Wednesday 28th September 2016

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Conflict-free tantalum

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Maybe only half a dozen companies in the world are able to process tantalum concentrate and refine it into high-grade tantalum products for industrial uses. It can be very difficult to trace their sources, as well as the prices paid to acquire the raw concentrates.

The United Nations has been reporting these problems for at least 10 years. Within the DRC there has been some effort to restrict conflict tantalum and encourage legitimate mines. But so far this amounts to a very small scale of operations. Therefore the onus has been placed on tantalum processors and consumers to certify their sources.

In the Democratic Republic of the Congo, rebel groups control large parts of the country. They have imposed dictatorial rule on local communities and generated small-scale mine production under conditions so harsh that they actually approach slavery.

The American Dodd-Frank legislation that took effect in 2010 requires all public companies listed in the United States to document that they do not participate in the consumption or trade of conflict minerals. This also applies to doing business with offshore suppliers and processors. Not yet known is how these regulations have affected the tantalum market. But one would assume future supply sources will face greater scrutiny.

Given limited supply, industrial consumers have adapted by building stockpiles. This has helped offset the production decline of recent years. Stockpiles are shrinking, however, making shortages more likely to occur.

That suggests price increases, which have already taken place. Further increases are foreseeable. But even with higher prices, there are few immediate prospects for increased mine production. And many current producers have already committed their future production to third-party buyers. Even efforts to expand production could take a year or more. Additionally, those efforts could inhibit output in the short term while building additional future capacity.

The fact that tantalum is irreplaceable in many of its uses suggests that higher prices will do little to curb consumption. For example, tantalum is required for the fabrication of capacitors, a critical component in most electrical circuits and high-tech products. Only capacitor-grade tantalum has the properties that allow these components to hold such a volume of electrical charge. Yet tantalum comprises a fraction of the product’s cost. Demand therefore remains relatively inelastic even in the face of higher prices.

Additionally, new technologies have created further demand. For example, replacing the tungsten filament in light bulbs with a tantalum alloy greatly increases reliability. Tantalum alloys have long been known for advantages of hardness and durability. In component designs where metal fatigue cannot be tolerated, a tantalum alloy is irreplaceable. That applies to a wide range of applications, from gun barrels to jet turbine blades. Even some medical devices are now coated in tantalum for enhanced strength and resistance to corrosion.

The implications are clear. If tantalum demand remains firm or is in fact rising, and if mine production cannot meet market demand, prices will continue to rise. But even a significant price increase is unlikely to put this market in balance, due to the slow process of increasing supply and the lack of substitutes.

The logical long-term remedy is new, advanced-stage projects. There are several undeveloped tantalum deposits with potentially positive economics. As tantalum prices continue to rise, these projects could suddenly find development capital to put them on the fast track.

Many mining projects have stalled lately due to uncertain market conditions and funding difficulties. But the world’s largest electronics manufacturers, for example, have annual sales worth billions. Their products rely on tantalum. Alliances or strategic partnerships with miners could help put new projects into production. That, in turn, could help manufacturers secure legitimate, conflict-free supply even as prices continue to rise.

 

Michael Kachanovsky is a freelance writer specializing in resource companies. Michael graduated with a bachelor of science from the University of Toronto in 1989. He is a founding partner of Smartinvestment.ca and a regular contributor to several leading newsletters and blogs. He provides consulting services for institutional investors to help research and evaluate mining projects. He has visited over 100 mines worldwide.

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