US to Reduce Reliance on China; A Macro Tailwind for Krakatoa Resources

Rare Earths exploration and production companies are witnessing increasing interest from the investor community. The reasons are plenty, ranging from increasing use of rare earths in the manufacturing of powerful magnets to the change in global trade dynamics fitting well for the future prospects of rare earth companies such as Krakatoa Resources Limited (ASX: KTA).

Macro Tailwinds Gusting to Potentially Push Krakatoa Resources out of the Doldrums

One Australian exploration company that is potentially well-positioned to gain from this REE market growth is Krakatoa Resources Limited (ASX: KTA). Currently trading with a market cap of $2.29 million, Krakatoa Resources is among the very few listed micro cap companies with REE projects.

For comparison, an ASX snapshot of listed REE companies appear below:

*Market Cap as on 10 September 2019 (Source: ASX)

Are the other listed market caps’ in the above table likely to come down or is KTA likely to go up?

Let’s have a closer look at the recent developments in the global trade dynamics.

US Dependence on Rare Earth and US-China Trade War Saga

The U.S. Geological Survey in 2017 reported an interesting set of numbers, such as about 80% of rare earth minerals imported by the US came from China and over 80% of the world’s production was from China.

Rare earths are heavily used by the US in the manufacturing of military jet engines, satellites, missile defense systems and night vision devices, making it the largest importer of rare earths in the world. Historically, the US has majorly relied on China for its rare earths supply.

The US-China trade war has led the Chinese government to use its dominance in the rare earths supply chain to gain the upper hand. It has been widely published in the media that China is strongly contemplating rare earths export curb to the US.

Concerned about the fragility in the rare earths supply chain which could impact the US military power, the US Department of Defense (DOD) is now looking at a variety of mechanisms to stand up rare earths processing facilities. The US is now moving to other avenues to fulfil its rare earths supply needs.

Recently on 26 August 2019, Undersecretary of Defense for Acquisition and Sustainment Ellen Lord made a statement, in which she confirmed that her government is in talks with Australia to stand up a facility that would take care of DOD needs.

“The challenge is really the processing of them (rare earth minerals) and having facilities to do that. Because quite often, China mines them elsewhere and brings them back to China to process them, so we are looking at a variety of mechanisms to stand up processing facilities”- said Ellen Lord at Press Briefing on Acquisition Reform and Innovation.

Australian Rare Earth Scenario

Historically, Australia has exported large quantities of monazite, a rare earth-thorium-phosphate mineral, from heavy mineral sands mined in WA, QLD and NSW used for the extraction of both thorium and REEs (rare earth elements).

Recently, the Australian government released a report titled: Outlook for Selected Critical Minerals: Australia 2019, which examined the market outlook for six critical minerals and highlighted Australia’s opportunity in critical minerals. While welcoming the report, Minister for Resources and Northern Australia Matt Canavan said, at a global level, Australia is the largest rare earths producer outside China, and its resource endowment, mining capability and existing processing infrastructure means that it is well placed to help meet the global demand.

Currently, Lynas Corporation Limited (ASX: LYC) is the only existing rare earths processor outside China, processing ~ 20% of global supply in Malaysia, using concentrates shipped from the Mt Weld mine in Western Australia. Recently, Lynas announced its plan for the establishment of heavy rare earths separation capability in the United States of America via the proposed joint venture with Blue Line Corporation. However, it is to be noted that Lynas has been in spot of bother over its license in Malaysia due to environmental concerns. The end-users such as the US could consider looking at other processing alternatives outside environmentally sensitive Malaysia.

It is now evident that the current US-China trade war is a blessing for rare earth players outside China. Along with this, the expected growth in the rare earths’ demand driven by their increasing applications, has prompted investors to look for REE players outside China.

Applications for REEs in emerging technology areas (Source: Government of Australia)

The combination of Neodymium and Praseodymium (NdPr) is commonly used in the manufacturing of magnets, which are used in powering many electric vehicle motors. Lynas stated that the demand for NdPr is forecast to accelerate from 2021, mainly driven by increasing use in electric vehicles.

Global demand for fresh NdPr Oxide (Source: Lynas Corporation Limited)

Krakatoa’s recently acquired (subject to grant) Mt Clere Rare Earth Project is located within the Gascoyne Region of Western Australia and is prospective for three rare earth element (REE) deposit styles:

• Monazite sands in vast Alluvial terraces;
• Chinese-type ion adsorption clays in extensive laterite areas; and
• Carbonatite dyke swarms.

Previously conducted exploration programs on this project also provide robust evidence to indicate that the KTA project holds massive potential to serve in the REE space. For instance, Historic exploration by BHP, which was not looking for REEs at that time, identified numerous highly prospective areas for thorium and REE mineralisation:

• substantial monazite (with mineral abundances exceeding 50%) identified in a significant number (>20%) of pan concentrate stream sediment samples;
• Monazite concentrates can contain up to 70% REE after physical upgrading, primarily cerium (Ce) and lanthanum (La) as well as significant concentrations of neodymium (Nd), praseodymium (Pr), and samarium (Sm);
• Thorium (Th) content is also high, ranging from 4% to 12%;
• Distribution and REE-composition of monazite at the project remains untested

Extraordinarily high monazite (up to 48%) was independently confirmed in heavy mineral concentrates taken by Astro Mining NL. Along with this, the project’s REE prospectivity was further confirmed by All Star Minerals Plc, which reported the following observations:

• Heavy mineral concentrate produced from alluvium returned up to 0.46% Ce, 0.25% La, 0.12% Th, 1.4% Zr and 9.9% Ti;
• Numerous REE anomalies returned in limited shallow auger drilling, including sample EBA052: 1050ppm Ce, 660ppm La, 112ppm Pr, 360ppm Nd and 43ppm Sm;

With the Marco tailwinds firmly in favor of non-Chinese rare earth players, and an underlying fillip in demand for REE’s due to substantial inroads made by Green tech, Krakatoa Resources with its Mt Clere Rare Earth Project is providing a great, ground floor investment opportunity with loads of leverage.

Stock Information

On 10^th September 2019, KTA shares were trading at $0.021, with a market cap of $3.1 million.

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