Great Western Minerals Group Ltd. (GWG) is a Canadian-based company which owns 100% in the Rare Earth Extraction Co. Limited, which owns a 74% equity interest in the Steenkampskraal mine located in the Western Cape province of South Africa. In addition to an exploration program at Steenkampskraal, GWG also holds interests in four active Rare Earth exploration and development properties in North America.
As part of the Great Western’s strategy to pursue a vertically-integrated business model, the Company’s wholly-owned subsidiaries of Less Common Metals Limited (LCM) located in Birkenhead UK, and Great Western Technologies Inc (GWTI), located in Troy, Michigan, produce a variety of specialty alloys for use in the battery, magnet and aerospace industries. These “designer” alloys include those containing copper, nickel, cobalt and the rare earth elements.
Great Western currently has three projects in development, one of which (Hoidas Lake) has been advanced to the prefeasibility stage of development. They are currently evaluating spinning off the exploration properties outside of South Africa. GWG’s goal is to put in place a “mine-to-market” strategy and become North America’s first vertically integrated rare earth elements producer. This explains why GWG acquired its wholly owned subsidiary and processing GWTI, in January of 2006, and LCM, in June of 2008.
Mine Supply & Separation
Great Western’s former producing Steenkampskraal mine is under development through refurbishment, as the company builds a rare earth mixed chloride plant and a rare earth solvent extraction separation plant near the mine. The company aims to ensure it can supply its downstream processing and intends to be one of the first to produce significant quantities of the more valuable heavy rare earth oxides, which are important materials for alloys.
The current NI 43-101 report for Steenkampskraal, filed on May 31 2012, indicates the presence of 13,823.64 metric tonnes of TREO, including yttrium, under the indicated resource category, and 14,147.76 metric tonnes under the inferred resource category, each using a one per cent cut-off grade. The deposit is very high grade and will ensure production costs are low. Whilst it is a small deposit, the grade and costs will ensure it is very profitable.
As drilling continues, I believe the resource is likely to increase substantially. The current resource is around 5-6 years mine life but historically has only been mined to a depth of 300 feet. There are also other outcrops and showings within the permitted area that the previous owner has identified. I would expect further drilling to establish a mine life of at least ten years.
Great Western has done its cultural homework and South Africans have a vested interest in its success through the Black Empowerment program. The mine is located far from the areas of strife and even major population centres. The black empowerment trust receives 26% of the profits from the mine and this money goes into a trust for the mine workers. Given the relatively small number of workers at the mine when it is up and running, this will be a substantial sum per person and have a large impact over time.
In January 2012 Great Western signed a joint venture agreement with Ganzhou Qiandong Rare Earth Group Ltd (GQD) of China for the construction of a rare earth separation plant near Steenskampskraal has been completed and signed. The newly created JV has since been finalising the process design and environmental components of the separation plant and move toward construction of the facility.
GWGQD will process the mixed rare earths chlorides under a tolling agreement. The Agreement provides that GWGQD will separate mixed rare earths into products usable by LCM, and third party customers.
Under the terms of the Agreement, GQD receives 25% of the shares of GWGQD for its contribution to design and construction of the facility, and $7.5 Million of GWG shares to be paid over three years contingent on the facility being fully commissioned and operating effectively, and fees and/or dividends for providing long term management support for the operation of the separation facility.
GQD has over twenty years experience of processing Rare Earth oxides in China and has been a significant supplier of metals and oxides to LCM.
At the LCM facility, GWG is now producing test batches of rare earth alloys using its new Ulvac strip cast furnace, optimizing melt conditions, with customers currently evaluating. The second strip cast furnace ordered from the same Chinese supplier is now fabricated, and is scheduled to arrive in the latter part of the first quarter of 2013. It is expected to be fully operational in the second quarter. This will double the current capacity of LCM from approximately 1,100 tonnes per year to just over 2,000 tonnes per year. The company conducted a tour of the LCM facilities for analysts last month. LCM should work its way up to a total of five or six Ulvac furnaces over the next two to three years.
For the three months that ended September 30, revenues from processing alloys rose to $4.79 million, from $4.21 million a year earlier. However, losses widened to $3.6 million from $2.3 million as the company transitions to a producer of rare earth metals, and as it expands its processing facilities.
Snowden Mining in presently carrying out a Preliminary Economic Assessment (PEA) and this was due to be released this month. The aim of the PEA report is to further develop operational and financial projections based on an independent analysis of the mining of rare earth-bearing monazite, the extraction to mixed chloride, separation of oxides and metal and alloy production. The company instructed Snowden Mining to extend the original scope of the PEA work to include a new resource estimate for the area of mineralization found at Steenkampskraal in recent months.
The PEA is crucial because not only will it include capex requirements and operating expenditures for Steenkampskraal, but also timelines for the next steps in the development and will, for the first, time, enable the company to discuss financial projections for the fully integrated model. Originally, production from the mine had been expected towards the end of 2013 so we await an update.
Earlier this year GWG raised $90m via a convertible bond issue. The Bonds bear interest at the rate of 8.0% per annum, are payable semi-annually, mature on April 6, 2017, and are convertible into common shares of the Company at a conversion rate of C$0.66 per share. The Bonds are secured obligations of the Company that have a first charge against the Company’s shareholdings in its various operating subsidiaries.
The net proceeds will fund the NI 43-101 for Steenkampskraal, develop the mine and construct the monatize processing and separation facilities. In addition some funds will be used for equipment purchases, expansion of Less Common Metals Limited and for general working capital purposes. The PEA will provide more clarity on whether further funds are required.
Background to rare earths
Rare earth elements (REEs) are used in many alternative energy, lifestyle, and military applications. Alternative energy systems such as wind power generation, fuel cells, hydrogen storage, rechargeable batteries, and the permanent magnets used in electric vehicles all rely on rare earths. REEs are used as phosphors in many consumer displays and lighting systems, and are used in fluid cracking catalysts and catalytic converters in the oil and automotive industries. REEs are as vital for many military technologies including precision guided munitions, targeting lasers, communications systems, airframes and aerospace engines, radar systems, optical equipment, sonar, and electronic countermeasures.
There is some confusion about future supply and demand forecasts for rare earths. The supply of rare earths is dominated by China, which provides 97% of the world’s production. However, China only has 48% of the world’s known reserves of rare earths, according to the USGS Mineral Commodity Summaries 2011. Due to industry consolidation and tougher environmental regulations, China has imposed export quotas on rare earths.
There are two major rare earth projects coming on stream outside of China from Molycorp and Lynas. The difficulty in rare earth supply and demand calculations is that each rare earth element has different end uses and applications and is produced in different amounts. Therefore, certain rare earths, including, Neodymium, Europium, Terbium, Dysprosium, and Erbium (critical rare earths) will be in a supply deficit, with the more abundant rare earths such as Lanthanum and Cerium (the Light rare earths) will be in a surplus.
Great Western is in a good position as their deposit contains a high percentage of the critical rare earths. However, the key is to start producing these so they are in control of their supply chain as and not dependent on China. The margins from GWG’s “mine to market” business model will really kick in when it is fully integrated. All of the heavy rare earths produced by GWG will be supplied to LCM and the excess lights will be sold on the open market.
Great Western is undoubtedly a company in transition and at a relatively early stage of development. Unfortunately, the share price has continued to decline from a 12 month high of $0.65 to the current low of $0.20. This means the company now has a market capitalisation of around $80m. In my view these are the key reasons why the share price has continued to slide:
- The rare earth sector became overheated in 2009 & 2010 and sentiment is now extremely depressed. Many junior resource companies have seen their share prices decimated over this time.
- A lack of understanding of GWG’s mine to market business model.
- Concerns over funding of the business model. The GWG Management Discussion Q3 2012, issued on Nov 28 Page 9 states “The Company’s financial resources will not be sufficient to cover a significant portion of the funds required for construction of the RECI facility, the Separation Extraction Facility nor the working capital required to start up the facilities”
- The recent management resignations. However, GWG has stated this is to move the company forward as they enter their next phase of growth and a new CEO is due to be appointed soon.
- The market is still waiting for the release of the Preliminary Economic Assessment (PEA) that is due imminently.
Great Western is at an early stage and currently loss making. There is clearly execution risk and some issues that need to be resolved but I believe this is more than accounted for in the depressed share price. The “mine to market” fully integrated model should enable GWG to generate high margins and substantial cash flow. Byron Capital is assuming alloys continue to sell for at least $60/kg (based on a conservative $200/kg Neodymium/Praseodymium metal price) in the future, whilst cash costs will only be around $8/kg.
Byron have a price target of $2 and whilst this seems a long way off, the share price peaked at $1.20 in early 2011 so this is not improbable in the medium to longer term should GWG see their vision come to fruition. GWG’s cash balance remains healthy at around $54m, but the PEA should confirm whether contingency funds are required. Byron have suggested that GWG could initially toll process its REOs, especially for Neodymium and Praseodymium content, either in China with GQD or elsewhere in the world, and defer the necessary $30m expenditure on the JV-built SX plant in South Africa. The JV SX facility could be funded from future cash flows rather than from existing capital. Such action would likely only delay the JV SX plant for a year.