Alkane to demerge Australian Strategic Materials (ASM) to unlock value of its rare earths project
Alkane Resources Ltd. (ASX: ALK | OTCQX: ALKEF) plans to soon demerge their poly-metallic and rare earths holding company Australian Strategic Materials Limited (ASM) and pursue a separate listing of ASM on the Australian Stock Exchange. ASM is the 100% owner of the very promising, long life, poly-metallic and rare earths project known as The Dubbo Project, located in NSW, Australia.
Today I look at what investors need to know and the potential of the new company.
About Australian Strategic Materials (ASM)
ASM’s three key assets include:
- The Dubbo Project – ASM owns a 100% interest in the project which is a ‘construction ready’ poly-metallic and rare earths project with potential to become a key global supplier of specialty metals and rare earths.
- Metals Technology Business – ASM is investing in new technologies related to the separation, purification and metallisation of oxides. ASM’s goal is to establish an independent facility that produces high-purity metals and value-added metal oxides, particularly in relation to hafnium separation from zirconium and other materials from The Dubbo Project. In 2019 ASM initiated a joint venture with South Korea’s Zirconium Technology Corporation (ZironTech) to pilot the production of hafnium and zirconium by combining their proprietary process with ZironTech’s metallisation technology. ASM has exclusive global commercialisation rights under the licence. The pilot plant is in the final stage of construction in South Korea and production is due to commence in mid-2020.
- Toongi Pastoral Company – The Company owns 3,500 hectares of freehold and leasehold land 25kms south of Dubbo, NSW, Australia.
Highlights of ASM’s 100% owned Dubbo Project
The Dubbo Project
The Dubbo Project is a large resource of zirconium, hafnium, niobium, and rare earths (including praseodymium, neodymium, and yttrium). It is the most advanced poly-metallic project of its kind outside China. The Project has an incredible estimated 70 year mine life and can be an open pit design. The Project is ready for construction with all major state and federal approvals and licences in place.
The 2013 DFS resulted in a pre-tax NPV8% of A$1.235 billion, and a pre-tax IRR of 19.3%. The Company has since proposed a two stage production start up so as to lessen the first stage CapEx from an estimated US$930 million to US$480 million.
Total Mineral Resources are 75.18Mt @ 1.89% ZrO2, 0.04% HfO2, 0.44% Nb2O5, 0.03% Ta2O5, 0.74% TREO. Total Ore Reserves are 18.90Mt @ 1.85% ZrO2, 0.04% HfO2, 0.44% Nb2O5, 0.029% Ta2O5, 0.735% TREO.
The Dubbo Project resource estimate
Next steps for ASM will include:
- Proof of capability for commercial-scale production of hafnium and zirconium.
- An updated FS or BFS.
- Forming strategic customer relationships and offtake agreements.
- Establishing the capability to process other Dubbo Project outputs, including rare earth metals, in Australia and South Korea.
- Project financing. Export Finance Australia (EFA) recently confirmed interest in being part of the financing consortium for The Dubbo Project.
About the demerger
- The demerger is subject to finalisation of outstanding regulatory matters and shareholder approval at the Alkane Resources extraordinary general meeting scheduled for 16 July 2020. ASM is currently anticipated to list shortly after on the ASX on July 30 (indicative date only).
- Alkane Resources shareholder are to receive one share in ASM for every five Alkane Shares held (rounded down to the nearest whole number) on the demerger record date. Ineligible Foreign Shareholders are excluded.
- Under the demerger, the Alkane and ASM entities will be separated, and no cross-holdings between companies will exist.
- ASM will be demerged with its cash reserves of A$20 million and no bank debt.
- All interests in the Dubbo Project and associated assets (including land and water rights), together with ASM’s investment in South Korean metals technology company RMR Tech Corporation (RMR Tech), will be 100% owned by ASM following the demerger. Note that ASM is a part-owner of RMR Tech, which is majority-owned by ZironTech.
Alkane Resources Chairman Ian Gandel stated:
“Since joining in February, ASM Managing Director, David Woodall, and the ASM team have focused on distilling the key value drivers for ASM and the Dubbo Project, and have brought new focus, momentum and opportunity to the team which is working hard to realise catalysts for the Dubbo Project and the ‘Clean Metal’ metallisation technology in South Korea. The demerger of ASM will provide investors two opportunities to grow value; in Alkane as a growing gold exploration, development and production company, and in ASM as an exciting critical materials business leveraged to the changing world economy.”
As a ‘rough’ guide as to what ASM’s market cap may end up being once listed we can look at current listed pure play Australian rare earth developer Arafura Resources (ASX: ARU) which has a market cap of A$119 million. Of course the mix and grade of critical metals and rare earths differ, so this is only a rough guide. If we value ASM based on say 10% of the 2013 DFS value of a pre-tax NPV8% of A$1.235b, then we get a rough value of A$123 million. This gives zero value to the extraction technology or the A$20 million in cash.
Given the gold production success at Alkane Resources their massive Dubbo poly-metallic and rare earths Project was left in the shadow. The proposed demerger will help ASM to stand on their own and focus on getting their Project and processing up and running. For investors it should unlock value that was not recognized previously in Alkane Resources.
The Dubbo Project is development-ready, subject to financing, with the mineral deposit and surrounding land acquired, all major State and Federal approvals in place and extensive piloting and engineering completed. In term of financing the Australian Government (via EFA) has shown interest and we all know that the US government is also looking seriously at developing a safer rare earths supply chain and safely sourcing critical materials.
Investors in Alkane Resources will automatically get shares in the demerged company on a one for five basis. For new investors ASM is indicated to list on the ASX on July 30, 2020. It will be very interesting to see what value the market assigns Australian Strategic Materials and how it progresses from here.