MD: Over at Great Western's Steenkampskraal Mine, the all-important total rare earth oxide (TREO) grades are well above 10% TREO, some of the highest grades of any deposit in the world, which could translate into the most robust profit margins. Rock mined at Steenkampskraal is monazite, so in-demand HREE concentrations are high. The mine could be in production in less than 18 months. The company already has a license to store the thorium byproduct at the mine, and since the mine was operated decades ago before it was shut down, infrastructure is already present. The company owns two quality processing facility assets worth more than the current market cap. Management has already said demand is increasing so rapidly that another doubling of production capacity is possible after the first expansion is implemented in the next three years.
Great Western Minerals owns a few other promising REE deposits. It will be buying tailings from other South African miners. It has a deal negotiated with Aichi Steel, a subsidiary of Toyota Group, for Aichi to buy a large quantity of rare earth alloys and another long-term supply contract with German permanent magnet maker, Vacuumschmelze.
The downside is that the Steenkampskraal Mine is located in South Africa, which is politically unstable. However, Great Western's processing plants will comprise most of the profit and those facilities are located in the U.S. and U.K.
Also, although it is generating significant revenues, Great Western Minerals is still not profitable because it pays high input costs for processing materials. The company imports rare earth metals from China at great expense. Management has not done a good job of understanding the macroeconomic situation or of managing the cash levels at the company and because of this, management botched a financing in the last few months that it could have easily done at a much higher stock price earlier in the year and have diluted less. The company is not fully funded yet and is not completely self-sustaining. Cheaper materials from Steenkampskraal will generate higher profits. The company's other processing facility, Great Western Technologies in Michigan, is currently sitting idle because of a dearth of HREE materials.
Great Western Minerals is a long-term play. Financial statements are getting stronger with increasing gross profit margins due to the Less Common Metals processing plant. Great Western's stock price also benefited tremendously when the rare earth metals price rose from 2010 to July 2011. Since then, the stock price had a violent correction, mainly from declining rare earth prices and dilution. Investors will have to have a two- to three-year timeframe when investing with Great Western Minerals. The most important thing to watch is management execution. Can they can recover from the dilution? Will they bring the Steenkampskraal Mine to full production on time with no major setbacks? Will they reduce processing costs? And can they continue to expand profit margins? If management can execute, we would not be surprised if this stock goes up tenfold.
