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Greenland Minerals And Energy: Bell Potter Sees A Mammoth Stir Beneath The Snow At Kvanefjeld

Greenland Minerals and Energy (ASX: GGG) has received a buy recommendation from Bell Potter with a twelve month price target of $2.32 - almost nearly seven times higher than the last trade of $0.34.

It sees the rare earth and uranium giant moving towards mining.

The broker said that Kvanefjeld is one of the few Tier 1 mineral projects held by a small cap that has a real chance of being built in the next five years. With post-tax NPV (15%) of $2.4bn, its economic potential is indisputable.

The main challenges for GGG will be obtaining a mining licence, funding, and generating confidence among investors in the REE and uranium markets.

The following is an extract from the report.


Rare earth and uranium giant moves towards mining

Following recent metallurgical breakthroughs and a gradual pro-uranium political shift
in Greenland, GGG's massive Kvanefjeld REE-U Project (in-ground resources ~$450bn) is likely to be operating within the next five years.

Key points:

- Kvanefjeld: the world's second-largest deposit of rare earths (RE-oxide 10.33Mt)
and fifth of uranium (U3O8 575mlbs), with significant zinc (2.25Mt) and calcite.

- Metallurgical breakthroughs mean simple, low cost processing by flotation and
atmospheric leach.

- PFS updated Aug '12: processing 7.2mtpa for 36years, producing 51.9ktpa REO as carbonate and 2.6mlbspa U3O8, OPEX $3.07/kg REO with U credits at $70/lb.

- CAPEX is US$1.3bn with likely further reductions due to metallurgical improvements. Project is scalable, so potential to start smaller and expand.

- GGG moving to 100% ownership from 61%, JV legal problems resolved.

- Moratorium on mining uranium in Greenland; however, GGG has approval to investigate uranium potential up to DFS. Mining Licence possible in 1H14.

Valuation: $2.32/sh (12 months)

We've followed the assumptions GGG's recent Pre-Feasibility Study of Kvanefjeld, but assumed a higher WACC of 15% and 20 year mine life for a post-tax NPV of $2.45bn. Risked at -50% NPV (due to pre-BFS stage and the challenges of permitting and funding), our price target (12 months) is $2.32/sh.

Kvanefjeld is a unique deposit, so comparing GGG to its peers on an EV/resource basis is challenging. We note, however that EV/resource on a REO basis is $0.023/kg, and on a U3O8 basis is $0.04/lb. Its uranium resource is bigger than Extract's A$2.2bn Husab, in a similar deposit, at about 60-80% of Husab's grade but with 85% of the revenue in REE.

Kvanefjeld is discounted, paradoxically, for its massive scale and the market's erroneously strong impression of project risk.

Investment comment: Buy (Speculative)

At this stage, GGG's Kvanefjeld appears financially robust under conservative valuation conditions. For example, base case total NPAT is US$7.8bn in the first 15 years.

For Bell Potter, metallurgical breakthroughs in the past year or so have changed the whole complexion of the GGG story, from near-impossible to probable. A clear political shift in Greenland in favour of uranium mining provides us with further encouragement.

Price target over 12 months is a speculative $2.32/sh, contingent on a near-term shift in Greenland's anti-uranium stance. If the uranium moratorium stands, Kvanefjeld will be hard to develop. A binary outcome if ever we've seen one.

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