Rare earths financing: a contrast in fortunes
Money has never been more important for the emerging rare earth players. We have seen that in spades over the past week or two on the Australian scene. Today Lynas Corp (ASX:LYC | OTCQX:LYSDY) reported it had in the second half of 2015 exceeded its target of 1,860 tonnes of neodymium/praseodymium production, thus ensuring the interest rate it is paying its Japanese financiers drops by 0.5%. Not only that, but the performance will be reassuring the Japanese that performance at LYC is heading in the right direction.
In the case of two other companies, we have a contrast in fortunes when it comes to those all-important financial backers. Peak Resources (ASX:PEK) has not only put in place its financing (last February) for A$29.2 million, but its main backer has just taken a larger stake. Appian, a fund based on the Channel Island of Jersey, has just turned convertible notes into shares to inject another A$2.1 million into Peak (at a substantial premium to recent traded share price) to lift its holding to 16.1%. The company’s other backer, the International Finance Corp (IFC), part of the World Bank group, is another steady rock under Peak and its Ngualla project in Tanzania.
Appian was established with backing from Anglo American, Rio Tinto, JP Morgan and Bain Capital. As Peak has pointed out, Appian’s management team have been involved in running more than 60 mines between them, 30 of those in Africa. The IFC is backing Peak because it is developing its mine in Tanzania, one of those countries targeted by the agency for development finance.
Peak is now powering along its development path, the most recent announcement being the appointment of Rocky Smithas chief operating officer for development; Smith was previously the managing director at Molycorp’s Mountain Pass.
Then there’s Northern Minerals (ASX:NTU), which is the other side of the REE money coin. At the end of September, according to its quarterly report for that period, the company had cash reserves of A$1.42 million. However, it was banking (literally, in some sense) on the A$49.5 million financing package agreed to by a subsidiary of Jilin Ji En Nickel Industry. The Chinese had done their due diligence on the Browns Range project in Western Australia and expressed themselves satisfied. As InvestorIntel had reported mid-2015, Chinese companies were showing interest in acquiring rare earth projects abroad, and it seemed Browns Range would have ticked all the boxes what with its attractive proportion of heavy elements, notably dysprosium.
However, the Chinese did not meet their first deadline to stump up the A$17 million next tranche of the funding, and were given an extension until Christmas Eve – which they also missed, and now the deal is off.
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Northern Minerals has commissioned an Australian firm to take over the financing search and meanwhile has slashed its budgets. In the present commodity climate, finding money for a rare earth project is not going to be an easy task given the struggle at Lynas and the succumbing of Molycorp that have coloured investor views of the sector.
But is also leaves a question hanging: why has a large Chinese outfit walked away from a HREE project, and an advanced one at that? Why, when in the longer term China is going to require foreign supplies of some REE elements?
It’s not as if Jilin Ji En is pulling down the shutters. A month ago it joined China Railway Resources in a plan to develop a graphite mining project in Luobei, in Heilongjiang province in northeast China. Ji En Nickel is to spend the equivalent of $310 million to get the project up and running.
By that standard, A$17 million is spare change, especially in view of the fact that you get your hands on what will be an important source of dysprosium and other HREE.
Jilien Ji En is some size. When the deal was signed last February the Chinese company, listed on the Shanghai Stock Exchange, was valued at the equivalent of $3.4 billion. Even with the semi-collapse of many Chinese stock prices, Jilin Ji En this week is still worth $2.8 billion.
Regardless of what the reason is for the Chinese company to renege on its deal with Northern Minerals, the development underlines the fact that, in the REE business these days, having your financing secure has never been more important.
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