Strategic Metals Bulletin Bulletin #38

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Strategic Metals Bulletin Bulletin #38

  1. 1. Strategy Metals Bulletin (38)Terence van der Hout June 12 - 18, 2011Gold&Discovery Fund Aims to update investors on developments in the world of strategy metals – crucial inputs to industry, defense and technology innovationI attended the Critical Materials Investment Symposium in Vancouver, last week,and this is the reason I was unable to send out a bulletin. The flip side of this isthat a number of interesting topics were discussed during the symposium, someof which I would like to share with you. This week’s selection looks at innovationstarting to bypass strategic metals, looks at electrification as key to movingforward, sees metals morph, and provides a list of metals mentioned by variousspeakers and which should therefore be regarded as critical.Innovation bypasses strategic metals: magnets & drive trainsThere was some consensus on the effects of the rising prices of REE. Althoughthe investor in us may enjoy the recent run up in stock prices, the priceexplosions are not a good thing. They make inputs for manufacturers expensive,and stimulate innovations away from their use. Ron Stravlo, a manager forJapanese magnet maker TDK emphasized this, stating that for some magnets,reengineering out of REE-containing products has already commenced. MrStravlo believes this process will take 6-8 years, and this is effectively the timewindow that the REE industry is given to provide security of supply for themagnet elements (dysprosium and neodymium). According to Jack Lifton’sforecasts, using fairly conservative growth figures and under the assumption thatthe non-Chinese projects will mostly come online as planned (which is highlyunlikely), the neodymium supply will be solved by 2016, and the dysprosiumsupply issue will never be solved. This is a fairly problematic statement. In theautomotive industry, 5 different drive train technologies are being developed,only one of which contains rare earths. It appears the world can do very wellwithout REE, despite the added performance they bring.Innovation bypasses strategic metals: catalytic convertersNeil Branda of 4D Labs, an innovation laboratory based in Vancouver, gave us aninsight into the way research is done at the frontier of technologicaldevelopment. Amongst many other innovations, a catalytic converter has beendeveloped at the lab which works well and is completely devoid of the strategicmetals REE, palladium, rhodium and platinum. The device is apparentlypatented, and may be applied in the automotive sector in 6 – 12 months.Although this doesn’t mean the technology will be adopted immediately, theconverters might be cheaper to produce, given the absence of expensive metals,Terence van der Hout Strategy Metals Bulletin; Jun 12 - 18, 2011 1If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl
  2. 2. and will not be subject to the supply constraints apparent in the world of criticalmetals.For us as consumers of automobiles, this is probably a good thing, although notmany of us are aware of the issues in strategic metal markets or know that theyare inputs to many of the most important components of a car. For investors inREE, a sizeable part of the lanthanum market may fall away as a consequence ofinnovation. Lanthanum is not part of the set of elements for which there areshortages, as oversupply is prevalent and is expected to last. The oversupply iscompounded with the new technology. The impact is greatest in the othermetals that a converter uses. According to experts, 40% of the palladium supplygoes to catalytic converters, 50% of the platinum, and a whopping 90% of therhodium. These markets will be impacted in a major way should the technologytake off, and the investment proposal for these markets will be greatlydiminished.Electricity is key to innovationTom Drolet, an expert on nuclear energy, believes electricity to be the core ofthe future, as it translates value into use. Everything will be electrified, and inorder for this to happen, more energy is needed to generate electricity. For allthe potential of solar and wind power, they currently add less than 5% to thetotal energy need, and scaling up to signifanct levels is years and billions ofdollars away. Mr Drolet sees varying potential for nuclear energy for the future,the inherent dangers need no explanation given the recent set of disasters inJapan. He believes natural gas will be the number one fuel of choice for movingelectrification forward.As an extension to this, John Kaiser believes that battery technology is at thescience frontier, and two challenges need to be met. Firstly, how do we copewith intermittent energy, and how do we electrify vehicles. Both challengesimply a crucial role for the further development of batteries that are able tostore large volumes of electricity, and batteries that are quickly rechargeable andprovide sufficient power for enabling efficient transportation.Morphing metalsMike Berry reinforced the message I have been trying to convey for the last 10months: the days of abundant resources are over and the age of resourcenationalism has started. Resources have fallen in price persistently over the last100 years, up until 2002. Since then, prices have gone up dramatically, morethan compensating for all previous declines. Mr Berry speaks of the comingconvergence of the quality of life when he explains the ambitions of theemergent economies of China, India, Brazil, etc. to equal or surpass the quality oflife that the western countries have become accustomed to. In order to facilitatethis, demand for resources has risen dramatically, which subsequently ‘morph’Terence van der Hout Strategy Metals Bulletin; Jun 12 - 18, 2011 2If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl
  3. 3. into scarce, critical and highly qualitative resources. The resources undergoingthis morphing will provide for investment opportunities, but in the end, demandfor them will become more and more intense, and will lead to resourcenationalism.Critical metalsA large number of metals were discussed by various speakers, but it appears thetwo following metals are pretty much central to the criticality issue (besides theobvious REE) and have the necessary scale to be interesting:- Graphite – not a metal, but central to the car industry, including as input to batteries. Used in steel, brake linings and fuel cells, the emerging technologies for graphite are based around its application in batteries and in pebble bed nuclear reactors. The market is dominated by China.- Vanadium – input to the steel industry, and in the large scale storage of electricity. China’s per metric ton use of vanadium in steel is low relative to other countries, and is expected to rise, giving the metal a robust demand growth. Demand additions as a consequence of vanadium’s application in the battery storage industry may be substantial. Vanadium is not rare, but has potential supply constraints in the fact that 90% is supplied by Russia, China and South Africa.Further metals that are in the critical category are tantalum, manganese, lithium,niobium and indium, although not all of these have the same supply constraintsor high-tech application potential. There are a number of companies that areexploring for these metals, and the general message is that a number of thesecompanies have the potential to match the performance of the REE explorersgoing forward.Disclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund hascommercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in thisbulletin is the author’s independent opinion of developments in markets and at companies, and hence may containfactual errors, and may not reflect the opinions of the Gold&Discovery Fund. The content of this bulletin is not intendedas an investment recommendation.Copyright: The information in this bulletin can be forwarded, cited or used otherwise, but only within the context asintended by the author, and with complete reference to the source.Terence van der Hout Strategy Metals Bulletin; Jun 12 - 18, 2011 3If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl

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