Greenland Minerals & Energy (GGG)

Transcription

1 Greenland Minerals & Energy (GGG) MoU signed with Chinese REE major 4 April 2014 Recommendation Spec. BUY Company Data Market Cap $106m Shares on issue 574.6m Price $0.185 Sector Materials 12mth Price Range $0.175-$0.46 Net cash (Mar14F) $4m Major Shareholders Citicorp Nom 17.9% HSBC Custody Nom 15.8% JP Morgan Nom 15.6% Rimbal Pty Ltd 9.5% Tracor Ltd 5.0% Analyst Authorisation GGG Share Price $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 Trent Allen Rex Adams $0.00 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 GGG S&P 200 (relative) GGG has signed a Memorandum of Understanding (MoU) with NFC, a subsidiary of global top 500 company China Non-Ferrous Metal Mining Group (CNMC), to provide concentrate to a planned 7000ktpa REE separation facility in China. The two parties will cooperate on feasibility studies and a Mining Licence application for Kvanefjeld, then establish an integrated REE supply chain. NFC can help plan and partly fund the Kvanefjeld Project NFC is a diversified materials company, backed by the balance sheet of CNMC (revenue ~US$30bn). It can provide GGG with rare-earth processing expertise during Definitive Feasibility Studies (DFS) of Kvanefjeld, so as to align GGG s plant design with that of its own planned separation facility. Even though the MoU is non-binding, NFC has allowed itself to be named as the other party in the agreement, which is a strong sign of confidence in GGG and the Kvanefjeld project. CNMC is the same company that in 2009 offered US$286m in debt and equity to ASX-listed Lynas Corp (LYC) to complete construction of the Mt Weld REE project in WA. The two parties could sign a binding agreement once the DFS is completed, with NFC s input, in 4Q14. A Mining Licence could be granted in early Valuation: $0.77/sh (previously $0.98/sh) Blue Ocean s risked valuation of GGG is A$0.77/sh with a post-tax NPV of US$825m. We ve assumed CAPEX will be $1.4bn, a 50% increase over Pre- Feasibility estimates, to cover refinery construction in Greenland and a REO separation facility in China. The valuation uses current REO spot prices (to China FOB), equivalent to a basket price of US$28/kg, and assumes OPEX of ~US$15/kg separated REO a highly competitive margin compared to other large scale REE projects. Recommend SPECULATIVE BUY GGG s Kvanefjeld is one of the biggest deposits of rare earths and uranium in the world. This fact, along with its strategic location in Greenland and potentially low operating costs, means the resource is likely to reach production. NFC could be the ideal development partner for GGG, as it has the financial and technical heft required to push the project forward. Potential share price drivers over the coming 12 months: completion of the DFS; a binding agreement between GGG and NFC; and an accord between Denmark and the Greenland Government over the latter s right to sell uranium.

2 China Non Ferrous settles in for the long term GGG has signed a Memorandum of Understanding (MoU) with NFC, a subsidiary of global top 500 company China Non-Ferrous Metal Mining Group (CNMC), to provide concentrate to NFC s planned new 7000ktpa rare earth separation facility in China. The two parties intend to cooperate on final feasibility studies and a Mining Licence application for the Kvanefjeld rare earth and uranium project in Greenland, ahead of establishing a vertically integrated REE supply chain. The MoU has come after a three-year due diligence process by GGG and NFC. NFC will help plan and could partly fund the Kvanefjeld Project NFC (which stands for China Non Ferrous Metal Industry s Foreign Engineering and Construction Co. Ltd) is a major engineering and mining company. It is listed in China (000758:CH; market capitalisation ~$US1.6bn) and backed by the balance sheet of CNMC. It is a skilled refiner of rare earths and can provide GGG with technical expertise during advanced feasibility studies of Kvanefjeld, so as to better align GGG s refinery design with that of NFC s planned REE separation facility. Stage 1 of Kvanefjeld REE production (without La and Ce) would be sufficient to supply the full capacity of NFC s plant. NFC is one of the +250 subsidiaries of CNMC. Founded in 1983, CNMC operates as a large-scale central enterprise under the management of China s State Owned Assets Supervision and Administration Commission of the State Council. It is focused on the development of nonferrous mineral resources, construction and engineering, as well as related trading and services. CNMC has a global presence, with mines and developments in central and southern Africa, South East Asia and central Asia. It has annual revenue of +US$30bn (Source: GGG). CNMC offered to fund Lynas s Mt Weld REE project in 2009 CNMC offered US$286m in debt and equity to ASX-listed Lynas Corp (LYC) to complete construction of the Mt Weld REE project in WA. The deal, which would have seen CNMC taking a 51.6% placement of shares in LYC (for A$252m) and brought in funding from Chinese banks, was denied by Australian regulators (FIRB). Since then, CNMC has been in search of a new production partner in the rare earth space. Any binding agreement between NMC and GGG could potentially take the same form as that proposed between CNMC and LYC. NFC must be serious about Kvanefjeld or it wouldn t be named in the MoU Even though the MoU is non-binding, NFC has allowed itself to be named as the other party in the agreement, which is a strong sign of confidence in GGG. In our view, the two parties could look to sign a binding agreement to develop the project once Definitive Feasibility Studies are completed in 4Q14. Investment by NFC could follow the issuance of a Mining Licence. Granting an ML could take another two years (~1Q16) and will involve Denmark agreeing with Greenland on how to manage the mining and sale of uranium. Uranium isn t included in the MoU with NFC A separate partner is needed for uranium offtake. This could be an existing major uranium producer in Europe or Asia; or GGG could sell directly to one or more nuclear facilities, probably in the EU. Marketing will undoubtedly be strictly controlled, under a future agreement between Greenland and Denmark, with an eye to meeting Denmark s commitment to the non-proliferation of nuclear weapons. Page 2

3 NPV in US$m (12% nominal, post-tax Greenland Minerals and Energy (GGG) 4 April 2014 Greenland Minerals and Energy (GGG) Overview Greenland Minerals and Energy Limited is evaluating the Kvanefjeld multi-element project (GGG 100%), which is part of a giant alkaline igneous province in southern Greenland. The JORC resource of RE-oxide (10.33Mt) and uranium (U 3 O 8 575mlbs) is globally significant. Production of 23ktpa of REO and 1.1mlbspa U 3 O 8, with potential for expansion, would place Kvanefjeld on the same scale as Mt Weld (21ktpa, Lynas) and Mountain Pass (18ktpa, Molycorp). Other products will be zinc concentrate (6.5ktpa Zn) and fluorspar. The 956Mt open-pittable resource is divided into three areas: Kvanefjeld (619Mt), Sørensen and Zone 3. Pre-Feasibility Study of REE, uranium and zinc production have reached pilot plant stage for the flotation circuit (concentrator) and advanced bench-testing stage for the leach circuit (refinery); results have been highly encouraging. A new MoU with China s NFC could see a 7ktpa REO separation plant added to the flow sheet. Recommend SPECULATIVE BUY: Valuation: $0.77/sh We ve followed the basic assumptions GGG s Pre-Feasibility Study of Kvanefjeld but assumed a 25 year mine life and +50% CAPEX (onsite RE-carbonate production in Greenland and REE separation in China) for a post-tax NPV (12% nominal) of $825m. Risked at -40% (due to ongoing feasibility studies and the challenges of permitting and funding), our 12 month valuation is $0.77/sh including dilution from a potential capital raising. Due to these changes to the model, our valuation is lower than the previous $0.98/sh and NPV $1.3bn (4Q13). Base capital costs (CAPEX) are US$1.45bn and operating costs (OPEX) are US$15/kg for separated REO including uranium and zinc credits. The valuation uses current REO spot prices (to China FOB), equivalent to a basket price of US$28/kg, very competitive with other Tier 1 rare earth projects. Figure 1 shows that NPV is highly leveraged to changes in REO prices, and less so to CAPEX and OPEX. Figure 1: GGG valuation: Post-Tax Net Present Value (10%) and Sum of the Parts Basket REO price Units base US$28/kg Revenue (first 25 years) US$m 25,649 EBITDA (25yrs) US$m 12,416 NPAT (25yrs) US$m 7,698 NPV (12% nominal, post tax) US$m 814 Risked NPV (-40%) US$m 488 Cash (Mar 15F) ** A$m 12 Debt (Mar 15F) ** A$m 0 Corporate overhead A$m -28 $2,000 $1,500 $1,000 Change in REO basket price Change in pre-production CAPEX NPV $814m NAV $US 473 Shares on issue (Mar 15F) ** 680 Net asset value US$/sh 0.70 Net asset value A$/sh 0.76 $500 $ Current A$/sh 0.18 Upside % 320 * Basket price is that received for 1kg of Kvanefjeld blend of rare earth oxides; uranium price US$50/lb; exchange rate is current, i.e AU/US ** Assumes dilution in 2014 from placement of 20c/sh, for DFS and w orking capital -$500 Variation % Page 3

4 The Blue Ocean View At this stage, GGG s Kvanefjeld appears financially robust under conservative valuation conditions. For example, base case total EBITDA is ~US$4.2bn in the first 10 years. Some key aspects of the project are as follows. CAPEX and OPEX: after Pre-Feasibility Studies, pre-production CAPEX was expected to be ~US$ m for an open cut mine, on site concentrator and remote refinery. It now seems likely that the refinery stage will also be on-site or at least in Greenland, and a separation plant will be built in China. This will add value to the end products but also push CAPEX up by 50% or more due to the requirement for extra infrastructure in Greenland. BOE estimates that OPEX could be about US$15/kg separated REO products with U credits at $50/lb and Zn at $0.80/lb. Metallurgy is unusual but favourable. The obscure steenstrupine mineralisation has turned out to be crackable for REE-U extraction. The upstream concentrator (flotation) has been tested to pilot plant stage. Now that NFC has agreed to partner with GGG to create a rare earth supply chain, the downstream refinery process (atmospheric leach and REE conversion) can be shaped and tested to fit NFC s planned separation plant in China. At current prices, most of the project s value comes from middle and heavy rare earths. At a run rate of 23ktpa REO and 1.1Mlbspa uranium oxide, 30% of the REO mass but 87% of the US$28/kg basket value comes from the rare earths other than La and Ce. Overall, La and Ce only contribute about 10% of the revenue. Environmental and social impact studies are in progress. These are the rate-limiting steps for the mining/exploitation licence application, which is expected in 1Q15. Greenland is a frontier of mineral development but politics can intervene. Greenland is prospective for deposits of metals and hydrocarbons but there has been very little modern exploration. A former Danish protectorate, Greenland was granted home rule in 1979 but the Danish government is still responsible for foreign affairs, financial and security policies. Greenland recognises that the minerals industry is important to its future as an independent nation. For example, a long-established moratorium on uranium extraction was recently lifted, opening the way for Kvanefjeld to proceed to advanced feasibility studies and potentially mining. Denmark s view is that uranium sales fall under its jurisdiction, so the two nations will have to reach a cooperation agreement on the matter this is expected in late There is upside for rare earth and uranium markets. The REE market has settled since the price bubble of 2H10-1H11, supply expansions have been delayed and most elements are in demand. The uranium market is suffering but an increase in the current ~$50/lb contract price is forecast by many commentators. Long-term offtake agreements will be key to price stability and will be available to a big producer like GGG. Potential share price catalysts over the coming two years Completion of the DFS and associated studies in 4Q14. Binding development agreement with China Non Ferrous in 4Q14 leading to Bankable Feasibility Study (BFS) at Chinese standards. An agreement between Greenland and Denmark over uranium sales, in 2H14. Granting of a Mining Licence in 1Q16 after application in 1Q15. A potential lift in REE and uranium prices. Page 4

5 Main Risks of Investment Permitting: Greenland has lifted the general ban on uranium mining but must still reach a cooperation agreement with Denmark over responsibilities associated with its production. Greenland may not be able to grant a U/Th exploitation licence until The environmental and social impact assessments (EIA/SIA) required to obtain such a permit will be exhaustive. Commodity prices: Kvanefjeld is leveraged to the market for rare earths and to a lesser extent uranium and zinc. A fall in prices could render the project uneconomic. However, it remains financially robust in the face of most realistic price assumptions. Project funding: Pre-production costs of Kvanefjeld will be subject to a BFS but are likely to be in the range $1bn to $1.5bn, especially if the refinery is required to be built in Greenland. Financial position At the end of CY13, GGG had $5.3m in cash and no debt. Forecast outflows for MarQ14 included $0.55m on exploration and $0.75m on corporate/administration, on which basis we estimate the current cash position is ~$4m. At that burn rate and in order to continue feasibility studies the company will need to raise further capital in Board of Directors Non Executive Chairman, Michael Hutchinson; Managing Director and CEO, Roderick McIllree; Executive Director, Dr John Mair; Executive Director, Simon Cato; Non Executive Director, Jeremy Whybrow; Non Executive Director, Tony Ho. For the past several years, GGG has met every key milestone in terms of project timing except for those dictated by outside influence such as permitting or politics. Figure 2: Timeline for project development Source: Company Page 5

6 Kvanefjeld is well situated in terms of infrastructure such as deepwater port and hydroelectric power. Less than 20% of the prospective area has been included in the REE-U resource (which is already sufficient for many decades of production). Figure 3: Project location, outline of mineralisation, potential development Source: Company Kvanefjeld s flow sheet is relatively simple. The concentrator and probably the refinery will be built in Greenland; the separation stage will be built in China by MoU partner NFC. Figure 4: Global ex-china REE projects by contained REE Appendix 1 Source: Company Page 6

7 The Kvanefjeld Pre-Feasibility Study ( ) will be upgraded to a DFS we have assumed +50% on PFS CAPEX Figure 5: Kvanefjeld project DCF modelling key assumptions including commodity prices Source: Company and BOE Page 7

8 Analyst Trent Allen Senior Research Analyst, Blue Ocean Equities Research & Dealing Contact List Rex Adams Executive Director P E. [email protected] Trent Allen Senior Research Analyst P E. [email protected] Philip Pepe Senior Research Analyst P E. [email protected] Gregg Taylor Senior Research Analyst P E. [email protected] Peter Chapman Senior Research Analyst P E. [email protected] Adam Stratton Institutional Dealing P E. [email protected] Kevin Curran Institutional Dealing P E. [email protected] Doc Cromme Institutional Dealing P E. [email protected] Nic van Vliet Institutional Dealing Ph E. [email protected] Tim Potts Institutional/HNW Dealing P E. [email protected] Blue Ocean Equities Pty Limited T E. [email protected] L39, 88 Phillip St Sydney NSW AFSL No ABN General Advice Warning: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Blue Ocean Equities Pty Limited. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives you should consult your own investment adviser before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Blue Ocean Equities Pty Limited has not verified independently the information contained in the document and Blue Ocean Equities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or by implication, that the information contained in this document is complete or accurate. Nor does Blue Ocean Equities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Blue Ocean Equities Pty Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest Blue Ocean Equities Pty Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document.. Blue Ocean Equities Pty Limited and associates hold 10,000 shares in Premier Investments Limited at the date of this report and this position may change at any time without notice. Page 8