Expecting Someone Else to Solve US Rare Earth Vulnerability

Jan. 21, 2011

ST. LOUIS -- Early next month thousands of delegates will converge on Cape Town to participate in one of the world’s most important mining capital formation and distribution processes – Investing in African Mining Indaba. The event is ground-zero for the money flowing to and from the world’s last great frontier in mineral exploration and development, Africa. Yet the United States will, as usual, have no formal representation even as officials from China, Australia, India, Japan and Canada jockey to land mining assets for their national companies and national interest.
It is unfathomable that the American government continues to leave mining investment events like Mining Indaba to everyone else. Sometimes the United States Embassy in Pretoria assigns low ranking officials to noodle along, but even then it’s not without pleading for discounted access.

Here we have the world’s largest economy on the brink of a national commodity crisis, epitomized by the complete dependence on the importation of rare earth elements (REE) and related fabricated products, but it can’t afford to spend $1,500 on a delegate.

Perhaps the CIA sends along a desk officer or two, but the event is utterly worthless as a clandestine exercise given what really takes place. The US Geological Survey makes a reliable showing each year, but its focus is narrowly academic rather than policy driven.

None of the consular officials, USGS staff or CIA officers is capable of representing the US in the policy war that takes place each February in Cape Town, where national cabinet level ministers and their entourages engage in elaborate but hard-knuckle trade diplomacy. They have also committed millions of dollars to back up their efforts to own tens of billions of dollars of natural resource wealth.

The US gazes at its navel, although its diplomats can write fine cables observing what others are doing. It’s one reason why the private sector has taken matters into its own hands.

It is another component in the massive and ongoing failure in US strategic policy on commodities and mining, which has left the country vulnerable on several fronts. It also raises the risk for resource based conflicts around the world.

Contrast Washington’s placid indifference (incompetence?) with China.

China deliberately, patiently and methodically undermined America’s leadership in rare earth oxide extraction, processing and product development. Twenty-five years after initiating its policy to monopolize rare earth elements, China has successfully shut down its competitors and shipped their assets home.

Today the US has no local source for rare earth oxides (REOs), and its manufacturing capacity for heavy rare earth products or alloying is non-existent. More worrying is the evidence that many American originated REE related patents have also been evacuated to China along with the skills, equipment and knowledge.

The problem is not confined to REOs and minor metals more broadly. There is a much larger commodity sourcing and pricing problem related to the combination of America’s capital markets and its regulatory burden. Both have conspired to offshore American mining capital. That is thanks to costs-of-capital that no longer provide a competitive edge, and nanny state regulations that make it entirely unattractive to run a mine either in or from the US.

Consequently, very few US mining companies remain competitive internationally, and the same pattern is repeating in hydrocarbons. When measured by mineral reserves under management, units of production, and free cash flow, America has surrendered to Australia, Canada, and the UK. Now it is being knocked further down the totem pole by China, Brazil, and Russia. India is trying hard to catch up, but remains its own worst enemy.

The United States seems to think that owning stock in mining companies is sufficient. It is not. From a strategic perspective you then limit yourself to capital gains and dividend flows. Meanwhile you have financed your rivals who control the assets and cash flow, very little of which may ever accrue to you.

Returning to Cape Town, let’s unpack what goes on at Mining Indaba. In it’s simplest form, the conference is a bid-offer spread on Africa’s mineral resources.

Bidders showing up next month include (no particular order):

China (ministerial and consular level).
Japan (ministerial level and technical bureaucracy).
India (ministerial & ambassadorial level).
Australia (ambassadorial level with high level trade development program).
Canada (high level trade development program).
Sweden (technical bureaucracy).
United Kingdom (technical bureaucracy).
Czech Republic (technical bureaucracy).
France (technical bureaucracy).
Sellers include (no particular order):

Burundi (Vice President, ministerial level and technical bureaucracy).
South Africa (ministerial level and technical bureaucracy).
Ghana (ministerial level and technical bureaucracy).
Botswana (ministerial level and technical bureaucracy).
Zambia (ministerial level and technical bureaucracy).
Ethiopia (ministerial level and technical bureaucracy).
Guinea (ministerial level and technical bureaucracy).
D.R. Congo (ministerial level and technical bureaucracy).
Nigeria (ministerial level and technical bureaucracy).
Niger (ministerial level and technical bureaucracy).
Algeria (ministerial level and technical bureaucracy).
Malawi (ministerial level and technical bureaucracy).
Zimbabwe (ministerial level and technical bureaucracy).
Afghanistan (ministerial level and technical bureaucracy).
Angola (ministerial level).
Tanzania (ministerial level).
South Sudan (ministerial level).
Congo Brazaville (ministerial level).
Cameroon (ministerial level).
Gabon (ministerial level).
Burkina Faso (ministerial level).
Mali (ministerial level).
Liberia (ministerial level).
Sierra Leone (ministerial level).
Namibia (technical bureaucracy).
Morocco (technical bureaucracy).
Mauritania (technical bureaucracy).
Senegal (technical bureaucracy).
Kenya (technical bureaucracy).
Uganda (technical bureaucracy).
Egypt (technical bureaucracy).
This is a highly liquid market with willing buyers and sellers, and fantastic assets to trade. It doesn't reflect the sovereign wealth funds that are lurking in the shadows. But look who failed to show up – the nation that’s retired to its mortgaged enviro-haven and expects someone else to bring it cobalt, thorium, tungsten, titanium, lanthanides, vanadium and everything else it needs to sustain its innovative industrial-commercial complex.

Not only is the US walking away from a chance to bid for minerals, or sway the outcome in favor of allies, but it has also gifted foreign banks first rights on the Cape Town generated deal-flow.

Banks report doing more business during the week of Mining Indaba than they can drum up in the rest of the year for their mining investment divisions. Although American banks are active, there has been a decline in their representation, and the deal structuring and execution has increasingly moved away from New York.

That also amplifies the risk that America will sooner lose the benefits of having commodities denominated in US dollars since trading volumes gravitate closer to the largest sources of demand. Iron ore priced in yuan, anyone?

Deal flow domicile has a domino effect on related mining service and equipment deal flow because bankers exert a strong influence over purchasing and servicing decisions. So there has been a parallel swelling of business going to non-American insurers, manufacturers, consultants and lawyers to name some key elements in the mining value chain.

Reflecting this is the low number of mining related IPOs in the US, especially if they operate abroad. Related, there is also evidence that foreign markets are becoming sufficiently deep and broad to make an automatic parallel US listing (usually via depository certificates) unnecessary.

Indeed, it is notable that no American securities exchange is showing up to pitch for business in Cape Town. By contrast, the London Stock Exchange, Australian Securities Exchange, Toronto Stock Exchange, and Johannesburg Securities Exchange having invested considerably in attracting clients to their markets.

Analyzing Mining Indaba’s ~$1.5 trillion market value for sponsors reveals that very few American based mining companies are represented, and it has been steadily declining for 17 years. Indeed, a smaller proportion of American delegates make the trip south each year. And why should they? There’s no work for them thanks to American industrial and strategic policy.

Perhaps someone could wake up the grandees in Washington to do more than write about securing materials for “green energy technologies." That alone tells you all you need to know about the deplorable prioritization in American policy. The first requirement would be to place a national initiative in the hands of someone, anyone, other than the US Department of Energy. How about the State Department getting someone into Africa to do more than dish out condoms and abortions?

The US gazes at its navel, although its diplomats can write fine cables observing what others are doing. It’s one reason why the private sector has taken matters into its own hands.

Contrast Washington’s placid indifference (incompetence?) with China.

Returning to Cape Town, let’s unpack what goes on at Mining Indaba. In it’s simplest form, the conference is a bid-offer spread on Africa’s mineral resources.

Bidders showing up next month include (no particular order):

Not only is the US walking away from a chance to bid for minerals, or sway the outcome in favor of allies, but it has also gifted foreign banks first rights on the Cape Town generated deal-flow.