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Why We’re Confident In Our Medallion Projections

|Includes: Medallion Resources Ltd. (MLLOF)

This article was originally published at

Our friends at Rockstone (financed and motivated by Zimtu Capital-major shareholder in Commerce Resources) responded to the critical piece on Commerce we put out in December. We're itching to respond to some of the arguments he puts forth in defense of Commerce, but have decided that the company isn't worth our time and energy. However we would like to respond to one point the author makes regarding Medallion Resources. The criticism is that the company has not released any formal economic data.

First of all, this issue should be secondary to the fact that the company hasn't released any formal assessment of its process, because project economics will be, in part, a function of the chosen process. Our problem with Rockstone's analysis of Commerce has been that they just automatically assume that if a number is printed in the PEA, then it necessarily reflects some feasible reality. We demonstrated that Commerce has just the vaguest idea of its hydrometallurgical process, and we ask why the company feels justified in assuming that its processing will only cost a small fraction of the assumptions of its peers (who have done advanced pilot plant work) based on the assumption that their high grade mineral concentrate will be that much easier to process. We argued that these assumptions are short-sighted, especially since Ashram has a unique mix of minerals (and even when minerals share a name (e.g. monazite) they will not be amenable to the same process in every case).

Medallion will also be using a unique mineral feed for its hydromet plant since its prospective sources haven't been processed commercially. Several companies have commercially processed monazite sand from the tailings of HMS operations in, for instance, India, Brazil, and Malaysia. Medallion may source monazite from Malaysia since it is looking to source material out of southeast Asia, but it will likely be a different source than that of material that has been processed commercially in the past. However, one key similarity that Medallion will have with other monazite sand processors is that they will be using a monazite sand from a zircon and/or ilmenie and/or titanium oxide HMS mining operation. They are also all sands, which reduces the processing costs to begin with since there's no need for crushing/grinding (although further grinding may be considered in an optimization trade-off study). This also limits the variety of different gangue minerals that Medallion will need to deal with-hard rock mining companies face unknown and unquantifiable risks in dealing with these, adding additional uncertainty to their technical report conclusions.

Medallion has not formally announced a monazite supplier (although it has disclosed that it is cooperating with several potential suppliers) and finding one is one of three major hurdles we perceive in the company's business development (the other two being finding a concentrate buyer and finding a company to dispose of its radioactive waste). However, the monazite sand found in HMS tailings in southeast Asia will be relatively similar (there are only a handful of viable sources). In fact we have reason to believe that it could contain more REE on a relative basis considering that, for example, Indian monazite tailings contains a high amount of thorium-~8%.

The monazite is disposed of with poor zircon and other trash minerals that don't meet industry needs in about a 20/80 monazite/tailings ratio. A simple beneficiation process (remember, this is a clean sand so it is relatively easy to beneficiate) will upgrade this to a 90% monazite/10% impurities product. Monazite contains ~65% TREO equivalent, with the bulk of the remainder consisting of phosphate (the anion that bonds to the REE ion) and thorium. This means that Medallion's mineral concentrate would be ~58.5% REO-eq. assuming that the 10% impurities don't contain any REEs, which likely is not the case. Given other HMS samples there will likely be some xenotime-HREE-phosphate-which will increase the company's Dy/Tb exposure slightly while giving it even more phosphate, which Medallion plans on processing as a byproduct. Zircon contains REEs as well, and so we wouldn't be surprised to see Medallion's feedstock come in at >60% TREO-eq.

Since the REEs come mostly from monazite, and since the process for extracting REEs from the monazite tailings from a HMS operation is fairly standard, we can make economic predictions from this starting point.

There are two common processes for dissolving monazite in preparation for REE production. The first, which is used by Lynas, is sulfuric acid leaching. Here is the flowsheet for this process as found in Gupta and Krishnamurthy's Extractive Metallurgy:

Medallion has chosen an alternative method-alkaline digestion. This is the more modern process, and the preferred process of Solvay/Rhodia and India Rare Earths as the sodium hydroxide doesn't damage the machinery as much as sulfuric acid. This process also yields a phosphate by-product that cannot easily be recovered in the sulfuric acid leach.

There are several options for subsequent steps, the preferable path depends on a variety of factors. We suspect that separation companies will prefer to deal with a RE-carbonate, although we've seen companies announce plance to produce other compounds (e.g. Tasman will produce a RE-oxalate).

Medallion may customize its process for various reasons, but we know that it is using the above flowsheet as a starting point for its current hydromet analysis. We know that it has done so successfully at the bench scale since it is reporting that separation companies have approved of the sample product it has sent out.

Given this information we have a very good idea of the company's reagent costs will be. We also have specific information regarding the equipment it will need (e.g. the of the equipment as a function of the amount of material processed, how resistant it must be to corrosion…etc.) and its cost in central Canada or the U.S. We can similarly project labor costs based on current rates, and note that our concern here would be more that operating a REE processing plant would require a unique skill-set that very few people possess.

We note the one unknown will be the cost of the monazite. However, there is reason to believe that a HMS mining partner will have incentive to see Medallion prosper. The monazite is just sitting there, and it is effectively a waste product that is obtained at almost zero cost. Mining companies would be happy just to have other companies take it away. Since the REE bubble in 2010-11 mining companies are well aware of the potential value of this monazite, although there is very little value in upgrading this themselves since it would be such a small operation in the context of their massive ilmenite, titanium oxide, and zircon operations. So Medallion is coming in and offering to pay for this "waste" provided it is upgraded from the aforementioned 20%/80% monazite/zircon mix to a nearly all monazite product. This upgrade will have minimal costs yet it will enable the mining company to generate a small cash-flow stream (which could grow along side Medallion) while getting rid of its waste (think sorting your bottles and cans and getting a nickel for each, but on a large enough scale so that you can pay somebody to do it and still generate cash-flow). We project 15% of the separated REO value as a reasonable assumption and note that the mineral beneficiation that has to be carried out will involve one simple process that will likely cost just a few dollars per tonne, maybe a few pennies per kilogram, if that. Thus 15% is generous with the projected monazite basket worth ~$12.50-$13/kg. , with the cost to Medallion coming in at a little less than $2/kg. At $2/kg and 10,000 tpa. of TREO-eq. production, the mining company would generate ~$20 million in annual cash-flow in its effort to get rid of its waste-not bad for an activity that is often associated with having a cost.

The Bottom Line

While our analysis may not meet NI 43-101 standards our projections are based on a detailed analysis of the project and similar ones before it. Given Medallion's strategy we're able to make assumptions regarding the optimal process with a much higher level of certainty since we've seen many examples of processes used for extracting REEs from very similar material-similar both physically and chemically. Mining companies may have monazite or basnaesite, but the host rocks, the consistency, and a variety of other factors increase the extent to which preliminary assumptions will deviate from reality.

Disclosure: I am/we are long MLLOF.