Bauxite is not your sexy Cobalt or Lithium, but it has been making great revenue in the last five years. Could Bauxite be the next commodity rush?
The demand for bauxite took a run north in 2012 when the Indonesian government stopped the export of ore from their shores. Subsequently, this created a shortage of supply or rather a perceived future shortage, and that seemed to have established a string of investments into the industry.
The UAE has recently completed a massive refinery project (Al Taweelah Alumina Refinery) commissioned by Hatch Engineering. The refinery is processing ores from Africa, and it is so efficient that it is extracting every last gram of aluminium from the ore. If that is not an argument for the future of bauxite, I am not sure where else you could go to find signs of the next commodity rush.
I decided to look at this industry lately because my contacts in China are now asking me to source bauxite for them. For me, this has traditionally been my heads up that the market is buoyant.
As commodity trading is not my core business, I have taken this request as a sign that a surge in demand for the commodity is near. In 2009, we had people chasing us to get the iron ore when the market dipped to USD 40, and everyone was professing the death of the iron ore market. As we can all remember, the market shot back to three figures again six months later.
What is Bauxite?
In 1821 the French geologist Pierre Berthier discovered bauxite near the village of Les Baux in Provence, southern France (Wikipedia). I have read from another source that this French geologist is of another name :-). So this piece of trivia may not be entirely correct.
Bauxite is a rock composed mainly of aluminium-bearing minerals. It is formed when laterite soils are severely leached of silica and other soluble materials in a wet tropical or subtropical climate.
Bauxite is a mixture of hydrous aluminium oxides, aluminium hydroxides, clay minerals and insoluble materials such as quartz, hematite, magnetite, siderite and goethite. The aluminium minerals include gibbsite (ALOH)3, boehmite (AlO(OH), and diaspore (AIO(OH).
Most bauxite, including Australian bauxites, are lateritic, formed by intense weathering of various rock formations. The alumina in lateritic bauxite is mainly in the form of gibbsite, an aluminium oxide trihydrate. Other bauxites contain higher levels of boehmite are called monohydrates and involve significantly higher levels of energy to process.
How is Bauxite mined?
(Source: The Aluminium Association)
Bauxite is usually found near the surface of terrain and can be strip-mined economically. During the strip-mining process, bauxite is broken up and taken out of the mine to an alumina refinery. Once mining is complete, the topsoil is replaced, and the area undergoes a restoration process. When the ore is mined in forested regions, an average of 80% of the land is returned to its native ecosystem. The bauxite industry takes a leadership role in environmental conservation efforts. When the ground is cleared before mining, the topsoil is stored so it can be replaced during rehabilitation.
Bauxite Resources in Australia.
(Source: Geoscience Australia)
Australia is the world’s largest producer of bauxite, representing 30% of global production in 2012. The substantial bauxite resources at Weipa with more than 3000 million tonnes (Mt) in Queensland (Qld) and Gove (>200 Mt) in the Northern Territory (NT) have average grades between 49 and 53% Al2O3 and are amongst the world’s highest grade deposits.
Weipa was discovered in the 1950s and dispelled the myth that high-grade bauxite did not occur in Australia. Primarily the use of two strategies unearthed what is now Australia’s other bauxite province. The first was the realisation that bauxite gave a radioactive response. The second, discovered during the aerial mapping of the extent of Weipa, was the realisation that a bauxite-rich area forms a very distinctive surface.
According to Rio Tinto’s website, the discovery of the Weipa deposit was due to Maurice (later Sir Maurice) Mawby of Consolidated Zinc Proprietary Limited (CZP, the company that later merged with Rio Tinto to become Conzinc Riotinto of Australia (CRA)). He told his field geologists to keep their eyes open for bauxite regardless of whatever other minerals they were looking for at that time.
Mawby repeated this advice to geologist Harry Evans in mid-1955, as he was preparing to take a trip to Cape York in Far North Queensland, showing him a bauxite rock. Rarely has a piece of advice been so valuable.
Weipa is 100 per cent owned by Rio Tinto Alcan and produced 26.34 million tonnes of bauxite in 2013 (60 per cent of Rio Tinto’s total bauxite production).2013 also saw the fiftieth anniversary of the first commercial shipment of bauxite as well as the shipment of the 500 millionth tonne from Weipa.
Other significant deposits (each >500 Mt) are located in Western Australia (WA) in the Darling Range, the Mitchell Plateau and at Cape Bougainville, of which the latter two have not been developed.
The bauxite mines in the Darling Range have the world’s lowest grade bauxite mined on a commercial scale (around 27-30% Al2O3). Despite the low grade, the mines accounted for 23% of global alumina production as they also have low reactive silica, making the bauxite relatively easy to refine. The Darling Range bauxite have been supplying the Alcoa refineries for decades.
The Darling Range bauxite may be lower in grade, but they cost less to process, and this has been its economic advantage over the higher grade equivalents.
The Darling Range bauxite deposits are predominantly at Jarrahdale, Dwellingup, Huntly, Willowdale and Mt Saddleback. The deposits fall within a 50 km wide, north-south trending corridor on the western margin of the continental plateau bounded to the west by the north-south Darling Fault.
Bauxite deposits are distributed over a north-south interval of almost 240 km immediately to the east of Perth in Western Australia. The primary deposits listed are located over the southern half of this interval, from just to the south-east of Perth to the north-east of Bunbury.
Bauxite resources also occur in New South Wales (NSW) and Tasmania (Tas), but these are small (<25 Mt).
Australia indeed is not the only source of bauxite. The largest producer of bauxite as of 2017 is Guinea in West Africa. According to Wikipedia, in 2010, Vietnam announced that their reserves might total 11,000MT, which would make it the largest in the world.
What’s the market like?
Bauxite does not have a spot price and the price quoted from several sources seem to be on a case by case scenario. I knew about 15 years ago that there was a downturn in the aluminium pricing. However, in the last ten years, there has been somewhat a recovery in demand. As I mentioned, in 2012, the Indonesian government created a catalyst to help the price of bauxite take a turn higher, and it appears the market is still sloping upwards.
The growing demand for the use of aluminium as a lightweight metal is increasing and this will support the mining of bauxite. There is also thought that ease and recycling of aluminium will reduce any significant rise in demand over supply. While this is true, the new uses of aluminium will probably offset that in the future. It is a good note to remember that 6.5% of total bauxite produced is consumed in non-metallurgical applications such as in abrasives, refractories, chemicals and others. As you can see in the diagram below, that market size is already USD 800+ million.
Companies on the ASX
There are not many bauxite companies listed on the ASX. I am not surprised as bauxite is not something that is in abundance in many places. Traditionally, bauxite is dominant in the Darling Range of Western Australia, and that is dominated by Alcoa Australia and Worsley Alumina (South32). A company called Bauxite Resources Australia tried to get into that area, but they struggled, and I believe they are now seeking silica sands.
The next best place is the Weipa area in far north Queensland and that is also dominated by a big player, Rio Tinto.
It is good to understand that globally, bauxite is primarily a Tier 1 company commodity. How it came like that, I do not know, but that is what it is now. We all know what happens when the big boys play together? What happens when they don’t want you, the small-cap player to join? The answer is, they get their way and that is life.
Bauxite is a bulk commodity game, and that means its capital intensified and you need a buyer to take your stock, and they want the security of supply and abundance of supply. Personally, if you are not having hundreds of millions of tonnes or billions, I think you are going to be on the outer.
The only way to get a look into the market is that your resource is chemically better or you have a mining edge and beats them on mining costs.
So why write about such a boring commodity? A boring but important commodity. There are lots of billions of dollars being spent on this sector. It may be boring but it’s a big money-making sector.
I am intrigued by the bauxite market as it is a commodity that can be mined easily. The mining process merely is removing topsoil (if you are in a jurisdiction like Australia) and then scrapping the ore off the surface. Exploration is simple, and the cost of drilling is minimal, not more than a few metres would be the norm. However, everything that is worthwhile to explore or mine are all taken up by the big companies.
If you take the iron ore industry where the majors also dominate it, the Tier 1 companies, there is room for other players. During the last iron ore boom, small players were able to take decent projects such as BC Iron (project is now part of Fortescue Metals Group), Atlas Mining and the Aquila- Aurizon JV, Mineral Resources and Cliffs (I know they are not small but definitely not Tier 1) These small-cap companies still can get in the game and make a difference. Look at Fortescue Metals Group (ASX: FMG), although they are not a Rio Tinto or a BHP or a VALE, they can muscle into the game and make a difference. There is also Grange Resources Limited (ASX: GPR) who now run the Savage River Mine.
In the Bauxite industry, it is not easy to find a small-cap company that has a significant foothold on a decent bauxite project. It is almost non-existent. In Africa? In Asia? There are some, but anything that has legs, like the ones in Guinea are all Tier 1 players.
It’s because of this that intrigues me. I am thinking that if one of these small-caps did find a decent project, it is probably going to be a very good thing for shareholders. Hence, I began my research on which companies do hold interesting projects that may one day become bauxite elephants.
I have only been able to identify three companies that are pretty decent, but in terms of ranking their projects, I don’t think they would not make the tryouts for the reserve team. However, they seem to be able to make money with what they are holding. I will discuss those companies in the next article as this will be too much for one piece.
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The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not take into consideration, nor have any regard to your specific investment objectives, financial situation, risk profile, tax position and particular, or unique needs and constraints.
Accordingly, no warranty whatsoever is given, and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before committing to purchase or invest in the investment product(s) mentioned herein.
If you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.