This week’s column: Magnets are important, nobody wants cobalt, and mining under railways is dangerous.
Let’s get after it!
“Digging for Value, One Story At A Time.”
But Muh Magnets!
I love writing about rare earth elements (or REEs). There’s always some new tariff or export restriction to shake things up. It’s a constant reminder about a) how fragile our supply chains are and b) how we never actually do anything to address those supply chain issues.
For instance, auotmakers are losing their minds over China’s REE ban (from MiningMx.com):
“Frank Eckard, CEO of German magnet maker Magnosphere, told Reuters on June 9 the situation as “full panic” across the automotive sector, with desperate manufacturers willing to pay any price for alternative supplies. Several European auto-supplier plants have already shut down, according to industry association CLEPA.
“Sooner or later, this will confront everyone,” CLEPA Secretary-General Benjamin Krieger told the newswire.
The crisis stems from China’s dominance over rare-earth production, controlling up to 70% of global mining, 85% of refining capacity and about 90% of magnet production, according to consultancy AlixPartners. These materials are essential for dozens of automotive components including side mirrors, speakers, oil pumps and braking sensors.”
This is OPEC on steroids. As it turns out, you need REEs for virtually every part of the car. Those subwoofers you use to blast Dua Lipa? You can thank an REE for that.
Luckily, Xi Jinping loves Dua Lipa and resumed REE and magnet imports to the US. But now the US has a bigger problem: We’ve admitted to China that we have no leverage when it comes to rare earths. China can simply play the “REE card” whenever negotiations stall, and come out ahead?
So the rest of the world has two options:
- Don’t piss China off to the point where they ban all REE and magnets, and mean it.
Or
- Diversify REE and magnet supply chains.
The short answer is you can do both. The longer answer is that the second option takes decades, and maybe nobody tries because it’s easier to wait a storm out than build a stronger foundation for the next one.
“Companies including General Motors and BMW are developing motors with reduced rare-earth content, but most efforts remain years away from commercial scale. Minneapolis-based Niron has raised over $250m for rare-earth-free magnets, planning a $1bn facility for 2029 production.”
There’s another lesson here, and that’s to never start (or invest in?) a car manufacturing company. Seriously. Look at this string of luck.
“The shortage threatens to replicate previous supply chain disasters that have plagued the industry since 2020. The coronavirus pandemic forced factory closures, followed by a semiconductor shortage that eliminated millions of vehicles from production plans between 2021 and 2023, said Reuters.”
A lot of you already know that I’m very long Idaho Strategic (IDR) as a way to play this “US-based REE domestication” theme. IDR owns the US’s largest REE land package.
Imagine what that asset is worth if the world gets serious about diversifying its REE supply chain. Or worse, if Xi bans exports and means it.
No More Cobalt Hoarding
In March I wrote that hedge funds are a good business, but there’s an even better business idea: getting paid to hoard physical commodities:
“Here’s an even better business:
- You develop some fetish for a commodity, say, cobalt.
- You tell someone, like Glencore, “I really like cobalt and think it looks cool to hold. I want to start a company to buy as much cobalt as possible.”
- Glencore, realizing it never hurts adding another demand source to a commodity, says, “Sure, why not.”
- You charge a management fee for holding physical cobalt.
- You market your fund as “Nationally Strategic” because “we need cobalt for everything.””
I don’t know. That sounds like a good idea that’s simple enough to IPO in London without any complications, right? Wellllll.
“Metals investor Cobalt Holdings said on Wednesday it would not proceed with its planned initial public offering on the London Stock Exchange, ending hopes for what could have been the largest listing in the UK capital since early 2024.
The company declined to specify the reasons for dropping its plans days after the listing was priced at $2.56 per share.
However, one person with knowledge of the process said the process was halted as a result of lack of investor demand. Management continues to believe in the business model and the market for cobalt, a second person with knowledge of the situation said, adding that the company is planning to explore options including funding the business privately.”
I love that the company “declined to specify the reasons for dropping its plans.” I have a few guesses:
- Nobody wants to own physical cobalt (or a certificate that says “I own shares in this company that owns physical cobalt”). That’s not sexy!
- Cobalt prices are down 75% and who wants to own something down 75% when you can own, I don’t know, CoreWeave?
- Nobody wants to own UK-listed stocks. Glencore is even considering moving to a US exchange.
The company says it might fund the business privately. Which is fine, but then couldn’t the person(s) supplying the $200-$230M to fund the business just buy the cobalt from Glencore themselves?
I get why this business should be public: you issue shares when your stock trades at or slightly above NAV to buy more commodities, hope the commodity price rises, and rinse and repeat.
But why should you invest in this as a private business? If you theoretically had access to $200-$230M, couldn’t you just call Glencore yourself and negotiate a purchase agreement? I bet you could make it happen if you were that desperate for cobalt.
Zimbabwe’s Underground Railroad
Mining is dangerous. You’re crushing, hauling, exploding, and moving tons of rock, sometimes underground, oftentimes in remote locations, and usually without the comforting hug of OSHA-approved safety standards.
Now add high unemployment, poverty, and record-high gold prices. The result is even more dangerous mining methods. Like mining under an active railroad:
“A peculiar case of gold fever got a Zimbabwe man arrested this week. On the hunt for nuggets, he decided it was in his best interest to dig underneath a railway track.
Unfortunately for him, his dangerous and illegal prospecting ambitions will result in up to a decade of prison time.
“An artisanal gold miner was arrested by loss control personnel on Sunday while digging for gold under the railway tracks in Mvuma,” the National Railways of Zimbabwe said in a social media statement Wednesday.
The African railroad service has sent a team of engineers to examine and repair the damage before any trains pass over that section of the track again.
“It is an offence under the Railways Act to prospect for minerals within the railway reserve and is punishable by up to 10 years in jail,” the organization added.”
In finance, we call this “picking up pennies in front of a steamroller.” In Zimbabwe, it’s more literal.
There’s more nuance to this story, though. I’m blessed enough to where I don’t have to ask, “Is it worth it to mine under this railway? I might die or go to jail for 10 years. But I might find a crap ton of gold.”
But some people do ask these questions, draw their own conclusions, and risk it anyways.
“A representative from the nation’s Centre for Natural Resource Governance (CNRG) told a local publication that the incident was merely a symptom of larger issues of inequality plaguing the country’s mining and resource sectors.
“Communities are increasingly resorting to desperate and unsafe mining practices due to exclusion from formal mining benefits, widespread poverty and the lack of development in mineral-rich areas,” Nyarota added.”
There’s a lesson here about incentives, externalities, and the unintended consequences of resource policy. If you make it hard for people to share in the gold boom, they’ll find a way — even if it means risking a train derailment or their life.
