Rare earth explorers could be in for a rude financial awakening as they try to secure off-take agreements for what they have in the ground, according to Matamec Explorations President Andre Gauthier.
“Do you think any end-user of rare earths – based on how this market is evolving – would pay half a billion dollars cash for a (REE) deposit without any certainty, without knowing the real value of a deposit, without knowing what can be recovered or how the market will continue to change?” he asked.
His message is a relatively simple one: end-users can certainly bring tangibles such as cash to the table, but the intangibles – the stuff that can’t be readily valued – must be included and priced into any deal’s equation.
He said all the big companies out there that use or need rare earths for their products are looking for an alternative in this China-dominated market – Sumitomo, Mitsubishi, Ford, GM, the German car companies, you name it.
If a rare earths company wants to fast track a project or, indeed, ever get to production, then putting a simple price on a specific project or asset simply can’t be the only consideration.
Shareholders and investors must also realize this; they must be ready to place considerable value on reducing project risk – and increasing the likelihood that rare earths will actually come out of the ground and be sold one day.
Gauthier said that while the cash injection is necessary, another vital component is the additional technical expertise as well as the chance to work with an end-user – a “client” who will have customer-specific needs, in terms of what and how the rare earth concentrate is produced.
That can have far-reaching implications for how a project, the metallurgy, the costing evolves, which, of course, affects capex, the time-line, the end product and a wide variety of other issues.
It’s complex and, like it or not, the risk of a project coming to naught is always there if the economics or metallurgy prove unworkable.
This issue of project valuation is becoming increasingly important within the sector. Matamec is drawing criticism from rivals this week for cutting a rare earths deal that ostensibly takes care of its short-term financing needs but could have negative implications for rivals, in terms of valuations and the prices paid for future off-take agreements.
Depending on who you talk to, Matamec sold off its flagship rare earth asset cheap, but under the guise of pulling in a high-profile backer, securing a REE off-take agreement and shortening the to-production timeline of its Kipawa HREE deposit in Quebec. (note: resource update listed below)
The idea of a JV, the off-take agreement and fast track potential certainly caught the market’s attention. Matamec’s shares at one stage this week gapped 61% higher to $0.42 a share versus $0.26 last Thursday, before closing yesterday at $0.39 – still 50% up on news of what is a non-binding MOU with Toyota Tsusho (TTC), the trading company for Asia’s largest automaker.
Gauthier: “I think this is a good deal; it’s good for the company, the shareholders and it’s good for the rare earth space, because it shows that a rare earth (explorer) can sign a deal with an end-user.”
Here’s the gist of the deal:
First, TTC carries out due diligence on the deposit while Matamec completes a preliminary economic assessment (PEA), one that is now long overdue and raising suspicion amongst rivals.
While some claim Matamec has been busy “cooking the books,” in terms of the input numbers for the PEA, Gauthier has a straightforward explanation for the delay.
Matamec’s new partner, TTC, saw a draft of the PEA last week, he said.
They will soon review the final draft and make comments, which will be incorporated into the report.
There’s also the matter of TTC’s proprietary marketing documents, which have now been given to Matamec – some of the issues included in the report will also have to be incorporated, Gauthier said.
“We will release the PEA in a few weeks, in January, after all the comments have been received from (TTC),” he said.
After that, Matamec will focus on building its pilot plant by June, 2012.
Second, if TTC likes what it sees after carrying out its own funded due diligence, then, ultimately, a Kipawa Deposit-only JV (Matamec will hold 51%) will be negotiated, where TTC will fund a feasibility study. If positive, the next step would be production.
If that’s the case, TTC will also arrange Matamec’s future financing so that at the end of the day, the Quebec explorer becomes Kipawa’s operator, retains 51% of the JV and, depending on future negotiations, is able to use the terms of its off-take agreement to pay down debt and increase shareholder value.
“We will not have to go back to the market; the deal is that TTC will pay for the feasibility study and, if positive, they will arrange financing, which Matamec will reimburse with the cash flow from the Kipawa deposit,” Gauthier said. “If you look at this kind of agreement, you must consider the tangible and intangible; we reduce the risk, increase the value of what we’re trying to do, we have access to expertise and many other advantages.”
(Matamec will also still control and develop the rest of the assets currently under management, such as the six other deposits on its Zeus property.)
TTC will pay $17.5 million for this 49% position but it can walk if it doesn’t like what it sees – this would be the non-binding part of the MOU.
Gauthier said all indications suggest TTC is in for the long haul, given the increasingly close working relationship, the sharing of proprietary information, the money spent on due diligence, the lab work done in Japan and the two years it has taken to get this far in the first place.
All sounds good. A deal – albeit a non-binding one – is in place, shareholders are happy and potential funding headaches appear solved.
Nice week for Gauthier, who says that, if Matamec had remained standing on its own, a large fund-raising exercise would have been undertaken at something like $0.25 a share. Dilution would have been substantial and Matamec’s success as a stand-alone play would have remained a big question mark.
“TTC’s involvement has reduced the risk for shareholders,” he said. “We have a far better chance of having an economic project than if we had worked alone.”
End game: TTC will acquire a mixed rare earth concentrate, both LREE and HREE, one that will likely be shipped to TTC’s separation plant in India. Gauthier wouldn’t comment on price negotiations for the off-take agreement, but said it would be for all of the Kipawa production coming out of the potential mine. Pricing will remain confidential but would be settled at what both sides consider a fair market price, he said.
Gauthier said the deal’s “intangibles are priceless,” in large part because rare earth production must be aligned with what the end-user wants, so the opportunity to get this process right with one customer is invaluable.
Having said all this, others in the rare earth space simply don’t share his views about the deal.
“They’ve capped the asset value of the deposit at $35 million… so I would suggest Toyota walks away with a pretty cheap deal,” said one senior executive of a rare earths exploration company.
The big criticism out there amongst Matamec’s rivals is that the bar has been set too low, in terms of prices being paid for potential off-take agreements.
One insider said he’d never sign such a deal but conceded that Matamec appeared to be working with the last remnants of its previous financing – the company needed both money and news sooner, not later.
The news, of course, would be the catalyst to drive the share price higher.
It worked. One can’t fault Matamec for that one.
“As president, I have to represent the shareholders…how many (rare earth) deposits to date have signed an MOU with one end-user?” he asked.
One of the big issues is the type of deposit that Matamec is dealing with – a silicate, not bastaenite or monazite; the company has to prove to TTC that extraction and separation can be accomplished – economically and to specific requirements.
That’s the high-risk, high-reward part of the equation.
Still, one angry executive said the deal is being viewed by the market as some sort of vindication of the quality of the Kipawa deposit.
“It has nothing to do with the quality of the asset; it has everything to do with the financial terms,” he said. “I’m flabbergasted as to how loose-ended this deal is, but power to Toyota – they got a hell of a deal. And the relative financial risk it has incurred on this is zero.”
Like it or not, this might have to be the route that rare earth explorers will have to take if they want to survive and remain economically viable into the future.
Note: In late June, Matamec issued an updated resource for the Kipawa deposit, saying resources of total rare earth oxide (TREO) in the rare earths-enriched zones now stand at 63,850 tonnes in the indicated category and 17,780 tonnes in the inferred category with a cut-off of 0.3% TREOs. The heavy rare earth oxides and yttrium combine for an average of 36% of TREOs totaling 22,940 tonnes of indicated and 6,300 tonnes of inferred HREO +Y2O3. If this deal closes, TTC has agreed that it will sign an offtake agreement for both the LREEs and HREEs.
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