May 03, 2013

Russia and China Vie for Rare Earths Dominance

May 1, 2013
By Daniel McGroarty
http://www.realclearworld.com/articles/2013/05/01/russia_and_china_vie_for_rare_earths_dominance_105120.html
 
One step down from the real wars -- on terror, in Syria and the daily death without end in Afghanistan and Iraq -- and a second step beneath our next wars -- nuclear menaces North Korea and Iran -- comes the war that will shape national fortunes in the 21st Century: the contest to control vital resources.
Driven by demography and technology -- a mid-Century planet of 9 billion people seeking a tech-enabled First World lifestyle, limited by finite access to the metals and minerals that make it possible -- the resource wars are to date metaphorical, but the geopolitical positioning is underway in earnest.
At least it is in Russia and China.
 
Witness news that ICT Group, the company controlled by Russian billionaire Alexander Nesis, will spend $1 billion developing the Tomtor rare earths deposit in Eastern Siberia, a tiny outpost of 570 frozen souls equidistant from the Arctic Circle and the Sea of Okhotsk.
  

  
ICT will partner on the deal with Rostec -- headed by Sergei Chemezov, former KGB colleague of Vladimir Putin during the latter's East German tour: the secretive state conglomerate with hundreds of subsidiaries in Russia's defense technology sector. The deposit at Tomtor is rich in niobium, yttrium, scandium and terbium -- each a much sought-after strategic metal. The deal follows the February announcement that the Russian Federal Government has approved the equivalent of $4.8 billion in the form of loans, tax breaks and "licensing improvements" in Russia's resource rich Far East.
 
As part of the deal, ICT Group will gain control of more than 80,000 tons of rare earth-bearing Monazite concentrate that has been sitting in a Central Urals warehouse since Soviet days. Like the stuff of a Cold War novel, these "monocyte sands" have been stashed in a "state reserve" facility, reportedly put there by direct order of Stalin's ruthless chief of secret police, Lavrentiy Beriya.
 
If ICT Group can get hold of the dusty old geological maps from the Soviet Era (legendary Soviet geologist Larisa Popugayeva's field notebooks were classified as State Secrets), their hunt for rare earths should proceed at full speed. In contrast to U.S. mine projects, saddled with a world-worst permitting process that runs seven to ten years, the new Russian project announcement comes with a promised start-date: 2017. Apparently, Moscow mine permitting has its own EZ Pass lane.
Shift southwest from Eastern Siberia, and there's a second front in the resource wars, this one in the old Soviet Union's Central Asian backyard.
 
The prize here is Kutessay II, site of a mothballed Soviet-era rare earths mine in the Central Asian nation of Kyrgyzstan, being brought back into production by Canadian-listed Stans Energy. As one measure of Kutessay's potential, rare earths analyst Gareth Hatch ranks it among the top five REE prospects in terms of "basket price," a metric that suggests a strong profile in the coveted heavy rare earths.
With a mine whose past production seems prologue to a promising revival, Stans is a tempting target -- and not just for those who do their investing through the public markets. Since buying the property in 2009, Stans has been plagued by sudden stops in the permitting process, and more than a few cases in Kyrgyz courts. In an interview with ProEdgeWire on the eve of this month's Toronto Tech Metals Summit, Stans CEO Robert Mackay shared email traffic suggesting that Stans' byzantine legal travails in Kyrgyzstan were in fact due to string-pulling by a Chinese metals entity intent on gaining control of Kutessay.
 
At one point, Stans management was summoned to China for a meeting on their Kyrgyz project. Mackay demurred, insisting on a Kyrgyz meeting site, whereupon a Chinese delegation arrived with an offer to buy majority control of Stans -- then boasting a market cap of $100 million -- for $6 million, roughly one-tenth market value. Mackay states that his Chinese interlocutors also indicated that a payment of $1.5 million would result in Kyrgyz approval of the mine project. Having heard enough, Mackay ended the meeting early. Now, he's gone public with the email trail, shining a light on the attempted skullduggery in order to keep his project moving forward, and keep it out of the hands of shadow figures.
 
It's a difficult impasse. One day you're running a rare earths company, the next you're a candidate for a Harvard Business School case study on political risk. But don't count Stans out: The company may be headquartered in Toronto, but it has strong contacts in Russia's ruling circles, so the tug-of-war between a Canadian company and Kyrgyz officials may find Moscow and Beijing pulling hard at the far ends of the rope.
 
In this world of Russian oligarchs and Chinese combines, where does all of this leave the American, Canadian and Australian junior miners, struggling to bring new strategic metals into production? As Jamestown Foundation fellow Igor Rotar observes:
"... the prevalence of incidents of politically and criminally motivated rallies against foreign businesses significantly harms the Central Asian republic's investment climate."

That's certainly true for Western investors, with their quaint expectations of transparency and responsible governance. But as Stans Energy may be finding out, it's the perfect playing field for non-Western entities -- explicitly or implicitly state-backed -- who write their own rules in the 21st Century battle for resource dominance.

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