Dacha takes center stage after rare earths squeeze

Metal Bulletin – Published: July 27, 2010

Dacha Capital’s rare earths stockpile has started to look more attractive following China’s decision to slash rare earth export quotas for the second half of the year by more than 60%, market participants told MB.

The quota, announced in early July, was cut to just under 8,000 tonnes for the second half, compared with around 22,000 tonnes for the first six months of the year, taking the 2010 total to 30,258 tonnes compared with 50,145 tonnes in 2009.

Dacha’s plan to create an exchange-traded fund (ETF)-like structure for rare earths, and a similar move by SMG Indium Resources in the indium market, have been met with scepticism. Critics say the markets are not liquid enough for the model to work.

But with supply from China constricted even further, a rare earths stockpile has more appeal, a trader told MB.

“A lot of consumers outside China are panicking a bit; the Americans and the Japanese are up in arms. It’s going to make Dacha’s stockpile look a lot more attractive,” the trader said.

Dacha’s stockpile consists of 216,000 kg of heavy rare earth elements, with 90,000 kg held outside China, including 20,000 kg of yttrium oxide and 5,000 kg of dysprosium oxide.

Dacha also holds gadolinium, lutetium and terbium in oxide form outside China, as well as europium oxide inside China.

“Our stockpile is definitely looking better, but not surprisingly there’s a lot of rhetoric around the slash in rare earth export quotas,” Patrick Wong, chief investment officer at Dacha Capital, told MB.

“Our inventory looks great, not just because of the change in perception but also in its portfolio make up. We’re long in all the good stuff and we are not affected by the export cuts because we’re buying all of the highest-valued material that gets shipped out first,” Wong said.

But the west should not be fooled by what appears to be a pause by China, independent industry expert Jack Lifton warned.

China will return as a competitive force in the rare earths market once it has resolved internal issues around environmental legislation and competition from illegal operations, he told MB.

“I’m very sceptical that the Chinese are leaving the market to the west. When they resume competition some time in this decade – the Chinese think in decades – will the western miners then be competitive?” Lifton asked.

“The perceived shortfall [in rare earths supply] generated an immense increase in potential supply; the challenge is sorting this into who will be making a profit. The western rare earth miners are not at all sure whether they can make a profit and this is holding back professional investors,” he added.

SMG Indium Resources hopes to raise $45 million through a Nasdaq listing on August 5. The company’s stockpile stands at 9.2 tonnes of indium, purchased from large producers including MCP.

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