deal.

Often the strategy is intended to force the target to take a far less attractive offer than was originally made.

The latest victim is Australia’s TUC Resources (ASX:TUC) which has been notified by the Shandong Provincial Bureau of Geology and Mineral Resources that the Chinese side will not now take any action on a memorandum-of-understanding signed in January regarding TUC’s heavy rare earth-dominated projects. TUC shares dropped more than 30% on the news.

Australian investors are getting acquainted with the way Chinese companies do business. There have been takeover offers made — and then withdrawn, in one recent case two years after the original indication. Breaking MoUs is now a familiar event. Sure, the whole point of these MoUs is to do little more than indicate the way ahead, but once signed the non-Chinese “partner” spends a good deal of time pursuing the matter, and then there is the lost opportunity cost once the mat has been pulled from under the so-called target. In this case TUC has seen months go by when it could have been talking to other people.

Shandong gave no reason or its withdrawal this week, stating merely that “we are presently are unable to take this forward”. There was a scrap thrown to the Australians: Shandong said it was “very hopeful” of reviving the MoU and that discussions were going on in China regarding the project. Well, we’ll wait and see about that.

TUC received a big boost when the MoU was signed in January. It was proposed that Shandong would, in several stages, take new shares worth A$19 million to give it an eventual 50% stake in the rare earths joint venture covering eight tenements in Australia’s Northern Territory. The first stage was to involve a A$4 million injection to take Shandong to 15%.

At the time it seemed to signal another move by China to locate heavy rare earths abroad as the country faces shortages in the future; better to mine them overseas yourself (or with a joint venture partner) than have to go cap-in-hand as a buyer in a seller’s market, we observed. As one analyst pointed out at the time, “importantly TUC has aligned themselves with a partner who has access to specialised knowledge of HREE clay deposits and processing technologies, which to date have been confined to China”.

It has been one of the more interesng aspects of the TUC story that the geological processes that have formed at the Stromberg Prospect are similar to those that the Southern China Clay rare earth deposits.

TUC’s projects — should they prove to be as good as the company claims (and you have to wait until final production justifies those claims) — seemed tailor-made to Chinese requirements. The Stromberg deposit is more than 80% heavy rare earths: yttrium accounts for 70% of the TREO mix, with dysprosium at 7.3% and erbium at 5.4%; there’s also europium.

TUC said today it was extremely disappointed by Shandong putting the proposal on ice. It plans to keep talking to the Chinese, but also now looking for other interested parties. The Australians, once they learned of the move, tried to get meetings arranged with Shandong to find out what was the problem. But, so far, no luck on that score.

It will be interesting to see whether Shandong comes back with a shaved-down offer or whether something has happened in its own HREE strategy to make the Australian plan less urgent.


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