It's a treat to share my thinking on an important company in the rare earths business that deserves more attention: GeoMegA Resources. This is not sponsored content. Read on for my thoughts on some important aspects of the economics of their business, which is all about recycling rare earths. GeoMegA has published info showing parts of their economics, but we don't have a complete picture yet. Join me to look around the corner a little bit.

Find the key points of this article first published as a tweetstorm here, https://twitter.com/PeterNBell/status/1108459970477985793

The GeoMegA pitch deck has some key info on what to expect, but it takes a few calculations to see what's what. For the initial stage, they are talking about producing +150 tonnes per year of NdPr from 500TPY magnet waste feed with 30-40% NdPr by weight. At current prices around $50/kg NdPr, this is $7.5M revenue per year. Revenue! Imagine that.

There's lots of things to like already. Recycling waste from magnet manufacturers is a smart niche -- amazing it's still a blue ocean strategy in North America. It may get more competitive but GeoMegA's refining technology may serve as an effective economic moat.

Another thing to like is the high quality of the feed. Lots of the good stuff and none of the bad stuff, as Kiril explained at PDAC 2019:

"We are focusing on the magnet-based feed, which is the main product of rare-earth magnets. The grade is more than 30% for those four elements. Nobody puts lanthanum or cerium or low-grade rare earths into a magnet..." 

The technology may be a great moat, but the cost of that appears to be transparency about how it works. We don't have much detail on it yet and I'm not holding my breath. We do know a few key facts that allow us to make a rough estimate on capex associated with that production capacity mentioned above.

GeoMega mentions a target concentration of 100 grams REO per litre. Litre of what, exactly? Again, I'm afraid I don't know. We do know the "Residence time" is down from hours per litre years ago to fractions of an hour today. That matters because it suggests they can handle thousands of litres capacity in one day.

How many litres, exactly?

For that 150TPY of payable NdPr, we're looking at 0.5TPD if they running 6 days per week. That 0.5TPD is 500 kg NdPr per day or 500,000 grams REO, which needs a 5,000 litre capacity to get 100g/l concentration.

The GeoMegA pitch deck mentions a capital expenditure of $500/litre capacity, so we're talking about $2.5M to get set up for this initial scale of production. At a 33% profit margin on that $7.5M revenue, they could repay that capex in one year simply from retained earnings. Not bad!

That's about as far as we can get with stuff from GeoMegA for now. Between the $500/l capex, 100g/l concentration, and target for NdPr production, we have a sense for top-line revenue and capex. What about other key parts of economics? Let's turn to some comparables.

Find some info on various projects on a Google Drive folder I made here, https://drive.google.com/open?id=1Q5UfC68xeomostcvoUbUDMCaqo6fQUuI

Lots of projects made it to various levels of planning, but few all the way to production. No-one in the Western public markets is doing what GeoMegA's up to with recycling. The recent proposal from Peak Resources, listed in Australia, gives some really useful numbers for comparison with GeoMegA. They are talking about producing +2,000 tonnes NdPr per year, which is 10x beyond GeoMegA. The total market is like +40,000 tonnes, so there is room for both of them and more.

Peak Resources reports opex at $32/kg NdPr. The capex is an additional $5/kg over 26 year LOM. The total costs are in the hundreds of millions, ‎but unit costs are in the ballpark against selling price of $50/kg for NdPr. Note that Peak Resources is vertically integrated with a mine in Africa and refinery in the UK. Their 2017 Feasibility Study provides "Average Operating Cost to Mine Gate" and "Average Refinery Operating Cost to Final Product", which are key comparables for cost of GeoMegA's input materials and refinery.

As a sidebar, note that Peak Resources is similar to GeoMegA in that both produce a final NdPr oxide and have access to supply stream that others can't get. Peak has a mine and GeoMegA has deals with recyclers. Peak is also similar to Lynas, which is a vertically integrated producer with a mine in Australia and refinery in Malaysia. These three are different from the many proposed REE mining projects that didn't launch, which proposed to produce a mixed concentrate that needed further refining. 

One rule of thumb is that a REE mixed con is worth 65% ‎of the gross metal value. That's in a competitive market in China, where various suppliers of mixed con and refineries have squeezed each others' margins. You generally don't expect to sell the mixed con for the gross value of all the NdPr in it because it still needs refining, which costs. The standard approach is solvent extraction, which is about 45% of the total opex for Peak Resources. More on that in a second. 

65% of gross metal value is one answer to the question, "What's that feed stock worth?", but there are others. A comprehensive report by Caesars Report from 2016 on the economics of Medallion Resources notes that mineral sands miners are apparently willing to sell monazite to Medallion for 15% of the REE value. Not 65%, but 15%! That sounds cheap, but it might make sense if it solves other problems for heavy sands miners; monazite is radioactive. That's a whole other can of worms there -- watch for more from Caesars Report on Medallion.

 For now, the magnet manufacturers set to provide waste feed to GeoMegA need a sense for what cost they can charge. A hard upper bound for magnet waste is the cost of production for NdPr final product, itself. The Peak Resources loaded costs are circa $38/kg NdPr, which means that any magnet waste (with 30% NdPr) costing more than $11.4/kg feed is too expensive. There's no way GeoMegA should be paying more for magnet waste than what it costs their competitors to make the final product.

What should GeoMegA look to pay for the magnet waste feedstock? Well, the magnet waste is like a mixed con! Both have grades +30% REE and need refining. I don't know how the costs of GeoMegA's ISR process will compare with solvent extraction, but have heard GeoMegA's CEO Kiril Mugerman say several times that they aim to be competitive with SX.

"Over the last six years, we've been slowly developing a clean technology for our separation. It's organic-solvent-free, which is the main thing that we want to avoid. We don't want to be dealing with solvent extraction. It's a sustainable and competitive alternative to solvent extraction." 

If it's competitive, then GeoMegA can afford to pay a similar amount for feedstock as it costs Peak Resources to mine the mixed con! The Peak Resources 2017 BFS puts 55% of opex to get the mixed con "to the mine gate", which is $18.81/kg NdPr eq.

In passing, note how that's like 35% of the NdPr price per kg. Well below the 65% rule of thumb in China mentioned above, but above the 15% payable to monazite suppliers -- it certainly leaves room for GeoMegA to achieve some good profit margins.

What does that mean, specifically, for the cost of GeoMegA's feed?

With magnet waste running 30% NdPr, it has $15 gross metal value. If GeoMega pays the cost of production for mixed con (35% of metal value), then GeoMegA would be paying $5.25/kg for magnet waste feed.

Now, the other 45% of Peak's operating costs are refining. These are $15.39/kg NdPr eq., as in the 2017 BFS. Can GeoMegA be competitive with that? We will see. For now, we can use the same approach to calibrate our expectations for GeoMegA's economics based on Peak's BFS.

If GeoMegA spends the same amount as Peak on refining, then GeoMegA will spend $4.62/kg feed to refine magnet waste into final product.

Watch for official numbers from GeoMegA on the cost of buying feed and refining to see if they will be competitive with conventional mining and SX after all. Cost of feed and refining are two key drivers, but there will surely be others. What about capex, for example? At $2.5M for 150TPY NdPr over a 5 years effective life, say, there is an additional $3/kg NdPr capex loading on costs for GeoMegA. This is less than Peak's loading at $5/kg and puts total(ish) production costs for GeoMegA at $37/kg, which leaves a 25% margin.

With the $7.5M revenue calculated initially and that 25% margin, GeoMegA could make $1.875M profit per year. Starting when? Well, they've already announced two supply deals with magnet manufacturers for up to 225TPY. That's almost half their 500TPY initial goal. Things could happen quickly here.

The XLI ETF of mature industrial companies has a 15x P/E multiple, which would support a $28M valuation for $1.875M profit per year. And that's in US dollars! Currently, GeoMegA has a CAD$9M market cap. 

The upside looks good on paper, but there are many more important things to consider about the company. Have you seen their balance sheet, for example? Dig into the details yourself and contact the company directly to find out more:

Kiril Mugerman (President & CEO)
kmugerman@geomega.ca
Tel: 450-641-5119

A big shoutout to Caesars Report. Note that I mentions Lynas Corp, Peak Resources, Medallion Resources, and GeoMegA, but none of these companies mentioned had any input into my work. Watch for another version of the analysis here that digs into real production numbers from Lynas, rather than the projected numbers from Peak. And watch for more from GeoMegA to see what's next!