Tantalus Rare Earths AG

Transcription

1 a Equity Research Watchlist Rating: N/A Target Price: N/A (TAE DE, 18.47) All figures in US$, unless otherwise noted. The First Ex-China Ionic Clay? February 21, 2012 Recent Price: Week Range: Shares O/S: Basic (MM): 2,350,966 F.D. (MM): 2,350,966 Market Cap (MM): 43.4 Average Daily Vol: 1,740 Fiscal Year End: Dec. 31 Cash (Mar/11) (MM): N/A Company Description: Tantalus is a junior rare earth exploration company, focused on the development of its properties in northwest Madagascar. Should this deposit be confirmed to contain clays that easily leach rare earths, Tantalus would be the first so-called ionic clay deposit identified outside China. Jon Hykawy, Ph.D., MBA Head of Global Research Clean Technologies & Materials jhykawy@byroncapitalmarkets.com Sandy Lam Associate, Equity Research slam@byroncapitalmarkets.com Tantalus: (Tantalus) is a rare beast. It is a junior rare earths company, making it a member of a club with perhaps as many as 400 members. The deposit, in northwest Madagascar, tends to contain a significant proportion of HREEs, making it a member a club with no more than 100 members. But it also seems possible that the argillaceous laterites overlaying the REE-bearing hard rock may contain REEs that can be extracted with simple, weak chemicals such as fertilizers, making this deposit a very close cousin of the southern Chinese ionic clays. If so, then Tantalus is a very rare animal indeed, part of a group that numbers no more than four members, at present: the small group of companies that may hold deposits containing ionic clays outside of China. The Deposit: The TRE Project in Madagascar has recently been described in a JORC-compliant report. SRK (UK) has established an inferred resource of 130 million tonnes of clay with an average grade of 0.08%. While this grade looks exceedingly low, if the material is shown to be amenable to simple recovery of the REEs, without additional crushing, grinding or costly hydrometallurgy, then it is of a grade and composition consistent with the Chinese ionic clays. Those Chinese clays very profitably produce the bulk of the world s HREEs. Tantalus could quickly take a place within the REE industry as an important source of HREEs outside of China. Emerging Interest: The most likely entities to recognize the potential importance of an ionic clay deposit outside China would be the very Chinese companies mining the southern Chinese ionic clays now. Tantalus management is now engaged in JV discussions with China Non-Ferrous Metals Company Limited. More to Come: While we remain interested in Tantalus and its TRE Project, an additional message should not be ignored. Those companies touting expensive, large hard rock-based HREE projects are now under fire from small, potentially quick-todevelop ionic clay projects. We know, potentially, of four such clay deposits, and it seems likely that more will emerge. Please see end of this report for important disclosures

2 Tantalus and the Rare Earths We have long believed that while rare earths are not rare and are certainly not irreplaceable, they are awfully nice to have. In fact, even with the trajectory taken by REO prices post the imposition of stringent export quotas by China, in several key industries we believe that it has not been high price that has discouraged the use of REEs, but uncertain supply. Exhibit 1 Price of Nd 2 O 3 Post 2010 Quotas to Present Heavy REEs are the only ones that may remain in chronic short supply. Ionic clay projects could be key to alleviating any such shortages Source: Asian Metal Arguably, even at the peak prices for Nd 2 O 3 of US$370/kg, Nd-based rare earth magnets would have been happily used in automotive applications, given the superior energy efficiency of permanent magnet synchronous motors, and the very high costs of the batteries required to drive hybrid and fully electric cars. However, it is impossible for a design team to recommend use of components in a car design that may not be available in a short period of time; that is a recipe for idling a plant and generating huge losses. Curiously, the relevant Chinese ministries may have learned this point and took great pains in the brief message on December 27 announcing the first tranche of 2012 REE export quotas to emphasize stability of supply. One point we have made is that HREEs are perhaps the only REEs that may remain in critical long-term undersupply. Clearly, the demand for La and Ce oxides outside China would likely be supplied into the indefinite future by Molycorp, Inc. (MCP - NYSE), Great Western Minerals Group Ltd. (GWG - TSXV) and Lynas Corporation Limited (LYC - ASX). Our latest analysis of the supply/demand dynamics in the space and the resulting price deck noted that even HREEs would be in good supply. But this was due to our assumption that at least two ionic clay HREE projects outside of China would begin producing material before And we had projected that one of those ionic clay projects could be Tantalus. We refer readers to our latest publication on supply and demand of REOs through 2020 ( Rare Earths: No Problems, No Shortages? from October 24, 2011), but to illustrate the point, we provide the following two supply/demand imbalance charts. One analysis incorporates two ex-china ionic clay projects, the other omits them. To further make the point, we note that the capital cost for each of these ionic clay projects, wherever they may be located, is likely well under US$250 million each, making their combined capital cost much less than one remote hard rock-based HREE project. Jon Hykawy, Ph.D., MBA jhykawy@byroncapitalmarkets.com Page 2

3 Exhibit 2 Supply/Demand Imbalances of REOs (Through 2020, Assuming Clays) Oversupply (t) La Oxide 0 1,021 13,399 29,163 30,142 39,525 38,716 38,656 38,560 38,428 Ce Oxide 0 2,900 22,698 53,737 58,172 75,210 74,721 75,576 76,429 77,279 Pr Oxide 0 (139) 1,798 4,650 4,671 5,545 4,683 3,776 2,727 1,481 Nd Oxide 0 (546) 5,061 13,925 13,167 15,842 11,476 5,781 (985) (9,475) Sm Oxide ,816 2,030 2,882 2,740 2,641 2,530 2,406 Eu Oxide Tb Oxide 0 (3) Dy Oxide 0 (10) (239) Source: Byron Capital Markets Exhibit 3 Supply/Demand Imbalances of REOs (Through 2020, Omitting Clays) Oversupply (t) La Oxide 0 1,021 12,619 28,375 29,346 38,722 37,905 37,828 37,716 37,567 Ce Oxide 0 2,900 22,458 53,495 57,927 74,962 74,471 75,321 76,169 77,014 Pr Oxide 0 (139) 1,558 4,408 4,426 5,298 4,433 3,521 2,467 1,216 Nd Oxide 0 (546) 4,161 13,016 12,249 14,915 10,539 4,825 (1,959) (10,468) Sm Oxide ,513 1,724 2,573 2,427 2,323 2,206 2,074 Eu Oxide Tb Oxide 0 (3) Dy Oxide 0 (10) (17) (196) (453) (824) Source: Byron Capital Markets Tantalus has what appears to be an interesting ionic clay deposit located in northwest Madagascar. Anecdotally, extraction of the REEs from the clay has been attempted by both a German laboratory and a Chinese state-owned enterprise, both using relatively benign chemicals. The fact that REEs were recovered using such chemicals provides suspicion that these argillaceous laterites may be so-called ionic clays. Further testing has provided additional backing for belief that these African laterites may be REE-bearing ionic clays. Per a press release issued on October 12, company management noted that their clays have been tested as releasing an average 79% of the contained REEs when subjected to acids. This is superior, we believe, to the ionic clays in Guangdong and Jiangxi provinces in China. With a comparable grade and very large deposit size, these Madagascar clays may be a significant source of HREEs in the future. Jon Hykawy, Ph.D., MBA jhykawy@byroncapitalmarkets.com Page 3

4 Why We Should Be Interested The obvious reason that those interested in rare earth investment should be interested in potential ionic clay deposits can be illustrated using Tantalus as an example. We first assume that the deposit in Madagascar is shown to be ionic in nature. Our second assumption is that, in using fertilizer to remove the REEs from the clays, we need 100 ammonium ions to be put into the soil for every REE ion that emerges. With a desired production of 5,000 tonnes per year, the production of REOs of interest from the deposit would be: Exhibit 4 Annual Production of REOs from Project TRE (Estimate) REE Oxide (ppm) Rel Dist Prod (t) La % 703 Ce % 2579 Pr 20 3% 144 Nd 71 10% 503 Sm 14 2% 100 Eu 2 0% 14 Gd 13 2% 91 Tb 2 0% 16 Dy 14 2% 100 Ho 3 0% 21 Er 9 1% 63 Tm 1 0% 10 Yb 9 1% 65 Lu 1 0% 9 Y 82 12% 581 Source: Byron Capital Markets If we assume a requirement for 5x the number of ammonium ions needed to liberate one rare earth ion, then we can calculate the required ammonium sulphate load to liberate and subsequently process 5,000 tonnes of effective TREO. This mass is roughly 10,000 tonnes of fertilizer, worth no more than US$4 million. Further assuming that mixing, handling, settling ponds and other costs double this level, we are still at an operational cost of only US$8 million. We also need similar quantities of acids, to acidify the leach liquor and precipitate contaminants, and then carbonates to precipitate the REEs out of solution. This would add no more than an additional US$2 million. So for a total of US$10 million, we can process 5,000 tonnes of effective REO to final hydrometallurgical concentrate. This is an effective price of roughly US$2,000/tonne. Meanwhile, according to our price deck for 2015, this level of production would be worth, as separated and purified oxides, roughly US$99 million. That production from Tantalus is being sold as concentrate reduces its value to no more than 50% of this level, so revenue would be a maximum of US$50 million, but this is on a cost basis of no more than US$10 million. Given the current market capitalization of the company of less than 50 million, this is a very strong level of potential cash flow. And we would estimate that the mine itself would be very inexpensive; we have visited ionic clay mines in southern China, and the operations are simple and quick to establish, with capital costs likely no more than US$50 million. Jon Hykawy, Ph.D., MBA jhykawy@byroncapitalmarkets.com Page 4

5 Conclusion We continue to believe that HREEs will be in good supply, at least from 2014 onward. A good part of the reason for this is companies that can produce HREE in sizeable quantities and for reasonable levels of both capital expenditure and operational costs. We include Matamec Explorations Inc. (MAT - TSXV) in this category, as we do Tantalus or other similar soluble clay-type REE deposits. Tantalus appears to have the potential to be the very first deposit outside of China with the characteristics of the so-called southern ionic clays. While there are many factors that can ultimately lead to failure of a project such as this one, the discovery of such a deposit represents a sea-change within the REE industry. While we do not yet have sufficient certainty regarding costs and characteristics to derive a valuation, interested investors in the REE market should continue to watch developments at Tantalus, as will we by making Tantalus the very first rare earth name on Byron s Watchlist. Jon Hykawy, Ph.D., MBA jhykawy@byroncapitalmarkets.com Page 5

6 IMPORTANT DISCLOSURES Analyst's Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. Byron Capital Markets Ltd. ( Byron ) is a Member of IIROC and CIPF. Byron compensates its research analysts from a variety of sources. The research department is a cost centre and is funded by the business activities of Byron including institutional equity sales and trading, retail sales and investment banking. Since the revenues from these businesses vary, the funds for research compensation vary. No one business line has greater influence than any other for research analyst compensation. Dissemination of Research Byron endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients. Byron equity research is distributed electronically via and is posted on our proprietary website to ensure eligible clients receive coverage initiations and ratings changes, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via , fax or regular mail. Clients may also receive our research via a third party. Company Specific Disclosures: 1 The research analyst(s) and/or associates who prepared our original research report have not viewed the material operations of this company. Investment Rating Criteria STRONG BUY BUY SPECULATIVE BUY The security represents extremely compelling value and is expected to appreciate significantly from the current price over the next month time horizon. The security represents attractive value and is expected to appreciate significantly from the current price over the next month time horizon. The security is considered a BUY but in the analyst s opinion possesses certain operational and/or financial risks that may be higher than average. HOLD The security represents fair value and no material appreciation is expected over the next month time horizon. SELL The security represents poor value and is expected to depreciate over the next month time horizon. Other Disclosures This report has been approved by Byron for distribution in Canada for the use of Byron s clients. Clients wishing to effect transactions in any security discussed should do so through a qualified Byron salesperson, registered in their jurisdiction. Informational Reports From time to time, Byron will issue reports that are for information purposes only, and will not include investment ratings. These reports will be clearly labeled as appropriate. Jon Hykawy, Ph.D., MBA jhykawy@byroncapitalmarkets.com Page 6