Pensana
Of all mining commodities in investors eyes over the last decade, ‘rare earths’ (or REE’s – rare earth elements which occur in deposits; and REO’s – rare earth oxides which are the product of extraction and refining and are the raw materials for use) have featured as a potential high growth market.
It has however proved a volatile and dangerous one for some would-be participants. Investors will know the outlines. The most abundant (not really ‘rare’) of these commodities is tantalum (in demand for a long while now due to its essential use in electronics but whose long term price has mimicked a roller-coaster) and, more recently, lithium, for its likely long lasting (although not guaranteed) use in batteries. These minerals are actually quite common. But deposits in quantities making them economic to mine have so far been found only in Africa Australia Brazil and Canada – outside China.
Niobium is another, similar to tantalum and almost as abundant (found with other elements) and is used to improve the properties of steel, and in superconductors. Their close relationship is reflected in the Tantalum and Niobium International Study Centre to which Auag belongs.
Mining projects for these ‘common’ rare earths have therefore been well known. But there has been a much less abundant and more difficult industry springing up in recent decades for what are the ‘really rare’ earths whose applications are still being found, and are at an early stage of the development of the infrastructure and mining and supply chains they need. Mining of these ‘rare earths’ only started 30 years ago in in the USA, but by 2010 China accounted for 95% of world-wide production.
Web sites for these true ree’s list ten of them, (and another four alloys of them found in nature) of which the best known to investors are probably Neodymium (essential to make the strongest permanent magnets and for use in specialised glass); and the similar Praseodymium; Cerium is the most abundant and is used in optics and lighting; and Scandium can be alloyed with aluminium to improve its properties, making for its use in aerospace.
Of them all, it is the neo and praseo-dymiums – known as NdPr’s – which account for most of current fast growth. Alloyed with iron and boron (as NdFeB) they make exceptionally strong permanent magnets – which are essential to build the most efficient (ie smallest and lightest) electric motors and generators in wind turbines and electric transport. It is estimated that each MW of turbine generated electric power needs 200kg of Neopraseodymium oxide (the product of extracting and refining the REE) to make each magnet, while every electric vehicle will need up to 1 kg.
With forecasts of explosive growth in demand the price of Pr and Nd has trebled over the last two years and their market size is now estimated at $2.2bn – accounting for 20% by volume of the whole REE market, but 80% by value.
Extracting all these REE’s however is energy-intensive and complicated by their occurrence with radioactive elements such as uranium and thorium. As a result there are as yet few plants to process them in the west, and some major companies (eg Lynas Corp) have faced big financial problems in the past trying to develop the refining stages.
The realisation that the West was beginning to lack its own secure supplies of these ree’s and was having to rely more and more on China has spurred governments to take an interest, but – particularly in Europe – have been slower than the US to draw up lists of ‘strategic commodities’ for which they will support initiatives to create supply chains not dependent on China.
Meanwhile companies – often small – have been springing up to mine the raw REEs which have been found in economic quantities mostly in Africa, and to process them closer to customers in Europe. They include ASX quoted Peak Resources (ASX:PEK) which is developing a NdPr extraction operation in Tanzania to supply a refining plant on Teeside; Premier African Minerals on AIM; and LSE and Canadian listed Mkango Resources, are others with planned source mines in Africa and planned processing plants in Europe.
Mkango for example is developing a rare earth separation plant in collaboration with a well established chemicals manufacturer at Pulawy in Poland to process material from its Songwe Hill mine in Malawi, and is proposing a UK plant to recycle REE’s and magnets. While in America, government subsidies are helping companies such as MP Materials, Lynas Corporation, and Molycorp (both the latter having been financially damaged trying to build their businesses in the early stages of the industry).
Lynas Corporation of Australia, (ASX: LYC, market capitalisation: US$4.1 billion) is currently the world’s largest non-Chinese producer – last year outputting around 4,700 tonnes of magnet metal oxides from its facility in Malaysia. MP Materials (NYSE: MP, market capitalisation: US$5.0 billion) likewise is planning to produce c. 6,000 tonnes pa of magnet metal oxides once in operation.
In the UK, the most advanced of these hopefuls planning a ‘integrated’ REO supply chain appears to be Pensana Rare Earths (LSE:PRE) which was tipped last November by a Sunday paper as one of four shares to benefit from the spur to the industry to be given by the then pending COP26 convention.
That came on top of Chancellor Sunak’s £3.2bn commitment to support UK electric vehicle manufacture (eg Nissan’s planned £1bn EV hub, and Ford’s £230m plant) and to boost wind power by 40GW (requiring 8bn kilos of Neopraseodymium oxide.)
PRE’s shares’ minor spurt on that news didn’t last however, just as a broker tip a few weeks before had little effect, and the reason, of course, is that funding, originally expected by the end of 2021 for the two parts of Pensana’s project, is still awaited.
It could, however, be near, in which case PRE could be the first of this fledglingsector’s shares to take off, provided as always that the funding terms are seen to be as attractive to shareholders as they will be to the funders. Because it isn’t possible here and now to judge that, I’m merely suggesting that investors keep a close eye until the prospect becomes clearer.
Pensana started life as an Australian listed company with a rare earths discovery at Longonjo in Angola, and listed on LSE in July 2020 with 188.3m shares at 20p – but raised no funds. Its intention was to find partners to develop Longonjo, but it was not until October that year, after establishing its belief that Longonjo (with a fresh discovery nearby) is potentially one of the world’s largest rare earth deposits, that Pensana announced it would study the potential for a separation plant in the UK. That, of course, spurred the shares on an upward track, and although speculative, illustrates the potential investor interest.
At that stage, bringing Longonjo on stream was estimated to cost $130m, and subsequently in April 2021, PRE published a business plan “to seek to establish, subject to funding, a world-class, independent and sustainable supply chain of the rare earth metals vital for electric vehicle, wind turbine and other strategic industries” . That, of course, persuaded shareholders with good profits to sell in anticipation of the necessary funding.
PRE’s plans now are to build its rare earth separation facility at Saltend in The Humber free trade zone, with a target annual production of c 12,000 tonnes of rare earth oxides, including 4,500 tonnes of magnet metal rare earth oxides (“NdPr”), which would represent approximately 5% of 2025 projected world demand and be one of only three key producers outside China. The plant would cost $125m in addition to what had grown to be the $270m cost at Longojo from where it would import concentrate.
The company has published its financial projections, which at this stage must be somewhat speculative even though undertaken by world-class consultants and engineers, and unsurprisingly look extremely good with a 50% irr and a $2.1bn NPV8 (scaled down – as is par for the course – from previous estimates) in return for what is now $400m or so upfront cost.
Since it produced that plan, having raised an initial £15m at 120p in June 2021 and receiving a £10m equity investment by M&G fund managers at 81p in December, Pensana has started site preparation at Saltend and has completed preliminary engineering design work at both Saltend and Longonjo. At present it envisages – subject to funding – that a 1-1.5yr construction phase can start almost immediately with commissioning by end 2023.
However funding isn’t there yet. And it has to be said that with competitors’ coming on line at some time, the medium term market has to be somewhat unpredictable unless PRE can secure fixed price offtake agreements with customers – something entirely practicable given the large overall supply deficit being forecast. But the separation technology is still at an early stage, so some commentators are wary. A report late last year said the government had doubts about Saltend’s viability and, whatever the reason, a mooted government grant has still not materialised.
If funding does arrive, Pensana expects it to be a mixture of offtake agreements (paid for up front) and various levels of debt, and fresh equity including from the Angolan sovereign wealth fund for Longonjo.
On the optimistic side, Pensana says ‘expressions of interest’ for the off-take have come from ‘major European and US electric vehicle and wind turbine OEM’s, while a Memorandum of Understanding has been executed with a key Asian trading house for 50% of Saltend’s’ ouput’.
If these come to fruition, that 20 yr $2.1bn NPV, even if preliminary, will make Pensana’s current £190m market cap look quite attractive, depending how much shareholders will be called upon to contribute.
But in the long term Pensana could be up against larger competitors, so may need government support to keep NdPr production in the UK.
It all depends on the product price. Neodymium oxide has trebled in the last two years – which might be partly a bubble. But with medium term demand forecast to well exceed even the planned supply, investors will assume the optimistic scenario.
Meanwhile PRE looks an interesting medium term speculation on government support for what it says is a vital need. Having recently appointed an investor relations officer, PRE’s broker can be expected to start flagging the company at some point, adding to the medium term attractions.
Auxico
With rare and not so rare earths found in a variety of sources, there is obviously a place for traders to fill the gaps, and one such – Auxico Resources (CSE:AUAG) based in Canada – has featured at Master Investor shows in recent years. While its business which commenced only in 2014 is still settling into a recognisable shape, so needing to be financed by private investors, the current year might see it go live with a venture that could attract institutions and broaden its investor reach.
Auxico’s trading spans both the ‘bulk’ rare earths such as tantalum and niobium, and it also has footholds in the rarer earths, as well as ownership of a historic gold and silver mine in Mexico.
From what is obviously an entrepreneurial trading approach and resulting contacts, Auxico has also been able to acquire its own, or joint ventured, mineral rights in Colombia, Bolivia, Brazil and the Democratic Republic of Congo, and made its first profitable trade in 2021, sourcing manganese ore from Brazil for customers in India, China, and the UAE.
In the current year it has signed a potentially much larger long term contract to supply rare earth concentrates to a customer in Canada from the DRC where it has teamed with Kibara Minerals. The first 96 tonne shipment valued at $459,000 has already been made, and the offtake agreement provides for a minimum of 18,000 tonnes over the next five years, with an objective for 60,000 tonnes.
Auxico earns a 15% commission on these trades, which at current market prices means it could earn up to $43m if this contract goes as strongly as hoped, and as potentially the highest value trade the company has arranged so far, would go some way to placing it on a secure financial footing.
Other trades it has secured since commencing business have included MOU’s with users in Bolivia to supply tantalum, niobium, and tin in industrial sands from a source in the same country, and in 2021 a LoI to finance the production and export of high-grade tantalum and iridium ore from a property in Ivory Coast was signed.
Another joint venture has been signed with Canadian company Impact Global Solutions Inc. (“IGS”) for it to process tantalum and niobium ores from Auxico’s own discoveries in Colombia and Brazil which it claims have grades exceeding 25% tantalum and 15% of niobium.
AS well as from Columbia, Aux is also extending its activies into Brazil where it has a MOU to source REE’s from an estimated 30m tonnes of tin tailings, averaging 2.83% total rare earth oxide (TREO) content.
It is in Colombia however, where the company’s potentially highest value venture is planned. Auxico reckons its REO deposits there – in an area deliniated by the government for its tantalum and niobium, as well as for rarer earths – have one of the highest in-situ grades in the world. So, like the rest of the industry which recognises it is the separation and treatment of rare earths that is by far the most profitable part of the value chain, AUXICO is hoping to build a refining facility at Vichada. It would be capable of processing 36,000 tonnes of ore per year, sourced from its Columbian and DRC licences, which Auxico reckons could make it “a major supplier of rare earths to the North American economy.”
A feasibility study is currently under way, for which preliminary estimates are that the initial cost will be $116m – to finance which Auxico might come to the UK for a share flotation. With other estimates that the project could generate $3.9bn of cash flow ($200m pa) over 19 years, that will be the first occasion when investors can gain some idea of AUX’s financial shape and potential
Along the way, Auxico has licensed a technology (UAEx) for a more environmentally friendly extraction of rare earth metals based on ultrasound which, after tests on samples from six REE sources, the company reckons will dramatically reduce capital and operating cost compared with known metallurgical processes
that use acid leaching.
What with 100% ownership of rights in a historic mine at Zamora in Mexico (where unexploited grades up to 20 g/t gold have been sampled) and with all its other interests, it could be said that Auxico is already a substantial business with far reaching tentacles. But that isn’t necessarily a good thing. The company is still financially too small to exploit what it reckons to own, and as far as can be judged is going to have to raise substantial sums to benefit. Having said that, commission income from its trading could contribute, although its timing and amount is impossible to predict.
As a result, the company has been financing its activities up to now via non-brokered placements with Canadian private investors. Currently there are 65m shares in issue (and considerably more will result from converting a debenture issued in 2021, as well as from warrants) with the latest Sept 2021 balance sheet showing (in $Can) $23.9 of accumulated losses, financed by $28.1m of convertible debentures.
That balance sheet came after $30.7m of exploration and company costs in the latest year, and after only $8.2m raised from shares and warrants. At that September year end there was only $2.6m cash and $4.3m of net current assets in the balance sheet, so the company is going to have to raise substantial funds in the near future to fund its various ventures, unless helped through joint ventures or other strategic investors.
That is why this review is providing investors merely with a ‘heads up’ on what could turn into an interesting proposition once that probable fund raising and new listing is known. We will write in more detail on the company and its prospects once that happens and the potential is clearer.
No doubt in anticipation of the necessary financing, Auxico’s shares on the Canadian stock exchange have sunk to 57c recently after reaching $1.175 last November. So, clearly, while investors think the company is worth following – it is tempered by the realisation that it needs more support.