China controls the minerals that power everything from EVs to wind turbines—and is starting to use that leverage more aggressively.
As export restrictions tighten, is the West still in “competition”—or already in a mineral war?
In this episode, I speak with Tomasz Nadrowski, author of Mineral War, about how this is playing out beneath the surface.
We discuss:
Why the US and Europe built “houses of straw” while Japan prepared for the storm
The hidden financing advantage behind China’s mining dominance
Why even Japan still can’t fully escape dependence
Whether the West can rebuild supply chains before time runs out
This is a useful reality check on how far behind the West really is.
Listen here:
Spotify | Apple Podcasts
Tomasz also writes an excellent newsletter at Amvest Capital: https://mailchi.mp/amvestcapital/terraden
From the conversation:
“Despite everything Japan has done… it still imports about a third of its magnets from China.”
“Even the least deindustrialised economies remain dependent on Chinese inputs.”
Read the full transcript here →
Henry Sanderson (01:00)
Thomas, thank you so much for joining me. I really enjoyed your book. I got a copy right here, Mineral War. I think one of the really interesting things—and shocking things, really—is that the West was given a big warning in 2010 when China cut off rare earth supplies to Japan.
And yet, after that period, very little was done in the West. I mean, Japan did quite a bit by investing in Lynas, an Australian producer, but the West—US, Europe—did very little. I wonder if you could talk a bit about why that was, why there was so little action taken.
Tomasz Nadrowski (01:39)
Thank you for the question. Thanks for having me, Henry. It’s a pleasure to be here with you. There are two answers to this. Because you’re bringing up Japan, and the Japanese answer directs us into this bifurcation of two answers: because one is really policy failure, and the other one is what we call in economics hysteresis. So there’s a certain inertia in a system which is very difficult to unwind all of a sudden. Why am I saying this?
I’m generally a big fan of the way Japan approached this. You mentioned Lynas, of course; metallization plants in Vietnam; good control over the patents of Hitachi or Sumitomo before on the magnet side. So they did a good job in general from mining all the way through magnet making, including alloying, which is now often part of magnet making. However, if you look at the current spat between China and Japan, and you just compare the recent statistics, Japan is not entirely out of the woods.
So the country needs about 9,000 tons of permanent earth magnets, out of which it still imports about a third from China. That’s 16 years since that embargo originally. And on the oxide side, where Japan is by far the largest customer, that dependency actually has crept up a little bit in recent years from about 60% to 70%.
So it just shows that despite the fact that Japan has a very consistent strategic procurement system—which is the term that the CEO of Lynas uses comparing the business with the Japanese with the business with others—others see procurement as a cost center for large corporations, and they’re basically trying to “skin the cat” all the time. And then, of course, we have the problem of prices not being very transparent, coming from the Chinese system.
Despite all of this, customers, even in Japan, are still addicted to product from China, both on the oxide side and the magnet side, despite having never lost really manufacturing. It’s still about 20-something percent of GDP, so similar to—a bit less even than South Korea and Taiwan.
So the only institutions in Western countries that have not been deindustrialized, even those are dependent on inputs from China.
And the second part of the answer is, of course, policy failures—significant policy failures. In the book, I compare it to the old fable of the Three Little Piggies with the wolf prowling on the edge of the forest. And Japan built this house made of brick; we just discussed it. The US, we did believe in the system that we set up here by the United States after the Second World War: the financial system, IMF, World Bank then the GATT for the Allies and eventually expanded to WTO, trying to invite all the other polities, all the other jurisdictions into the rule-based trade order.
So in 2010, when that embargo happened and really was pointed just at Japan at that time—not worldwide as last year—our approach was, “Let’s just go to Lausanne and Geneva and just sue the Chinese.”
And we won the case—and actually won two cases, two different cases regarding at the WTO—not just rare earths but also tungsten. I think if my memory is correct, molybdenum was there, a couple of other metals. And we won. The only result in Chinese policies was that instead of applying export quotas, which are explicitly illegal according to WTO, China just moved to production quotas.
And as they continued to consolidate the industry, specifically the rare earth industry over time, these quotas were allocated to state-owned enterprises, so those that would consolidate the entire value chain by buying private operators, a smaller state-owned, local state-owned enterprises and so on.
So the effect was exactly the same. Now, Europe is unfortunately on the far end. This was this piggy that built the house made of straw because it usually talks a lot. It produces a lot of papers, white papers, studies to understand what’s going on.
I just was on a call with a project in Africa this morning and they’re currently wondering what to do—whether to attach themselves to the European value chain when all the strategy is very palatable, or to the United States where there is a bit of a noisy, haphazard approach with a lot of input from the Department of State in Africa, and from Africaspace in Germany. But the Americans come with the money even though they’re quite lost in Africa.
So that’s a difficult decision right now for many operators who want to contribute to the rebuilding of this value chain in the West, but now is the choice on which side of the Atlantic you do this, given the deficiencies on both sides. I think Japan has less of those deficiencies, has done a good job, and still I think JOGMEC, which really was only created in 2004 from the government mining agency and Japan Oil Corporation is definitely a bit of a shining light here, showing how the government should be looking at different projects.
And actually, when I go to see projects around the world, I stumble upon either JOGMEC itself or the footprint of JOGMEC. So they’re very active and maybe there’s something we can learn from.
Henry Sanderson (07:09)
So in terms of the West’s failure, you talk a bit about how China was playing a completely different game, but when do you think we actually entered a mineral war? Was it with China’s actions last year to introduce export controls on rare earths? When do you think we actually moved from strategic competition into an actual war footing?
Tomasz Nadrowski (07:34)
Probably around the time I was writing the book. So I encourage my friends and colleagues here on Wall Street, a couple of blocks down, to focus a little more on how conflict is approached through strategy and philosophy and military strategy historically. And Carl von Clausewitz, this European Sunzi, if you wish, he once said that the war doesn’t start with the initial aggression; it starts with the reaction to the aggression.
So think about it, you know, 1938, 1939, right? When Germany takes over Sudetenland and Czechoslovakia, there is no military response. It’s still not a war, right? It’s aggression, but it’s not a war. War really starts when Germany invades Poland on the one side and Soviet Union on the other, and Poland reacts. And that’s—this is where the European chapter of the Second World War starts. So I think this has really turned into a war when the West decided to react to Chinese weaponization.
The buildup to that—and that’s the origin of my fund, which I set up in the early 2020s—was the export control law that China introduced in October of that year.
When that happened, my lightbulb quickly switched on. I thought about what happened 10 years before over the Senkaku crisis, because it was obvious to me that critical minerals would play an important role, and those constraints for exports—either specifically applying this to a given country like just right now again this year against Japan, or globally, or against the United States.
And that’s exactly what happened with a number of regulatory moves. I counted about 23 or 24 of these different regulations in China between summer ‘23, when we first saw probably germanium and gallium on our radar screen, and then graphite and so on, and then all the way to April last year and then October last year. And then the truce in Busan between Trump and Xi Jinping led us to suspension of four of those different 23 restrictions.
And since then, as I mentioned, we have new ones, this time targeting Japan. So I think reaction to this—the fact that Europe is serious about it, the United States is serious about it, that Japan, Korea, Taiwan are serious about this...
It’s just this example I cited earlier on that even if Japan has been in it for 16 years, it’s not entirely independent of the Chinese input. Either we find something technologically that will help us accelerate that, or this is a long journey ahead of us.
Henry Sanderson (10:15)
What is China’s aim? I mean, you mentioned they introduced the export law in 2020, but if you look at the April announcement last year, they introduced export controls on seven rare earths, but they’re very happy to export some of the lighter rare earths, neodymium, praseodymium. So it’s very targeted. And they also talked about, in terms of dual use, preventing dual use of rare earths. Is it the case that they’re trying to legitimately prevent these rare earths going to defense uses while allowing exports of certain rare earths? What’s actually the aim, do you think?
Tomasz Nadrowski (10:58)
I think there are a number of different aims they are trying to achieve—both a defensive aim because China has a massive refining capacity, which is larger than its mining capacity, which is larger than its reserve replacement. So depletion of its reserves is way too fast and therefore, you know, hence the investments overseas in Myanmar and other places.
But the original imposition of those restrictions in April was actually quite haphazard because of a lack of discernment in HS codes that define the flow through customs between different types of magnets. So the magnets with heavier earths and the magnets without heavier earths—and that led to massive dislocation around the world also for those civilian applications for lower quality magnets, or magnets that do not have to withstand high temperatures or radiation for which you need this dysprosium-terbium heavier earth doping of those magnets.
But let’s not forget there is—there is a national security element to it in China for sure, but it was applied as a response, almost instantaneous response to the Liberation Day in the United States in April. Therefore, it was used as a lever or as a tool in the broader trade war. Now, why are we having the trade war?
We have the trade war because the United States and to some extent Europe and others for years have been trying to rebalance the very lopsided trade relationship with China, which has only deepened last year despite the US tariffs. Simply, some of that surplus was redirected mostly to Africa—tragically for Africa, with a current account deficit now at over $100 billion for the entire African continent vis-à-vis China.
So these attempts—because the US for the first time started this in 2018—China had some time to prepare its weaponry for retaliation. And they did precisely that. They used this leverage which is extremely sharp. It’s sharp because of the importance of magnets, but also other technologies from these and some other critical minerals. The restrictions in April, as you rightly pointed out, they affected seven—I call them the “Magnificent Seven”—heavy and mid-rare earths.
And the subsequent escalation before the October meeting, another five. But there were also some points related to technology equipment, including for battery materials processing. So it’s a broader picture of a weapon to prevent this rebalancing of the trade relationship. And why does China need that lopsided trade relationship? And that’s because of very, very heavy leverage in the Chinese economic system. That’s over 320% of GDP, so way beyond Japan.
And Japan with inflation now, actually, this number of 240% is kind of ebbing a little bit. US is 120% or 125%.
China is 320% for an economy which on a per capita basis is much less developed. So you can do only a couple of things with this. Either you assume that there’s going to be a very long, protracted recession Japanese-style for about two decades, or you have a very, very high GDP growth compared to your savings-to-GDP ratio. That’s no longer the case in China; it’s about 4%. So that 47% savings to GDP will give you maybe $1 out of $12 that you invest is very inefficient. So you cannot do this. You cannot do inflation because it’s a totalitarian police state and we know how it ends in those states. So Nazi Germany and USSR were very successful at generating deflationary environments, at least USSR until 1980s. But Iran is not successful; the rial lost about 99% of its value since the revolution in ‘79.
So China went through a similar dislocation in the late 1980s, culminating with Tiananmen, and has since tread always on the side of caution, meaning tighter than usual monetary policy leading to deflation and the loss of consumption-to-GDP ever since Tiananmen, essentially in a very consistent way. It accelerated since COVID.
So all the stimuli go not into consumption, they go into production, leading to overproduction, leading to overcapacity, and therefore you have to borrow external demand. There is no domestic demand for this. And if you borrow external demand, you’re going to destroy industries around the world, especially if you may be not efficient but hugely competitive on cost because of managed currency and so on.
And so it’s natural that one day those different economies, especially the more powerful ones, will come and push back and say, “Well, let’s find a solution, a modus operandi,” because David Ricardo told us about comparative advantage but didn’t talk about comparative advantage that translates into one party producing everything and the other parties producing nothing. And therefore, China expected that and prepared this very, very successful retaliation using critical minerals. And suddenly the West found itself with no proper answer. So this is where we are now.
Henry Sanderson (16:05)
How long do you think China can push it? Because as you say they need export markets and they’re very happy to export magnets—rare earth permanent magnets—which we saw trade actually exports went up last year. And they’re happy to export some rare earths; they’re not heavy rare earths. I mean, how far can they push this strategy because we’ve already seen a lot of investment into projects outside of China? At what point does this become a losing policy for China because it just incentivizes its competition essentially?
Tomasz Nadrowski (16:39)
So it takes time to rebuild these value chains. We’re certainly not going to make it till November when Xi Jinping’s deadline runs out. The question is, of course, what does it mean to the producers inside China? If you slap an embargo on your largest customer, which is Japan, then, of course, they’re losing money. But it’s immaterial because it’s now part of the state-owned system predominantly. For the same reason, a lot of mining investments in Africa wouldn’t normally make sense for a Rio Tinto or a BHP or even Glencore.
But as long as you have an EPC firm that is a state-owned enterprise, it’s not really a profit center. And then the bundled infrastructure—that’s the additional cherry on the cake for the local government—that’s also provided by an SOE, the profits really don’t matter. And this is one of the reasons why we don’t actually invest in those listed offshoots of state-owned enterprises, Chinese enterprises, because there’s really no upside from producing these minerals right now if you are completely subject to the decisions of the central government for reasons which are purely geoeconomic—therefore using economic tools to achieve strategic goals. That’s very different from commercial rationale which still prevails in our part of the world.
But regardless, the timelines are what they are. You know, once you get to the resource in any kind of metal ore to build a large open-pit mine and actually produce steady-state, it’s going to take you about 15 years for a copper or nickel mine. So part of this is permitting and that needs to be reformed. It is just taking a really long time. So not only that, courtroom reforms here in the United States, some kind of cooperation between different nations, because not everybody has the geology or not everybody has the refining prowess to actually help move forward. So it’s a work in progress, but I think in the near term, China is still the winner. You’re probably right: at some point this will unwind and we’ll find other ways to move around it. But who knows? We’re not the only ones here with the agency and we’re not the only ones who determine what the calendar is.
Henry Sanderson (18:48)
Just picking to go into some more detail—just picking the heavy rare earths, dysprosium, terbium—and when you look at the export data they’ve actually declined. They declined last year. So is it a case that China wants to keep those for itself because Myanmar obviously is one big supplier there? There isn’t a lot to go around. Is it partly that they want to keep that for their own magnet industry and export the magnets? Is that what they’re trying to do?
Tomasz Nadrowski (19:18)
Yeah, and the way to actually understand what they’re doing is by observing their tax system. So China has a 13% VAT and that VAT is reimbursed—so there’s a rebate of exactly that amount when you export products from China.
However, if you produce raw materials or just half-processed materials such as rare earth oxides, you’re not going to get that. You’re not going to get that rebate. Therefore, you’re incentivized to use this cheap input into the local domestic industrial production. And so the strategy is to export the final product, say EVs or maybe batteries, and not to sell anything midstream or even upstream.
And this is how the tax system is incentivizing so that the maximum value added is pushed as close as possible to the customer; and the customer, whether it’s B2C or B2B, it’s irrelevant, and then that gets exported rather than something, you know, midstream. That’s actually, you know, easy to affect because the midstream has always been very much an element that’s controlled by the Chinese Communist Party and the state apparatus. Because, as you know, most metal refining really functions on very, very thin margins, right? So you need a lot of volume here to push through it. But it’s not in their interest to sell those, say, oxides, for example, for someone else to produce magnets. It’s really a question of directing exports towards specific sectors with multipliers, usually on the labor side.
Let’s not forget it’s a Marxist economy, so they believe in the labor theory of value—the value generated by inputs rather than at the moment of exchange. It’s a different, philosophically different approach to economics.
Henry Sanderson (21:11)
When you look at China, also in this mineral war, it has weaknesses, right? I mentioned Myanmar—it has to import a lot of the heavy rare earths from Myanmar, has to import lithium from Australia, from Chile. So it relies on imports for its gigantic manufacturing industry. So that’s a weakness that it has, right?
Tomasz Nadrowski (21:31)
You see, but that depends who leverages this weakness. So if we are in a conflict mode, right? So what’s the vocabulary in conflict? Asymmetry, right? Sub-kinetic aggression, escalation ladder.
This is the vocabulary that we in a competition world never had to use. But this is a vocabulary that China deploys in terms of both market access and export restrictions, and which Putin applied for a long time with oil and gas versus Europe, right, on a very selective basis. I cannot imagine yet Australia saying, “Well, we’re not going to sell you any lithium,” or Chile, despite the fact that the smelting industry has been decimated by the competition from China—subsidized competition. I don’t expect Chile to say, “Well, sorry China, we’re not going to sell you our concentrate.” It’s just not the way in which these Chinese partners function. We might get there if there is a major kinetic conflict in the Pacific, and who knows these days... but we’re not there yet.
Henry Sanderson (22:31)
And in terms of what the West can do—I mean, you wrote in your book that the West is perpetually in a reactive mode and has yet to articulate a constructive response. But you do see Trump being pretty constructive in terms of Project Volt, which is about stockpiling, and then this idea to launch a trade zone for critical minerals, which will have a price floor. What do you think of what he’s done in these sort of two big initiatives?
Tomasz Nadrowski (22:59)
Momentum is encouraging; the direction is still with a question mark.
So these are two different things. Project Volt really protects downstream and that’s understandable to reduce the volatility of the prices of these materials for the companies that are still relatively powerful industrial companies downstream in this country. The fact that three major trading companies are involved in this—I haven’t seen anything that will tell us that they cannot buy Chinese material for that matter, we still don’t have all the fine print there.
On Forge, which really replaces the Minerals Security Partnership—the Biden administration’s initiative which was mildly successful and maybe not entirely successful—here, the issue is how exactly are you going to protect the taxpayers’ money that’s going to be spent, for example, on reference prices for these materials to incentivize investment? It’s difficult enough in one country because when you do that, you almost certainly have to protect these reference prices with tariffs.
And not IRA tariffs, which were struck down by the Supreme Court of course, but 301 tariffs, which are specific to country and product, which exist, for example, for graphite right now, right? And very steep tariffs since January.
So that’s possible in one country. And yet, what I mentioned before, downstream there’s still a viable industry. We don’t have viable refining or we don’t have viable large-scale mining, but we have carmakers and equipment producers and so on, and they have the political power. So they’re going to come back like they did in 2018 when Trump was trying to impose tariffs on steel, and what happened back then? There were 40,000 applications for exemption from the tariffs, right?
And that’s one example; another example, of course, graphite under Biden, and when Tesla came back saying, “Don’t you even try,” and then we have this massive 18 months, whatever, transition period. So it’s difficult to do this politically when the power, the lobbying power, is downstream.
So once you have a reference price high enough for upstream to invest and you protect it with tariffs, then you have to offer some subsidies downstream to incentivize them to move gradually away from Chinese product. So these are two things. And then you have to somehow manage that revenue from the tariffs versus the spending from subsidies so that it doesn’t settle your treasury.
And slowly, slowly, over years—I don’t know what it is, a decade—with some positive branding, traceability of the material and so on, and make sure that it survives the next administration. So it has to be embedded in the legislative process; it cannot be just an executive order. Now, you take that problem and try to expand it to—maybe there were 55 members at this Forge meeting in Washington.
But even if you take the core, which is Japan, Korea, Europe, Australia, Canada, US, even that is complicated. Relations between some of these countries are not at their best right now. So it’s fairly—I think it’s a big challenge to do this. It’s inevitable. And indeed, the US needs help from Australia and Canada on mining, and from Korea and Japan on refining, smelting, separation, you name it. So yeah, I think it’s a step forward. It’s a positive step forward, but it’s not going to solve the issue immediately. There’s a lot of work that’s involved in this for coordination between those countries.
Henry Sanderson (26:27)
When you look at rare earths, I mean you can see a supply chain taking shape, right? You’ve got Lynas now doing heavy rare earths; you’ve got some metal production in South Korea, Vietnam, elsewhere; you’ve got a lot of magnet planned capacity coming on in the US; you’ve got in France rare earth separation—Solvay; you’ve got Less Common Metals in the UK doing metal... you can see a supply chain is being built. I guess the worry is what China could do to damage any potential competition. And we’ve seen rare earth prices increase now. Are you worried that China could come back and flood the market again and cause a lot of damage like it did last time?
Tomasz Nadrowski (27:19)
Yes, of course. In 2022, they also kept the prices right after the ‘21 run in the prices. So maybe something similar will happen now. It’s going to be actually easier because it doesn’t have to really incentivize the local producers in the market and just control it directly. Their system is not as leaky as it used to be, for example, in 2010, when smugglers completely killed the Beijing’s plan to maintain the embargo against Japan. I think there are some positive movements. What you mentioned about, you know—there’s a metallization plant here, there’s a separation plant there. Some people are mining or preparing to mine and there are some magnets—it still looks like a Swiss cheese. My favorite, you know, emmentale with big holes in the middle.
So we—we see, I think, more understanding now than in ‘21, ‘22, how this value chain is structured and what’s missing.
For me, the best example was Energy Fuels’ acquisition of ASM in Australia. Not because ASM has any attractive mining assets—I don’t think Dubbo is attractive; it’s a type of deposit similar to what’s found on the Kola Peninsula in northern Russia. It’s always been problematic for Russians. So rather than that, ASM owns a metallization plant in Korea. So suddenly Energy Fuels, that has monazite feedstock potentially from Australia, Madagascar, maybe from Bahia in Brazil... a separation plant that’s still sort of at an inchoate stage.
However, this company will know how to function with a Class 7 material because it’s a uranium producer, right? So less problem than many others. And then suddenly you have the metallization plant in Korea, whose client is in Texas, Noveon, the magnet maker. So you have connectivity within one company, potentially, you know, when that deal closes in June or whenever.
However, it’s still going to take the product, say, from Australia to Utah, from Utah to Korea, from Korea to Texas. The CEO of Lynas once told me that she didn’t want to see her product, you know, traverse the Pacific a couple of times.
But that’s probably inevitable for us. You mentioned La Rochelle in France, Carester, and the former Solvay people. Obviously, you know, this is a magnet—pun intended—for a lot of producers from Australia, from the United States, from Brazil, maybe even from Norway, because these engineers still have institutional memory of how it was done 30, 40, 45 years ago. So yes, there are some hubs, but at the moment, as we speak, commercial production only comes from Malaysia (so, Lynas) and from Estonia (Neo Performance). To my knowledge, Neo Performance still is not separating any heavies.
Lynas started since the third quarter of last year. The first production of nine tons—I think we should all sort of raise our flags here. We’re beginning to grab back the terrain, but these are early stages.
Henry Sanderson (30:26)
That’s extraordinary. So outside of China producing the heavier earths, there’s only really a handful of players at the moment—two or three?
Tomasz Nadrowski (30:35)
Yeah, really. I mean, so the feedstock that Energy Fuels will get is going to be quite rich, potentially. JOGMEC’s sitting on this very long lead project, full of yttrium, xenotime in Namibia. That’s potentially high quality. There are high quality projects in Wyoming and in Scandinavia, in addition to ionic clays, which are usually richer in heavy rare earths—hence Lynas’s interest in deposits in Northern Malaysia, right? Although they’ve never done ionic clays. So yes, we’ve seen the beginnings, but you know, it’s still early. You know, when we’ll see the 2,000 tons of dysprosium-terbium coming out of Malaysia, I’m not sure. But that, for example, would already satisfy about 50% of the US needs, right? So that’s quite...
Sorry, more than that. We need about 40 tons only for about 2,000 tons of high-end magnets. So when we get there, we’ll be in a position to become much more independent. And the question is how united the whole system will be. Because right now there’s a bit of a competition between EU and the United States, whether in Africa or South America and so on. Are these going to be connected value chains, or are these going to be multiple ones? Given, for example, Japan is more advanced. Japan offered prices that were still quite below the last year’s MP Materials deal, right, to their main provider—non-Chinese provider.
Now this will have to be adjusted right now with the new reality. So it’s going to be... it’s going to take a while to find the proper ground. I don’t think the Rotterdam prices are very reliable. It’s a tiny volume, but it gives you an idea that we should have a significant premium over the Chinese heavier earths. And if China doesn’t export them, of course, their prices are not relevant.
Henry Sanderson (32:47)
Yeah, that’s one of the key issues, right? China has pricing power and all the rare earth prices are in China—SMM, Asian Metal. You made a good point that outside China, we’re seeing these price premiums. But your point is that we don’t know the liquidity in terms of how much is actually being traded outside China, and presumably it’s not very much. How do we actually get liquid ex-China rare earth prices, do you think?
Tomasz Nadrowski (33:16)
Yeah, we need—we need an exchange. We need like a futures exchange. CME apparently has been working on that with some other attempts, I think, in Geneva and elsewhere that failed. So you need a large number of hedgers and a significant number of investors and speculators to do this. And only then will banks be willing to back the projects, right? This is currently the main hurdle: that new projects coming on, with even with successful, you know, drilling data, visibility of production—they cannot find proper commercial banking support. So for that you need, you’re right, you need liquidity, so you need volume. And without either an exchange or government policies—probably the best solution is the combination of the two—we’re going to find it very difficult to take it off the ground.
Henry Sanderson (34:03)
And that’s one of the key points that came across, I think, very strongly from reading your book, which was the cost of capital—the financing advantage that China has. And really in the book, you sort of chronicle the “death of financing” into mining. In the West, you know, the way that Canada and all these markets or London where I am used to have thriving sort of junior mining financing, which has all declined quite a bit, and private equity investors aren’t interested because the return is too long. Can you talk a bit about how the cost-of-capital part is such an advantage for China and then how we can overcome that now—because obviously you’re seeing a lot of US government grants, US EXIM Bank, DFC, others putting money in. Yeah, I wonder if you could talk about those two things.
Tomasz Nadrowski (34:51)
So I’ve gone already public a couple of times saying that, okay, DFC and EXIM and all of this—it’s fine. It’s okay. You need to kickstart something and maybe some projects are indeed strategic rather than just well connected to Mar-a-Lago. Who knows? I’m not there. However, the real issue here is opening the floodgates for private capital. And for that currently, our tax system here—and here we’re talking about $72 trillion worth of equity capital—which could easily bankroll the entire critical mineral system upstream to midstream, is not incentivized to do this, even though we’re talking about national security. And we’re talking often about allied countries such as Canada, UK, and Australia, each of which are part of the Defense Production Act Title III. Therefore, products generated by these countries are considered domestic sources for our economic and national security. So why aren’t American investors incentivized to invest in those? Why does this matter?
It matters because on the mining side, there’s a long gestation period that’s pre-cash and therefore you’re basically dependent on equity, and cost of equity by definition is higher than cost of debt. Now, if there was no strategic rivalry or conflict with another party next door that comes, say, to Africa and comes to Africa with completely different cost of capital because return—the required return—is much lower... and required return is much lower because the risk profile is completely different. The risk profile is different because the jurisdictional risk is roughly almost removed through a number of government-to-government relations, such as FOCAC (so, the Forum for Africa-China Cooperation) in Africa, or China-plus-CELAC in Latin America, and China-plus-ASEAN, and so on. So that’s one area.
The second area is they don’t travel then alone, as our Canadian, Australian, or UK-based juniors that you mentioned; they travel there as SPVs with already guaranteed offtake. Now, as you know, for any of the critical mineral companies, there are several steps—unlike, say, in gold—to actually standardize the product for a pilot plant and demo plant and so on. For each of these, you need external funding, usually very dilutive because of the long times and long duration, especially in these high interest rates. The third thing is that in addition to the jurisdictional risk and the offtake risk, the Chinese players also don’t have to deal with the commodity risk. Why? Because the offtake structure—and with financing risk—because they’re already backed by state-owned enterprises if there are strategic investors outside of China for the sake of the Chinese system. This material is not going to be sold to LME or CME somewhere else; it’s going to be a pipeline that just takes it straight back to smelters and refiners in China, or in the case of nickel, in Indonesia, where most of the production is also Chinese-controlled.
So these are the reasons why the cost of capital, as currently offered by those relatively illiquid markets (compared to the United States) in Toronto and Sydney, is just exorbitant. I understand that, you know, for the last couple of months, brokers in Perth, you know, were dancing on the table every Friday night and getting drunk because we have a rally. But between those rallies, we have four or five years of desert. And that just can kill a lot of projects that otherwise would be viable. So we have to do something about it and we have to incentivize capital to really move back to the sector, which as you rightly pointed out has been orphaned for, you know, since the super cycle. So I count since 2011.
Henry Sanderson (38:33)
Well, Thomas, thanks so much for joining me, and I highly recommend your book. I really enjoyed it—Mineral War. It’s brilliant on China’s strategic intentions and the way China has dominated the critical mineral markets and how concerning this is. So thanks so much for your time.
Tomasz Nadrowski (38:51)
Thank you.
