Update on GWG from Byron Securities.
•Delayed but Done: Perhaps the largest milestone to date in the company's history was reached earlier this month when Great Western Minerals Group Ltd. (GWG) closed a US$90 million convertible bond issue. This is likely sufficient capital to re-open the Steenkampskraal monazite mine, construct a processing plant in South Africa and make the company one of the very first mine-to-market producers of rare earth downstream products.
The path to this point was not simple. The company missed an excellent financing window in late 2011, and had to complete this bond transaction in a much more difficult market. But the deal is done and GWG now has a clear path to market. The only risks are execution and a reliance for SX plant design on GWG's JV partner, Ganzhou Qiandong Rare Earth Group Ltd. (GQD).
We incorporated the bond issue, its required interest payments and eventual dilution into our DCF. We have delayed production of separated and purified REOs and magnet alloy from the new plants into H2/13. Growth in output is also delayed, but still reaches an effective level of 20,000 tonnes per year by 2020, as per our discussions with some of GWG's intended off-take partners. Our standard price deck for REOs is applied, and a 10% discount rate is used (down from the previous 11%). The result is a new target price of $2.60 from $3.40 based on a DCF valution, and we maintain our STRONG BUY rating. GWG remains our top pick in the rare earth sector.
•The Bond Issue: In detail, this is a simple transaction to describe. US$90 million in convertible bonds were issued, bearing an 8% interest rate with a conversion date of April 2017 at a strike price of
.66. We have factored the required interest payments and eventual dilution into our DCF model.
•Money (Being) Well Spent: The funds will be used to reopen the Steenkampskraal mine, allowing the commencement of mining operations prior to the end of calendar 2012. Additional funds will be spent on the construction of a hydrometallurgy plant and SX facility; the SX plant's design will be provided by Chinese SX firm GQD, based on the most recent designs that the company is employing at operations in China. Equipment will also be purchased for Less Common Metals in England, to allow the ramping of magnet alloying capacity.
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