RE Prices Deflate a bit; China Rare Earth Holdings; Hints On "14-5"; China Nonferrous Shady Deal;
2020 Rare Earth December 15
|Dec 15, 2020|
Very China today, but we feel it is necessary to keep it in focus, as rarely anybody else does.
Rare earth prices this week opened with a weakish tone for magnet materials, compared to last Friday. We give you three charts to give you a good idea where we come from and where we are, so to prevent either doomsaying or hype
Year to date change, year on year change and 4-year change of prices
Price changes since beginning November:
Price changes since beginning December:
And last, but not least, the USD/RMB exchange rate:
It is this time of the year again, when China-based rare earth “information services” and consultants peddle post-mortems of the rare earth market, which barely offer any insights beyond annual report contents of the Big 6 and berating the obvious.
As discussed before, China-based information services are subject to publication and media rules, which means they have got to stick to official media like New China News Agency “Xinhua”, the offshoots of the People’s Daily and other official lead media organisations. Even if they know something off the beaten track, they can’t share it, if they want to stay in business.
Expect no important, juicy details from them. Instead of buying such reports, you’d rather give money to charity.
So, you are an investor, bullish on rare earth, seeking full, real time exposure to the world’s largest market for rare earth products. What do you do?
This brings us straight to China Rare Earth Holdings, a company listed on the Hong Kong Stock Exchange and probably the only stock you can buy with direct, undiluted exposure to physical rare earth business in China, perhaps apart from Neo Performance Materials.
CREH have two lines of business, refractories and rare earth. Their main business in RE is rare earth oxides, mostly the permanent magnet materials neodymium, praseodymium, dysprosium and terbium. The RE factory is in Yixing, near Wuxi, Jiangsu Province, China.
63.6% of the shares are held by the married couple Ms. Qian Yuanying (chairwoman) and Mr. Jiang Quanlong (executive director). Apart from CREH, the couple privately owns more than 30 companies in Jiangsu and Shanghai, according to our research.
Owing to lack of raw material, CREH 2019 sales volume dropped 30% to 1,100 mt (the smallest of the Big 6, Xiamen Tungsten, are at ~4,000 t REO), with unchanged 95% of volume sold in the China domestic market (2015: 64%). However, sales of rare earth oxides increased 25% to HK$692 million (~US$ 90 mio) (2015: HK$436 mio) and after multi-year losses the company swung to an operating profit.
Prepayments to suppliers of raw materials more than doubled, however, it is common in China business: If you want raw materials, you pay cash in advance, else you don’t get any. There is a risk if prices rise, that you either get your raw materials late, only partially, or not at the agreed price, but a renegotiated one.
Overall it looks prudently managed, minimal exposure to exports, and could be taken as a typical example for a rare earth processing business in China.
Some elements in the annual report seem a bit unlikely in this particular configuration, which suggests some non-consolidated subsidiaries or affiliates at work, as indicated in earlier annual reports of the company. With more than 30 companies in Jiangsu and Shanghai owned by the controlling shareholders, it can not be excluded that some of these might accidentally be creditors and debtors of CREH, which may help in shifting around unpleasantries.
Very visible in the CREH example also the China banks pawnshop mentality, that Jack Ma scathingly criticised in the presence of China’s vice-president. While this was not one of Jack Ma’s most glorious moments, as it borked what could have been the world’s largest IPO ever, his description of China bank practises was spot-on.
Another thing you should know is, that in 2011 CREH built a rare earth processing factory at Ban Lingxan in Laos under the name of Laos Wonder New Materials Import-Export Co. Ltd. The original concept had been to produce rare earth oxides from monazite. However, in absence of a sustainable radioactive waste disposal plan and proximity to nearby Nam Gnum river, the Laotian government denied the operation permit in 2012. Apparently, ahead of construction there had been no public consultation regarding the purpose of the factory.
In 2016 Canada Rare Earth announced to take a 60% share in Laos Wonder New Materials Import-Export Co. Ltd., subject to the factory getting licensed by the Laotian government.
How this came about: The de-facto controller of Canada Rare Earth, former chairman Rojer Li (Li Qiufeng), is native and resident of the same tightly knit community the ultimate controllers of CREH are from: Yixing.
Apart from the permit issue in Laos, there is also the minor issue that rare earth production know-how is on China’s 2001 export prohibition list and enabling this factory in Laos could be in violation of the recently enacted China export control law, even though it seems practically all of the know-how already is in the public domain.
Canada Rare Earth apparently primarily source raw materials for Mr. Rojer Li’s 95% owned company Yongzhou Xiangjiang Rare Earth Co Ltd in Hunan, China. After a debt to equity conversion in 2019, Noble/Talaxis hold ca. 11% of Canada Rare Earth.
One additional risk with CREH, that applies to all China companies listed on outside China stock exchanges, as all of them base on VIE/SPV: One stroke of a pen in Beijing, and foreign shareholders of China-based companies henceforth only hold shares of a prime, first class, optionally coloured letterbox on a Caribbean island.
We hold no shares in CREH, nor do we have any other relation with that company and its people, while we do have significant unrelated on-site experience in Yixing.
In order to prevent state-owned assets to get robbed like it happened in Russia, it is mandatory in China that state-owned assets for sale are listed on state-owned asset exchanges (“equity exchange”) and are there matched to competent buyers.
But strange things still happen.
China has a plan to turn the entire Pearl River Delta into a giant metropolis with a population of hundreds of millions of people. The plan includes cities like Shenzhen, Guangzhou, Zhuhai, etc.
Along with this plan comes a reclassification of land. A lot of land that used to be industrial is being reassigned to residential real estate. Owing to massive digressions in the past, state-owned enterprise are not to deal in real estate and focus on their licensed business range.
Guangdong Zhujiang Rare Earth Co., Ltd. (nameplate capacity 3000 mt/year REO, we think it is closer to 4000 t) is located in Guangzhou’s Huangpu district, land which has been reassigned as residential real estate, which means the company must close and/or move. Since China Nonferrous are not allowed to trade in real estate, they saw it prudent sell Guangdong Zhujiang Rare Earth Co., Ltd. for compliance reasons.
The company was put up for sale on the China Beijing Equity Exchange and on September 25 a sale to Guangzhou Haoxing Real Estate Investment Co., Ltd for RMB 256 million was announced. 2 directors of Zhujiang Rare Earth, representing 4.14% minority shareholder Wanxiang Resources objected the deal, terming it value destruction.
They have a point: Just last year Zhuijiang Rare Earth’s capital had been shored up in cash and doubled to RMB 181 million. Add to that compensation for land and moving expenses, like in the unrelated case of Minmetal’s neck-of-the-woods Ganzhou facility RMB 155 mio, then the sales price of RMB 256 mio in a big city like Guangzhou looks undervalued.
On September 28 these two directors were made to resign.
The buyer, Guangzhou Haoxing Real Estate Investment Co., Ltd. was only incorporated on October 27, ultimately controlled by individuals.
On December 12 the deal was signed with China Nonferrous.
With this China Nonferrous are effectively out of the rare earth production business, but remain an equipment and technology supplier.
Question is, who will get their quota. For 2020 it was 3,610 t REO. Do Guangdong Rare Earth Industry Co., Ltd. have the additional capacity for this? Or are we looking at a large-scale restructuring of the industry? Watch this space.
Thank you for reading. Have a wonderful rest of the week!
Energy Fuels Inc. (NYSE American: UUUU) (TSX: EFR) ("Energy Fuels" or the "Company") is pleased to announce that it has entered into a three-year supply agreement with The Chemours Company (NYSE: CC) ("Chemours") to acquire a minimum of 2,500 tons per year of natural monazite sands, one of the highest-grade rare earth element ("REE") minerals in the world. Energy Fuels expects to process this monazite at its 100%-owned White Mesa Mill starting in Q1-2021, recover the contained uranium, and produce a marketable mixed REE carbonate, representing an extremely important step toward re-establishing a fully-integrated U.S. REE supply chain.
Comment: Chemours’ daughter company Southern Ionics Minerals, LLC should be the supplier. We don’t know what the TREO of this monazite is, and how much of it Energy Fuels can recover, perhaps +/- 200 mt? Regarding the “marketable mixed REE carbonate”, who will take it?
BioSolar, Inc. (OTC:BSRC) (“BioSolar” or the “Company”), a developer of energy storage technology and materials, today announced that it has formed a wholly owned subsidiary, NewHydrogen, Inc., to develop an electrolyzer technology to lower the cost of green hydrogen. This program will run parallel and complementary to the Company’s existing lithium-ion technology development targeting the high-growth battery electric vehicle (“BEV”) sector. (See www.NewHydrogen.com)
Some believe that fuel cell electric vehicles (“FCEV”), powered by green hydrogen, or hydrogen produced via renewable means vs. natural gas or other fossil fuels, will represent a major market opportunity in the future of electric mobility. In a 2020 research report, Goldman Sachs estimates that green hydrogen will be a “once in a lifetime” market opportunity worth more than $12 trillion.
Pound for pound, hydrogen contains 3 times as much energy as natural gas or gasoline, and 200 times as much energy as lithium-ion batteries.
Comment: See below, also China has been banking on hydrogen since 2017, incl. hydrogen fuel cells in all public road transport in China.
The global lanthanum market is experiencing significant growth, with lanthanum being the most widely used rare earth metal after cerium in various automotive and aerospace applications. The significant presence of rare earth metals in developing regions such as the Asia-Pacific region has led to huge demand for lanthanum in various industries such as hybrid electric vehicles and consumer electronics.
Comment: While we have seen a forecast for La prices rising in 2021 from a respectable company, we doubt the seriousness of this “report.”
Another reason for this round of rare earth price hikes is the serious shortage of spot supply. In terms of downstream demand, the rare earth permanent magnet industry is the main demand side for rare earths. The global output of rare earth NdFeB has increased from 120,000 tons 10 years ago to the current 250,000 tons.
The rapid rise in the price of heavy rare earths has stimulated downstream efforts to expand stocking, and it has also led to sudden high downstream costs. On the one hand, the production rigidity demand of magnetic materials plants has increased and most of them are long-term customers. On the other hand, magnetic materials companies and end customers have encountered strong resistance to re-negotiating prices. The pressure on the rare earth industry chain is concentrated in the magnetic materials link.
In recent years, with the development of new energy vehicles, the demand for magnetic materials for new energy vehicle motors has also become the main growth point in the demand for high-end neodymium iron boron magnetic materials, that is, the demand for neodymium praseodymium oxide is rapidly increasing. Therefore, the high-performance NdFeB market in the field of new energy vehicles is broad. Industry insiders predict that the demand for high-performance NdFeB in the field of new energy vehicles will reach 20,000 tons in 2022, doubling the 2020 figure.
Entrepreneurs discuss the strategy for the next five years: mastering hard-core technology can seize the trend
On the afternoon of November 27th, the 2020 Ninth China Listed Companies Summit Forum was held in Shenzhen. As one of the most influential high-end economic forums in China, this forum was initiated and hosted by the Daily Economic News.
At the forum, Yao Jinlong, Chairman of Meijin Energy (000723, SZ), Hu Zesong, Chairman of Shenghe Resources (600392, SH), He Zhiyong, Chairman of Xinhua Winshare (601811, SH), and Li, Chairman of Haite High-tech (002023, SZ) Biao and others started a round-table dialogue on topics such as "How to seize the opportunities and outlets of enterprise development around the 14th Five-Year Plan".
"We chose the hydrogen energy route in 2017. Hydrogen energy broke out for a period of time in 2019 and has attracted the attention of the broad market (investors). When will it be the head? I think technology never ends, so it will always Going down, with the continuous advancement of technology, whether it is electric vehicles or new energy routes, it will also progress with the advancement of technology." Yao Jinlong said.
Yao Jinlong believes that in the future, Chinese enterprises will face the problem of changing their roles. While consolidating and developing their businesses, they must actively study national policies and closely follow national strategies; New way out.
"An important background of the big changes we are talking about is that we are facing a smart world, a revolution consisting of a series of dazzling wisdom (products) of big data, the Internet, cloud computing, and intelligent manufacturing, which will significantly enhance our human creation. Economy, it is not difficult for us to find that rare earth is a key element that cannot be bypassed in this process. So sometimes we say that our rare earth innovation has an obvious effect on our national rejuvenation. Therefore, in recent years, various countries around the world All pay attention to rare earths, value rare earths, and compete for rare earths." Hu Zesong said.
Comment: They talk about the new 5-year plan, the 14th, “14-5”.
The legislation includes provisions that would:
Require the Secretary of Defense to report to Congress on information about rare earth materials, improvements to the supply chain, and evaluation of domestic processing and manufacturing.
Require a list of partnership opportunities on the government’s contracting website. Many small Department of Defense contractors, including those that produce rare earth elements, are often not aware of these partnership opportunities, making them disadvantaged relative to bigger contractors.
Comment: Hadn’t the outgoing president vowed to veto this bill?