Strategy Metals Bulletin: Tantalum Fundamentals

Strategy Metals Bulletin (44)Terence van der Hout Aug 21 - 27, 2011Gold&Discovery Fund Aims to update investors on developments in the world of strategy metals – crucial inputs to industry, defense and technology innovationThis week’s bulletin focuses exclusively on tantalum.Tantalum fundamentalsDespite this being a newsletter that claims to cover the most critical of metals,market developments and my personal expertise have made me focus primarily onthe rare earth elements in the past. However, the situation in the tantalummarkets are just as fascinating from a critical and strategic standpoint, and deserveattention. Analogous to the REE, tantalum is in short supply due to a number ofmarket and political developments, and this has forced end-users to travel up thesupply chain to secure supplies.Tantalum is used in electronics capacitors which are found in consumer electronicsproducts such as cell phones and computers. It is virtually irreplaceable in helpingto enable miniaturization of electronics. Tantalum is also used in chemical andpharmaceutical processing, aerospace, energy and ballistic applications. The totalmarket for tantalum metal is just over 1,000 tons, so the market should beconsidered very small. Supply and demand were in balance in 2008.Tantalite ore prices remained fairly constant at $40 per pound from 2007 into2009, but starting midyear 2009 prices began to increase dramatically. In less thana year, tantalite ore prices more than doubled, with prices in June 2011 peaking at$132 per pound. What has caused this rise?Two developments have impacted the tantalum market in recent years. Firstly, asa consequence of the 2008 market crash, two major tantalum producers (GAMand Cabot) ceased producing at their respective Wodgina and TANCO mines,effectively cutting global supply by 40%. Wodgina has now been reopened, but isproducing at half of its previous capacity, whilst TANCO has yet to be reopened.The second development has been the passing of the “Conflict Minerals Act”, apart of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.This bill mandates all actors in the mineral supply chain to prove that theirminerals are conflict-free. The measure, estimated by manufacturers to costbetween $9 bil - $16 bil to implement, came into effect last April and is meant toavoid mineral wealth ending up in the hands of those who fund (often extreme)violence. It has had a particular effect on tantalum coming from the DemocraticRepublic of Congo, traditionally one of the largest suppliers of tantalum, and Terence van der Hout Strategy Metals Bulletin; Aug 21 -27, 2011 1 If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl

China’s main source of the metal. The government of the Democratic Republic ofCongo halted all mining operations in the region in September of last year,reducing the overall available supply by another 16%.Thus, within a matter of 2 years, the global supply of tantalum was decimated byalmost 60%, with 2010 supply coming from just 4 major operations in Brazil,Ethiopia and China. Barring the 2008 crash, however, demand has not lagged. Onthe contrary, demand has increased 10% annually over the last decade or so, ledby the insatiable need of the electronics sector, and China’s increasing demand.These developments are putting huge strains on market supplies. The gapbetween supply and demand has widened significantly, and consumers arebecomingly increasingly concerned about future supply. In a study published inearly 2010, Paumanok Publications stated: “We estimate based upon the closing ofthe primary mining operations in Australia, Mozambique and Canada, that adeficit will build in the market in CY 2010 and CY2011 and then peak in CY 2012.”This was before it became clear that DR Congo tantalum would be taken off themarket as well.Tantalum is rare enough in the sense that there are no alternative suppliers, andstockpiles are running low. If a stockpile runs out, paying higher prices isn’t goingto help, because there isn’t any raw material on the market. Electronic parts willsimply not get delivered. Thus, tantalum is truly critical. Insiders state thatcompanies typically have between 3-12 months of stockpiles, and some may runout any day now.What is the industry doing to secure access to ethical tantalum in very tightsupply? The first to move, as ever, are the Asians. After the passing of the ConflictMinerals Act, the Chinese were reported to be searching out all non-Congolesesupplies of tantalum. A short while later, Brazilian Fluminense signed anagreement with the Chinese, off-taking 75% of their production, effectively takingall the ethical tantalum out of the market place for the short to medium term.A second strategy has transpired in the acquisition of Cabot Corporation’stantalum processing business by tantalum producer GAM. According to someexperts, the deal is very significant in terms of being the first vertically integrated,conflict-free tantalum supply chain. It is a case in which the balance of powerwould switch from the fabricator to the raw material supplier. As an interestingaside, GAM is backed by commodity-focused private equity group ResourceCapital Funds and is 20% owned by Traxys. Both of these financial power houseshave significant stakes in Molycorp, which in turn owns REE and tantalumprocessor Silmet. The two funds are becoming forces to be reckoned with in thefinancing of strategic metals.A third strategy is to prove the tantalum you use in your manufacturing processthat has been sourced in the DR Congo, is in fact conflict-free. AVX and KemetCorporation, two manufacturers of tantalum capacitors, are implementing Terence van der Hout Strategy Metals Bulletin; Aug 21 -27, 2011 2 If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl

separate pilot programs to demonstrate a process that will deliver conflict-freetantalum. Registered artisanal miners will mine ore at one designated site outsideof the conflict areas. The ore is shipped to a smelter, which makes tantalumpowder and wire. This in turn is input to AVX’s capacitors.A fourth strategy has focused on recycling of tantalum from electronic appliances.Tantalum suppliers are asking their customers to sell back their scrap or risk notbeing supplied at all with the material they need. In other words, supply is so tightthat end customers will only be able to continue production if they contribute thetantalum content from used goods themselves.So demand continues to remain strong, supply has been severely curtailed and willtake a while to recover, if at all, and stockpiles are being depleted. The market is indeficit. The raw material is produced in small volumes and is a crucial and largelyirreplaceable input in high tech products, particularly in the capacitor/semiconductor markets. It is produced in countries that are not regarded as areliable source, and demand is high in China. These are classic symptoms of a rawmaterial that is critical and strategic, and for which reliable sources in stablewestern jurisdictions would be expected to receive a premium. A few Canadianniobium/ tantalum projects are in fairly advanced phases of development, andcould provide for this much needed supply within a couple of years.On a finishing note, Resource Investor have been kind enough to publish an articlealso placed in this bulletin, some weeks ago:http://www.resourceinvestor.com/News/2011/8/Pages/Rare-Earths-20-Rise-of-the-Heavies.aspxTwitter: @GoldDiscFundDisclaimer: 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 this bulletinis the author’s independent opinion of developments in markets and at companies, and hence may contain factual errors,and may not reflect the opinions of the Gold&Discovery Fund. The content of this bulletin is not intended as an investmentrecommendation.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; Aug 21 -27, 2011 3 If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl

Strategy Metals Bulletin: Tantalum Fundamentals

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Strategy Metals Bulletin: Tantalum Fundamentals — Document Transcript