Joel’s Resource Report – Rare earths race #PRE

Joel’s Resource Report – Rare earths race #PRE

At the time of writing, the author holds a long position in the company discussed.

Since I last covered pre-revenue rare earths mining company Pensana, they’ve announced an updated business plan.

As a reminder, Pensana is looking to develop the Longonjo mine in Angola and create the world’s first sustainable rare earth separation facility at the Saltend Chemicals Park in the UK. The market cap is currently c. £265 million.

What does Pensana plan to do?
  • Plans to establish the world’s first sustainable rare earth separation facility at the “plug and play” Saltend Chemicals Park (“SCP”) in Humber, UK, and with a target production of circa 12,500 annualised tonnes of rare earth oxides, including 4,500 tonnes of magnet metal rare earth oxides (“NdPr”), which would represent approximately 5% of 2025 projected world demand.
  • Plans to establish the Saltend rare earth separation facility (“Saltend”) as the world’s first major separation facility established in over a decade and which would be one of only three major producers located outside China. The planned US$125 million facility would create over 100 direct jobs processing purified rare earth sulphates, which would be imported from the Company’s state-of-the-art Longonjo mine in Angola.
  • Benefitting from the recently awarded Humber Freeport status, Saltend has the potential to bring high value manufacturing jobs back to the UK and, through Pensana’s plans, could become one of the world’s largest rare earth processing hubs, importing sustainably, globally sourced feedstock and processing it into valuable oxide and metal products for consumption by European OEMs and beyond.
Financials of the projects

(Source: Pensana. Study information not included here to save space.)

  • Total capex requirement = $423 (£300 million)
  • Forecast after-tax NPV = $2.3 bn (£1.65 billion)
Conservative valuation?

If Pensana shareholders were diluted by 100% to bring the project into construction, the equity valuation would rise to £600 million – still less than half of the forecast NPV.

Every indication is that Pensana’s project is highly financeable. They state:

“Saltend has received first phase progression from the UK Government’s £1 billion Automotive Transformation Fund which seeks to support the national transition to electric vehicles.

Pensana has received indications of potential financial backing which include its major shareholder, the Angolan Sovereign Wealth Fund, and approaches from a wide range of financial institutions to date as it seeks to review the potential funding sources and structures to deliver its plans.”

As a “green” investment, ESG funds may want to take a look, especially as the project promises an over 50% IRR – not easy to find this in wind turbines or solar panels, which often rely on subsidies!

Were Pensana to have a 70/30 debt/equity split on the £300 million required, Pensana shareholders would only be diluted by about £100 million. Potential upside for existing shareholders would then increase, relative to NPV, from 100% to several hundred percent.

Peer valuations?

US Pensana peers trade at about ten times Pensana’s market cap despite Pensana planning to produce a similar amount of magnet metal oxides:

“With a nameplate capacity of circa 12,500 tonnes per year of rare earth oxides – including 4,500 tonnes of magnet metal rare earth oxides – representing approximately 5% of 2025 projected world demand, under the Company’s plans, Pensana’s plant at Saltend would become the world’s first major separation facility established in over a decade and one of only three major producers outside China.

Lynas Corporation of Australia, (ASX: LYC, market capitalisation: US$4.1 billion) currently the world’s largest non-Chinese producer, last year produced around 4,700 tonnes of magnet metal oxides from its facility in Malaysia. MP Materials (NYSE: MP, market capitalisation: US$5.0 billion) is planning to produce c. 6,000 tonnes of magnet metal oxides from 2023.”

On this basis Pensana looks cheap!

Conversely compared to London listed Mkango (£40 million mcap) and Rainbow Rare Earths (£70 million mcap), Pensana may look expensive. For me both of those companies have issues:

  1. Mkango have taken absolutely ages to produce their BFS. Thankfully it is (at last!) due in the coming months. I actually hold shares in my SIPP but the team has taken a ridiculous amount of time to progress the project. The most recent PFS is from 2015! More positively for Mkango, they’ve announced material improvements to their feasibility study last week which are worth looking at.
  2. Rainbow Rare Earths – they were mining rare earths with highly variable results until a new CEO stepped in. Currently their mining licence in Burundi is suspended.
Summary

When I own shares in companies that have gone up by multiples, I try to ensure I’m not drinking from the company’s kool-aid! For me, however Pensana’s upside looks attractive even if massive dilution were to occur. I look forward to continued delivery over the rest of the year.

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  • comment-avatar

    Hi Joel. I already hold Yellow Cake, Sylvania Platinum and Jubilee Platinum so I am most interested in your posting, as rare earth oxides is in similar ‘in demand and short supply’ territory, although at a much earlier stage of development. Although operating in Angola carries the usual risks associated with mining shares, the UK processing aspect is an exciting plus. I appreciated your valuation rationale re future dilution etc but I see the SP has come down significantly off the high achieved on 15th March and I wondered why? If I bought it would just be a punt – is that the way you see it?

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  • comment-avatar

    I wouldn’t view it as a punt (or at least it wouldn’t be for me) the reason I say that is because of how I’ve valued the company in this article. I believe the UK government want the UK processing facility to go ahead the fact they already have planning permission indicates this – planning permission in the UK can be a real issue just look at what’s happened with Simec Atlantis in Wales! The team’s already pegging out the site – https://twitter.com/PensanaRE/status/1394293371812913153?s=20

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    • comment-avatar

      On the reason for the SP dropping I’m not entirely sure however the share price was up many multiples which could be a factor.

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