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With the global rare earths market in the midst of significant transformation, one emerging project’s Australian-domiciled status appears to provide a distinct competitive advantage.

On the first Friday of 2019, China’s Ministry of Industry and Information Technology (MIIT) announced it would be stepping up efforts to eliminate the illegal mining, production and smuggling of rare earth elements (REEs).

The news is deja vu for many long-term followers of the rare earth market – the updated guidelines echoing similar attempts by Beijing to tighten controls on the sector in 2009, 2013 and 2017.

Responsible for about 80 percent of the global supply of the commodity, previous Chinese regulatory shifts have severely impacted REE-dependent North American manufacturers, driving up prices dramatically.

The mining and refinement of REEs involves the creation of several complex waste by-products, some radioactive, which if not managed responsibly can be damaging to the environment and worker health.

To date, China’s dominance of the rare earth sector has been less a result of resource endowment and more a reflection of the state’s willingness to permit environmentally irresponsible mining and smelting practices.

In the January notice from the MIIT, a ministry spokesperson stated that while regulation of the industry was improving, illegal mining, production and exporting continued to disrupt “market order” and “damage the interests of legitimate enterprises”.

The MIIT has also announced a traceability system to put pressure on manufacturers and other buyers benefiting from lower priced commodities.

As previous guideline announcements of a similar tone were followed by widespread shutdowns and supply shifts from within China, a host of small private firms and illegal mines have already been shut down in 2019, with control of the rare earth industry increasingly dominated by six state-owned mining groups.

This shift in policy on rare earth mining is one of many long list of crackdowns on the sector, as Beijing’s commitment to reducing pollution gathers momentum.

 

Who stands to benefit from this supply insecurity?

 

Against a backdrop of worsening US-China trade relations, growing Chinese supply insecurity and a widely predicted demand hike, REE-reliant manufacturers are increasingly looking for producers operating under the jurisdiction of reliable governments.

Australia is one such source. Already ranked second behind China as the largest supplier of rare earths, Australia was responsible for 9.9 per cent of global supply in 2017, albeit via Malaysia, primarily through the efforts of Lynas Corporation (ASX: LYC).

Amongst the nation’s most promising rare earths companies, and one that is uniquely placed to benefit from the Chinese supply shifts, is Arafura Resources (ASX:ARU), owner of the Nolans neodymium-praseodymium (NdPr) project in the Northern Territory

NdPr rare earths are used in the manufacture of high-strength permanent magnets that have a range of technology applications, including in electric vehicle motors.

In 2018, Arafura cemented its all-Australian project status with a decision to build its downstream separation plant for Nolans at the project site in the Northern Territory, as opposed to an overseas location.

Speaking on the decision, Arafura Managing Director, Gavin Lockyer, said: “We are very pleased to have settled on the site for the project’s Separation Plant. This makes Nolans a 100% Australian domiciled project and unlocks significant value prior to product export.

“Provenance of raw materials is become a larger and larger factor in the rare earth industry (and other industrial supply chains) and as such by locating everything at Nolans it means we have 100 per cent control over all the wastes from the project and can assure that they are managed in an appropriate manner.”

Nolans is one of the largest undeveloped NdPr deposits in the world.

The project has a JORC-compliant resource of 56 million tonnes and an economic reserve of 19.2 million tonnes which supports an initial mine life of 23 years. The operation is forecast to supply between 5 and 10 per cent of the world’s demand for NdPr oxide (about 4360 tonnes per annum).

 

Star Investing may have commercial relationships with the companies mentioned in this article. This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.