Great Western to reap Chinese expertise

Over the last month Great Western Minerals (GWG-T) has completed a joint-venture with the Chinese to build a rare earth separation plant near its Steenkampskraal mine in South Africa, about 350 km north of Capetown, and successfully carried out the first pour from a new rare earth furnace owned by a subsidiary in the United Kingdom.

The junior is the top pick among the rare earth companies that mining analyst Jon Hykawy follows at Byron Capital Markets and he holds a strong buy recommendation on the stock with a 12-month target price of $3.40 per share. Lately Great Western Minerals has been trading at about 62¢ per share within a 52-week range of 39¢-$1.23.

“The company just announced its final agreement with Ganzhou Qiandong Rare Earth Group Ltd. on solvent exchange processing, giving GWG the ability to mine, process and separate rare earth oxides and then turn those rare earth oxides into very high quality magnet alloy,” he penned in a recent note.

“We expect GWG to be in mining production around the end of the first half of 2012 at Steenkampskraal, and we expect the new joint venture company, Great Western GQD Rare Earth Materials Co. Ltd (GWGQD) to be working to rapidly bring a hydrometallurgical and SX facility into production in South Africa, with initial operation around the end of 2012.”

While the majority of rare earth oxides at Steenkampskraal are the less valuable light rare earths, Hykawy concedes, with a dysprosium oxide distribution of 0.7% of total rare earth oxides the deposit remains a “significant source” for both heavy rare earth elements and magnet materials, he contends.

“It is precisely the speed and grades of magnet materials that prompted GWG management’s interest in Steenkampskraal,” he continues. “The company’s sole reason for reactivating Steenkampskraal is to provide feed to its Less Common Metals subsidiary in Birkinhead, U.K., and to its Great Western Technologies operation in Troy, Michigan. The company’s need was for near-term access to a reliable source of feedstock, and it has found that in Steenkampskraal and access to GQD’s technology through a joint venture.”

Furthermore, the company’s Less Common Metals subsidiary “has already proven that it can make magnet alloy that is some of the best in the world, now it needs to show that it can make magnet alloys that we already know sell for $300.00 per kilogram for less than $20.00 per kilogram in costs. If the company can do that, then our target price will look much more reasonable.”

Great Western Minerals is in the process of putting the past-producing Steenkampskraal mine back into production. Previously Steenkampskraal was operated as a monazite mining operation producing monazite concentrate that was shipped elsewhere mainly for thorium recovery. Great Western Minerals holds a 74% stake in Steenkampskraal through its 100% interest in Rare Earth Extraction Company.

Jim Engdahl, Great Western Minerals chief executive, described the company’s joint-venture agreement with China’s Ganzhou Qiandong Rare Earth Group in a recent press release as “one of the single most significant milestones” in the company’s history, adding that its partner has two decades of experience processing rare earths in China.  

Under the terms of the agreement, Ganzhou Qiandong Rare Earth Group will receive 25% of the shares of  the joint-venture company, Great Western GQD Rare Earth Materials Proprietary (GWGQD) for its contribution to the design and construction of the separation plant and $7.5 million of Great Western Mineral’s shares to be paid over three years contingent on the facility being fully commissioned and operating effectively.

The joint-venture partners will separate mixed rare earths into products that can be used by Great Western Mineral’s subsidiary Less Common Metals, and third-party customers. On Jan. 31, Less Common Metals carried out the first full-scale melt at its newly acquired furnace in Birkenhead, U.K. The furnace was approved to start melting trials of neodymium-iron-boron alloys for permanent magnet applications. Trials this month will focus on the production of alloys that fully conform to detailed customer specifications, Great Western Minerals says. Engdahl noted in a press release that the first pout with the new furnace was an important step in the company’s mines to magnets strategy because it increases its alloy production capacity by nearly 50%.

“With the high grade of Steenkampskraal’s monazite ore, the cost that Great Western Minerals will pay to produce a kilogram of magnet alloy will be roughly $15,” Hkyawy writes. “Even in our most conservative scenarios we cannot envision good magnet alloys selling for less than $100 per kilogram, and there is absolutely nothing wrong with a 85% gross margin. Plus, GWG will reap cash flow from the sale of other rare earths, either in the form of oxide or metals …GWG is easily our top pick and we consider it the best value in the rare earths market.”