Seeking Alpha
Mid-cap, small-cap
Profile| Send Message|
( followers)  

Not a day goes by when China is not mentioned in the papers. This new global powerhouse has been flexing its muscles on multiple fronts, including politics and economics. Recently the country has asserted itself by withholding limiting exports of rare earth elements (REE) -- crucial metals produced almost exclusively in China. It cut exports from 50,000 tons in 2009 to 30,000 tons in 2010. This has led buyers around the world scrambling for new supplies and substitutes.

Antimony is another metal produced largely in China; greater than 90% of the metal is produced in the country. It is not a rare earth, but has seen its price skyrocket as supplies are squeezed. Even as China’s exports of antimony ingots rose by 13% year-over-year in 2010, the latest price is up 45% since August and 230% since April of 2009, standing at $13,600/$14,200 a ton in mid-February. Demand is increasing in both Europe and the U.S.; the U.S. was the biggest buyer of Chinese antimony, with import volume rising 45% to 1,884 tons.

There is worry that efforts by the Chinese government to rein in antimony production will further pinch supplies. It has shut down hundreds of illegal antimony mines and smelters in an attempt to reduce pollution and improve safety. In March 2010, the government stopped accepting applications for new antimony exploration and mining. Small players are also being closed as authorities work to consolidate the industry.

Along with its rising price, interest in the metal has grown in the mining community. Although China controls most of the world’s antimony production, it has only about 50% of the reserves. Russia, Bolivia, Tajikistan, and South Africa all hold significant quantities of antimony. Peru, Mexico, and Canada are also producers.

Antimony is typically found as an ore called stibnite, which is processed and extracted with straightforward smelting processes. Rare earth elements, which like antimony are also distributed widely around the world, typically occur in poor deposits that cannot be economically mined. This has given China a historical advantage due to its low cost of labor. The metals are locked into a mineral that needs to be broken down, or cracked, usually using acid. The cracked rare earth concentrate then needs to be processed again, to separate the individual rare earths, which are then purified into oxides. Ironically, most of the specialized downstream capability is currently found only in China.

Not all of the 17 rare earth elements are created equal. The most prized is Neodymium, used in permanent magnets; it is what most new mines seek to produce. For all the hype, only about 124,000 tons of REE were mined in 2010, putting the market at less than $2 billion.

But such is the allure of rare earths that Market Vectors launched a Rare Earth/Strategic Metals ETF. REMX, containing 24 companies in the sector, has sprung up for those wishing to place a bid on the next big rare earth winner. Industry players caution that few of the new entrants are likely to meet with success. Commentators have compared the REE rush to the dot-com boom of not so long ago.

This situation makes antimony an interesting bet from an investor's perspective. The amount of mined metal is similar to rare earth elements at 135,000 tons produced in 2010. Similarly, the market was between $1-2 billion. And, of course, prices for both are rising spectacularly. However, the economics of antimony production are far different.

Rare earths are often difficult to recover and process, increasing costs significantly. Even after the ore has been recovered, the company faces two difficult choices: Sell unfinished concentrate at a lower price, or spend hundreds of millions of dollars to build a REE/rare metal hydrometallurgical plant.

Antimony mining is more cost-effective, requiring less effort in labor and equipment; without the need for specialized mineral processing plants or equipment, downstream costs are lower as well.

There has been a good deal of M&A activity in the antimony space. The world’s largest antimony miner, Hunan Nonferous Metals Corp. of China, purchased Beaver Brook Antimony Mine Corp. of Canada in 2009 for $29.5 million as part of its global expansion plans. The Beaver Brook Mine contains the largest antimony deposit outside of China -- one of the largest deposits in the world.

Other active participants include Mandalay Resources Corp of Canada, which acquired the Costerfield gold-antimony mine in December 2009. Advanced Metallurgical Group signed an agreement to buy antimony mining rights and an antimony smelter in Turkey for up to $20 million in August 2010.

On the exploration front, Canada-based Mountain Lake Resources is developing an antimony property in Newfoundland only about 80 km from the highly successful Beaver Brook mine. The company is still in the drilling phase, with no active mines. Its Little River antimony property is the most advanced project. Tests has been encouraging; confirming data should be available within a month.

Demand is on pace to surpass supply for a host of rare and important metals in the coming years. This will necessitate investments to reduce this imbalance, creating opportunities for entrepreneurs and investors alike. But as is always the case, not all investments are created equal.

Source: Why Antimony Is Acting Like a Rare Earth Element