Byron Capital Upgrades GWG to $3.80
Rating: STRONG BUY Great Western Minerals Group Ltd.
Target Price: $3.80 (GWG – TSXV)
All figures in C$, unless otherwise noted
Solvent Extraction Partner Announced
The Best of the Best: Great Western Minerals Group Ltd.’s (“GWG”) management announced that they have signed a Heads of Terms agreement with Ganzhou Qiandong Rare Earth Group (“GQD”) of Ganzhou, China, to build a new solvent extraction (“SX”) plant in South Africa. GQD has been a supplier to GWG’s Less Common Metals Limited (“LCM”) subsidiary for at least 15 years, and have been able to deliver consistently high quality rare earth oxides, ferro alloys and metals. As LCM is known for delivering some of the highest quality magnet alloys available in the market, evidenced by the recent announcement of a Co-operation Agremeent between GWG/LCM and Aichi Steel Corporation of the Toyota Group, high quality and consistent supply is critical. More importantly, GQD possesses state-of-the-art SX technology. GQD is likely the best choice as a partner for GWG, as the two companies have developed a strong business relationship over an extended period of time.
What It Means: A new company, Great Western GQD Rare Earth Materials Co. Ltd. will be formed in South Africa, 75% owned by GWG and 25% owned by GQD. A final JV agreement is under negotiation, and GWG management anticipates it being finalized by the end of next month. GWG will need to pay the proportional costs of building the proposed, modular SX plant, with an initial 5,000 tonne per year throughput, but we have previously noted that new Chinese technology makes the cost of these plants far lower than one would anticipate if one studies the plants built by Lynas Corporation or proposed by Molycorp, Inc. We believe that total costs of $30 - $35 million should allow for the construction of the SX facility, with these levels of proportional ownership. At present, we do not know if there are requirements to share material, but we are assuming that if an off-take agreement for GQD is finalized, that GQD would be paying market rates for the REOs from Great Western GQD, as would GWG.
Company Description: GWG is a mine-to-market junior rare earth company. Its subsidiaries, Less Common Metals and GWTI, produce finished powders and alloys for various industries, but as its mines and separation capabilities are brought on line, the company will grow revenue and margins.
Valuation: We have allocated 25% of SX margins to GQD, removing these from cash flows to the parent. But we have also reduced our discount rate for GWG to 11%, given that we believe the naming of a SX and metallization partner de-risks the entire project substantially. We do not foresee major capital expenditures beyond those we have already modeled, with total project development costs remaining well below $100 million.
Based on our existing, admittedly conservative rare earth price deck, we maintain a STRONG BUY rating on GWG, but we are raising our target price to $3.80 from $3.50.
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