Guest post: Africa’s role in addressing China’s dominance of rare earths

By Ian Coles of Mayer Brown

Mining professionals are gathered in Cape Town this week for Indaba, one of the largest mining investment conferences in the world. At the top of the agenda for many will be Africa’s capabilities as the next global provider of rare earths.

Global demand for rare earth production continues to increase. Ernst & Young has estimated the value of the market this year between $4bn and $6bn. The greatest demand comes from Japan, where annual imports are estimated in the region of $500m.

China currently meets this demand, supplying over 90 per cent of the world’s rare earths. We may see even more coming out of China, as this year it was reported that the country’s strict export quota had been dropped, to comply with a World Trade Organisation ruling last year. China introduced the quotas to combat what it called an unfair return on rare earths due to their very high environmental costs.

From as early as 2010, Africa has been hailed as the potential answer to the problem of China’s dominance of the rare earths market. Australia and Canada possess some rare earth deposits but it is thought that Africa has the most potential, with more than half of the world’s carbonatites (the rock formations that yield rare earths.) Indeed, in the past South Africa was probably the world’s largest supplier of rare earths. Today, at least two projects in the country, Steenkampskraal and Zandkopsdrift, have been re-opened and should re-commence production soon.

Other countries in Africa have the potential to produce even more rare earths. The Nuguala project in Tanzania has been called the largest, highest grade rare earth undeveloped project outside China. Wigu Hill is another rare earth project in Tanzania, owned by Montero Mining & Exploration. Bordering Malawi also has significant potential as do Mozambique, Kenya, Tanzania, Somalia and Namibia.

That said, capital for exploration remains scarce. One reason is that offtakers are reluctant to enter long-term supply contracts to support exploration and other early-stage activity. Price instability for most rare earth elements means that incentives for producers to sell into the spot market can be substantial. This reduces the length of supply contracts, which were previously one to five years long, to three months or less.

A further problem, not just for African countries but for any country with rare earth deposits, is that there is no standard process for the extraction and beneficiation of rare earths. This inevitably makes it a lengthy process and is in stark contrast to the lead time for the developments of other metals – the pre-production stage of a gold mine, for example, can be as little as two years compared with seven for a rare earth project. In order to optimise profits, a unique processing system is needed so that the relative proportions of the various rare earths found in each ore body are extracted.

Environmental concerns are also a factor. It has been reported that in Baotou, China, where a large proportion of the country’s rare earth extraction is carried out, a mine’s tailing pond has been leaking into groundwater and is threatening a major water supply for northern China. Processing one ton of rare earths produces 2,000 tons of toxic waste.

So, when the opportunities afforded by the supply and demand imbalance are set against the challenges faced in connection with the development of a rare earth deposit, can Africa be part of the solution?

In short, yes. It is clear that there are opportunities for the development of rare earths in Africa. Just last Autumn, mining company Cortec announced it had found deposits worth $62.4bn in Kenya. However, it is a telling statistic that at present there appear to be only three projects at feasibility study or pre-feasibility study stage. The dearth of capital, when coupled with the difficult market supply and demand model, is bound to make the development of projects difficult for those in the junior mining sector. However, there is no doubt at all as to the quality of the prospective resources.

One potential answer lies with technology assistance from foreign end-users. In May 2013, the Malawi government launched a project to explore for rare earths and natural gas, a project supported by rare earth technology from Japan Oil, Gas and Metals National Corporation. This type of technological assistance is likely to be of great importance if Africa is to be able to develop opportunities in the rare earths sector. It is also likely to be key for those countries which, unlike China, have yet to develop significant ties with host governments in Africa.

Ian Coles is head of international law firm Mayer Brown’s Africa and Mining practices.

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