‘Boring’ bauxite develops a shine as supply and demand drift apart

Bauxite, the principal aluminium ore, doesn’t get much airplay in this market, mostly because much of the production of the stuff is hidden away in the integrated aluminium operations of Alcoa (NYSE: AA), Rio Tinto (ASX: RIO) and South32 (ASX: S32).

But there is also a dynamic seaborne market for bauxite, dynamic because the world’s biggest aluminium producer China is increasingly reliant on imports to feed the fleet of aluminium smelters it has built in recent decades.

While the West is doing its darndest to move away from cheap energy in the form of coal to generate the huge amounts of electricity required in the smelting process, China has embraced it with gusto.

Think of it as a way to convert dirty coal into US dollars by producing molten electricity in the form of aluminium. Quite smart really, and a strategy once pursued in the eastern states of
Australian, starting off in the 1960s.

The Chinese aluminium industry doesn’t face the same green backlash that is pressing the Australian industry. But it does have a bauxite problem. Its domestic supplies haven’t been able to keep up with the growth in metal production.

From importing small amounts at the turn of the century, China’s bauxite imports now account for more than 55% of its needs. It mostly comes from Guinea in West Africa and from Australia.

Tightening things even further is aluminium’s key role in the world’s decarbonisation and electrification efforts, leading to strong annual compound growth in demand for aluminium, and by extension bauxite/alumina. Forecasts out there project that aluminium demand will grow by 40% by 2030.

That won’t happen without the underlying growth of bauxite and alumina (4-5t of bauxite is required for the 2t of alumina needed for 1t of aluminium). As it is, unlike copper to which aluminium is a major substitution threat in electrification, the aluminium price has not been doing much.

It’s currently $US2,290/t on the LME which is below the June half average of $US2,358/t. But things have been stirring in bauxite and alumina pricing in response to the challenges China faces in keeping it alumina refineries and aluminium smelters full.

METRO MINING:

Outside of big integrated bauxite producers, there is precious little exposure to the bulk commodity on the ASX.

In fact, there is only one independent bauxite producer – Metro Mining (ASX: MMI), trading on Thursday at 4.7c for a market cap of $280 million.

Because of the goings on in the seaborne bauxite market outlined above, and because of its locked in growth to 7mtpa of bauxite from its Bauxite Hills operation north of Weipa on Cape York Peninsula, the cash-generating Metro is one of the best performed mining stocks on the ASX this year.

Its share price gain since the start of the year is a hefty 124%. Again, the performance is based on a commodity that gets little airplay on the ASX. It is an opaque market but thankfully, Metro is a prime source of what is going on.

This is what it had to say in its June quarterly report released to the ASX on July 26:

“The Metro expansion is perfectly timed as the traded bauxite market continues to grow strongly with Chinese imports up 7.4% year on year. Metro (CIF) prices are up 19% YOY and 13% over Q4.

“FOB prices are also up 13% on Q4 2023 and a further 8% under negotiation for Q3 2024.”

It noted that China’s bauxite imports were a record 142 million tonnes in CY2023, and 13% above CY 2022. “Chinese domestic bauxite supply remains very tight, and prices are up strongly,” Metro said.

“This is having a positive effect on the bauxite market pricing. The most recent spot market pricing (CM Group) shows continued firming price for Guinea bauxite at $US75 /DMT, up 34% since January 2022, and prices for Australian high-temperature bauxite at US$59.5 /DMT, up 48% over the same period, with the strongest rise in the last 6 months.”

ARROW MINERALS (AMD):

Talking about Guinea – the world’s biggest bauxite exporter ahead of Australia – the ever-bustling David Flanagan has just secured an agreement for Arrow Minerals (ASX: AMD) to acquire a large bauxite project in the West African nation.

It’s called the Niagara project and Flanagan was able to say that it was an advanced asset with a significant exploration history, so much so it has a historic foreign resource estimate.

Because the nuts and bolts of the foreign estimate are not currently available, Flanagan had to stop there under ASX rules for reporting such things.

While not able to be reported by Arrow on the ASX platform, there is no such issue for others to go searching on the internet.

A cursory search pops out a nice bit of work by a Russian fella in 2010 on Guinea’s broader resources riches (it is home to as much as 30% of the world’s bauxite resources, at the best grade/low silica too) arrived at an estimate of 290Mt grading 46% aluminium oxide.

It also seems that Brazil’s Vale actually drilled some wide-spaced holes into the project around 2007.

The grade is up there with what is mined here on the York Peninsula and well ahead of the 32% stuff mined in the Jarrah forest of WA where the EPA has been causing anguish for Alcoa and South32 on their access to new mining positions.

Assuming the historic resource estimate for Niagara is not widely inaccurate, then Arrow with its $32 million market cap at 0.3c a share in Thursday’s market gets interesting.

As it is, Arrow already has a presence in Guinea with its North Simandou iron ore project along strike from the $US26 billion Simandou iron ore project being built by Rio Tinto and Chinese interests.

The beauty for Arrow is that if it confirms production potential at North Simandou, the multi-user Simandou rail to the port would also give it a route to exports. And as it is, the same rail line will pass 100km to the south of Niagara.

Successful bauxite operations geared to export markets are no different to their bulk commodity iron ore cousins – it’s all about access to infrastructure.

Flanagan knows that more than most having created Atlas Iron (acquired by Gina Rinehart in 2018) in the Pilbara where the incumbent producers were less than friendly when it came to accessing their rail and port infrastructure, leaving Flanagan to arrive at his own solution.

Having government decreed multi-user access in Guinea means getting either bauxite or iron ore, or both, on to the seaborne market will be a lot easier in Guinea than it was for Flanagan with iron ore in the Pilbara.

Arrow’s foothold on Niagara is by way of a $400,000 option (cash and shares), and $2 million in cash or shares on its exercise. If that Russian fella was even half right, Arrow will be exercising the option for sure. Bringing in a partner for what could be a big project also seems likely.

GATEWAY:

Nice work by ex-investment banker Alex Rovira in pulling off the sensible gold rationalisation of the Sandstone district in WA.

That the vehicle for the long called for rationalisation, the Rovira-led Brightstar (ASX: BTR), is actually an outsider to Sandstone makes the rationalisation/consolidation achievement all that more remarkable.

In short, Brightstar is to takeover over Alto Metals (ASX: AME) via an agreed scrip offer and is to acquire Gateway Mining’s (ASX: GML) Montague East project for $14 million cash, scrip, and contingent payments.

As a result, Sandstone becomes a third hub in the goldfields for Brightstar, the other two being the Menzies and Laverton hubs Rovira has previously built up with asset acquisitions and a private company takeover.

Brightstar will emerge with 3 million oz across the hubs and cash of $31m after a $24 million nil-discount placement. A re-rating of in Brightstar post the Sandstone consolidation will be the company’s reward.

For Gateway, the future changes from it being a cash constrained explorer with a gold deposit shy of standalone development status, to a cashed up junior with ongoing gold exploration ground at Montague West, as well as an emerging and intriguing magmatic copper-nickel-PGE prospect back at Montague East.

The $14 million value of the sale to Brightstar (cash, shares and contingent payments) is more than Gateway’s $9 million market cap at 2.3c a share in Thursday’s market.