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Sitting on the world’s largest undeveloped deposit
Greenland Minerals (ASX:GGG) is a Perth-based resources company focused on the Kvanefjeld Rare Earths Project in Greenland. Demand for Rare Earths is strong given its use in various 21st Century products, most notably electric cars and wind turbines, and Greenland Minerals controls 100% of the world’s largest undeveloped Rare Earths deposit. With the help of Shenghe Resources, a major Chinese Rare Earths player, we expect that Greenland Minerals can move towards an updated Feasibility Study for the project in the next year or so, with the mine potentially starting up in 2021.
The Kvanefjeld Project has considerable advantages as a Rare Earths source, most notably its favorable metallurgy and wide spread of critical Rare Earths. A steady increase in Rare Earth and U3O8 prices, further progress on the Kvanefjeld flowsheet, and completion of permitting in Greenland can help drive favourable sentiment and re-rate the stock into our valuation range, and, potentially, beyond.
Valuation range of A$ 0.18 – 0.43 per share
We value Greenland Minerals at 18 cents per share base case and 43 cents per share optimistic case using a DCF approach with conservative assumptions on Rare Earths. Our valuation is highly sensitive to changes in the prices of critical Rare Earths such as Neodymium. Should prices return to the levels assumed in 2015, Kvanefjeld will be a very valuable Rare Earths mine indeed.
Introducing Greenland Minerals
Greenland Minerals is a Perth-based resources company focused on the Kvanefjeld Rare Earths Project. This project, located in southern Greenland, has been worked on by Greenland Minerals since 2007 and has been 100%- owned by the company since 2012. Over the last 11 years Kvanefjeld has emerged as one of the largest undeveloped Rare Earth Oxide resources in the world, with a current JORC 2012 resource of 1.01 billion tonnes grading 1.1% REO. The project also has substantial uranium (593 million pounds) and zinc resources.
What are Rare Earths and why are they important to the global economy in the 21st Century?
The Rare Earth Elements are 17 members of the periodic table that are often found in the same ores and deposits. They are sometimes nicknamed the ‘vitamins of industry’ because of their use in smart electronic products, wind turbines and sophisticated defense equipment. The rise of the electric car as a 21st Century transport option will depend in part on the availability of Rare Earths. A significant factor in the market for Rare Earths today is China, which accounts for around 85% of the world’s mine production and has substantial and sophisticated downstream production capability. China’s dominance of Rare Earths gives the country potential leverage over price in the event that few new deposits are developed outside of China in the years ahead.
What is Kvanefjeld’s current state of development?
Kvanefjeld has gone through an initial Feasibility Study that was published in May 2015 and updated in April 2016. These studies envisage a mine life of 37 years with a primary product of ‘critical’ Rare Earth Oxide, ‘critical’ meaningthat these particular Rare Earths are expected to be in short supply in the future. An improved cost profile for Kvanefjeld in 2016 suggested average free cash flow of US$376m p.a, up 14% on the 2015 estimates. In this update, expected capital costs came down markedly, from US$1.36bn to US$832m. Greenland Minerals is continuing to work hard on costs. A key step forward, from late 2016, has been the involvement of a major Chinese Rare Earths company called Shenghe Resources, which now owns 11% of Greenland Minerals. Shenghe Resources has brought considerable technical expertise into the project as a collaborator as well as a shareholder.
What comes next for Greenland Minerals?
The company expects to work on a Feasibility update once the flowsheet has been optimized and the relevant permits have been granted by the Greenland government. After this, Greenland Minerals and its collaborators will move to Bankable Feasibility Study. In this note we envisage a start-up of production at Kvanefjeld around 2021.
If Greenland Minerals is so good, why is it currently capitalized at only A$91m?
We think that the main reason for the apparent under valuation of Greenland Minerals is concerns that environmental and related permitting issues have some years to progress. We look for a re-rating once permitting has completed and the company can work on an update to its Feasibility Study.
Ten reasons to look at Greenland Minerals
1. The Kvanefjeld Rare Earths Project is massive, with a JORC resource of 1.01 billion tonnes containing 11.1 million tonnes of Rare Earths Oxides, 593 million pounds of uranium and 2.25 million tonnes of zinc. Various drilling campaigns since 2007 have contributed to progressive resource increases and there is strong potential for further extensions.
2. The prospect for Rare Earth demand is strong, with their use impermanent magnets and rechargeable batteries, among other ‘21st Century’products, likely to increase into the foreseeable future as the world increasingly turns to clean, green technologies.
3. The long-term pricing environment for Rare Earths is favorable, due to constrained supply out of China, the world’s major producer, which has moved to shut down mines that have environmental issues and is now capping production and lowering exports.
4. Kvanefjeld has potential to be a low-cost, long life producer, with Greenland Minerals having shown this in a 2012 Pre-Feasibility Study and a 2015 Feasibility Study as well as in the 2016 operation of a pilot plant. Greenland Minerals currently anticipates a mine life for Kvanefjeld of 37 years, based on a 108 Mt ore reserve.
5. Kvanefjeld may become a particularly attractive source for a ‘critical’ number of Rare Earth elements, notably Neodymium, Praseodymium, Terbium and Dysprosium, since it appears to be the only major ore body in the world that is non-refractory and therefore amenable to yielding a wide spread of Rare Earths.
6. The Kvanefjeld Project has had a long development timeline with Greenland Minerals having been involved since 2007. This history has allowed a deep foundation of technical understanding to be established, along with strong in-country relationships. Greenland Minerals has also developed strong knowledge as to how the rare earth sector operates.
7. Shenghe Resources is driving growth in shareholder value, with this Chinese Rare Earths company having contributed to proposed changes in the Kvanefjeld flowsheet in 2018 that are expected to markedly lower capital costs from those suggested in 2015 and 2016.
8. The regulatory environment in Greenland is broadly favorable, with the Greenland government having shown a generally ‘pro-mining’ attitude in recent years and having permitted uranium exploration to proceed. We believe this bodes well for the granting of a Mining License related to Kvanefjeld.
9. Greenland Minerals has solid management. Dr. John Mair has been involved with Kvanefjeld since 2008. Since his 2014 appointment as Managing Director he has overseen the corporate evolution of Greenland Minerals as a Rare Earths play aligned closely with Shenghe. Backing Mair is a well-qualified board chaired by the experienced company director Tony Ho.
10. Greenland Minerals is undervalued on our numbers. We value the company at 18 cents per share base case and 43 cents per share optimistic case using a DCF-based approach with conservative estimates on long-run Rare Earths pricing and capital costs.
Kvanefjeld has all the qualities of a great Rare Earths project
Greenland Minerals has been working on Kvanefjeld for the last 11 years, and in that time has built up a large knowledge base on the project. We see a number of major advantages for Greenland Minerals with Kvanefjeld:
A favorable location. Kvanefjeld is in Greenland’s southernmost municipality,Kujalleq, around 8 km from the coastal town of Narsaq (Figure 1). The capital of Greenland, Nuuk, is 460 km north of Narsaq. The climate in the Narsaq district is mild by Greenlandic standards, ranging between minus two degrees and 10 degrees Celsius over the year.
Transport to the project area is straightforward. Narsarsuaq Airport, one of two airports in Greenland capable of serving large airliners, is only 35 km away. More importantly, the deep-water fjords in the Narsaq area provide direct year-round shipping access, vital for the development of a project like Kvanefjeld.
A favorable jurisdiction. Greenland, population 56,000, is a possession of Denmark that has had substantial self-government since 20093. In recent years the country has elected ‘pro-mining’ governments, including that of the current Prime Minister, Kim Kielsen, who took office in late 2014. One of the factors that had previously inhibited development of Kvanefjeld is a 1988 ban by the Danish government on uranium mining. The ban as it pertained to Greenland was repealed by the Greenland Parliament in October 2013, with the country becoming an IAEA signatory in September 2016.
A large resource base. As at February 2015 the Kvanefjeld Project had a JORC 2012 resource inventory of 1.01 billion tonnes containing 593 million pounds of uranium, 11.14 million tonnes total Rare Earth Oxides and 2.25 million tonnes of zinc. This makes Kvanefjeld one of the largest undeveloped Rare Earths projects in the world.
A favorable spread of Rare Earths. Not every Rare Earths deposit around the world is the same in terms of the distribution of minerals. Some have only a few of the 17 elements in meaningful amounts. For example, the NolansProject of Arafura Resources in Australia’s Northern Territory is mostly just Neodymium and Praseodymium. Kvanefjeld has these two elements as well as Europium, Terbium and Dysprosium in meaningful quantities. This has allowed Greenland Minerals in its Feasibility work to focus on ‘critical’ RareEarths expected to be in short supply in the years ahead
Favorable project economics. The proposed stripping ratio for Kvanefjeld is only one to one in the early years, at 1.4% REO and 400 ppm uranium, while the non-refractory metallurgy allows for simple and inexpensive processing. Both factors suggest a low cost of production for the project. In addition, there are numerous by-products to be enjoyed, beginning with U3O8 but also including zinc and fluorspar. This has led in the past to the suggestion that it may have the world’s lowest production costs. Obviously, time will tell as to the long-run veracity of this latter claim, particularly given the recently depressed price of U3O8.
We value Greenland Minerals at 18 cents per share base case, 43 cents per share optimistic case. Our basic valuation approach is as follows:
- We created Discounted Cash Flow (DCF) models of Kvanefjeld broadly based on the assumptions of the 2015 Feasibility Study and GreenlandMinerals’ 2016 update to that study. Our DCFs used a 10% WACC and a long run AUD/USD exchange rate of 0.75.
- We assumed mine startup in 2021.
- We assumed initial selling prices and mining/processing costs and escalated these at a 2.5% p.a. inflation rate.
- We assumed a 37-year mine life based on the current 108 million-ton JORC reserve.
- We assumed a 30% corporate tax rate.
- We assumed that the government of Greenland would collect a 2% royalty on product sales.
- We assumed an equity capital raising by Greenland Minerals of A$90m inorder to provide the standard equity buffer in the project’s capitalbudget. It must be emphasized that we do not expect Greenland to make such a raising at the current price, however for valuation purposes we use a discount to the current share price.
Capital costs. As we note above, Greenland Minerals has twice estimated the capital costs of Kvanefjeld in recent years – in 2015 at US$1.36bn and in 2016 at US$832m. Given the progress the company has reported in flowsheet optimization since 2017, there is strong potential for further reductions in capital costs. However, for conservatism’s sake we assume US$850m for a base case assumption and US$700m for an optimistic case. We note that the 2016 Feasibility Update envisaged the possibility of direct shipping of concentrate, saving several hundred million dollars on the cost of a refinery. Consequently, we believe the risk is to the downside on our numbers.
Funding of the project. We assumed that after the A$90m equity buffer, Kvanefjeld is debt-funded at an interest rate of 8%. We assume debt is amortized over a seven-year period after start-up.
Rare Earths pricing. For both our base and optimistic cases we assumed US$42,000/t REO for the critical Rare Earths basket which will be the mainstay of the mine. We believe this was conservative (Figure 18), with our estimate way below the levels used in the 2015 Feasibility Study. We also note that in the 2016 update Greenland Minerals maintained its pricing forecasts for Neodymium, Praseodymium, Terbium and Dysprosium on the reasonable expectation that these metals would be in structural deficit by 2020. As we show below, Kvanefjeld is valuable even on the current U308 price, and highly sensitive to any changes in Rare Earths pricing
Initial operating costs. We assumed mining costs of US$3/t for both base and optimistic cases, while for processing costs we assumed US$65/t base case coming down to US$55/t for an optimistic case
Initial fixed costs. We assumed in each case that fixed costs would be 8% of the projected capital costs.
The resulting DCF valuations show an optimistic scenario yielding a value per share of A$ 0.18 and A$ 0.43 per share. The mid-point of this range is A$ 0.31 per share.
Conclusion: Progress expected with Shenghe’s help
Greenland Minerals has made strong progress over the last two years in moving Kvanefjeld forward. Sustained increases in Rare Earths prices, completion of permitting in Greenland and reductions in expected capital and operating costs as Greenland Minerals and Shenghe optimize the flowsheet will help move this high-quality asset forward and contribute to a re-rating of the stock. We have set a valuation range for GGG of A$ 0.18 to A$ 0.43 per share.
- World’s largest undeveloped Rare Earths deposit
- Forward outlook for Rare Earths strong
- Shenghe relationship
- Potentially very low operating costs
- Potential delays in permitting
- Recent weaknesses in uranium prices
- High capital costs
- High demand for Rare Earths in a ‘clean, green’ economic environment
- Potential for lowered capital costs through flowsheet optimization, driven by Shenghe
- US-China trade war featuring Rare Earths
- Potential substitutionary activity reducing demand for critical Rare Earths
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