Is it finally time?
A company which I have been holding for approximately two years seems though as the stars have finally aligned here.
From a top down perspective, the market looks to have accepted the fact the COVID as something we have to adjust with, accompanied with unparalleled support from central banks to boost confidence – that even within one in hundred year events and crisis they’re able to swiftly bail markets out. Although I am of the opinion the market are slightly stretched short term.
The added catalyst then becomes the post-COVID world trying to reduce dependency in China’s supply chains and products, whether it is banning Chinese owned social media companies like TikTok or reducing their Rare Earths stranglehold. Foreign countries (America in particular and the Trump narrative) are doing their best to move away from Chinese supplied products and COVID has shown just how brittle our supply chains are.
Sources quote China accounting for 90-95% of rare earths supply and owning an even larger share of HREE (Heavy Rare Earths Elements – the valuable elements) supply.
Furthermore, to quote Daniel Packey from Curtin University –
“The ionic clay rare earth resources in China are the cheapest and most accessible source of heavy rare earths. They are also the most valuable. The Chinese rare earth market has an uncontrolled illegal market segment that represents approximately 40% of the domestic market, which translates to 30% of the global market.”
With a crackdown on illegal mining that makes China’s Ionic Clay Rare Earth deposits even more valuable in the eyes of the global market. Unfortunately, even with 30% of the global market being crackdown upon, South China still has ample Clay reserves to continue to expose and hold onto their monopoly.
Looking at the charts of PM8, PEK, GGG, LYC, ARR, REE you can see the race for rare earths has commenced
WHY IXR?
So why have I held IXR for over a year waiting for the stars to align? Simple, I believe it’s a tier above the rest of the developers – once again referring to the quote above:
“The ionic clay rare earth resources in China are the cheapest and most accessible source of heavy rare earths. They are also the most valuable.”
The particular reason why I have held onto IXR for this long irrespective of sector performance is simply because of its rarity to discover these types of assets. Hard rock rare earths are found globally in ample amounts, however not so much for clay.
South China hosts >95% of the worlds clay deposits which they have full control essentially as a monopoly without allowing foreign buyers to step in. Outside of China, we have 4 major discoveries and of these only 3 projects remain active globally – the fourth (Tantalus) in Madagascar had EIA rejected as it was on native protected land, however, was valued at $1B prior to the conflicts.
The remaining three Ionic Clay Projects outside of China is as follows;
- Serra Verde in Brazil at Construction Phase
- Biolantanidos in Chile at Pilot Plant Phase
- IXR’s own Makuutu in Uganda at MRE Expansion/Scoping Study moving to Pilot Plant after that.
Essentially I can attribute two key reasons why I believe IXR is a tier above the rest – at least for the data we are given now.
1. EXTRACTION ECONOMICS
Ionic Clays requires a unique type of weathering to develop, which makes them near impossible to discover on a regular basis. They are also notoriously economic, instead of spending $500M building a Rare Earths Plant and spending further $100’s of Millions extracting them with chemicals, Ionic Clays have a straightforward extraction method. This extraction method is known as Ion Exchange, by using an inexpensive Cation (Positively Charged) salt to leach out the rare earths from the clay leaving a high value solution.
An extract from “Recovery of Rare Earth Elements From Clay Minerals” by Vladimiros Papangelakis and Georgiana Moldoveanu explains it better below;
So, while hard rock resources could require $200M-$1B CAPEX, multiple ionic clay deposits in China have been started up for <$20M. This is exactly why China has been able to have a strong hold on the REE sector. No institution wants to wager $100’s of Millions CAPEX to start up an REE project and bet against thin margins and a spot price which can be undercut by China’s pricing power at any moment.
Just to give an idea how economic Ionic Clays can be this extract has been taken from “China’s ion-adsorption rare earth resources, mining consequences and preservation”
So, although REE deposits are abundant in China, Ionic Clay REE’s make a mere 2.9% of total REE reserve discoveries in China, in contrast, they account for 35% of China’s production in 2009, which goes to show how many hard rock projects become uneconomic or have incredibly long lead times to production. On a one to one basis if both hard rock and clays were equally economic – clays should only be accounting for 2.9% of China’s production.
2. HREE CONTENT
The second reason why Ionic Clay deposits like IXR is a tier above the rest is because of the composition on rare earths; I’ll begin with this excerpt taken from “Global Potential of Rare Earth Resources and Rare Earth Demand from Clean Technologies” by Baolu Zhou to provide a bit of context.
“Except for identifying the deposit mineralogy, REE-distribution is critical to the economic value of REE-deposit“
Unlike a standard base metal project, the percentile grade in REE is not straightforward. Although punters frothing at grades on precious/base metal projects can be justified it can be foolish to froth at grade’s coming into Rare Earths.
The grade provided in Rare Earth projects are shown as “TREO” – Total Rare Earth Oxides % or ppm. However, as per quote above, it is the distribution that is critical. This is essentially because of the wide varying prices of the different REE’s.
Here is a few numbers from my database with the HREE highlighted in red.
Now what you can see is REE’s like Lanthanum goes for a worthless $1.54/kg. Whereas, Heavy Rare Earths like Dysprosium goes for $351/kg.
Project A could have 1Mt at 10% TREO consisting all Lanthanum.
Project B could have 1Mt at 1% TREO consisting purely of Dysprosium.
On the face of it, the grade of Project A looks excellent, but looking into the distribution of what lies within each project shows that Project B is 20x more valuable.
The more accurate (although not perfect) methodology for solving for grade in Rare Earths is to use Basket Value, which is the dollar value (considering the distribution) per kg of separated ore. Which goes back to my original point of why IXR remains a tier above the rest, because Ionic Clays contain far greater distributions of HREE (The expensive stuff) versus Hardrock (Which have greater amounts of Light Rare Earth Elements).
This extract from USGS reinforces the dominance China has with their Ionic Clays and subsequent control over HREE.
Because of the high value HREE distribution and extremely low CAPEX/OPEX, anything above 500ppm TREO in Ionic Clay’s are considered high grade with deposits as low as 300ppm being economic.
Attached below is a list of Ionic Clay deposits across China with respective grades and recoveries to give an idea the project parameters and grade benchmarks which has resulted in the >35% of global supply.
PEERS AND COMPETITORS
I have updated all the REE prices to the most recent quotes from the sources provided in the “HREE” section – I don’t consider these 100% accurate but I’ve applied the same prices across all companies mentioned below to solve the basket value so that the consistency remains. Also note; IXR’s project value was calculated at a price of $0.011, on a fully diluted basis with all earn-in liabilities priced into their ownership. An AUD to USD conversion rate of $0.68 was use across the board of companies.
Biolantanidos currently is 5x smaller than IXR (13kt versus 66kt in-situ tons) at a lower grade.
Where Biolatanidos has the edge is their HREO/TREO ratio (as mentioned earlier, distribution is key) giving them a much larger distribution of HREE in their ore versus IXR, which consequently leads to their higher basket price and superior margins.
However, IXR remains 5x larger with potential to go 10-20x larger while being valued at half of what Biolantanidos was taken over for.
Serra Verde remains a tier above the rest, in terms of grade, size and how advanced the project is, albeit slightly lower margins and higher CAPEX. To date Denham Capital have spent about $US260M on the project, so fair to say they expect a far higher value for this project if they are looking to make a ROI, for now I’ve left project value at a very modest US$260M.
It should be noted, the CAPEX and OPEX are highly speculative for IXR, no official announcement has been released providing guidance on these numbers. This was simply hand calculated by me using data I got from Chinese projects scaled up for Makuutu with further 30-50% contingency, also note that I have no professional qualification in mining economics so best to take it with a grain of salt.
I will not go into full explanation of the IXR CAPEX/OPEX figure but however will provide screenshots on the build up of CAPEX and OPEX itself below – and once again to reiterate if it was missed the first time, highly speculative and rough estimations.
Now comparing IXR to its ASX hard rock peers
Above we compared clay with the only two other world class clay deposits ex-china. When you compare the numbers of the clay deposits with those of the hard-rock deposits we see on ASX, you can truly see why Ionic Clays remain superior in economics.
Keep note however, the margins are not 100% accurate;
The formula is calculated as Margin = Basket Value ($/kg) – OPEX ($/kg Conc. Produced), the flaw within this formula is basket value assumes the same distribution within the oxide concentrate – which is often not the case. Furthermore, different companies aim to produce different end products, some hydroxides, some mixed oxide concentrate, some concentrate of only one REO etc.
The margins work as a guideline for project feasibility and usually is good for highlighting the upper & lower quartiles, i.e. projects which really stand out or projects which are sub-par. The notes aim to provide greater fundamental context to each company.
Looking at the collection of hard-rock projects, two differences standout to me:
- CAPEX
With exception of PM8 the CAPEX on these projects are significant, averaging US$633Million (excl. PM8), and averaging US$444Million (Excl. PM8 and VML – both outliers at either extreme ends). Once again not many institutions are willing to wage half a billion to start a project especially when China owns the Monopoly and pricing power. This is the key barrier to entry within the sector and the reason why most of these companies are not valued far higher and also why Lynas remains the only producer in Australia.
A company like PEK has its project valued at US$51M with 5.4Mt of REE in-situ at grades ranging 2-4%, where as Hothschild were happy to take over the Biolantanidos Clay project in Chile for US$60M which has only 13Kt of REE in-situ at grades of 0.063%. Which emphasises the insane additional premium put on Clay Economics - MARGINS
The margins although not 100% accurate are generally far lower on Hard Rock than for the Clay projects. With exception of HAS which appears to have impressive margins which is overshadowed by US$396M CAPEX
RISKS
To tone down the optimism a little; there is risks that need to be considered still. Disregarding global and macroeconomic risks, some which come to mind
- China is currently running an HREE monopoly and can easily undercut prices at their will to squeeze out competitors, this can take out wind from the sector.
- My biggest concern reading the technical documents of the Makuutu Project was the metallurgy. Numerous clay projects sit around 40-60% recovery (at least the world class ones) while IXR at first glance looks around 30-35% which is still economic, however, leaves less room for error. On the positive, the recent and revised metwork done by the new team do show recovery have been consistently at 50% so hopefully they can retain this level at scale, for now I have assumed the conservative 35% in my calculations.
- Ionic clays are renowned for their environmental friendliness due to having no radioactive waste. However, on counter-side there is an environmental issue with leaching in-situ and soil contamination. Getting EIA approved can be tricky depending on the land and vegetation.
- Extension/Step-out drills have been promising to date however is no guarantee of a resource expansion, and a big part of this thesis assumes the IXR can expand in size while retaining similar levels of HREE composition within the extension.
- There are the obvious risks of any early stage developer, no numbers are really set in stone, no off-take contracts have been guaranteed or financing for the pilot plants etc.
SUMMARY
IXR has made it clear they expect a low CAPEX and substantially better OPEX than its hard-rock competitors, although it is still early days and we are yet to see the actual size of the deposit it certainly should be trading to premium to hard-rock peers such as PEK, ARU, NTU which appear to fail themselves on both CAPEX and Margin fronts.
There is a significant edge with Clay deposits, having a simple extraction process, being shallow, not requiring extensive processing or expensive leaching acids, having greater distributions of HREE and no radioactive waste which consequently leads to better economics.
Time will tell, and there is still much progress for IXR to make to prove itself up.
This infographic by Terra Studio seen below shows the potential for IXR, with the current resource based of only 900m of drilling, if the further 3.7km of drilling is successful its due to walk amongst the giants as seen by “Makuutu Max” – giants such as Serra Verde which is valued at a conservative US$260M, of course IXR will be discounted for the fact they haven’t shown commercial success on pilot plant yet and Serra Verde has. Furthermore, if they do reach that upper echelon from drilling it will be multiples the size and grade of Biolantanidos (Taken Over US$60M) while being at the same project stage.
I could go on about the semantics of the company ranging from management to technicalities, but I rather not bore everyone to death further.
The company remains on track so far to build up a world class asset, the unique style of deposit other than presenting an economic advantage has the ability to become a political chess piece for either America or China, which makes for a compelling story.
I did expect it to run earlier, however each time it was sold into due to CR fears, the company has recently bit the bullet and secured financing. The companies track record of financing has been impressive with 3 of the last 4 raises coming at zero discount to the market bid.
Seems though technically the stale holders are being absolutely cleaned out with huge change in register lately, its the mega volume on the left hand side that is being worked through and looks like a bit more soaking at 1.1/1.2 needed before marching and attacking the highs.
Disclosure should be made; I have bought majority between 0.002-0.005 and have active bids 0.01 plus a recent fill at 0.011. This company is also among the larger holdings in my portfolio so I speak with a clear vested interest.
And goes without saying to seek professional advice when it comes to investments rather than reading a blog to form decisions. Also keep in mind, I too am human and get plenty wrong as well and far from having a 100% track record.
952i Capital 