After Defense Metals Corp. (DEFN:TSX.V; DFMTF:OTCQB; 35D:FSE) published its much anticipated preliminary economic assessment (PEA) for its Wicheeda rare earth elements project in south central British Columbia, investors watched as the share price dipped to $0.23 on Nov. 26, down from $0.32 just four days earlier, a 28% drop on average daily volume of about 460,000 shares.
The selloff was predictable. After all, markets are fickle, especially for junior resource stocks. But was it warranted? Let’s look at the numbers.
The PEA, produced by SRK Consulting, says Wicheeda has a pre-tax net present value (NPV) of $765 million ($765M), which dips to $512M after taxes and using an 8% discount rate. The internal rate of return is 20% before taxes, and 16% afterward. Healthy, but not a showstopper.
It would cost $461M to build Wicheeda, which includes a 20-25% contingency for major items.
Over its first four years of operation, Wicheeda would generate a high-grade flotation-concentrate averaging 43% total rare earth oxide (TREO) for average annual REO production of 25,423 tonnes. During those four years, as concentrate was being produced and sold, a hydrometallurgical plant would be built on-site using revenue from concentrate sales.
"We're going to be potentially one of the largest producers of neodymium and praseodymium on the planet, and the U.S. military needs a relationship with friendly countries to supply them, because as it stands right now, they're very concerned about China cutting off their supply."
—Craig Taylor, Defense Metals President and CEO
Once the hydromet plant is up and running, it would be fed by the Wicheeda concentrate to produce mixed hydrometallurgical precipitate, which is much more valuable.
The precipitate (containing all 17 elements) would then be shipped to an off-site solvent extraction plant to separate out the 17 different elements into individual oxides ready for manufacturers.
The PEA says Wicheeda would generate annual revenue of almost $400M and it would take five years to pay back the capital used to build it. The mine would run for 16 years at annual operating costs of $137M, and an operating margin of 65.2%.
The base case economics were calculated using rare earth oxide prices of US$5.76/kg TREO in flotation concentrate and US$14.04/kg TREO in mixed REE carbonate precipitates — those are the average prices over the previous three years, which are much lower than current prices.
Despite recent investor dissatisfaction, there are three keys to Wicheeda that still make this REE project a worthwhile investment.
"China’s share of production of REE needed for high performance magnets and other ultra high tech metals has actually been growing as production in the rest of the world has slowed to a crawl... You could say China has a stranglehold on REE just as they did with microchips. And the result will be similar."
—Bob Moriarty, 321 Metals
First, DEFN completed a 29-hole, 5,350-meter drill program earlier in November designed to upgrade and expand the resource. Those drill results were NOT used in the PEA.
Wicheeda currently has an indicated resource of five million tonnes averaging 2.95% LREO (light rare earth elements) and an inferred resource of some 29,500,000 tonnes averaging 1.83% LREO — a 36% increase over the 2020 estimate.
Defense Metals President and CEO Craig Taylor tells Streetwise that investors can expect an expanded resource estimate early in 2022. It could add mine life and boost the overall PEA numbers.
Second, Wicheeda is the only rare earth elements project in Canada with a high-grade concentrate from a sizable deposit situated in a mining friendly jurisdiction with good infrastructure.
Vital Metals Ltd. (VML:ASX) reported producing a “high mineral” concentrate from flotation (>30% TREO) at its Nechalacho REE project in the Northwest Territories but has used very high-grade ore from its T-zone, which only contains about 101,000 tonnes at 9.01% TREO.
The rest of the Nechalacho project, though quite large, is much lower grade.
Commerce Resources Corp.'s (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) Ashram deposit, 130 km south of Kuujjuaq in northern Quebec, shows in a presentation on its website a 7% to 10% concentrate after flotation. The company claims to have a high-grade mineral concentrate, but not a high-grade flotation concentrate. That means the company must leach ore with only 7% to 10% TREO, which requires larger, more expensive equipment and greater consumption of reagents.
“This is a real story. Contrary to all the other ones. And the only the reason this is a possibility is that nobody else in Canada has been able to produce a high-flotation (TREO) concentrate. Anybody can say, ‘Oh, we have concentrate,’ but it is a high-flotation concentrate that is the key here. And that’s what Defense Metals has,” Defense Metals Director Luisa Moreno tells Streetwise.
Moreno says the coarse-grained mineralogy of the bastnasite family of minerals, the same host minerals found at Wicheeda, make floatation easier. When elements are in fine-grained minerals, they are more difficult (read more expensive) to recover.
This excerpt from the MDPI journal explains why the industry uses flotation: "Froth flotation is the most economical method to separate minerals in ores. However, the complexity of new ore bodies requires fine grinding to liberate valuable minerals, which produces particles with sizes too fine for an efficient mineral flotation and separation. In addition, fine grinding has produced undesirable effects, where gangue minerals too often dilute the valuable mineral concentrates.”
"Price/volume action in recent months strongly suggests that a base pattern is forming that will lead to a breakout into a major new bull market."
—Clive Maund
And third, Defense Metals has positioned itself as a North American solution to Chinese domination of rare earth elements (REE) supplies. These are the key elements used in petroleum refining, cell phones, and electric vehicle motors, but America’s Department of Defense is most concerned about their use in things like precision-guided munitions.
Log on to the Defense Metals website and you’re greeted by images of fighter jets and ballistic missiles. The junior’s corporate presentation reads like a dossier and everywhere you click you feel like you’re inside a covert op. But is this simply clever marketing or is supplying the U.S. military with critical REE part of a legitimate business plan?
“It's a real concern. We're going to be potentially one of the largest producers of neodymium and praseodymium on the planet, and the U.S. military needs a relationship with friendly countries to supply them, because as it stands right now, they're very concerned about China cutting off their supply,” Taylor tells Streetwise.
Indeed. China controls more than 80% of the global supply of REE, mostly because it has vast REE deposits and the solvent extraction and refining facilities necessary to create oxides.
After China announced in 2012 that it would limit REE exports, the U.S. started to look at alternatives. The Department of Defense is now funding rare earth elements projects through a Defense Production Act program called Title III, which aims to “ensure the timely availability of essential domestic industrial resources to support national defense and homeland security requirements through the use of highly tailored economic incentives.”
Defense Metals filled out an application with the Pentagon to qualify for Title III funding but that application is still under review. If the junior gets green lit, it could mean millions toward development of Wicheeda.
Other projects have already received Title III cash. Early in 2021, the Department of Defense put pen to paper on a deal that will see Lynas Rare Earths Ltd. (LYC:ASX; LYSCF:OTC) get US$30.4 million to help build a light rare earth elements (LREE) recovery plant in Hondo, Texas.
Taylor tells Streetwise he’s talked with half a dozen parties about offtake agreements but prefers a Canadian partner. That step could still take a while. In the meantime, the company is looking at hiring a lobbyist in the U.S. to help with getting Title III money.
Author Greg Nolan at Highballer Stocks writes that despite a cool reception to Defense Metals’ PEA, all the fundamentals remain.
“The West needs Wicheeda in the biggest way… With the compelling supply/demand dynamics likely to maintain its prevailing tension, current shareholders, those playing the long game, might be considered ‘smart money',” Nolan says.
DEFN recently raised CA$5M at $0.325 per share and now has 80.34 million shares outstanding, with management and insiders holding a combined 9.9%.
Disclosures:
1) Brian Sylvester compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. He or members of his household own securities of the following companies mentioned in the article: None. He or members of his household are paid by the following companies mentioned in this article: None. His company has a financial relationship with the following companies referred to in this article: None.
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