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Medallion Resources(MLLOF) Rated As Urgent Buy

|About: Medallion Resources Ltd. (MLLOF), MLLOD
Summary

Medallion Resources represents a Buy opportunity with an Urgent momentum bias in the junior mining space.

Medallion presents relatively few risks and its project represents the most viable effort to supply high-demand rare earth materials in North America.

Medallion is based entirely in North America and thus, won't suffer from shortages in raw rare earth minerals' supply.

By avoiding mining, Medallion does not have to engage in the risky and capital-consuming operations that have caused many REE projects to fail.

Summary

After a detailed risk/reward analysis, Nxtanalytic rates Medallion Resources as a Buy opportunity with an Urgent momentum bias in the junior mining space. Medallion Resources presents relatively few risks and its project represents the most viable effort to supply high-demand rare earth materials in North America.

This de-risked scenario hinges on two key aspects. The first is that Medallion’s operations will be exclusively based in North America. This is an essential factor that addresses the susceptibility that the U.S. technology sector – and therefore the U.S. economy itself - has to the strong likelihood of Chinese REE export restrictions or outright bans in the wake of strained Washington-Beijing economic and political relations. In that sense Medallion addresses fundamental security and economic concerns for the United States and all other major economies outside China. The second key factor is that Medallion does not own a mine. One of Medallion’s main advantages to investors stems from the fact that it is a monazite processor. This makes it unique in the REE space, because, it avoids the risks and billion-dollar costs of mining operations. Rather, Medallion’s plan is to extract rare earths from a monazite feedstock supplied by heavy-minerals-sands producers (after they have removed the targeted industrial titanium and/or zircon minerals). Monazite feedstock contains crucial magnet application metals, such as neodymium (Nd) and praseodymium (Pr) - used to make NdPr magnets that are fueling the electric car revolution. Therefore, we believe, Medallion has adopted a safer and more reliable way to exploit the demand for rare earths by avoiding most of the risks traditionally associated with rare earths mining.

Rewards

Medallion Resources is Based in North America: As Because Medallion is based entirely in North America, it would not suffer from shortages in the availability of raw rare earth minerals. And it would be in a position to supply North American and other markets in the eventuality of Chinese restrictions, which appear highly likely. Indeed, as relations between the United States and China become more entangled amid Huawei, trade, and other geopolitical disputes, the Chinese have threatened to impose an embargo on crucial exports of rare earths - just as they did in 2010. Such a measure, even if partially enforced, would have a heavy impact on U.S. industry, which is forced to rely almost entirely on China for the supply of these critical materials – and not just in consumer technology; in the defense sector as well. Not surprisingly, Chinese rare earth stocks have more than doubled, while their North American counterparts (all at preliminary stages) have gained some 40% in 2019. The only non-Chinese rare earths miner and processor, Australian based Lynas Corp., has also shown similar gains.

The seriousness of the situation was made clear when Chinese President Xi Jinping himself signaled China is ready to impose a rare earth embargo against the U.S. and its allies. On May 21, 2019, as Trump announced restrictive measures against the telecommunications giant Huawei, Xi visited a super- magnet factory (the kinds of magnets derived from concentrates such as the ones Medallion intends to produce Nd or Pr) in Jiangxi, one of the main centers of rare earth production and processing.

China has made a real show of strength, which concerns the rare earths used in various technologies, including smartphones, electric cars and defense systems. Moreover, because of rising environmental concerns and official crackdowns on the widespread phenomenon of illegal REE mining (and smuggling), China’s own ability to increase NdPr production could be constrained, such that it may start to consider importing these materials to meet its own rising industrial demand in the next few years. Such supply constraints represent a significant catalyst for the development of alternative suppliers such as Medallion.

No Mining - High Value Resource Without the Mining Risk: In our view, a key reward aspect of Medallion’s project is that it exploits high value resources, focused on neodymium and praseodymium, without the associated exploration and mining risks. Neodymium (Nd) and praseodymium (Pr), are the most common elements for the manufacturing of high strength permanent magnets used in the new generation of electric motors and generators. NdPr magnets, as they are often called, have become essential as the world moves from carbon-based energy production towards renewables and electricitrification. Wind turbine generators use NdPr as do electric cars, drones and robots. Medallion is well poised to take advantage of an ever growing range of NdPr based electric motor applications. Currently, China controls almost 80% of the NdPr market, which constitutes a supply risk to end users from Japan to Europe and North America. Because of geopolitical factors, demand for alternative sources of NdPr is intensifying while the global rare earth market could increase at CAGR of 8.6% from some $8.1 billion today to around $14.4 billion in 2025. (Source: Zion Market Research).

Developed Monazite Sand REE Extraction Process Can be Located Anywhere: Medallion can build its processing facility in the location it deems most suitable, given such factors as: the ease with which it an comply with all regulations, the ability to attract qualified labor, and the ease of securing the chemicals and reagents for processing. Crucially, Medallion can choose the location that allows for the most convenient and cost-effective compliance with radioactive waste disposal – or processing. The strategy is based on four major steps:

  1. Acquire monazite sand
  2. Extract a rare earth concentrate from the monazite sand
  3. Sell the rare earth concentrate to refiners
  4. Dispose (which could include selling) the radioactive waste materials such as thorium and uranium

This is less expensive and risky than how typical REE mining projects (such as Mountain Pass, Lynas Corporation and just about all other emerging REE companies) operate or plan to operate. In some cases there are some examples of processing outsourcing. The current Mountain Pass operation (called MP Materials), Rainbow Rare Earths (AIM listed) send upgraded REE ore to China for processing. In China, the outfits that mine and perform hydrometallurgy are usually different operations than those that do the REE separation. Whereas, Medallion’s approach is in the middle of the value chain, adding significant value: Medallion buys the REE ore (in its case a pure monazite sand concentrate) from the heavy mineral sand miners. Medallion wants to achieve 90% monazite (or a 50-60% REE grade) and then take this upgraded material and process it to extract the concentrate. Medallion’s customers will be downstream separation specialists, which helps maintain low operating costs.

Traditional REE miners, even after they identify a deposit, must deal with the various characteristics of the orebodies; especially the combination of heavy and light earths, which determines the concentration of the kinds of REE that command the highest prices. And that’s just the start, there are challenges and exorbitant costs throughout the chain. Liberating rare earths involves high energy consumption and building complex facilities that can quickly run up capital costs into the billions of dollars. Instead, Medallion works with a well-known resource that involves a fraction of the steps – and even fewer risks -than those faced by a full REE miners.

We believe that one of Medallion’s key advantages, with respect to other REE plays, is that the company’s business model can be summed up in the following formula: buy raw material, process, and sell. This means that unlike the miners, Medallion can count on more predictable operating margins because they’re not dependent on high REE market values. There are pricing risks, of course; but, not abnormal ones: the price risk occurs in the interval between the acquisition of the raw monazite sand and the actual sale of the concentrate.

Scalability: Monazite sand has higher REE content than most known REE deposits. Grade is not the ultimate factor in determining operating costs, but it does give a good indication of the profitability potential. Medallion’s main advantage over all REE hard rock mining projects – apart from the lack of mining and beneficiation (steps performed by its suppliers) is the flexibility of its processing. It can process as much, or as little, as demand requires. In other words, the business is flexible and scalable, and can adjust to market conditions.

Economically Proven Concept: Medallion’s idea to focus on the processing of monazite sands has proven economic viability. India Rare Earth Limited (IREL) has run processed monazite from beach sands (in India) to extract rare earth minerals for the past few decades. The fact that one of IREL’s main partners is Toyota, moreover, adds even more credibility to Medallion’s focus on the emerging electric car industry. Medallion’s is at an advanced stage of research and moving quickly to the point where it will be able to sell its REE material, at least indirectly, to automakers, which are eager to diversify their supplies away from China for critical inputs to drivetrains and other components.

Strategic Deals in 2019: Having recently raised about CAD $630,000, the company has sufficient funds to advance its metallurgical test and process development programs. Medallion is also studying the opportunity to supply feedstock to a third party. The next round of financing will be used to produce an economic study to demonstrate the project’s value. In June 2017 Medallion partnered with Rare Earth Salts Separations and Refining, LLC (RES), a Nebraska based materials technology company to produce and share revenues from selling finished rare-earth products. Medallion will supply RES a rare-earth concentrate, and RES will separate and refine into individual REE oxides. Companies like RES are already positioned to refine and market the individual oxides. And they already have the right customers.

Low Environmental and Permitting Risk: Medallion faces more easily manageable environmental and permitting/regulatory risks than typical REE mining companies. Medallion does not need to secure mining permits, and risks that traditional rare earth mining companies have to address. Moreover, as a processer rather than miner/explorer, Medallion does not have to worry about infrastructure, being able to locate its facility near any location with access to services and scientific staff and labor.

Marketing of Phosphate Byproducts: Medallion’s process to extract REE’s, magnet metals, from monazite sand also produces a sizeable amount of commercial-grade trisodium phosphate (TSP), which is a compound that fetches some $500/tonne for use as a food additive/animal supplement. TSP is also used in a variety of household products such as cleaning agents, lubricants and degreasers. Given that monazite extraction yields about 25% TSP, this represents an additional revenue stream for Medallion. The overall TSP phosphates market is worth some $4.5 billion per year.

Experienced Managers with Stakes in Success of the Company: CEO Don Lay, who has been instrumental in several successful technology ventures, such as China MobileSoft and been a director of a number of resource companies as International Taurus Resources, American Bonanza and Sojourn Exploration, manages a team of rare earths and mineral sands experts at Medallion. During various interviews with Don Lay, it’s clear that Medallion has acquired the knowledge and experience that are missing from several REE companies. It is that experience that has led the company along the processing route rather than the mining one.

Not Just Electric Cars and Wind Turbines: REE, especially NdPr magnets are seen as the necessary ingredient for the manufacturing of electric car motors – therefore they are part of the green-tech revolution. However, REE, also have significant applications in the defense and aerospace sectors. And some US government papers have stressed a ‘national security’ argument to promote the development of North-American, or at least ‘out of China’ production of rare earth metals. In fact, Medallion also expects potential demand from the defense sector. Medallion has already entered discussions with some U.S. government groups interested in establishing a North American value chain for REE from mining through separating oxides. In other words, there is growing government support for REE related activity.

Favorable Rare Earth Market Forecasts: There’s almost universal consensus that rare earths elements, or rare metals, and NdPr magnets in particular, will experience tremendous growth over the next decade. Because, Medallion is not a miner, its profitability does not depend exclusively on the price of the raw minerals. That advantage cannot be overlooked, as rare earth prices have not always responded to supply and demand forces. One of Medallion’s most interesting advantages is that, apart from its uniqueness within the sector, the REE space itself features much fewer players than even a few years ago.

Fewer Competitors: The competition, which can be described as any rare earth miner/supplier outside of China, is more rarefied than it was at the height of the REE race in 2010-2012 – when there may have been as many as 200-300 REE explorers trading and vying for investor attention: today, that number is 18. The vast majority have given up. Even those that uncovered rich deposits were unable to raise the $1 billion to construct related mines and processing plants. Medallion has survived because it chose a different approach from the very start. And now it’s in a position to begin capitalizing on that foresight by targeting the North American and international markets.

Risks

Financing/Attracting Capital: One of Medallion’s main challenges, as any other resource company, is that investment capital has become scarce in the past few years. Medallion will have to raise sufficient funds to complete economic or prefeasibility studies (and/or their equivalent) and a pilot plant. The company recently completed a $630,000 private placement, but much bigger sums are needed to get the facility processing plant up and running. Medallion expects that it will need about $20-25 million to construct a rare-earth extraction plant, capable of producing at a yearly rate of 2,000 tonnes of rare-earth oxide. Even if the research and development costs are minimal, compared to traditional REE operations, Medallion, needs to secure more financing.

Radioactive Residue: Medallion’s REE extraction process produces traces of naturally occurring radioactive materials (NORM) such as thorium and uranium, as they are contained in the monazite an released when the monazite is broken down. Commercialization potential aside, these radioactive elements, pose an environmental risk. This is not unusual for companies in the REE space, but it’s a risk that adds costs and regulatory constraints. It means that specialized procedures and research will be needed to transport, process and dispose these byproducts. Medallion is working with the Saskatchewan Research Council, a Government of Saskatchewan (Canada) authority in uranium and rare earth test processing to develop a process that manages this risk.

Operations/Initial Processing Delays: As an emerging company, Medallion could endure some initial ‘teething’ issues, which could delay production, even after successful pilot testing. Medallion has started discussions with engineering companies, which should offer a clearer picture of the capital and investment costs in the near or mid term. As with any start-up operations the first few quarters of operations can be characterized by disappointing cash flows, compared to expectations. Another risk to consider is the possibility of Medallion incurring permitting delays, given the unusual nature of the facility the project requires. Investors should be aware that some unforeseen technical or regulatory issues may always emerge.

Investor Perception: Given the almost unique approach that Medallion has chosen, there is a risk that investors will fail to understand the company’s value proposition and the significant advantages it presents, compared to more traditional exploration based REE projects. Raising awareness will be essential in attracting investors, who may have been otherwise drawn to more typical REE companies.

Competition/’Copycat Risks: We think Medallion’s idea to be so feasible as to invite others to follow its example. That is, avoiding the mining, and focusing on producing a concentrate from monazite. The process is challenging but not uniquely complicated. Other entrants would compete for the best monazite sources – and increase prices. Medallion, has an advantage as it’s the first of its kind in North America, but others may be eager to follow its lead.

Combination of Higher Rare Earths Prices and Demand: A combination of higher REE prices and demand is encouraging the development of alternative materials to achieve the same technical results, and therefore reduce the need for Medallion’s processed material. And, the current geopolitical environment favors higher REE prices. Medallion faces risks from these potentially cheaper REE alternatives. One of the most credible risks in this sense comes from the development of new ways of recycling of rare earths from end of life or discarded electronic, hybrid cars, wind turbines and medical devices (among other things).

Researchers are studying ever more sustainable and efficient methods to recover rare earths contained in the magnets of electrical equipment, isolating the crucial neodymium and, praseodymium (Nd and Pr) used in all kinds of electric motors. In addition, the recycling of rare earths, in the long term, could pose significant competition to REE producers in the hi-tech and electric vehicle market; especially, if vehicle manufacturers themselves become more directly involved in recycling rare earths. Honda, Toyota, General Motors and Ford are all working on adopting better REE recycling methods.

Medallion Does not Own a Resource: Medallion does not own any rare earth resources of its own. That’s one of its main strategic advantages. But, it does pose some risks. As has been the case in China, rare earths have become important strategic resources, whose exports are controlled and sometimes restricted. While, monazite is not especially rare, REE concentrations vary. By not owning its own resource, Medallion may be subject to the whims and risks of its suppliers. Should one of the source mines halt production because of low titanium or zircon prices, it would cut off Medallion from supply. There is also the risk that other governments could start treating REE’s as does China and further limit supply of REEs. To mitigate this risk, Medallion will have to stockpile material as well as increase its number of suppliers.

Conclusion

Medallion Resource. is on track to becoming a significant North American supplier of Rare Earth concentrate for the production of high-powered and lightweight magnets based on neodymium and praseodymium (NdPr). Given the ever present possibility of Chinese rare earth export restrictions, Medallion’s all-North American supply chain makes an especially valuable alternative source for these essential materials. NdPr magnets are needed to meet rapidly advancing technological demands in applications from electric vehicles to alternative energy generation. The focus on producing a chemical concentrate rather than the complete mining/processing approach is what allows Medallion Resources to eliminate many of the risks typically associated with rare earth production. The company does not rely on untested complicated technology. And it does not need a billion dollar investment in processing facilities. Ultimately, Medallion offers low risk and low cost, near-term production of high-grade rare earth products beyond China.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: NXTanalytic is a research firm, which analyzes the potential strategic performance of companies, using a
risk-reward approach.