How to profit from the scramble for technology metals

The modern world relies on a supply of certain exotic metals. And China is sitting on top of most of them. Eoin Gleeson reports on the sector, and picks the best companies to invest in.

The modern world relies on a supply of certain exotic metals. And China is sitting on top of most of them. Eoin Gleeson reports.

Everyone wants to talk to Evo Morales. The Bolivian premier can't turn around without someone offering him favours. One minute, French ministers are inviting him to address their government in Paris. The next, Beijing is ringing to offer him warships and tanks.

What do they want from Evo? His lithium. The Bolivian government is sitting on one of the most valuable undeveloped resources on the planet a massive lithium deposit 12,000 feet up in the Andes. About half of the world's reserves are thought to lie a few feet beneath the vast salt planes. And suddenly everyone needs lithium. China needs it to produce batteries for the 500,000 electric vehicles it aims to produce by 2011. The Japanese need the metal to continue producing batteries for the world's laptops, digital cameras and mobile phones.

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So who will Evo allow to develop Bolivia's lithiums reserves? My bet is China. No other country has been more determined to get its hands on new sources of industrial metals during the global downturn. But there is a small group of metals lithium included that China particularly covets. Call them the technology metals, because owners of these metals hold the keys to 21st-century technology. None of the big innovations that major economies are relying on to kick-start their economies will materalise without a steady supply of these metals. Not solar panels. Not electric vehicles. Not smartphones or laptops.

So far the Chinese have managed to corner the market in one group of metals that is key to all of these industries rare-earth metals. And they have their eye on a few more. Only this time they'll be competing with the Canadians, the French, the Japanese and the Americans. It's a madcap rush across the globe to secure a steady fix of these metals and you can profit from it. We have a look at three of the most prized.

Lanthanum and other rare-earth metals

It was the Pentagon that first picked up on China's interest in speciality metals. A few years ago, the US military started noticing that Chinese buyers were placing huge orders for titanium. And it made them jumpy. The US military relies on titanium to produce everything from armour plating to aircraft and high-end weapons. Suddenly finding new affordable sources of military grade titanium became a top priority for the Pentagon, says Nathan Hodge in Wired.

But the Americans should have been more worried about China's interest in rare earth metals, because now the Chinese control nearly 100% of the world's supply. The rare earths are a group of 17 metals of which neodymium, terbium and lanthanum are among the most useful. You'll find them in almost every consumer technology staple from iPods to flat-screen televisions. "And we're not talking about trace amounts of these elements either," says Jim Jubak on MSN Money. Each battery in a Toyota Prius uses 20 to 30 pounds of lanthanum. And the turbines on a wind terminal are so huge that they need colossal rare-earth magnets to operate efficiently. You need about a ton of neodymium for every megawatt of generating capacity a wind turbine pumps out.

Up until the 1980s, much of the world's rare-earth reserves were mined at the Mountain Pass mine in California. That was until China entered the market in 1984. China set an army of cheap labourers to work and invested heavily in developing new mines and processing plants, eventually putting Mountain Pass out of the mining business.

The Chinese have paid a heavy environmental cost for their campaign. Rare-earth metals are not found in pure deposits close to the surface, unlike lithium. So the traditional method used to mine these metals has been to bore holes into promising rock formations, pump acid down the holes to dissolve the metals and then pump the acidic slurry into holding ponds for extraction. You can spot a rare-earth mine by the rancid lake of acid and dissolved chemicals that is left in its wake.

But Beijing will say it was worth it. Control of the world's rare-earth metals puts them in a position of extraordinary power. And they intend to lord it over their customers. The Chinese Ministry of Industry has already cut authorised production targets of rare earths this year by 8.1%, according to Wired. Serious restrictions on exports will follow. China's goal is to force the tech giants that rely on rare-earth metals to relocate there. It wants to be a global leader in wind, solar and hybrid car industries. Having elite technology groups operating in the country will go a long way towards developing the necessary expertise and intellectual property. That has spooked the likes of Japanese companies Mitsubishi and Sumitomo. Chinese production is projected to reach 160,000 metric tonnes a year by 2015, up from 139,000 tonnes last year. But that is still expected to leave a shortfall of 40,000 tonnes of rare-earth metals each year. So these technology giants have been scouring the earth for new reserves.

The good news is that there are plenty of rare-earth reserves outside China, according to metals analyst Jack Lifton. The bad news is that they haven't been developed for the last 30 years. So the race for rare-earth metals has shifted to Canada, Brazil and South Africa. Avalon Rare Metals is already drilling rocks at Thor Lake in Canada's Northwest territories. Its stock has soared over the summer in anticipation up 326% since June. There has been a dangerous amount of enthusiasm in this area, and it's not a stock we'd buy now. But one worth keeping an eye on is the as yet unlisted Molycorp. Backed by Goldman Sachs, this group is restarting work on the Mountain Pass mine a huge proven reserve and could well be worth a punt if it comes to market.


Congo is rich in minerals. From the north to the southern province of Katanga, the central African country harbours vast reserves of everything from gold to copper and diamonds. But it's been at best a mixed blessing. For years, militant factions in the Congo have been able to finance themselves handsomely by smuggling Congolese coltan refined to tantalum (see below) for use in digital cameras and mobile phones to neighbouring countries. This illicit trade has been so successful that the smugglers helped put the largest tantalum mine in the world out of business in December, says Andrew Grant in Discover.

So the Congolese government has opened the country to foreign money in a bid to develop its commodity reserves and spread the wealth more fairly. Billions have flooded in as American, Canadian, European and South African mining giants have fought for access to the reserves. But they have all been outflanked by surprise, surprise China. In April last year, the Chinese struck a deal to invest $9bn in the Congo. This was revised lower to $6bn earlier this year, after pressure from the International Monetary Fund (IMF). The IMF had threatened to withhold debt relief on $10bn owed by Congo, saying that the Chinese deal would add to the country's debt load. Other commentators, such as Peter Lee on Asia Times Online, have suggested that the IMF's move is more reflective of Western concerns about China's influence in the region, rather than any concern over Congo's debts.

In any case, it still means China has agreed to build thousands of kilometres of new roads and railway tracks, and hundreds of new schools and clinics across the country. In return, the Congolese have granted the Chinese rights over mines containing more than ten million metric tons of copper and 600,000 tons of cobalt.

So why should investors be looking at the Congo? Because of cobalt. Congo is home to a third of the world's cobalt reserves. A byproduct of copper and nickel mining, only about 65,000 tonnes of cobalt are produced each year, says Profit Hunter's Manraaj Singh. But it's an invaluable technology metal. Alloys of cobalt are found in jet engines and nuclear reactors. But what is often overlooked is that cobalt is also a key ingredient in batteries for hybrid electric vehicles. Today, most electric vehicles are powered by a nickel-hydride battery, which contains about three to five pounds of cobalt. However, the emerging standard lithium-ion batteries will contain five to seven pounds of the metal.

The burst of interest in electric vehicles has helped lift the price of cobalt sold in the US to an average $20.03/lb in August, up from $14.25/lb in March, according to Still, that is a long way off the $52/lb it traded at last year. As cobalt is largely a byproduct of nickel mining, it has fallen hard, along with many other metals. Zambian cobalt producer Chambishi Metals, for example, has said it will postpone the resumption of cobalt production until there is a further improvement in the price of cobalt to between $24/lb and $30/lb.

The company may not have to wait too long. The US already imports about 80% of the cobalt it uses. But it's about to have to import a lot more. The US Defense National Stockpile Center's inventory of cobalt has been run down to 600,000 lb compared with 96 million lb in 1992. One major Canadian cobalt miner is already bringing forward cobalt production in the Katanga Province. And another miner is developing a very promising cobalt reserve in Cameroon. We have a look at both below.


This soft, grayish blue metal with a melting point of 5,463F has an exceptional ability to store electric charge. That makes it perfect for making the electricity-storing capacitors you find in the circuit boards of computers, digital cameras and mobile phones. "Tantalum is used in every electronic device there is," says Lifton. "We don't know any other way to make practical devices."

Demand for tantalum has been hit during the recession as consumer electronics sales have slumped. A move towards lowering material costs in the electronics supply chain has encouraged purchases of cut-price tantalum from Congo, says Reuters' James Regan. Not all electronic manufacturers are above sourcing their raw material from Kalashnikov-wielding militants. Thankfully, though, most electronic giants have more scruples. Apple and Motorola have pledged not to purchase metals from the war-torn nation, says Andrew Grant in Discover magazine. However, with the closure of the world's biggest mine in Australia knocking out 30% of the world's supply, that means that the race is on to find a secure, ethical, steady supply elsewhere.

Look no further than Canada, says Malcolm Bucholz on Resource Investor. Excellent progress is being made in developing a tantalum project in Blue River in British Columbia. The deposit has approximately 14 million tonnes of indicated and 19 million tonnes of inferred resources. With tantalum trading at about $45 per pound, each ton of ore would have an economic value of about $65, which would be sufficient economically to support a mining operation. When demand for electronic goods recovers, tech giants will beat a path to Blue River. We have a look at the outfit developing the project below.

Three stocks to buy now

Technology metals have been the investment story of the year. As China has taken minority stakes in Australian mining groups Lynas Corp and Arafura Resources, stocks have soared across the board. But you have to be careful here. Some of the companies that have gone vertical this year are not close to production and are still facing feasibility studies. You have to accept the risk that projects may not come to fruition. Our rare earths tip, Lynas Corp, is closest but it's up 226% since we tipped it and its deal with China Non-Ferrous Metal Mining is up for review in October. There is concern that Australia is ceding too much control to Chinese state-owned firms. If the deal is rejected, Lynas will have to find new funding to develop its Mount Weld project. So take profits if you haven't already.


Lithium stocks have also soared on the back of demand for electric vehicles. But so far companies mining for cobalt the other chief ingredient in electric car batteries have been left behind. That has partly been down to financial difficulties as the price of cobalt slipped to $11/lb. But one very promising cobalt-copper outfit operating deep in the Congo is Katanga Mining (TSX: KAT). This Canadian-listed group is run by veterans of Congo's mining industry. Their political connections will go a long way towards making their project in the Congo work, says Profit Hunter's Manraaj Singh.

Katanga is sitting on 2.3 million tonnes of copper and 310,000 tons of cobalt. But the company has suffered badly over the past year. The share price dived as metal prices fell and its project was delayed. However, in April, the group secured a $250m bridge loan from Glencore Finance. This week its shares jumped 30% as it announced that it has accelerated the development of its copper-cobalt project in the Congo because of the recovery in copper and cobalt prices. The acceleration is expected to take installed copper capacity to 150,000 tons a year, from 70,000 previously. The worst looks to be over for this group and there is enormous potential here.

Geovic Mining (TSX: GMC) has one of the largest cobalt deposits in the world in Cameroon. The mine permit covers 1,250 square kilometres and provides exclusive production rights to seven large cobalt-nickel-manganese deposits. Geovic has also experienced delays due to financing. Construction has been put back until 2011. So it's a risky play. But Geovic expects to produce 4,200 tonnes of cobalt and 2,100 tonnes of nickel a year for at least 21 years. At C$0.64, it is valued at just above its cash value per share, given that the company has $60m in the bank.

The closure of the world's biggest tantalum mine in Australia is good news for Commerce Resources (TSX: CCE). It is working on a fantastic resource in Blue River, British Columbia. The resource is half the grade of typical tantalum mines, notes Victor Goncalves in the Gold Report, but it has twice the recoverability most mines recover only 45% of the tantalum, against 95% for Commerce. The group reckons the project could have a mine life of more than 15 years, with annual production reaching a million pounds. Commerce is close to production, says metals analyst Jack Lifton. "They are financially strong and have been involved in the tantalum industry for years".

This article was originally published in MoneyWeek magazine issue number 453 on 18 September 2009, and was available exclusively to magazine subscribers. To ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.

Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.