In June 2006, the worlds two
top players in the steel industry merged to form ArcelorMittal
- the largest vertically integrated company the world had ever
seen. The new mega-company had operations that stretched
upstream, right the way to iron ore exploration and coal mining
as well as downstream into steel mills.ArcelorMittal has
retained its top spot and has continued its profitability drive
right up to the present day. It is now not only the largest
steel producer in the world, but also has 29 mining operations,
excluding two greenfield projects and other early-stage
ArcelorMittal embodies not only the
virtues of vertical integration, but also provides the template
for how such a strategy is typically carried out - a company
grows as far as it can in its own individual field and then, if
the market and finances allow, purchases or merges with a
larger company or one at a different level of the supply
However, the current global
economic situation has created a business environment unlike
Supply chains are seeing margins
depressed at every level, which affects the mining sector in
particular because of the segregated stages in the production
process. These leave profit margins more distributed, and
therefore, lower. stages range from mining, initial separation
processing, chemical processing and finally either sale to an
end user, such as automotive manufacturers or sale to an
Traditionally, mining companies
took a path that focused on one specific area until production
begins and they grow large enough to look into vertical
integration, but now many junior miners are changing their
attitudes and are instead looking to integrate vertically even
before they begin production.
Focusing on downstream processing
requires a very different skill set from traditional mining and
processing. Initial mining requires a strong focus on
explorational geology, then mine building and construction, and
finally managing the logistical and day-to-day operations of
the mine itself.
Once ore has been mined, it must
undergo initial physical processing. This requires a wide
variety of different skills and technologies from when the
material is crushed and ground until the mineral itself is
liberated from the waste.
The initial processing focuses
predominantly on the physical side of the procedure, whereas
further downstream processing can involve significant chemical
applications, requiring an entirely different skill set.
This is particularly true in the
case of rare earths.
The initial processing [to
reach a mixed rare earths concentrate] is not unlike other
mineral processing, Paul McGuinness, Frontier Rare Earths
CFO, told IM.
The separation of [the
individual rare earths elements] is, however, a very delicate
solvent-extraction process, which aims to get very high
purities, he added.
This is also true outside of the
rare earths arena. Argex Titanium, a junior company in Canada,
is looking to create titanium dioxide pigment straight from its
Argex is becoming more a
speciality chemical company with its own raw material reserves,
rather than a mining company, Roy Bonnell, CEO, told
This trend of identifying what
would have been a mining outfit as a chemical company, is being
adopted by junior miners across a number of industries, in
particular in lithium, graphite, rare earths, titanium dioxide
and silica sand for the hydraulic fracturing industry.
Industries where this approach is
not so common is when the range of end products created is too
A good example of this would be the
aluminous clay kaolin. Kaolin is used in both ceramics and
paper and within these end uses there are a number of very
different grades, produced at quite high volumes. As such, the
technology required, and therefore the potential capital
expenditure, is much greater than where a product is following
a more linear processing flowchart such as those of lithium,
rare earths and titanium dioxide.
Within this latter sector, even
very large companies, such as Imerys and KaMin, have not looked
to expand further downstream to perhaps produce pulp or
More stringent end-users
Despite the possibility to extend
downstream, junior miners require some kind of motivation to
encourage this drive.
First, it was
necessity, Jim McKenzie, CEO of rare earths junior Ucore,
End users are very important,
they are dictating what they want - specifically how refined
they want the product to be, he added.
End users, such as technology
leader Samsung or paintmaker AkzoNobel, demand products that
are tailored to their exact requirements and do not want to
perform further processing of their own supply.
This was previously not always the
case, but in a global economic situation where margins are
tight in any industry, larger, more downstream companies are
unwilling to spend money bringing materials up to scratch.
At one point there was
speculation that [end users] would reach upstream and buy mines
and get into the business of mining, but we found that it has
actually gone the opposite route and the miner has either been
forced to or found it prudent to reach downstream,
This product is so valuable
that end users are demanding for us to move downstream and
deliver a fully fleshed-out, fully matured product, he
Another key factor pushing junior
miners downstream is that a definite niche exists in the
chemical processing sector.
We do not believe it is a
matter of choice, McGuinness told
This is particularly true of
lithium, where the ability to produce battery-grade lithium
(lithium carbonate equivalent) is a rarefied technology.
Canada Lithium serves as a good
example having chosen to build both its mine site and its
processing line simultaneously. There are a number of juniors
looking to bring processing facilities online at the same time
as their mining operations.
This is also true of titanium
dioxide pigment. This pigment processes has very specific
requirements as it is mainly produced from just two processes -
chloride processing and sulphate processing - and comes from
just three main feedstock minerals.
The chloride process is heavily
patented, which restricts it to just five major companies,
while the sulphate method has a lot of associated environmental
issues and does not produce the same high level of pigment
produced from the chloride method. As such, there is a distinct
niche in the market for new processing technology, which, if
implemented successfully, could provide a junior miner with
massive demand from pigment end users.
This situation has driven at least
two junior miners - Argex Titanium and Cassaforte - to focus on
this option and become chemical processors with mineral
Argex is also finding it beneficial
to open the chemical processing side of its production facility
before its reserves are ready to feed it. In a further example
of vertical integration before production, the company intends
to use third-party sources until its own reserves come online.
The finished product will be sold straight to paint companies,
with a large proportion of it likely to go one of its
investors, PPG Industries, one of the worlds largest
While this phenomenon is seen in a
number of other industries, where the necessity of this lack of
technology is most evident is in the rare earths
There is no separation
capacity in the western world that can take and process the
[mixed rare earths] concentrate, said McGuinness.
There are several juniors out
there proposing to go to a concentrate stage only, [but] we
believe this is a fundamentally flawed business model, he
Western rare earths consumers are
also seeking a stable rare earths supply chain, so any supply
chain that uses Chinese processing is of limited appeal.
The most important reason why any
junior miner would choose to integrate vertically before
entering production is, of course, money.
Bonnell describes the evolution of
Argex as a vertically integrated entity as inevitable because
of the increased margin from selling a finished product
as opposed to a raw material.
This, too, is true in the rare
Every time you pass a
processing threshold (...), whether it is physical
beneficiation or as far along as separation, you enjoy a
revenue uplift, Mark McDonald, Ucore vice president of
business development, told IM.
It is just sound
business, McKenzie told IM. If you
have a product that is increasingly valuable, you use the
ability to go downstream because of the good economics
The additional margins can be seen
simply from the difference in cost per tonne of product
produced and the prices moving down the value chain.
Titanium dioxide is ideally made
from rutile feedstock when using the chloride method. Recent
data from Iluka Resources Ltd, one of the largest rutile
producers in the world, showed that the average cost per tonne
for a suite of minerals that included rutile was A$719/tonne
(*$759.46/tonne) was partly due to deliberate mining of a
lower-grade ore body, so a more realistic cost is its 2011
level, before it made that decision, which was A$537/tonne.
Rutile prices have reached as high as $2,000/tonne and now have
fallen sharply, but still remain consistently above
$1,000/tonne regardless of market situation.
Titanium dioxide pigment, from
which rutile is made, sold in 2012 for between $3,000 and
$3,500/tonne. If the margin is sufficient for profit when
paying $2,000/tonne for rutile, than it will be far more
profitable when mining it for internal use at a cost of
For the example of a less expensive
feedstock, such as synthetic rutile or titanium slag, prices
can range from $800/tonne up to $1,500/tonne, while the pigment
will retain the price of $3,500/tonne although the pigment
costs of production will increase. In this case again, a
considerable margin will be captured.
These types of margins can be found
in a large number of mining industries and sufficiently offset
the initial capital costs to encourage the start up of a
variety of juniors.
Focus Graphite, a Canadian graphite
developer, focuses on both the upstream mining and the
downstream processing. This was key to securing a
cost-leading competitive advantage, Gary Economo, CEO,
Vertically integrating further
downstream has been an issue that miners have considered for
many years but the depressed margins caused by more limited
supply of raw materials and the global economic crisis has
brought the issue to the fore more than any other factor.
Its always been an
issue, but when you have a wealth of supply, security of supply
is not an issue (É) things have changed since the supply
spigot has been cut off, which is creating a lot more
impetus, McKenzie told IM.
Its always been a
concern, but it has never been such a pointed concern, he
New attitude not for
This new attitude is not for all
miners, and many industries remain split between the more
traditional attitude of mine it and sell it and the
newer attitude of creating a fully fleshed out developed
product for the end user. with graphite being a prime
Some graphite developers
(...) are laying the groundwork now to secure access to
advanced material markets, while some developers are generally
satisfied in planning to produce for those traditional
industrial graphite markets such as refractories, Economo
Focus Graphite is developing into
the battery market and is looking to control both upstream and
downstream, but stresses that traditional markets are an
equally valid demand source for graphite. Traditional markets
like refractories, metal casting, and lubricants are still
important demand sources for graphite and many producers could
still make strong profits mining and selling straight to these
markets rather than focusing on the extra downstream processing
required for battery-grade graphite.
There is a role and plenty of
space for both, said Economo.
There are other reasons to avoid
vertical integration, one being if a junior miner is hoping to
be acquired. Large downstream companies, and even large mining
companies, are always in the market for a good-quality deposit
to slot neatly into their supply chain and many choose well
developed junior miners ready to enter production.
This often proves to be a
considerably cheaper option for larger companies then
developing a downstream site, although this is never
Vertical integration before
production can also be a challenge simply because the company
struggles with the makeup of a deposit. As every deposit has a
unique mineral makeup, perfecting the processing technology to
produce a fully developed product can be challenging. This is
especially true in rare earths, which can be hosted in a
variety of minerals.
While processing xenotime or
monzonite hosted rare earths minerals is well established (if
by no means easy), liberating rare earths minerals from an
eudialyte deposit or a peralkaline deposit is more difficult
and can hinder any potential vertical integration at a junior
level as the processing technology either doesnt exist or
is difficult to obtain.
The cost of the extra processing
technology can also be prohibitive, especially given patents
(as in titanium dioxide) or the technologys focus on a
particular location, such as in lithium or rare earths.
Overall, many juniors, particularly
in the higher revenue/higher margin businesses, are beginning
to focus on vertical integration before production even begins.
This attitude is a new occurrence and is driven by scarce
supply of minerals in a tight economic climate, but also by
these juniors seeking to maximise their value for their
This approach, of course, does not
apply to everyone, and plenty of room still exists for the more
However McKenzie phrased it best:
Wherever possible, this is a phenomenal strategy (...) to
go downstream and capture more of the value. If the development
of rare earths is s football field, its the last 10 yards
where you make the most money.