Back in April 2019, I spent some time writing about GéoMégA Resources (TSXV:GMA) as they provided initial guidance on their new rare earths recycling business called INNORD. On October 1st, we got some new information from the company that confirmed the accuracy of the CAPEX numbers. Full steam ahead! What next?
Well, there's lots of important details to consider but there's one basic question I haven't seen addressed. What's the value for this "demonstration plant"? People may not expect a pilot project like this to turn much of a profit as it's more about demonstrating the whole thing is possible, but the numbers from INNORD have looked pretty good so far.
How good, exactly?
I crunched some numbers and came up with a rough estimate for the Net Present Value of INNORD's demonstration plant. The answer?
NPV of $6.5M at a 10% discount rate.
Against initial CAPEX of $2.6M, a $6.5M NPV is pretty impressive. The IRR is something silly, like 88%. If you can find a project with returns like that where you can reinvest early cash distributions at the same rate, then watch out -- that's how you get rapid exponential growth in capital.
For those interested in further details of my calculations, please read on. Check my operating costs in this article from April comparing my first research and subsequent guidance from the company here. And study the recent news from October 1st to understand where I'm getting new numbers for CAPEX and production.
** TOP LINE **
Magnet grade, 30% TREO
TREO Per Year, 150,000kg
Basket price, $66/kg TREO
Annual revenue, $9.9M
** BOTTOM LINE **
Cost of feed, $47/kg TREO
ISR Cost, $3/kg TREO
Operating margin, $16/kg
Operating margin, 25%
Annual Operating Profit, $2,400,000
Calculate NPV for an initial investment of $2.6M and annual profits of $2.4M out five years at a 10% discount rate at this link here. These rough calculations don't include any financing costs or G&A. It also doesn't include any benefit from the scaling-up that INNORD is planning on undertaking beyond this initial "demonstration plant".
All in all, this looks like a healthy project. GéoMégA is able to provide economic guidance because magnet waste doesn't count as "minerals" within the 43-101 framework. Watch for more detailed guidance from GéoMégA about what comes after the demonstration plant!
There are still big questions out there. How much feedstock is available for this recycling business? The economics may look great at a small scale of $10M revenue per year, but is there enough to material for INNORD to do $100M of revenue per year for decades to come?
The supply side of INNORD is interesting and contentious, but so is the demand side! The rare earths markets are surprisingly small -- will there be buyers for any amount of production that INNORD can muster? It helps to think that the suppliers of the magnet waste may end up being the buyers of INNORD's production as that creates a new market and avoids debates around strategic response of incumbents in the niche world of rare earths. While discussions go on and on, GéoMégA keeps moving forward.
Please note, GéoMégA Resources sponsors an ongoing series of #NewtonInterviews. This note is my own opinion.