This bulletin looks at the ongoing changes in Chinese REE policies, and muses how this will affect western access to rare earths in the relatively short term. There is also a discussion of the developments in the world of niobium.

1. Strategy Metals Bulletin (46)
Terence van der Hout Sep 11 - 17, 2011
Gold&Discovery Fund
Aims to update investors on developments in the world of strategy metals – crucial
inputs to industry, defense and technology innovation
This week’s bulletin looks at the ongoing changes in Chinese REE policies, and
muses how this will affect western access to rare earths in the relatively short
term. We also briefly halt at developments in the world of niobium.
How are China’s policies affecting western rare earth availability?
The rare earth industry is undergoing profound changes as a consequence of
China’s strategy. Despite all the banter and public outcry over the previous year,
ultimately the west has had access to just about the same amount of rare earths
with the same demand levels as previous years. This is about to change. China’s
apparent success in executing their strategy will structurally affect the availability
of rare earths in the west moving forward, I believe as early as next year. Four
policy measures are affecting China’s production of rare earths.
Production quotas set by Chinese officials in the past have not been strictly
adhered to in the past. Experts have calculated that the actual production of
Chinese REO over the last 4 years has exceeded the quotas by a margin of 43%. In
other words, Chinese companies have been allowed to mine and produce more
REO than was planned under the production quotas. Substantially more. This year,
however, it looks as though a turning point is being reached. China has just
announced the closing of three mines as a consequence of their reaching their
production quotas. However diminutive the mines may be, they will no longer add
to production volumes this year. They may also not be the last mine closures to be
announced, adding emphasis to the seriousness of China’s intentions on executing
its rare earth strategy. Production figures are bound to be lower than in the past.
Another element that is undergoing a crackdown is in the area of rare earth
smuggling. Allegedly, between 20,000 tons – 40,000 tons of REO are smuggled
across the Chinese borders every year, eventually ending up in the hands of South
Korean and Japanese manufacturers. There is no checking the validity of China’s
smuggling claims, and there is a remote possibility that China is using the theme as
a scare tactic, but assuming there is some truth in both the existence of smuggling
and China’s success in curtailing it, there is an obvious impact on rare earth
availability moving forward.
A further aspect influencing availability is China’s activities in building a stockpile
of rare earths amounting to 200,000 tons, over the next couple of years. This
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Terence van der Hout Strategy Metals Bulletin; Sep 11 - 17, 2011
If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl

2. equates to more than 1½ times the total annual production, and seriously impacts
availability.
A fourth Chinese policy measure is the inclusion of iron alloys containing more
than 10% of REE under the export quota provisions. Some expect this measure to
reduce REO coming to the west by between 5-8%.
So how does all this add up? Well, on the demand side, the Japanese earthquake
has impacted the need for rare earths. This has relieved some of the stress on REO
markets, although the drop in demand is judged to be temporary. What we have
seen is that the lack of availability of REO, as well as the destruction of supply
chains following the Fukushima disaster, has forced Hitachi to move a substantial
part of their magnet production to China. They will receive a secure supply of
Chinese rare earths, presumably in exchange for ‘sharing’ their magnet production
technologies, a value-adding art not yet practiced in China.
On the whole, we may assume that demand for rare earths for next year will
continue at the relentless 7-8% growth. Furthermore, and with any luck given the
measures set out above, we may be seeing Chinese production just about reaching
their targeted levels (approaching 90,000 – 95,000 tons), which is 20% less than
production levels of the last 5 years. China’s own need is barely covered by these
forecasted production volumes. How many tons of rare earths are the Chinese
going to leave for the rest of the world? Basic maths tells me it will be preciously
little, and in no way approaching the 30,000 tons that were allowed out of the
country under the quotas this year.
Either China will swallow the deficit internally (highly improbable), or export
quotas will be decimated next year. A third and more subtle approach would be
for China to differentiate the export quotas according to individual rare earth
elements. In that case, China might keep total rare earth quotas in line with this
year’s, but flood western markets with the much less rare and valuable light rare
earths such as cerium and lanthanum, keeping all the heavy REO in the country,
and effectively hijacking the world’s high performance magnet production using
Hitachi’s technology. iPads Made in China as of next year?
China secures niobium supply
In completely unrelated news, three Chinese firms have jointly acquired 15% of
Brazil's CBMM, which supplies about 70-80% of the world’s niobium needs. The
Chinese stake was acquired for just under $2 billion.
The main market of niobium is in the production of High Strength Low Alloy Steels
(HSLA). Taking the standard grade ferro-niobium and adding it to steel produces a steel
with enhanced strength, toughness and formability, and is therefore a strategic
additive in China’s 5 year plans related to building domestic infrastructure. It is input to
the automobile industry, used in gas pipelines, in durable cutting tools, jet and rocket
engines and land turbines, to name but a few applications.
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Terence van der Hout Strategy Metals Bulletin; Sep 11 - 17, 2011
If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl

3. 2010 production came primarily from 3 operating mines, two Brazilian and one
Canadian (the Niobec mine operated by IAM Gold), jointly producing around 63,000
tons of metal. Niobium has a number of substitutes, but its replacement comes at a
performance loss and at extra price. Reserves of niobium are sufficient to account for
demand for the next 500 or so years at today’s rate of use, but China’s thirst and lack
of domestic mines clearly add a critical spice to the ingredients.
Roskill foresees a healthy demand for niobium moving forward. MDN Inc, Commerce
Resources and Globe Metals & Mining are juniors that have advanced projects
developing deposits containing niobium.
Disclosure: The Gold&Discovery Fund holds shares in IAM Gold and Commerce Resources
Twitter: @GoldDiscFund
Disclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund has
commercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in this bulletin
is 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 investment
recommendation.
Copyright: The information in this bulletin can be forwarded, cited or used otherwise, but only within the context as
intended by the author, and with complete reference to the source.
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Terence van der Hout Strategy Metals Bulletin; Sep 11 - 17, 2011
If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl