Rare-Earth Deals Taking Place<br>Despite China's Dominance

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China may dominate 95 percent of the rare metals sector, but a string of recent deals suggest that there may be other locales for dealmakers to tap into those resources.

“There are a lot of other areas that aren’t China specific,” says James Forbes, a partner at PricewaterhouseCoopers, in an interview. North America and South Africa, for example, are regions that are ripe for M&A when it comes to rare-earth minerals, which are used in various high-tech manufacturing.

Recall three recent deals that happened outside of China. On March 9, Molycorp Inc. in Greenwood Village, Colo., spent $1.3 billion for Neo Material Technologies Inc., a Toronto-based developer of rare-earth materials.

Days earlier, on March 6, Compass Diversified Holdings (Codi) completed the acquisition of Arnold Magnetic Technologies Holding Corp., buying a 96.7 percent stake of the Rochester, New York-based engineered magnetic solutions manufacturer for $130.5 million. Codi executives told Mergers & Acquisitions that the company had $200 million in cash set aside for deals aimed at the rare earth space.

Another player in the space is Troy, Mich.-based Great Western Minerals Group Ltd., which last week received an environmental permit to tap rare earths in Birkenhead, U.K., in addition to its Steenkamskraal mine in South Africa.

Then there’s Canadian venture capital firm Pinetree Capital, which on Feb. 22, acquired 500,000 common shares of Paget Minerals Corp. for undisclosed terms. Pinetree’s investments are primarily in the rare earth resources sector. Paget is a publicly traded resource company focused on mineral exploration in British Columbia.

“I think middle market players see the value there,” Forbes says. That’s despite the fact that the space has U.S. government officials worried. Currently, the World Trade Organization is working with the European Union and Japan to lessen restrictions when it comes to China’s exporting practices.

Rare-earth minerals include 17 chemical elements in the periodic table and are basically metals used in a wide array of electronic devices such as cellphones, computers and military equipment. Clean energy is also one of the main avenues where rare earth elements are needed to create new technology.

With China commanding both the mining of these elements as well as the processing capabilities, “concerns have been raised over how these and other raw materials, are sourced, exported and controlled,” according to a PwC report released Tuesday, March 13.

China’s “size and stature in the metals market” will help it remain one of the key global drivers in the metals deals sector, the report continues. But even though the other regions are smaller by comparison, “there are going to be good financial returns for those that buy into it,” Forbes adds. “In the past, it’s a sector that [dealmakers] haven’t really looked at,” as opposed to other natural resources.

PwC predicts that, overall, there will be an 11 percent jump in metals M&A along with a 7.6 percent in deal value for 2012. In addition, consolidation trends in North America—where metals deals rose to 118 deals in 2011 at a value of $12.2 billion compared to 90 deals in 2010, valued at $3.1 billion—are expected to continue.

“We’ll see a year from now how right we are,” he says.

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