Strategy Metals Bulletin's Terence van der Hout released a weekly bulletin on the rare metal tantalum.

1. Strategy Metals Bulletin (44)
Terence van der Hout Aug 21 - 27, 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 focuses exclusively on tantalum.
Tantalum fundamentals
Despite this being a newsletter that claims to cover the most critical of metals,
market developments and my personal expertise have made me focus primarily on
the rare earth elements in the past. However, the situation in the tantalum
markets are just as fascinating from a critical and strategic standpoint, and deserve
attention. Analogous to the REE, tantalum is in short supply due to a number of
market and political developments, and this has forced end-users to travel up the
supply chain to secure supplies.
Tantalum is used in electronics capacitors which are found in consumer electronics
products such as cell phones and computers. It is virtually irreplaceable in helping
to enable miniaturization of electronics. Tantalum is also used in chemical and
pharmaceutical processing, aerospace, energy and ballistic applications. The total
market for tantalum metal is just over 1,000 tons, so the market should be
considered very small. Supply and demand were in balance in 2008.
Tantalite ore prices remained fairly constant at $40 per pound from 2007 into
2009, but starting midyear 2009 prices began to increase dramatically. In less than
a year, tantalite ore prices more than doubled, with prices in June 2011 peaking at
$132 per pound. What has caused this rise?
Two developments have impacted the tantalum market in recent years. Firstly, as
a consequence of the 2008 market crash, two major tantalum producers (GAM
and Cabot) ceased producing at their respective Wodgina and TANCO mines,
effectively cutting global supply by 40%. Wodgina has now been reopened, but is
producing at half of its previous capacity, whilst TANCO has yet to be reopened.
The second development has been the passing of the “Conflict Minerals Act”, a
part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
This bill mandates all actors in the mineral supply chain to prove that their
minerals are conflict-free. The measure, estimated by manufacturers to cost
between $9 bil - $16 bil to implement, came into effect last April and is meant to
avoid mineral wealth ending up in the hands of those who fund (often extreme)
violence. It has had a particular effect on tantalum coming from the Democratic
Republic of Congo, traditionally one of the largest suppliers of tantalum, and
Terence van der Hout Strategy Metals Bulletin; Aug 21 -27, 2011 1
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2. China’s main source of the metal. The government of the Democratic Republic of
Congo halted all mining operations in the region in September of last year,
reducing the overall available supply by another 16%.
Thus, within a matter of 2 years, the global supply of tantalum was decimated by
almost 60%, with 2010 supply coming from just 4 major operations in Brazil,
Ethiopia and China. Barring the 2008 crash, however, demand has not lagged. On
the contrary, demand has increased 10% annually over the last decade or so, led
by the insatiable need of the electronics sector, and China’s increasing demand.
These developments are putting huge strains on market supplies. The gap
between supply and demand has widened significantly, and consumers are
becomingly increasingly concerned about future supply. In a study published in
early 2010, Paumanok Publications stated: “We estimate based upon the closing of
the primary mining operations in Australia, Mozambique and Canada, that a
deficit will build in the market in CY 2010 and CY2011 and then peak in CY 2012.”
This was before it became clear that DR Congo tantalum would be taken off the
market as well.
Tantalum is rare enough in the sense that there are no alternative suppliers, and
stockpiles are running low. If a stockpile runs out, paying higher prices isn’t going
to help, because there isn’t any raw material on the market. Electronic parts will
simply not get delivered. Thus, tantalum is truly critical. Insiders state that
companies typically have between 3-12 months of stockpiles, and some may run
out any day now.
What is the industry doing to secure access to ethical tantalum in very tight
supply? The first to move, as ever, are the Asians. After the passing of the Conflict
Minerals Act, the Chinese were reported to be searching out all non-Congolese
supplies of tantalum. A short while later, Brazilian Fluminense signed an
agreement with the Chinese, off-taking 75% of their production, effectively taking
all the ethical tantalum out of the market place for the short to medium term.
A second strategy has transpired in the acquisition of Cabot Corporation’s
tantalum processing business by tantalum producer GAM. According to some
experts, the deal is very significant in terms of being the first vertically integrated,
conflict-free tantalum supply chain. It is a case in which the balance of power
would switch from the fabricator to the raw material supplier. As an interesting
aside, GAM is backed by commodity-focused private equity group Resource
Capital Funds and is 20% owned by Traxys. Both of these financial power houses
have significant stakes in Molycorp, which in turn owns REE and tantalum
processor Silmet. The two funds are becoming forces to be reckoned with in the
financing of strategic metals.
A third strategy is to prove the tantalum you use in your manufacturing process
that has been sourced in the DR Congo, is in fact conflict-free. AVX and Kemet
Corporation, two manufacturers of tantalum capacitors, are implementing
Terence van der Hout Strategy Metals Bulletin; Aug 21 -27, 2011 2
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3. separate pilot programs to demonstrate a process that will deliver conflict-free
tantalum. Registered artisanal miners will mine ore at one designated site outside
of the conflict areas. The ore is shipped to a smelter, which makes tantalum
powder and wire. This in turn is input to AVX’s capacitors.
A fourth strategy has focused on recycling of tantalum from electronic appliances.
Tantalum suppliers are asking their customers to sell back their scrap or risk not
being supplied at all with the material they need. In other words, supply is so tight
that end customers will only be able to continue production if they contribute the
tantalum content from used goods themselves.
So demand continues to remain strong, supply has been severely curtailed and will
take a while to recover, if at all, and stockpiles are being depleted. The market is in
deficit. The raw material is produced in small volumes and is a crucial and largely
irreplaceable input in high tech products, particularly in the capacitor/
semiconductor markets. It is produced in countries that are not regarded as a
reliable source, and demand is high in China. These are classic symptoms of a raw
material that is critical and strategic, and for which reliable sources in stable
western jurisdictions would be expected to receive a premium. A few Canadian
niobium/ tantalum projects are in fairly advanced phases of development, and
could provide for this much needed supply within a couple of years.
On a finishing note, Resource Investor have been kind enough to publish an article
also placed in this bulletin, some weeks ago:
http://www.resourceinvestor.com/News/2011/8/Pages/Rare-Earths-20-Rise-of-
the-Heavies.aspx
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.
Terence van der Hout Strategy Metals Bulletin; Aug 21 -27, 2011 3
If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl