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Greenland Minerals & Energy (GGG) MoU signed with Chinese REE major
4 April 2014
Recommendation
Spec. BUY
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 2016.
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.
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 Trent Allen
Authorisation Rex Adams
GGG Share Price
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
Apr 12 Oct 12 Apr 13 Oct 13 Apr 14
GGG S&P 200 (relative)
Greenland Minerals and Energy (GGG) – 4 April 2014
Page | 2
China Non Ferrous settles in for the long term
GGG has signed a Memorandum of Understanding (MoU) with NFC, a subsidiary of global top
500 company China Non-Ferrous Metal Mining Group (CNMC), to provide concentrate to NFC’s
planned new 7000ktpa rare earth separation facility in China. The two parties intend to
cooperate on final feasibility studies and a Mining Licence application for the Kvanefjeld rare
earth and uranium project in Greenland, ahead of establishing a vertically integrated REE
supply chain. The MoU has come after a three-year due diligence process by GGG and NFC.
NFC will help plan and could partly fund the Kvanefjeld Project
NFC (which stands for China Non‐Ferrous Metal Industry’s Foreign Engineering and
Construction Co. Ltd) is a major engineering and mining company. It is listed in China
(000758:CH; market capitalisation ~$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.
Greenland Minerals and Energy (GGG) – 4 April 2014
Page | 3
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 (U3O8 575mlbs) is globally significant.
Production of 23ktpa of REO and 1.1mlbspa U3O8, 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
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
NAV $US 473
Shares on issue (Mar 15F) ** 680
Net asset value US$/sh 0.70
Net asset value A$/sh 0.76
Current A$/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. 0.92 AU/US
** Assumes dilution in 2014 from placement of A$15m @ 20c/sh, for DFS and w orking capital
Basket REO price
-$500
$0
$500
$1,000
$1,500
$2,000
-30 -20 -10 0 +10 +20 +30
NP
V i
n U
S$m
(12%
n
om
ina
l, p
ost-
tax
Variation %
Change in REO basket price
Change in pre-productionCAPEX
NPV $814m
Greenland Minerals and Energy (GGG) – 4 April 2014
Page | 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$800-900m 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 2014.
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.
Greenland Minerals and Energy (GGG) – 4 April 2014
Page | 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 2016. 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 2014.
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.
Figure 2: Timeline for project development
Source: Company
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.
Greenland Minerals and Energy (GGG) – 4 April 2014
Page | 6
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
Source: Company
Appendix 1
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).
Greenland Minerals and Energy (GGG) – 4 April 2014
Page | 7
The Kvanefjeld Pre-Feasibility Study (2012-2013) 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
Greenland Minerals and Energy (GGG) – 4 April 2014
Page | 8
Analyst
Trent Allen
Senior Research Analyst, Blue Ocean Equities
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