According to the US Geological Survey, China accounts for around 79% of the world’s rare earth production. That’s as far as can be ascertained, because much of Chinese production is opaque and hard to quantify.
Either way, such an imbalance in global production at a time when trade war rhetoric against the Chinese is rapidly being converted into hard tariffs, is likely to favour significant rare earths operations in jurisdictions outside of China.
Mkango Resources Ltd (LON:MKA) has one such project, the Songwe Hill operation in Malawi. This project is moving rapidly towards a production decision, helped along by a significant investment at the project level from major commodities trader Talaxis.
This Talaxis investment is interesting in several ways. First, there’s every likelihood that Talaxis will follow its money when a production decision is made, meaning that for Mkango, financing Songwe Hill could be pretty straightforward.
But perhaps even more interesting in the immediate term is the implied value that the Talaxis investment puts on the project.
So far, Talaxis has committed £12mln at the project level, with a view to supporting further exploration and to hitting certain development milestones.
That investment as it stands will net out at a 49% interest for Talaxis once the project is taken through the bankable feasibility stage. When an additional investment into a downstream processing operation with Metalysis is taken into consideration, the overall implied valuation for Songwe Hill runs to a tidy enough £28.6mln.
And that, in turn, means that the interest in Songwe Hills that Mkango retains is worth 13.4p per share, according to calculations made by broker SP Angel. That’s a chunky 34% premium on the current 8.8p share price.
But there’s more.
The Talaxis agreement also has a built-in option for the commodity giant to up its stake in Songwe Hill to 75%, on the condition that it sources project finance.
That outcome would give Mkango a 25% free carry on a 500,000 tonnes per year operation with a net present value of between US$137mln and more than US$440mln, depending on which inputs you use.
SP Angel though, reckons that if it exercises its option, Talaxis’s total commitment would amount to £176mln, and that the valuation read-across for Songwe Hill, allowing for the 25% that Mkango would retain, amounts to £235mln.
That, in turn, nets out at a total valuation of £58.7mln for Mkango’s stake, or 53.9p per share.
With the rare earth markets continuing in bullish mode, given the context of new technologies in electric vehicles and elsewhere, the opportunity on offer here for investors is clearly significant.
Project financing is expected to be in place late in 2019 or early in 2020, at which point, if SP Angel’s forecasts are borne out, the share price should be significantly higher.