Rare Earths



Earlier in the week, we reviewed some recent developments with respect to foreign direct investment (FDI), arguing that the regime was pursuing FDI as a substitute rather than complement to reform. This particular story deserves its own post, as the magnitudes being thrown around are astronomical and precisely for that reason (as my colleague Marc Noland has argued) are to be taken with a grain of salt.

In early December, Mining.com—a reputable industry site—reported on the discovery of the largest deposits of rare earths in the world in North Korea. Privately-held SRE Minerals signed a joint venture agreement with the Korea Natural Resources Trading Corporation for rights to develop the deposit at Jongju for the next 25 years with a further renewal period of 25 years. SRE offers up independent assessments of the site, which will be developed by a joint venture company known as Pacific Century Rare Earth Minerals Limited. The group has also been granted permission for a processing plant on site at Jongju, situated approximately 150 km north-northwest of Pyongyang.

The assessment by Louis Schurmann, a geologist with substantial project experience, indicates the potential for 216.2 million metric tons of rare-earth-oxides, including both light and the more valuable heavy rare-earth-elements. If the assessments are accurate, the deposit would nearly double the world’s entire known reserves; by chance, the Congressional Research Service has a recent overview of the industry (.pdf here). At current prices, this could run literally into the trillions of dollars; the project values the by-products of the project alone at over $750 million. Further exploration is planned for this year, with two core drilling projects that would employ about 800 people at the site.

The combination of rising demand, lack of substitutes and the Chinese near-monopoly on rare earths make the project sound attractive. But now for the appropriate cautionary notes, since we have heard rare earth mania before. SRE Minerals is a private equity company based in the Caribbean; it is not a mining company. The success of the project will ultimately rest on raising capital and borrowing in international capital markets to finance the infrastructure demands of such a project, the mining itself, and the processing (technology for which has been closely held to date, and is by no means straightforward). The Century Rare Earth Minerals Limited site has extensive and quite straightforward material on its website about the capital markets’ and the mining industry. This is an investor pitch.

All this raises the problem of a classic large-fixed capital play in a very, very risky country. First, the ability of any given North Korean counterparty to make 25 or 50 year commitments is questionable to say the least; Yaohui Wang and Justin Hastings have an excellent overview at the East Asia Forum on the hazards of doing business in North Korea. A key take-away is that you better have your connections lined up, as the Jang execution will no doubt show.

Second, the group is clearly aware of the sanctions issue, and has a section on its website on the question, including reference to a "legal opinion" that the group is not in violation of current UN sanctions. The website notes that 12 other countries under sanction currently generate revenue through mining projects. We agree with that judgment, but it could also change. Individual companies—including those with “mining” in their title—have been designated (ie., subjected to company-specific sanctions) when it was believed that their income effectively contributed to North Korea’s WMD program, as arguably any income in such a state-dominated economy effectively does.

Mining is a reasonable thing for North Korea to do, and it will not happen without foreign investment. It is still not clear that North Korea completely understands the implications of this fact, as the highly public conflict with Xiyang showed.

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