Michel Nestour - Material risk impact on high-tech industries


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Mr. Michel Nestour, Director Transaction Advisory Services at Ernst & Young. Presentation at Critical Metals Investment Symposium, Vancouver, Canada. January 21, 2011

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Michel Nestour - Material risk impact on high-tech industries

  1. 1. Material risk impact on high-tech industries?Critical Metals Investment - VancouverMichel Nestour - January 21/22
  2. 2. Overview► Technology minerals critical to clean tech► Technology minerals market► Technology minerals reserves► Impact of the current political context► Investors interest in technology minerals► Availability of funding► Future technology minerals demand► Technology company potential responsesPage 2 Material risk – impact on high-tech industries
  3. 3. Technology minerals* are critical to clean tech, aerospace, automotive, IT, renewablestantalum, niobium, antimony gallium, indium neodymium (R/E) germanium beryllium, tungsten, cobalt PGMs Note: * Includes rare earths, antimony, PGMs, germanium, magnesium, gallium, indium, beryllium, cobalt, fluorspar, tantalum, tungsten, graphite, niobium. Page 3 Material risk – impact on high-tech industries
  4. 4. But represent small volume when compared tocommonly produced metals globally Global metal production as a % of other commonly produced metals chromium 1.95% zinc 0.94% nickel Others 0.12% copper 10% lead 1.34% 0.33% manganese 0.81% boron aluminium 0.38% 3.13% rare earths 0.01% Raw technology steel minerals 90% 0.98%Source: Mineral commodity summaries, USGS, January 2010Page 4 Material risk – impact on high-tech industries
  5. 5. Global technology mineral markets are alsoindividually smallBy-products cobalt indium germanium antimonyPrincipal Tantalum graphite tungsten Rare EarthsProducts PGMsMined bauxite fluorspars beryllium niobium iron ore 0% 20% 40% 60% 80% 100%Source: Ernst & Young analysis Share of 09E largest producing countryPage 5 Material risk – impact on high-tech industries
  6. 6. Technology minerals reserves are highlygeographically concentrated… Geographic concentration of 14 Geographic concentration of 12 critical global reserves critical global reserves (excluding magnesium and fluorspar) Russia Others 24% Others 40% 32% China China 51% 19% North Korea CIS US 7% 10% 17% Russia China North Korea Others China CIS US OthersSource: Mineral commodity summaries, USGS, January 2010; Mikolajczzk, Clair, “Availability of indium and gallium”, September 09, via www.indium.comPage 6 Material risk – impact on high-tech industries
  7. 7. … except Rare Earths, where reserves aredistributed globally 19.2% 16.8% 13.1% 36.4% 3.1%Key: Negligible risk Low risk Medium risk 5.4% High risk Very high risk x%: % of global reservesSource: Ernst & Young analysis, combining analysis from http://www.dolbear.com http://ihsglobalinsight.com and http://www.transparency.org and USGS surveyPage 7 Material risk – impact on high-tech industries
  8. 8. Recently subjected to a geo-politicbattleground of words between East & West…► "The slowdown . . . raised questions in many of our minds that it is not – whether it is China or anyone else – wise to be so dependent upon a single source for elements that are critical to many of the most advanced civilian and military technologies that countries like Australia and the US produce and utilise“ – Hillary Clinton, 8 November 2010► "China has not issued any measures intended to restrict rare earth exports to Japan. There is no foundation for that” – Chen Rongkai, 23 September 2010► “Considering the raw-materials policy of a country such as China, it’s urgently necessary to make capital available to secure long-term supplies. That’s not only a reference to natural gas and oil, but goes far beyond that” – Angela Merkel, 14 October 2010► “China will not use rare earths as an instrument for bargaining. Instead, we hope to cooperate with other countries in the use of rare earths on the basis of win-win outcomes and jointly protecting this unrenewable resource” – Zhu Hongren, 28 October 2010► “Allow open and legal access to (rare earths) and reconsider restrictions that China may have planned or has already undertaken“ - Rainer Bruederle/Li Keqiang , 7 January 2011Source: Quotations sourced via FactivaPage 8 Material risk – impact on high-tech industries
  9. 9. … stimulating increasingly competitivestrategies to protect national interests Nation Goal Key Business Policy Canada ØSustainable development and use of ØPromote recycling mineral and metal resources ØUse life-cycle-based approach to mineral ØEnvironmental protection management and use China ØStable supply of raw material ØREE export quotas and taxes ØIndustry consolidation and limits mining permits until mid 2011, increase environmental laws ØProposed unified pricing policy EU ØLimit the impact of potential material ØMineral trade policy for open international markets supply shortages ØIncreased recycling ØInformation gathering Japan ØSecure stable supply of raw materials ØFunding for international mineral exploration ØLoan guarantees for high risk mineral projects ØStockpiling ØInformation gathering South Korea ØReliable supply of materials ØFinancial support ØAgreements with resource rich nations ØStockpiling USA ØCompetitive domestic rare earths industry ØRestart and National Defence Authorisation Acts ØLong term availability of strategic & ØStockpiling critical materials by 2015 ØInformation gatheringSource: US department of Energy -”Critical Materials Strategy, December 2010”; The Hague Centre for Strategic Studies and TNO - “Rare Earths elements and Strategic Mineral Policy.2010”Page 9 Material risk – impact on high-tech industries
  10. 10. The cut in China’s export quota triggered therecent increase in oxides prices► The price of neodymium has increased 2.5x since China’s July announcement► The price of dysprosium has more than double over 2010 100,000 8/7/10 – China announces cut in export quota 800 Neodymium oxide US$/metric tonne 90,000 700 Dysprosium and terbium oxide US$/kg 80,000 600 70,000 500 60,000 50,000 Heavy Light 400 40,000 300 30,000 200 20,000 100 10,000 Heavy 0 0 2004 2005 2006 2007 2008 2009 2010 2011 Neodymium Oxide $/t Dysprosium Oxide $/kg Terbium Oxide $/kgSource: Thomson Datastream, to 7 January 2011Page 10 Material risk – impact on high-tech industries
  11. 11. Oxide price rises are benefiting the shareprices of rare earths exploration companies 3,000 2,500 8/7/10 – China announces cut in export quota 2,000 1,500 1,000 500 0 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Avalon Rare Metals Great Western Mineral Corp Lynas Rare Element ResourcesSource: Thomson Datastream, to 7 January 2011. Rebased to 100 at 01/01/2009.Page 11 Material risk – impact on high-tech industries
  12. 12. Molycorp’s share price has shown stronggrowth since IPO Molycorp raised $394m via its IPO on the New York Stock Exchange in July, making it the sixth largest IPO in the sector this year. 70 IPO price: $14.0 60 Price 7 Jan 2011: $54.4 50 40 US$ 30 20 10 0 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10Source: Thomson DatastreamPage 12 Material risk – impact on high-tech industries
  13. 13. However, investors currently find technologyminerals difficult to understand…► Material ore grade► >7-10 years before mines come into production► Complex supply-demand drivers – mined vs. by-product► Lack of data on mineral use per end-user application► Small global market size► Capital intensive► Chinese quotasPage 13 Material risk – impact on high-tech industries
  14. 14. … and specifically for rare earths► ‘Rare Earth’ – terminology is confusing► Element distribution (China probably has 15-20 years of heavy)► ‘Light vs. Heavy’ – application/restriction not well understood► By-product credits (uranium, niobium, tantalum in/out valuation)► Mines, which requires $0.5bn to $1bn to produce ore concentrates, are the low value add point► Complex processing chain (radioactive elements – environmental issue) and knowledge gap outside of China► Chinese cost advantagePage 14 Material risk – impact on high-tech industries
  15. 15. An example of technology minerals valuechain - Rare Earths Higher Value Add Step 5: smelting to Step 4: produce beneficiating metal alloys Step 3: (produce used in end separating high-value product (through oxides, (magnet, atomic metals or Step 2: mobile weight) into magnetic cracking phones, individual rare powders) into LEDs, etc.) concentrate earths refined Step 1: (acid/heat into oxides mining separation) Lower ValueSource: Ernst & Young analysis AddPage 15 Material risk – impact on high-tech industries
  16. 16. Technology minerals IPOs are emerging in 2010 2010 technology minerals IPOs 2010 fundraising by 3 Royal Bafokeng 500 Geography 450 Molycorp Others 400 6% 350 2Number Proceeds $m China 300 27% 250 South Africa 200 33% 1 150 USA 34% 100 50 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec China USA Proceeds $m Number South Africa OthersSource: Ernst & Young, Thomson Financial. Page 16 Material risk – impact on high-tech industries
  17. 17. $1.7bn of technology minerals deals werecompleted in 2010, majority PGMs 1,000 7 900 6 800 5 700 600 4 500 $m 3 400 300 2 200 1 100 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Value $m Number of completed dealsSource: Ernst & Young, Thomson Financial.Page 17 Material risk – impact on high-tech industries
  18. 18. Technology minerals demand, governed bycomplex dynamic, is expected to increase 30000 25000 20000 Ton 15000 10000 5000 0 Gallium Indium Germanium Neodimium Tantalum Demand 2006 from emerging technology Demand 2030 from emerging technologySource: “Critical raw materials for the EU: report of the Ad-Hoc working group on defining critical raw materials” EC June 2010 and Annex V to the reportPage 18 Material risk – impact on high-tech industries
  19. 19. So how should technology companiesrespond?First, don’t panic!► Help government agencies to compile data on the technology minerals requirement as data is sparse► Start new supply chains through off-take agreements/equity stakes in exchange for investment with explorer/fabricator► Lobby the government/tax authorities for technology minerals investment tax rebates► Invest in technology minerals recycling technology► Support the creation of a state-owned enterprise to take responsibility for exploration or to provide centralised funding supportSpecifically for Rare Earths: ► Support the re-build of value chain expertise outside China ► Understand which rare earths demand pattern is likely to grow fasterPage 19 Material risk – impact on high-tech industries
  20. 20. Our views and opinionswww.ey.com/miningandmetals www.ey.com/miningandmetals
  21. 21. DisclaimerThis publication contains information in summary form and is thereforeintended for general guidance only. It is not intended to be a substitutefor detailed research, or the exercise of professional judgement. NeitherEYGM Limited nor any other member of the global Ernst & Youngorganization can accept any responsibility for loss occasioned to anyperson acting or refraining from action as a result of any material in thispublication. On any specific matter, reference should be made to theappropriate advisorPage 21 Material risk – impact on high-tech industries