Greenland Minerals Ltd (ASX:GGG) is sitting on one of the world’s largest undeveloped rare earth oxide resources prompting Pitt Street Research to place a valuation range of 18 cents to 43 cents per share.
With this resource supported by uranium and zinc, the Sydney-based issuer-sponsored equity research provider’s valuation range represents a strong premium to the current share price of 8 cents.
Greenland Minerals is a Perth-based resources company focused on the 100%-owned Kvanefjeld Rare Earths Project in Greenland.
Kvanefjeld in southern Greenland hosts one of the world’s most significant rare earth deposits.
The project has a JORC 2012 resource of 1.01 billion tonnes grading 1.1% rare earth oxides (REO) with a substantial uranium resource of 593 million pounds as well as zinc.
Demand for rare earths is strong given its use in various 21st Century products, most notably electric vehicles, smart electronic products, wind turbines and sophisticated defence equipment.
Pitt Street analyst Stuart Roberts said in a new research report, “With the help of Shenghe Resources, a major Chinese rare earths player, we expect Greenland Minerals can move towards an updated feasibility study for the project in the next year or so, with the mine potentially starting up in 2021.”
Following are excerpts from the Pitt Street Research report:
The Kvanefjeld project has considerable advantages as a rare earths source, most notably its favourable metallurgy and wide spread of critical rare earths.
A steady increase in rare earth and U3O8 prices, further progress on the Kvanefjeld flowsheet, and completion of permitting in Greenland can help drive favourable sentiment and re-rate the stock into our valuation range, and, potentially, beyond.
We value Greenland Minerals at 18 cents per share base case and 43 cents per share optimistic case using a DCF approach with conservative assumptions on rare earths.
Our valuation is highly sensitive to changes in the prices of critical rare earths such as neodymium. Should prices return to the levels assumed in 2015, Kvanefjeld will be a very valuable rare earths mine indeed.
Kvanefjeld’s state of development
Kvanefjeld has gone through an initial feasibility study that was published in May 2015 and updated in April 2016.
These studies envisage a mine life of 37 years with a primary product of ‘critical’ REO, ‘critical’ meaning that these particular rare earths are expected to be in short supply in the future.
An improved cost profile for Kvanefjeld in 2016 suggested average free cash flow of US$376 million p.a, up 14% on the 2015 estimates. In this update, expected capital costs came down markedly, from US$1.36 billion to US$832 million. Greenland Minerals is continuing to work hard on costs.
A key step forward, from late 2016, has been the involvement of a major Chinese rare earths company called Shenghe Resources, which now owns 11% of Greenland Minerals. Shenghe Resources has brought considerable technical expertise into the project as a collaborator as well as a shareholder.
What comes next for Greenland Minerals?
The company expects to work on a feasibility update once the flowsheet has been optimised and the relevant permits have been granted by the Greenland government. After this, Greenland Minerals and its collaborators will move to a bankable feasibility study. In this note, we envisage a start-up of production at Kvanefjeld around 2021.
If Greenland Minerals is so good, why is it capitalised at only $91 million?
We think that the main reason for the apparent undervaluation is concerns that environmental and related permitting issues have some years to progress. We look for a re-rating once permitting has completed and the company can work on an update to its feasibility study.
Re-rating Greenland Minerals
Greenland Minerals’ stock is trading below our base case valuation. We see four factors helping to re-rate Greenland Minerals into our valuation range:
- Success in further test work at the concentrator and the refinery stage of the flowsheet;
- Granting of a mining licence for Kvanefjeld;
- Completion of an updated, or second, feasibility study;
- A binding commercial agreement with Shenghe on future product offtake from Kvanefjeld.
Furthermore, Greenland Minerals has a management team capable of taking Kvanefjeld to the next stage.
Managing director Dr John Mair has been involved with Kvanefjeld since 2008. Since his 2014 appointment as managing director, he has overseen the corporate evolution of Greenland Minerals as a rare earths play aligned closely with Shenghe. CFO Miles Guy brings an accounting and corporate governance background.
The Greenland Minerals board has the kind of skillset required to build an emerging rare earths play, in our view.
The Sydney-based non-executive chairman Tony Ho brings as a commercial background gained mainly in the retail sector. Simon Cato brings a capital markets expertise gained over three decades in the financial services industry. And Xiaolei Guo, a Shenghe executive, brings deep knowledge of the Chinese rare earths sector.
Conclusion: Progress expected with Shenghe’s help
Greenland Minerals has made strong progress over the last two years in moving Kvanefjeld forward.
Sustained increases in rare earths prices, completion of permitting in Greenland and reductions in expected capital and operating costs as Greenland Minerals and Shenghe optimise the flowsheet will help move this high-quality asset forward and contribute to a re-rating of the stock.