In today’s Exponential Investor

  • Alliances formed: it’s who you know
  • Governments spend big money to get control of the supply chain
  • There’s no limit on spending

Sometime last year, Australians woke up to the news that their country had formed a new alliance with an old alliance. Over tea and biscuits, three heads of state decided to create “AUKUS” – the Australian, United Kingdom and United States trilateral security pact. 

Of course, in Australia it’s big news. Mostly because Aussies are so insecure, we’re just happy when people notice us.

The AUKUS ruckus, however, felt a little overplayed. Surely the three of us don’t need another pact. We’re already in the Five Eyes (Australia, Canada, the United States, the UK and New Zealand) and the informal Quad (the Quadrilateral Security Dialogue, made up of the United States, Australia, India and Japan). How many more clubs does Australia need to join?

At the time, AUKUS was purported to be about submarines. Or the fact that Aussies don’t have very good ones. And the United States and the UK would like Australia to have better ones. Nuclear ones, perhaps. The kind of super-secret tech the US has only been sharing with the UK…

As these three leaders stumped up to the media, Australia’s prime minister let it slip that, because he was now getting fancier submarines, he was going to tear up the country’s AU$90 billion submarine deal with France.  

This ménage à trois had a different purpose to that of the other security groups – China’s increasingly threatening presence in the Indo-Pacific region.

Upsetting the French was collateral damage Australia could live with. AUKUS set the stage for strategic partners in the era of economic nationalism.

Strategic minerals from strategic places

AUKUS is perhaps the most tactical alliance of the 2020s.

However, this trilateral agreement is simply the cephalopod from which many future private partnership tentacles will extend. All three governments will eagerly back business arrangements that support their vision.

Take this, for example.

Australian small-cap rare-earths developer Ionic Rare Earths has finalised its acquisition of UK firm SerenTech.

For those not familiar with SerenTech, the company has developed a technology using ionic liquids to separate and refine rare-earth elements into high-purity rare-earth oxides (roughly a 99.9% purity rate).

The most useable tool they have is the ability to recycle neodymium magnets via the extraction of individual rare-earth content to produce high-purity rare-earth oxides. Ionic call this a “step change” in magnet recycling worldwide.

Referring to it as a “step change” undersells just how innovative it is. This process could drastically increase the very extent of rare-earth magnets recycled. While there are some limited magnet recycling programmes running throughout Europe, few can extract the minerals to such a high purity level?, making this “scrap” neodymium extremely sought-after in the marketplace.

The price of neodymium oxide has exploded in the past two years, from US$61 per pound to US$212 per pound today.(*)  

With the price of neodymium screaming higher, and demand for this rare metal likely to increase in the next few years, recovering it from waste is increasingly important. As of yet, there’s no easy substitute, and investing in recycling is becoming the cheaper option.

Now, this miner-plus-refiner seems like an odd pairing, right? Why would an Australian company whose expertise is in finding rare earths go about buying a UK-based technology firm that specialises in recycling said metals? Surely, these two are more competitors than sensible business partners?

Maybe a decade ago?, yes. But things have changed. Alliances are forming and governments are keen to fund them. Today, it’s all about strategic minerals from strategic places…

Wrestling back control

Ionic Rare Earth’s buyout of SerenTech is strategic, and fits in well with both the US and Australian governments’ agenda.

Let me connect the dots for you.

SerenTech’s ability – as impressive as it is – is unlikely to thwart the exploration and extraction business for Ionic. A decade ago, only 1% of all neodymium magnets were recycled. There’s no hard data for now, but the industry is optimistic that, by 2026, as much as 25% neodymium magnets will become scrap. Given the speed at which the industry is consuming this metal, scrap is likely to ease shortfalls, rather than put the sector in a surplus.

However, this takeover serves two purposes. It shifts Ionic from the mining business into the downstream business –  that is, the ability to process minerals and metals into what the markets need locally.

The merger gives this Australian mining company two tailwinds, because there are bigger margins to be had in the processing of materials than in purely digging them up. And the Australian government is playing favourites with rare-earths companies as well as mining companies that want to process things here rather than offshore.

Rare-earth manufacturing outside China is extremely important, as China controls 90% of all rare-earth production. This weakness was exposed in 2010 when China shut off the supply of rare earths to Japan, after Japanese officials detained a Chinese fishing trawler.

Source: China Power

That one decision made it clear who controlled the global market.

This leads me to my second point. Both the United States and Australia are keen to fund the rare-earths sector. The United States has set aside close to a billion dollars to support local rare-earth projects. The Aussies have gone further, promising US$1.4 billion in a “critical mineral supply chain” fund, though I’m sure this isn’t a hard limit.

It’s a lot of fuss and spending over a market that’s barely worth more than US$6 billion.

Loose purse strings behind government investments

Just as the AUKUS formation was a warning shot that the United States is interested in China’s increasing presence in international waters, the loose purse strings on rare-earths investing is about creating alternative sources and rare-earths supply streams.

Make no mistake, whether they be private buy-outs or a government alliance, there will be more deals like this between the three of us that set out to secure the rare-earth supply chain.

Until next time,

Shae Russell
Co-editor, Exponential Investor

(*)You saw this, did you? Come back on Thursday, and I’ll tell you why the price of neodymium that I’ve written today is utter rubbish.