July 3rd, 2023 | 08:15 CEST
Norway plans rare earths coup - but at what cost? Rheinmetall, Mercedes-Benz, Defense Metals
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"[...] China's dominance is one of the reasons why we are so heavily involved in the tungsten market. Here, around 85% of production is in Chinese hands. [...]" Dr. Thomas Gutschlag, CEO, Deutsche Rohstoff AG
Mercedes-Benz: More mass instead of class?
The Wuling Hongguang Mini EV weighs less than 700 kg and is a big hit in China. The co-production of SAIC and General Motors strikes a chord with city dwellers and would also be a suitable second car in Germany to transport children and groceries on short trips in a climate-neutral manner. But in Germany, SUVs dominate. Hardly anyone buys classic small cars anymore. The problem with this trend is that larger cars require more power to move them over long distances. Larger cars require more critical metals and exacerbate the supply deficit of rare earths and the like. Manufacturers like Mercedes-Benz have long since eliminated small vehicles from their portfolios. A luxury strategy should ensure that margins remain stable and the brand with the star continues to shine. A small car would only get in the way.
The war in Ukraine also creates increased demand for critical elements such as rare earths. The Federal Academy for Security Policy already highlighted in 2019 the strategic importance of rare earths for the economic and military security of the West. This is mainly about China's market dominance in rare earths, which to a large extent still exists today, and the role of rare earths in military equipment. The elements are found not only in expensive SUVs but also tanks, boats and aircraft. In an F-35 jet, there is still 400 kg, and in a Virginia-class submarine, about 10 times as much. For the rare earth market, the war in Ukraine will likely ensure increased demand for a long time. After all, the commitments to rearmament and deterrence are only being implemented gradually.
Mining planned in the sea: Self-sufficiency from China at any cost?
Given the military importance of rare earths, but also because of the latent economic conflict between East and West, deposits in Western industrialized countries should be even more in demand in the future than they already are. Mining for rare earths is now set to be permitted off Norway's coast. The area in question is half the size of France**. Despite protests from environmentalists, the government in Oslo is sticking to its plans, citing the importance of rare earths for the energy transition as the main reason. However, independence from China also speaks in favor of the deep-sea project - even if the costs for underwater mining are likely to be enormous.
Defense Metals: Rare earths from Canada with convincing key data
A rare earths project in a Western industrialized country is also pushing Defense Metals. The Wicheeda property is 4.24 hectares in size and is located near the mining town of Prince George in the Canadian District of British Columbia. The nearest major port, Port of Prince Rupert, is 500 km away and is connected via road and rail. An initial economic assessment of the Wicheeda rare earths project is already available. This assumes a pre-tax net asset value of CAD 761 million** at a discount rate of 8%. The project could generate annual sales of CAD 381 million and pay back the capital investment after just 5 years. The calculations are subject to change as investment costs and world market prices for rare earths change, but the project should be easier to implement than, for example, the planned mining off the coast of Norway.
The Wicheeda project, with its location in North America, is also likely to benefit from the USA's efforts to become increasingly independent of imports from China. As a neighbor and raw material country, Canada is an obvious import partner, for example, to secure the supply of critical elements for the mobility, climate and defense transition. Defense Metals shares were trading at EUR 0.27 at the beginning of the year but then fell. At current prices of around EUR 0.17, the Company is valued at only about CAD 55 million. Given the growing demand for rare earths and the desire of many Western industrialized countries to become more self-sufficient in critical elements, the Company could be of interest to long-term investors.
While stocks like Rheinmetall and even Mercedes-Benz have done well in recent months, stocks like Defense Metals may now have catch-up potential. Despite investors showing risk aversion due to high interest rates, the risk appetite could quickly return if there is a prospect of falling interest rates. Therefore, it may be worth keeping the Defense Metals share in mind.
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