Rare Earths Monthly – Is No News, Good News?
Well, here we go again with a basically rare earths space with no news month.
Some may say that the performance by Lynas in finally meeting its stated annual capacity is a bit of a boost to an otherwise quiet space. I would like to see their recently promised growth news first. If they are not going to return their at-best modest surpluses (post debt reduction) as dividends then where are they going to place those funds for growth? I am sure current and potential shareholders will also want to understand that.
Some ardent followers of Ucore may regale at the pilot plant success of the SuperLig®-One technology, but I am still to be convinced that a replacement of solvent extraction chemistry for a specialised ion-exchange is a fundamental game-changer. There are many other costs in rare earths development, just fixing the back end doesn’t quite do it for me. North America has more, bigger challenges to address before it can be considered as even a starter in the race with China.
So what are the things to watch?
Putin says “Import substitution unveil new opportunities for rare earth metals production”. Interesting. Should Russia develop more uses for rare earths, then the global demand will increase as others utilise the technology. More growth, higher prices, more opportunity for others to join in.
“Chinese firms develop rare earth based battery”. Now this is interesting. With the Rest of World quaking with the threat of reduced rare earths availability forcing industrial development with less or no rare earths, the Chinese are developing technology to use more. At this stage I can only presume they are targeting excess cerium, but I sure will be keeping my eyes (and ears) open.
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So I will finally give you the financing theory that has been buzzing in my brain for a long while now. How does a junior exploration company in the Technology Metals space get finance to enable it to get into production?
Picture the scenario. Company “Blue Skies Mining” has some good ground in a mining friendly environment. They have been through their IPO and have $5 million left in the bank after some exploration and mineralogical assessment. They appear to have a rare earths project that could produce 10,000 tonnes per year of in-demand rare earth products for 20 years at industry comparable operating costs (OPEX), but with a capital requirement (CAPEX) of say, $750 million. The NPV of the project is $1 billion plus, but they cannot get the CAPEX. Why?
- They are too small to borrow the money from conventional sources. Interesting that gold projects with such economics would have no problems.
- They are unwilling to introduce a partner with the financing ability due to the large dilution of the current shareholders.
- They are unwilling to agree to an off-take arrangement that would satisfy any potential off-take partner.
Last month, I suggested if you are in this scenario to consider (or question) the wishes of your stakeholders. If you had done so, you would have discovered:
- The government wants this development to start so that it can get its royalties (or equivalent). It also wants the payrole tax etc from ongoing operations.
- Your shareholders returns are interesting to define. I am betting that 75% of the world’s investors would love 15% annual return. You?
- An off-taker wants all of his rare earths at a price he is happy to pay for.
So the solution. You have 10,000,000 shares on issue, and the IPO issue price was $1.00 but is now $0.20 (Australian example) since you have diluted to obtain funds for exploration and development etc. Your shareholders (10,000,000) now want a 15% return on their money. So that’s $0.15 for every $1 invested every year.
Along comes an interested off-taker. He wants all of your output. You want to keep some of the output to ensure you get a fair share of any upside. But where do you get the money from? Remember, you can’t get the money! So, gents, here’s the deal!
The off-taker gets all of the project output! That is simply because he takes all the risk! He pays for all the development costs – exploration, PFS, pilot plants, BFS, and all CAPEX, and as long as the project is still running he also pays all OPEX (including royalties etc.). And how much does he pay for the output? Well, since he is already paying for all of the costs, he can have all of the output for free! Oh and yes, he also has to pay the shareholders their $0.15 per share per annum to meet the current shareholders desire for a 15% return on his investment.
Too simple you may say. What if he backs off after BFS and before development commences? Well he loses all entitlements to any future output. All assets (especially an agreed minimum cash balance) revert to the shareholders. 100%. And that includes all Intellectual property!
Now obviously, your companies are all in different financial positions, and in different stages of development, and in different jurisdictions, but you all share one common pre-cursor for success. The Board of Directors is responsible to deliver to the stakeholders what they want. And if you can better a 15% return on funds invested, I will gladly write you up in my next month’s Technology Metals Monthly.
Mr Mackowski is a qualified engineer in mineral processing with over 30 years technical and operational experience in rare earths, uranium, industrial minerals, nickel, kaolin ... <Read more about Steve Mackowski>