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.
A MAMMOTH STIRS BENEATH THE SNOW
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.
- 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
- 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.
Proactive Investors is a market leader in the investment news space, providing ASX "Small and Mid-cap" company news, research reports, StockTube videos and One2One Investor Forums.