Critical minerals under the spotlight in 2023

Excerpts from Morgans report
Analysts: Chris Brown & Kyle Williams

Junior mining sector

▪ The US Inflation Reduction Act (IRA), signed into law August 2022, will allocate nearly US$370 billion to climate and energy-focused investments.

A major objective is to support President Biden’s goal of reaching 50 percent EV market share by 2030 and ensuring a strong domestic supply base for strategic minerals.

Recent supply chain challenges in the US created serious national security concerns, with China dominating the supply chain for many critical strategic minerals.

▪ While the focus of the IRA is on strategic minerals, with immature and opaque markets, we expect that copper will also benefit from increased electrification.

▪ The copper price is incentivising year-on-year growth in exploration budgets globally and in Australia.

Strong underlying demand for copper is required for the energy transition.

Large copper discoveries have been in a steady decline over the past decade as producers have shifted their budgets toward near-mine exploration and largely neglected greenfield exploration.

We see continued M&A focused toward copper producers and development assets with long >10 year mine lives and those in tier-one mining jurisdictions.

▪ We review: Rex Minerals (ASX:RXM) - Spec Buy, TP$0.49, Aeon Metals (ASX:AML), and KGL Limited (ASX:KGL) - Spec Buy, TP$0.81.

▪ China produced an estimated 71,000t of contained tungsten in 2022, ~85% of world production.

Russia is the third largest supplier, with an estimated 2,500t.

Concerns over the security of supply of strategic minerals, exacerbated by sanctions imposed by liberal democracies after the Russian invasion of Ukraine, focus attention on tungsten. Hard facing for drill bits used in manufacturing, and drilling in the mining and oil and gas industries, accounts for 60% of production.

▪ China dominates tin production (~27% of world production), with Indonesia (~26%) and Myanmar (~17%). With the primary use for tin is as solder, it is a critical metal in the move to electrification, growth in EVs, and renewables.

▪ We review: EQ Resources (ASX:EQR) – Spec Buy, TP$0.10.

▪ Various Lanthanide REEs are used in permanent magnets, high-power magnets and high temperature magnets, components of electric motors and generators.

Two of the most important REEs, Neodymium and Praseodymium (NdPr), form the crucial ingredient in permanent magnets used in electric motors for wind turbines and electric vehicles (EVs).

▪ We comment on: Lynas Rare Earths (ASX:LYC), Arafura Rare Earths (ASX:ARU), Northern Minerals (ASX:NTU), and Iluka (ASX:ILU).

 
▪ Nickel prices on the London Metal Exchange (LME) averaged ~US$26,000/tonne through 2022, primarily due to a short squeeze event on the LME, coupled withstrong demand from battery cathode manufacturers.

The Class 1 LME deliverable nickel market remains tight, shown by historically low warehouse levels and limited liquidity in the market.

Relatively high nickel prices have encouraged the majors' BHP and IGO to strengthen their exploration budgets, followed by a growing list of junior explorers targeting nickel sulphide deposits in Australia, Canada and Brazil.

Exposure to ASX-listed primary nickel sulphide producers remains limited, with PAN being our key pick in the segment.

▪ We review: Panoramic Resources (ASX:PAN) – Add, TP $0.25, and Poseidon Nickel (ASX:POS) – Spec Buy, TP$0.11
 

▪ Governments, including the US, European countries and Australia are all taking steps to ensure security of supply as globalisation comes under scrutiny.

This is occurring above the major theme of electrification and the move to renewables.

Full report here