EDITOR: | August 28th, 2014 | 11 Comments

Great Western and the Parable of the Headless Milliner

| August 28, 2014 | 11 Comments

Parable of the Headless MillinerBack in my Argentine days, I dealt regularly with an Australian, also in Argentina, who was trying to float various schemes over a series of years with zero success. Eventually my business partner’s wife blurted out at a social event a truism in Spanish which had everyone (except the Australian) rolling around laughing. She had said that the guy was so unlucky that if he decided to make hats people would be born without heads…and that pretty much summed him up..

The thought comes to mind with regard to Great Western Minerals. This company was the Ur-Rare Earth stock. It was a Rare Earth company before there were REE companies. So how come it is now such an also-ran?

Ah, memory lane…

Such was the world of promise when the REE waves first broke upon the shores of global markets that GWG was the leader of the pack. It was positioned to merge with the then unlisted and mysterious (almost mythical) Molycorp. The world was its oyster. Here is an excerpt on GWG from our Rare Earth Sector Review of January 2010:

“Great Western Minerals Group (TSXV: GWG): Production, production, production, we repeat our mantra. Strangely though Great Western does not have mine production but is very strategically positioned in the downstream with two of the few REE processing/manufacturing facilities in the world. These are its plants at Troy, Michigan and Birkenhead in England. Molycorp was scheduled to make a large strategic investment into GWG, which fortunately fell through, to get access to this downstream side. The task for GWG is to now get mine production that frees it from the Chinese as suppliers. It is in the throes of this, having purchased all the offtake (with a potential for ownership participation too) from the mothballed Steenkrampskraal mine in South Africa. The company also owns the Hoidas Lake REE deposit in Saskatchewan. This has a MI&I resource of nearly 1.4mn tonnes of TREO (and Y) at a grade of around 2.3%(wt). GWG is in our model mining portfolio and is regarded by us as the company most likely to get to production (not that it isn’t already a downstream player) after Lynas. As such it is also a prime target for consolidators in the space. Market capitalization is below CAD$70mn”.

All these years later the company is actually no closer to a higher level of production than it was then. Less Common Metals remains the only cylinder on which its engine is firing.

The Convertible Dilemma

Financing is the Holy Grail for any REE company but in the case of GWG it was a case of “careful what you wish for”. The company’s dilemma has been made more profound (rather than less) by receiving an avalanche of funding. In early April 2012 the company closed an $80 million convertible bond financing organized by GMP Securities, ISM Capital and Byron Capital Markets. Such was the demand that It also opted to exercise an over-allotment option of $10 million, boosting the offering to $90 million.

The bonds are convertible into common shares of Great Western at a conversion rate of 66 cents per share. The bonds also have a yearly interest of 8% and mature on April 6, 2017. They are payable semi-annually.

Proceeds from the offering were to be used to complete an NI 43-101 technical report on its Steenkampskraal property, and to advance the project’s development, principally the building of a monazite processing plant and rare earths separation facility, as well as for the expansion of its processing unit, Less Common Metals.

In a move we cannot fault, Less Common Metals, at that time signed a contract to buy a second strip cast furnace to be shipped from China. The new furnace features similar design and output capacity as the first strip furnace unit purchased by the Less Common Metals in 2011, and commissioned in January 2012.

Frankly though, the financing was too large and yet not large enough. It was not sufficient to finish the Steenkampskraal plant and yet too large to be serviced out of the revenue flows from LCM. This raises the question “what were they thinking?”

Earnings have been burdened by servicing the debt and distorted by the various charges that come from the quarterly adjustments prompted by fluctuations in the value of the convertible vis-a-vis the current beaten-down stock price. The most recent quarterly results, for example, included an exchange loss of slightly over $2mn and interest payable/finance costs of a whopping $3.8mn. Thus far in the current financial year the latter number has amounted to $7.585mn. There is just no way that GWG can struggle through to production which such a debt servicing burden strapped to its back. Dilution is the inevitable outcome. We haven’t been able to find the specific terms of the conversion. The interesting thing to establish would be whether GWG can force the conversion. If it can, it’s better to hand equity (and probably control) to the debt holders at a price of 66cts, when the equity currently trades at 8cts than continue bleeding cash back to the debt holders in the form of such high interest payments.

At the rate the company is losing money at the current time, the conversion (or default) looks set for early 2015. In our long-held analogy of the REE space being like a horse race, GWG had better pick up its pace or its scheduled for a one-way trip to the glue factory.

Having said that the gems in GWG’s jewel box are still, in order of attractiveness, the LCM operation, the tailings stockpile (grading at 7%) at Steenkampskraal and finally the mine.


Our little parable of the headless hat-seekers might imply that GWG is in some way luckless. Then again there is an old saying that “you make your own luck”. GWG was dealt the cards of being first mover, of having an existing manufacturing business (in Less Common Metals), a Japanese partner on Benjamin River (Toyota Tsusho) and of having an easily exploitable high-grade tailings deposit (indeed the only one in the whole REE space). It has serially failed to capitalize on ANY of these opportunities and advantages. Even when it was able to raise a truckload of debt it has seemingly spent most of it with very little thus far to show for it and now runs the danger of running out of cash again as voracious interest payments and operating losses from LCM consume whatever cash it has left. Is this merely bad luck?

It is easy to indulge in what might have been in many or indeed all of the REE plays out there but in the case of GWG, it’s even easier. This company should have focused on its original plan of being a “cheap and cheerful” vertically integrated producer. The initial push should have been a small concentrating/ separating plant based on the tailings pile and then once issues were worked out then the main mine could have been brought back on stream. If the company is unlucky it might be in that it obtained financing relatively easily and then did not pursue a beeline to the fastest production option possible.

Yet another salutary tale in the REE space of the “path not taken”.



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  • ACommenter

    “We haven’t been able to find the specific terms of the conversion.”

    You need to use SEDAR. Look at “Material Document” dated Oct 12 2012 17:18:40 ET. It is the Bond Listing Particulars.

    My read is that the company cannot force conversion.

    August 28, 2014 - 11:13 AM

  • Christopher Ecclestone

    You are right… found the document… a very cheerless outlook there… no escape clause or hatch or even a well to throw themselves down.. does anyone know who the holders of these bonds are?

    August 28, 2014 - 11:53 AM


    The company could always sell LCM.

    August 28, 2014 - 12:12 PM

  • Christopher Ecclestone

    The bondholders have a lien on the LCM asset.. which when it comes down to it is the only “real” asset with moving parts…so the bondholders were not wrong in structuring the doc the way they did!

    August 28, 2014 - 1:01 PM


    The company is trying to restructure the Bonds in the last CC so the Bondholders have an option of liquidating LCM or be the cornerstone financial partner. The Bondholder have no other net realizable value in the SKK operation without management. A CCAA in Ontario ruling may not be recognized by the current/future S.African government so its a gamble.
    Without LCM the feasibility study shows a NPV of 60 cents per share at current market prices so a final payment of the Bonds for LCM would be dependent on the valuation of the subsidiary.

    August 28, 2014 - 1:13 PM

  • RGM

    Good analysis, but you missed Jim Engdahl’s famous quote that GWG was “fully funded.” That quote has been the source of confidence and then much bitterness on GWG’s Stockhouse board. It is now public record what they agreed to spend the 90 million on and what got the dough.

    August 28, 2014 - 3:27 PM

  • Christopher Ecclestone

    Maybe he was referring to the original $25mn design which was going to be “corrugated iron and plastic pipes” a la chinoise.. then capex inflation set in.. think about it.. capex blowout in REE has been even greater than at Pascua Lama in percentage terms. I strongly suspect its because, maybe, that the consultants writing PEAs and PFSs did not really know a damn about REE processing and were not prepared to admit it.. now everyone is paying for their mistakes..

    August 28, 2014 - 4:26 PM

  • sunrize

    So Mr. Ecclestone, if you were in charge of Great Western Minerals Group, how would you do to get financing for the mining project? How would you make the mine supply to LCM as quickly as possible?

    August 28, 2014 - 9:08 PM

  • jakeslicks

    Good Article Chris.
    Any thoughts on the transfer of part of Hoidas Lake to Jim Engdahl, G. Billingsley and Star Uranium from GWMG? Perhaps ” floating another unlucky scheme” at gwmg shareholders expense?

    August 28, 2014 - 9:45 PM

  • Jack Lifton


    You are absolutely right on this. I, for one, would very much like to know why Jim Engdahl, Gary Billingsley, and Dave Kennedy were all “turfed” out on the same day in December 2012. It may have been that they didn’t agree with the use of the proceeds, but no explanation has been forthcoming from GWMG. I thought it was a “housecleaning” by the new CEO, but the sale of the Hoidas lake assets to Jim and Gary makes it seem that the parting was not as hard as it looked at the time. Dave Kennedy seems to have left the REE space altogether; he is now an owner and participant in a mechanical “seals” manufacturer in the UK. Thus the longest experienced man in the rare earth permanent magnet alloy commercial manufacturing space outside of China, as far as I know, just walked away from the industry. It seems to me that Dave Kennedy voted with his feet on the future of REPM alloy manufacturing at GWMG. I suspect he, and the other gentlemen, had a paid non-compete, but I still wonder what the long term plan of the new management was. Any thoughts? Anyone?


    September 9, 2014 - 11:54 AM

  • ACommenter


    Engdahl and Billingsley resigned from the board Nov. 21, 2012.


    Levier was appointed to the board Dec. 18, 2012. (He became CEO in Jan. 2013).


    So, it was other board members who precipitated this.

    Also, Kennedy did not resign until March, 2013.


    and he remained on the board after that time. So, your timeline is not correct.

    September 9, 2014 - 12:38 PM

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